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International -- Cover Story
THE NEW LATIN CORPORATION (int'l edition)
They're aggressive, they're technologically savvy, and they're looking beyond national borders. Meet the fast-growing stars of a wide-open region
Miguel Gomez Mont Urueta has put roofs over the heads of half a million of Mexico's working poor. As chief executive of Corporacion GEO, the country's largest low-income housing developer, he expects to put up many more. Mexico needs at least 5 million more houses and apartments. This year, GEO is building 19,000 two-bedroom homes in attractive developments that cluster houses and apartments with schools, shops, and cultural centers. Since the houses are modular, purchasers can easily upgrade them as their family's fortunes improve. "We want to do for housing what Henry Ford did for the automobile," says Gomez Mont.
And profit from it. GEO, long a contractor for Mexico's public housing authority, has tripled its sales since 1993, when the government got out of the housing business, to $246 million last year. Its stock has risen to $25.80 from $17.50 when it went public in 1994. Now, GEO is taking its low-cost formula to Chile and to poor southern U.S. communities. "We can compete with anybody," says the 44-year-old Gomez Mont, who runs the company with six other directors in a collegial style that is rare for Latin America.
GEO is one of Latin America's corporate stars. A decade after most governments in the region began opening their markets to trade, competition, and investment, a new breed of Latin American company is making its mark. Many are niche operators building a booming business as they serve a rising consumer class. Run by a generation of relatively young and internationally savvy managers, they are expanding rapidly not just at home but throughout the region.
Others are long established groups that had been written off as dinosaurs. Mexico's Alfa, for instance, has turned itself from a bloated conglomerate into a focused, profitable maker of steel and auto parts. Technology-driven groups such as Mexican software developer Softtek are exploiting low costs and NAFTA connections to supplant Asian suppliers to U.S. companies (page 48). Indeed, the region's corporate strength contrasts sharply with the problems in Southeast Asia, where heavy debt has caused widespread distress among companies.
BUSINESS WEEK has taken a close-up look at the new Latin American corporation. Based on scores of interviews with CEOs, fund managers, and business consultants, we have identified companies that stand out as leaders in the region. They include new Latin multinationals whose clout is expanding as trade barriers fall. Others are companies that are zeroing in on the region's new consumer class. Innovators and entrepreneurs, meanwhile, are tapping a nascent flow of risk capital, while blue chips reinvent themselves to match foreign competition (tables). As state companies have privatized, billions of dollars of assets have landed in private hands. That has allowed once floundering companies such as Brazilian aircraft maker Embraer to thrive.
What all these companies share is the conviction that they must equal their global rivals in technology, productivity, and entrepreneurial drive. With multinational heavyweights encroaching fast, Latin companies know that in many sectors, they must grow or perish. In electric utilities, where foreign competition is fierce, "Latin America is for big players now," says Ricardo Alvial Munoz, director of investor relations for Chilean energy conglomerate Enersis, which supplies electricity to 32 million people throughout the region (page 49).
While few Latin companies are well-known beyond the region's borders, that's starting to change. Mexico's Cemex recently bought a stake in a Philippine cement maker, extending its earlier march into Europe and the U.S. Smaller, but no less competitive, is Brazilian textile maker Coteminas, whose state-of-the-art factories are turning out garments that undersell even Chinese rivals. "A number of Latin American companies have figured out how to be world-class competitors," says Monterrey-based Roberto Batres, head of consultant Arthur D. Little Inc.'s Latin American division. "They have done everything possible to lower their costs, become more efficient and productive, and export all they can."
CRISIS RESPONSE. What shaped many of these winners--and wiped out thousands of others--was the financial squeeze of the 1982 debt crisis and the ensuing free-market reforms that stripped away trade barriers and subsidies in many countries. The survivors ditched products in which they had no chance of competing, plowed all available resources into cutting-edge technology, and sent promising young executives abroad for MBAs. Many went public and learned how to communicate with investors. With the return of corporate financing to the region, these companies are thriving.
Nowhere is this new Latin dynamism more evident than in those companies chasing opportunities for cross-border investments. Economic opening has let companies leverage the strengths they've developed at home by taking them abroad. Chilean companies led the way, cashing in on the business knowhow they accumulated since they pioneered open markets in the mid-1970s. Flush with cash from fast growth and a buoyant stock market, they have plowed more than $8 billion in the past five years into cross-border investments from supermarkets to banking.
Chile's pension fund managers have been among the most aggressive emissaries, offering expertise they gained setting up the region's first privatized pension system. Countries from Argentina to Mexico have copied the model, and Chilean companies are front-runners. Provida, Chile's biggest fund, with $5.4 billion in assets under management, has already captured 30% of the market in Colombia and 25% in Peru. Last year, it started a Mexican pension fund with local and Spanish partners.
Following the money is Chilean software developer Sonda. With Digital Equipment Corp. as a 40% shareholder, it designs software programs for pension funds and insurance companies. Sonda was founded in 1974, when computers were just being introduced in Chile, and began expanding abroad a decade later. Now, 30% of its sales of $200 million flow from foreign operations in eight countries. "The Chilean market is small for software, and we needed a larger market to be able to compete," says co-owner Pablo Navarro.
Other companies are border-hopping with new factories and distribution systems. Mexico's Grupo Industrial Bimbo has for decades baked and delivered bread and cakes to thousands of mom-and-pop stores. Its 13,000 trucks travel unpaved roads to towns and villages all over the country. Now, Bimbo vans are carting locally baked bread throughout 11 countries, from Guatemala to Argentina. "Globalization pushed us to go abroad--we had no choice, even though it's a risky proposition," says President Rafael Velez Valadez. He first started investing abroad in 1990. Now, Bimbo earns 16% of its annual $1.9 billion in sales outside Mexico.
Argentine candymaker Arcor has adopted the same strategy. This year, it expects to top $1 billion in sales to 75 countries. Arcor started eyeing foreign markets in the 1970s, when Argentina was still a protected backwater. "We brought in good technology and became very efficient in order to compete with the rest of the world from inside a closed country," says Daniel Feraud, general manager of the international division. "We were investing not for the Argentina that was but for the Argentina that would one day be."
To keep control of its costs and supplies, Arcor raises its own dairy cows, farms sugar-cane fields, and makes its own packaging--a throwback to the days when Argentina's economy was closed. With five factories throughout Latin America, it plows more than $60 million a year into regionwide advertising to hold onto its consumer base.
The ability to round up new customers is a skill the best of the new Latin companies are honing. As growth has taken off and inflation slowed, the region's 470 million consumers are demanding products and services that were once beyond their reach. To be sure, there are big gaps in income across the region's 23 countries. While Argentina boasts a per capita income of over $6,000, Nicaragua's is less than $500.
But incomes have been rising, often quickly. In Chile, incomes are up over 5% a year since 1990. In Argentina, the figure is 4.6%. Just to stroll the shopping malls of Lima or Sao Paulo is to see that millions of people are slowly moving up the income ladder from grinding poverty toward the middle class. Latin America's new business class is tuned in to the new opportunities. Sales are booming as they develop products for lower-income families. Others are offering more sophisticated goods and services to richer consumers.
Mexican retailer Elektra is targeting Mexicans eager for a first taste of the consumer society. The company has built a half-billion-dollar business selling everything from washing machines to VCRs to the nine out of 10 Mexicans who make less than $5,900 a year. "We sell poor people goods on credit when nobody else will," says Elektra's chief financial officer, Luis J. Echarte. "We sell basic things, not fancy TVs or refrigerators that make ice," he adds.
Elektra employs an army of investigators and bill collectors to keep track of its loans. They pay home visits to size up first-time credit users and return again if payments are missed. Elektra calls this system the "neighborhood store" approach; each store recruits collectors among local residents. Although it's labor intensive, the system pays: Only 3% of Elektra's borrowers default.
SHOW TIME. To keep customers coming back, Elektra is constantly rolling out new schemes. The latest is a savings account launched in August with Mexico's third-largest lender, Banca Serfin. Customers unable to make the minimum deposit that most banks require can begin earning interest with as little as one peso--12 cents--on deposit. To keep the cash flowing, Elektra is in the business of electronic money transfers sent home by Mexicans working in the U.S. This year, it will handle about $600 million worth, up from $100 million in 1993.
In Peru, retailer Carsa has taken Elektra's approach a step further: It not only sells poor consumers home appliances but also helps finance materials for construction of bare-bones shanties. Carsa's goal is to win loyal customers early, as they take their first steps up the path to prosperity (page 45).
Further up the income scale, Banco Excel Economico, known as Brazil's "populist bank," is catering to a growing middle class. It allows interest-free overdrafts for 12 days or more on some checking accounts--a bid to hook clients who may later bring in higher fees with investment accounts. Excel also struck a deal with Sao Paulo cinemas to reserve 20% of seats for the bank's credit-card customers until 10 minutes before show time--a perk that's prized in the traffic-plagued city of 18 million.
Leisure activities such as movies and concerts were the first items cut from family budgets when inflation was soaring a few years ago. Now, Latins are spending more of their reals and pesos on entertainment. Enter Mexican mogul Alejandro Soberon Kuri: Ten years ago, the former movie producer launched Corporacion Interamericana de Entretenimiento (CIE) to promote international music concerts in Mexico. Soberon, now 37, figured that, with 34% of Latins under age 15, he had a ripe venue for rock concerts, sports events, and theater.
"A HUGE MARKET." CIE shook up the live-entertainment business by introducing telephone ticket sales in a joint venture with Ticketmaster. CIE also manages sports stadiums, industrial expositions, and theaters, handles 50% of all soccer stadium advertising, and does telemarketing for business clients--grabbing a big chunk of each entertainment dollar spent in Mexico.
Soberon plans to take his formula to other Latin countries, starting with productions of Walt Disney Co. theatrical shows throughout the region. "There's a huge market out there of young people who want to see good shows," he says.
Latin America's smart set is also the target of Saraiva Livreiros Editores, Brazil's leading publisher and Latin America's No.1 bookstore chain. Book sales are up 60% since Brazil tamed triple-digit inflation in 1994. Now, Saraiva is pioneering the megabookstore format in Latin America with stores featuring Internet cafes. Five dollars buys 30 minutes on the Net and a snack of pao de queijo, a Brazilian cheese-filled bread.
Saraiva's chief operating officer, Ruy Mendes Goncalves, wanted to build a chain of megastores after spotting a giant outlet in France 15 years ago. But "it was too early for Brazil," he says. He waited until after the country lifted its ban on imported software and video games in 1992. In the meantime, Goncalves was almost arrested in Madrid in 1994 as he videotaped a megastore to show his colleagues in Brazil.
Such enthusiasm is the stuff of many of the managers running Latin America's hottest companies. Bright and hard-working, these often U.S.-trained executives are now in charge at many top companies. They are skilled at using technology and freer trade to expand their companies.
Josue Christiano Gomes da Silva is one of Brazil's new-style managers. With an MBA from Vanderbilt University, the 33-year-old CEO runs Coteminas, one of the world's lowest-cost textile producers. In its gleaming factory located in the poor, rural region of Minas Gerais, Japanese looms spin out superfine threads for bedsheets and tablecloths. Nearby, technicians bend over computers powered by French software.
By investing in the best technology, Gomes da Silva can manufacture even more cheaply than rivals from Asia. He cranks out T-shirts for a wholesale price of 75 cents, while a similar shirt from China goes for 90 cents. In the past five years, Gomes da Silva has poured $500 million into improving the output of his company's seven plants. He travels the world picking up tips on technology and management. A typical workday is 14 hours.
His strategy is to boost the company's margins by moving beyond his textile base into clothing. After just two years in the business, he is Brazil's largest T-shirt manufacturer. The company wants to get two-thirds of its sales through higher-ticket clothing by 1999, up from 15% now. Coteminas earned $70 million on sales of $223 million last year, with revenues rising at a 16% pace. Analysts expect sales to top $1 billion early in the next century.
FOREIGN CASH. Fast-moving companies such as Coteminas are getting a closer look from global investors, making it possible for them to raise capital outside of the region. Analysts say Gomes da Silva is hoping to raise $100 million from an issue of American depositary receipts later this year. Other entrepreneurial companies, such as Mexico's Softtek, are also looking overseas for capital, largely because the region's banks still lend mainly to traditional blue-chip customers.
Tapping the international markets is encouraging Latin American companies to adopt U.S.-style business disclosure practices. With an openness inconceivable a decade ago, even some small Latin companies now report their latest earnings on the Internet. Internacional de Ceramica, a Chihuahua (Mexico)-based tilemaker with a factory in the U.S., is now creating its own Web page. With $164 million in sales last year, "we're just a very small company from Chihuahua, but we're very well-known in New York," says CEO Victor Almeida. As Latin American companies upgrade their business practices, more will become household names around the world.
Even many of Latin America's establishment companies are starting to step lively. Blessed with considerable resources from years of protected markets, the better companies are remaking themselves. "They wield a lot of political clout and have strong financial leverage, which gives them access to low-cost capital," says Mexico City-based Carlos Lukac of consultant Bain & Co. These conglomerates, many of them family-owned, are shedding businesses, bringing in new managers, and tapping outside markets. The best of these reengineered blue chips are now Latin American corporate stars.
In Argentina, for example, the Perez Companc conglomerate is dumping real estate and other businesses to focus on energy. It's investing $900 million this year in oil, gas, electricity, and petrochemicals from Venezuela to Chile, often in partnership with heavyweights such as Exxon Corp. "Our idea is to become one of the world's major energy companies," says Daniel Rennis, manager of corporate financial planning.
Despite the hard-won gains, Latin companies still face many challenges. They still operate in an underdeveloped region, with legal systems that are politicized and often corrupt and with thin capital markets and low savings levels. While many companies are giving multinationals a fight, the assault from outside is intensifying as Latin markets prove more promising. Even for deep-pocketed Latin blue chips, the new competition rules out going it alone in many businesses. To fortify themselves, many are taking on foreign partners in joint ventures and alliances.
Such infusions of foreign equity aren't bad, of course. And they may mean a much faster transfer of top management knowhow. Meanwhile, day by day, success by success, Latin America's corporate pacesetters are consolidating the region's free-market reforms. By ignoring national boundaries they're creating a close-knit regional economy out of a continent long fragmented by economic nationalism. The next step is for Latin America's biggest and best players to join the ranks of America's, Europe's, and Asia's best companies. That's still a stretch, but for Latin America's new bosses and citizens alike, it's a hopeful prospect.By Geri Smith and Elisabeth Malkin in Mexico City, Ian Katz in Sao Paulo, Andrea Mandel-Campbell in Buenos Aires, and John Pearson in New YorkReturn to top