Won’t Buy From Me, Argentina
By Nick OlleMarch 26, 2012
Doing business in Latin America has long been seen — rightly or wrongly — as a leap of faith. The Global Mail talks to an Australian leather start-up, a Dutch dairy giant, an English wine merchant and others about how they’ve navigated the cultural and regulatory landscape.
You want to do business in Latin America? Great, mañana.
So the stereotype goes.
But is the mañana attitude such a bad thing? Does it reflect lazy indifference, as the stereotype suggests? Or could it be more positively characterised as flexibility?
Likewise, bending (as opposed to breaking) a rule in business could amount to corruption or "thinking outside the box" depending on the beholder.
These questions matter in Latin America. Things do tend to take longer, and there often is a bit of wiggle room when it comes to the application of rules and regulations.
According to The World Bank's Doing Business 2012 Report, which ranks the "ease of doing business" in 183 countries, Latin America rates poorly, with a regional average of 103.
The index compares regulation for domestic firms by measuring factors including access to credit, trading across borders, protecting investors, paying taxes and enforcing contracts.
Latin America's best performers on this scale are Chile (39th), Peru (41st), Colombia (42nd) and Mexico (53rd). Most of the region's other economies are rated in the hundreds, with Venezuela the worst with a ranking of 177.
While there is no comparable study measuring the ease of doing business for foreign companies, it is worth noting that Chile, Peru, Colombia and Mexico all favour free market policies to the protectionist model now prevalent in Argentina (ranked 113) and to a lesser extent Brazil (126).
Global consulting firm Ernst & Young says Chile is the most globalised economy in Latin America — and 25th in the world — thanks largely to foreign trade and the arrival of foreign capital.
Ernst & Young senior partner Cristián Lefevre told Chile's El Mercurio newspaper that, unlike other countries, Chile had "promoted openness in times of turbulence, taking the sufficient precautions so the economic turmoil does not hit the country hard".
It is a policy that has worked, according to Staszek Chlapowski, managing director for Dutch dairy trading giant Hoogwegt , which buys dairy commodities in Chile, Argentina, Uruguay and Brazil and has a worldwide turnover of more than USD2.5 billion.
"Chile is very business-oriented," he says. "They have more bilateral trade agreements than anyone else, and I was surprised by how pleasant it is do business there."
While Chile actively encourages foreign businesses to set up within its borders, Chlapowski says the culture of doing business is common to all the Latin American markets he has worked in, including Argentina.
"I have some points of comparison; I've done the same in the US, Poland and Western Europe, and I've been impressed by the professionalism here," he says. "Here you see things are well developed, there is a good business ethic and people tend to honour contracts.
"Another positive is the level of entrepreneurial spirit here, especially compared to the US. There, they flick the switch and do 'product A', but they don't consider 'product A+' or 'product A-'. There could be a huge client asking for A+ and they'd say no. Here we don't have to say to clients, 'No, we can't do that.'
"The business relationship means something here," he says. "If you say, 'I need a hand with something,' most of the time they'll come through. They expect a lot of flexibility from you, too, of course."
The one main drawback of conducting business in Argentina, according to Chlapowski, is inflation. The official figure of 9.7 per cent provided by the state statistics agency INDEC is widely discredited; most private estimates have the real figure at above 20 per cent, a figure with which the Brazilian President Dilma Rousseff agrees. Inflation is a touchy issue in Argentina, and in September 2011 a judge ordered a court request for the names and contact details of journalists who had written about inflation in the previous six months.
"I am paying my people 25 per cent inflation correction each year," Chlapowski says, "and this year the dairy union got a wage increase of 37 per cent.
"For how much longer can we keep paying staff when our income stays more or less the same? Something has to give."
British wine consultant Nigel Tollerman agrees.
Since setting up his business 0800VINO in 2007 he's witnessed "rampant" inflation.
"It's a real pain, I waste large amounts of time updating prices on the website and other databases, and it renders printing brochures and other marketing material to a degree pointless," he says.
At less than six per cent, inflation is not such an issue in Brazil.
For Australian David Seale, managing director of Rio de Janeiro-based luxury real estate company InTown Property , it is the business relationship itself that requires careful nurturing.
"You have to be prepared for things to take longer," he says, "and Brazilians are very sensitive so you have to deliver your demands with a smile and a laugh.
"Even if you've been grilling them because they still haven't delivered your business cards two weeks later, you still have to manage to end that conversation on a light note."
Operating in the private sector, Seale says InTown is able to capitalise on the opportunities ushered in by Brazil's booming economy while avoiding public sector problems, namely corruption. President Dilma Rousseff has won admirers with her hardline stance against public sector corruption — six ministers involved in corruption scandals lost their jobs during her first year in charge — but dismantling endemic malpractice takes time.
"In terms of corruption, it is much harder if you have to deal with public contracts and you have a big reliance on public institutions and the public sector," Seale says.
"But if you are a bit immune from that — in consumer goods, or real estate like me — then you are pretty fine."
This is not to say that the Brazilian government does not get its hands dirty regulating the private sector.
Take the nation's car industry. The government exercises protectionist policies in favour of manufacturers — both Brazilian and foreign — that manufacture within the country. And just this month the government has shown it will fight for this protectionist ideal.
Since 2002 Brazil has had a bilateral car trade agreement with Mexico, whose own car industry is based on a free trade model. For years Brazil had the better end of the deal, which allows cars and parts manufactured in each country to enter the other tariff-free. But recently the strong Brazilian real and increasing Mexican competition saw the balance flip.
Brazil's response on Thursday, March 15, 2012, was to renegotiate the deal.
Last year Mexico exported $2.3 billion worth of cars to Brazil; next year a $1.4 billion limit will apply.
It is a victory for car manufacturers in Brazil and a loss for their counterparts in Mexico, many of whom set up with the Brazilian market in mind.
Former Mexican official Luz Maria de la Mora, who helped negotiate the original deal, told Reuters that Brazil had bullied Mexico into the deal by threatening to impose a 35 per cent tariff on cars made in Mexico.
"What kind of message is Brazil sending to the world?" she asked.
"Is this the way emerging economies are going to behave? Are these the economies that will become the engines of global growth with these kinds of policies, that are uncertain and unpredictable?"
She might well level the same criticism at Argentina soon, as that country announced this week that it too would renegotiate its car deal with Mexico.
This response comes as no shock to most in Argentina, as the country's protectionist credentials are well established.
The Argentine government is making life particularly, and increasingly, difficult for importers. Some, including car manufacturers, are required to match imports with exports.
As a result, BMW Argentina now exports leather, car parts and agro-industrial commodities — and the Porsche distributor Nordenwagen has begun selling wine.
On February 1, 2012, the government turned the screw even further, requiring that importers seek express permission from the tax authority, AFIP, to bring stock into the country.
Since this date, the premium Apple distributor MacStation has not been able to import a single iPhone, laptop or any other Apple product.
MacStation commercial manager Agustin Bracco says the government's objective to maintain a trade surplus is "easy to sell" but he hopes a common sense approach is taken in the granting of import permits.
"This is a strong measure. To give you an example, I have old clients who specialise working with [Apple video editing software] Final Cut Pro, which only works with Mac; what happens if I can't import Apple machines for them to use?
"I'd like to think that the government is observing this and will be flexible in some cases."
For its part, the government denies that its policies are protectionist. Economy minister Hernán Lorenzino points instead to an increased focus on regional trade.
"Argentina has changed its business destinations. Now more than ever we are trading with Latin American countries," he says.
"Intra-regional trade has not stopped increasing, and this will continue."
But Argentina's commercial restrictions are very unpopular within the region. Brazil is upset that its firms no longer receive automatic import licences, the denial of which flies in the face of regional trade bloc Mercosur's rules.
Chile, Peru, Colombia and Mexico — none of which are full Mercosur members — have intimated that they might act jointly to air their grievances with Argentina.
Outside the region, the European Union is none too pleased either, though possibly much of the European reaction has more to do with the perennial Falkland Islands sideshow. In February 2012, Argentina called on business leaders to boycott UK imports in favour of countries that recognised Argentine sovereignty over the disputed islands.
The independent monitor group Global Trade Alert rates Argentina second only to Russia as the world's most protectionist nation.
It's all a bit hard to believe when you consider that in 2010 and 2011, Argentina's growth rivalled that of China.
The Australia-Latin America Business Council (ALABC) promotes improved market access and reduced trade barriers for commercial relationships between Australia and Latin American markets.
ALABC chairman Jose Blanco says many Australian businesses run successful operations out of Latin America, especially in the mining sector.
Acknowledging that some markets are "more transparent and user-friendly" than others, he says that commitment, adaptability and the right product or service are still key.
"Clearly the level of Australian investment in Argentina is not as great as it could be, and perhaps that could be attributed to the fact that within the region Australian businesses are able to find other markets that offer comparable opportunities with perhaps slightly lower risk profile.
"It could well be that, irrespective of the user-friendliness of each of the markets, there are some that have more potential for certain companies than others."
But potential, of course, doesn't always translate. At least not overnight.
This is what Australian Alex Herlihy, co-founder of the Buenos Aires-based leather bag line ECEL, is contemplating.
Six months after starting in late 2010, Herlihy and his partner, Chloe Vandervord, decided to start over because of deadline and quality control problems. With import laws requiring them to make all their products from scratch in Argentina, they were at the mercy of the factories they contracted.
"They bled us very slowly of our funds, and it was becoming obvious that despite their super positive manner and very believable excuses for not reaching deadlines, they were not going to make the bags for us."
With new relationships in place, their first production did "outrageously well".
"We completely sold out using [crowd funding platform] Kickstarter.
"Whether we would do the exercise again is very questionable…. There is definitely a good reason that you don't come across made in Argentina labels everyday."