Enter the 'Multilatinas'Harold L. Sirkin
Several years ago we found that many Western business executives were just starting to realize their dominance was being challenged by little-known competitors from China, India, and other rapidly developing economies (RDEs). In a 2006 report, the Boston Consulting Group (BCG) identified 100 such competitors worldwide and dubbed them the "new global challengers."
Today many of the same Chinese and Indian companies that in 2006 were just starting to challenge U.S., Western European, and Japanese companies are now facing serious competition of their own. It's coming not only from Western businesses that have adjusted to the realities of globality, but also from a second and third wave of challengers—many of them from Latin America. We call them "Multilatinas."
The 2006 BCG New Global Challengers list included 18 Latin American companies. In 2008, the total climbed to 22. Last year, in a follow-up report called the "The 2009 BCG Multilatinas," we identified 100 Latin American companies with a global reach or global potential: 34 from Brazil, 28 from Mexico, 21 from Chile, seven from Argentina, five from Colombia, three from Peru, one from El Salvador, and one Venezuelan company, the state-owned oil behemoth, Petróleos de Venezuela.
Many of the Multilatinas have built significant positions in the U.S. and around the world. Mexico's Grupo Bimbo, which already owns Thomas' English Muffins and Entenmann's cakes, is evolving into a dominant player in the U.S. bakery market with its planned acquisition of Sara Lee's North American bakery business for $959 million. Brazil's Embraer (ERJ) has become the world's leader in regional jets (less than 120 seats). Virtually every major U.S. network carrier now includes Embraer jets in its fleet.
So what's going on in Latin America? In most cases, the answer is a combination of economic reform, advances in technology, improved education, comparatively low costs, abundant natural resources, and increased management sophistication. Combine these factors, and you have a sure-fire formula for economies that breed winners.
U.S. companies need to understand that the Multilatinas will use their low-cost platforms to challenge them in Latin America and the U.S. alike. But two can play this game. U.S. companies also can use Latin America as a low-cost, nearby manufacturing platform that can produce goods for Latin America's rapidly expanding middle class, capturing tens of millions of new customers. The potential is huge, with Latin America's total population nearly double that of the U.S.
As for the Multilatinas threat to China, though Latin America's total population is just 43 percent of China's (560 million, compared with 1.33 billion), the region's combined gross domestic product (GDP) equals China's, about $4.2 trillion in 2008. Estimates for 2010 peg Latin America's GDP growth at 4 percent for 2010. A number of countries have been growing even more rapidly. Brazil, for one, has a projected 2010 GDP growth rate of 7 percent. (Some foreign companies have avoided doing business with Brazil because of its complex tax and regulatory structure. Nonetheless, many U.S. companies are profitably manufacturing and selling in the country as well as exporting to it.)
While such growth rates fall well below China's and India's, they exceed those of the U.S., Germany, and Japan.
Free Trade Hotbed
The Latin American region, of course, has a volatile history. And some countries, such as Venezuela, still seem to take perverse pleasure in causing others heartburn. But as my colleagues pointed out in the "Multilatinas" report, the region as a whole is stable and calm, with most major countries reducing debt levels in recent years, strengthening their currency reserves, and showing unaccustomed fiscal discipline.
The region also has turned into a hotbed of free trade. In the past year alone, in fact, Costa Rica signed bilateral free trade agreements (FTAs) with China and Singapore (the latter of which already had FTAs with Chile, Panama, and Peru); Peru and Thailand concluded an FTA; and Chile and Malaysia signed an agreement. Negotiations for a broader pact, known as the Trans-Pacific Partnership, are currently underway. That agreement would include Australia, Brunei, New Zealand, Singapore, Vietnam, Chile, Peru, and the U.S. and is seen as a precursor to a future Free Trade Area of the Asia Pacific.
As a result of these and other economic reforms, Latin America for the first time in its history can now boast of five investment-grade economies: Brazil, Chile, Colombia, Mexico, and Peru. Together, the five countries account for three-fourths of Latin America's nominal GDP.
This growing prosperity, of course, has created new and expanded markets for goods and services. As families have moved out of poverty, they've wanted more and better things. And somebody—local companies, regional companies, and multinationals—needs to provide these goods and services, from food and beverages to banking and building materials.
Emerging Middle Class
Chinese and Indian companies have done extraordinarily well serving low-income consumers in their huge home markets and in other rapidly developing countries. They've also done well meeting the needs of cash-strapped value shoppers in the West and the developing world's growing middle class. As Lim Hng Kiang, Singapore's minister for trade and industry, told the Latin Asia Business Forum in September, "This emerging middle class will change the way we know Asia and Latin America," creating "valuable business opportunities for both regions." But China and India will not automatically be the default providers of such goods. With the coming of age of the Multilatinas, they now have serious competition.
With a few notable exceptions, most of the Multilatinas remain largely unknown to most Americans. But this doesn't mean they're pipsqueaks. To the contrary, each of the 100 Multilatina companies had revenue of at least $500 million in 2009.
Unlike many of China's challengers, most of which are state-owned, all but a handful of the Multilatinas are investor-owned and listed on the stock exchanges, though some two-thirds are family controlled. While some of the Multilatinas have grown into truly global companies, such as Cemex (CX), Embraer, JBS-Friboi, and Petrobras (PBR), most remain primarily regional players.
Like multinational corporations from other regions, many Multilatinas have expanded overseas through mergers and acquisitions, consummating some 312 deals from January 1998 through September 2008. Although "outbound" M&A activities slowed during the recession, a new wave could lie ahead, since many of the companies are reasonably cash-rich and debt-free, with some 60 percent having ratios of net debt to earnings before interest, taxes, depreciation, and amortization (Ebitda) under 2 and 73 percent with Ebitda ratios below 3.
Just recently, for example, Brazil's Marfrig Alimentos, Latin America's second-largest beef producer (behind JBS-Friboi), purchased Keystone Foods, a major supplier to Campbell Soup (CPB), McDonald's (MCD), Subway, and Yum! Brands' (YUM) Pizza Hut and Taco Bell.
So what does all this mean for U.S. and other Western executives?
From Within Our Hemisphere
First, the emergence and growth of the Multilatinas means the relentless competition U.S. and other Western companies have faced in recent years from newly emerging challengers will continue and even accelerate. Many of these challenges will come from companies in our own hemisphere, relatively close to home. The defensive lessons managers learned in dealing with Chinese, Indian, and other RDE challengers still apply.
Second, while the Multilatinas will create additional headaches for some managers, they'll create opportunity for others. With the Latin American economy expected to grow some 5 percent over the next year—and many countries, including Panama and Brazil, anticipating large infrastructure expenditures—there's an opportunity here to expand the business. Companies with available cash should seize the moment and consider entering new markets, introducing new products for the Latin market, and filling voids in their portfolios through mergers and acquisitions. Remember, too, that the fastest-growing market in the U.S. is the Latino market. New products that attain success south of the border often can do the same at home.
Finally, executives need to stay focused on the changing landscape. Globality is the new reality. The business model that carried many companies into the new millennium may be obsolete. And what works today may not work five years from now. Stay lean; remain flexible; be willing to go where you've never gone before, literally and figuratively. One of those places may be Latin America.
Editor's Note: Sirkin would like to thank the authors of "The 2009 BCG Multilatinas" report (Marcos Aguiar, Jorge Becerra, Jesus de Juan, Eduardo Leon, Gustavo Nieponice, Ignacio Pena, Michele Pikman, and Masao Ukon) for their contributions.
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