Should You Be Investing in Latin America?

Latin America has not been spared the effects of the current global economic crisis. While strong domestic markets support countries such as Brazil, a decrease in external demand could spell trouble. Regulatory structures, tax models and interest rates need to be reformed.

How can international companies capture the right opportunities in Latin American markets at the right time?

Is Latin American market growth sustainable?

Latin America is perhaps the world's most globalized economy and relies for more than a third of its growth on in-bound foreign investment; export income, in-bound remittances, foreign tourism receipts and foreign loans.

Weak economies in the United States and Europe have hurt Mexican, Central American and Caribbean growth since the onset of the financial crisis in late 2008. Conversely, strong Asian demand for commodities has been a boon for South American economies.

Most analysts predict a softening effect on metals and energy commodities in 2012 to 2013, as over-indebted developed economies de-lever their economies and new energy and mining supply sources come on line that compete directly with Latin America. Examples include Australian iron ore competing against Brazil, Zambian copper competing against Chile and Iraqi oil competing against Venezuela.

Declining commodity prices would take some liquidity out of South American economies, slow consumption and weaken currencies. All that said, Latin America's internal economies are increasingly solidified by a competitive banking sector and improvements to productivity thanks to recent investments in technology. With few exceptions like Venezuela, and Ecuador, the political environments in Latin America do not pose a risk to the internal economies of the region.

Another important element -- more specific for Brazil -- is the strong internal consumption that has helped Brazil minimize the effects of the 2008 crisis and its 2011 rebound. Long term sustainability will depend on infrastructure, already an issue in the region, with visible deficiencies in roads, ports, airports and electricity, to name a few. In the case of Brazil, long-needed legal, political and fiscal reforms are also crucial for long-term growth.

Which are the most exciting Latin American markets?

Colombia is probably the most cited “darling” of investors. It has certainly regained investor's credibility after almost 10 years of fighting drug organizations and by re-investing in the country's infrastructure. Two successive administrations have worked hard to simplify the complex regulatory environment and bring safety and security to citizen and investor alike. Colombia is blessed with many natural resources, a well-educated and industrious workforce and one of the most talented and respected governments in power in the region.

Brazil remains as the strongest country, with a 200-million population, high employment rates and investments for the World Cup 20014 and the Olympics 2016.

In its turn, Mexico -- whose economy depends largely on U.S. imports -- will continue to gain momentum when the U.S. economy grows, a trend still uncertain.

What are the common challenges of market entry into Latin America?

Contrary to a few foreign companies' perception, Latin America is not an 'unexplored land' full of opportunities. The opportunities indeed exist, but the region hosts numerous big local players as well as multinationals, making this a very competitive market.

The specificities of the region -- starting with the language, but permeated by a complex legal and accounting system, lack of infrastructure, and discrepant consumer's preferences due to the region's size -- makes it even more difficult for a seamless entrance in the region.

For many foreign investors, the greatest challenge will be the rule of law, or lack thereof in some cases, which can prove costly to highly regulated industries such as utilities, transportation, banking, mining and others who often require 10 or more years to recoup their investment. For exporters trying to penetrate the market, the greatest challenge may be identifying and negotiating favorable terms with competent, forthright and well-run distributor partners.

What are some common mistakes?

There are several reasons why a company makes mistakes when entering Latin America. They range from using English language product packaging to a complete lack of understanding of logistic restrictions and local competitors.

One example is when a Canadian brewery decided to enter the Mexican market by purchasing a portion of Femsa brewery in 1994. The deal was signed and sealed only four days before the infamous tequila crisis ensued, resulting in a 50% devaluation of the peso. The brewery was stuck holding an asset worth less than half of what they paid for it. If they had invested more time in studying the political risk in Mexico at the time, they would have realized how volatile things were.

A leading North American home decoration company once conducted a road show in Brazil to meet suitable partners for a joint-venture -- partners that it had found on its own, conducting secondary research from the United States. The company eventually found out -- after having spent a few weeks and a decent amount of cash -- that most of those companies were family-owned small businesses that were not suitable as an entrance partner.

Secondary research in Latin America is often scarce and, when available, not trustworthy, so having local consultants on the ground is key to perform in-depth interviews. Interviews are usually conducted in the local language. Another challenge is that specialists and company executives are usually not readily available for interviews, either because of a busy schedule or very strict company policies that prevent them from speaking on behalf of their organizations.

Latin Americans in general take personal relationships very seriously, and a good piece of information might come from someone you know or that was indicated by a friend or a colleague.

Natan Rodeguero is vice president, Intelligence Services Latin America at Global Intelligence Alliance (GIA) and John Price is managing director, Miami of Americas Market Intelligence, a GIA Member. Global Intelligence Alliance is a strategic market intelligence and advisory group. For further information, visit www.globalintelligence.com.