WorldCity Business Magazine

Is it sustainable?

by Joachim Bamrud

There was no question that 2004 was one of the best years in recent memory for Latin American economies, and the region’s success was clearly reflected in the results of the companies around the table, all of which grew by leaps and bounds.

Cisco’s Latin American division was the company’s fastest growing in 2004, with sales up 100 percent. UTStarcom, a California-based company that has been hugely successful selling IP access networks and switching systems in China, wasn’t far behind at 60 percent growth in Latin America last year.

The insurance giant AIG, whose Latin American division, a $2 billion annual business that recently relocated from Manhattan to Miami, also recorded a banner year. Likewise, did Telefonica USA, which offers telecom services to U.S. multinationals to leverage its massive networks throughout Latin America, and Terremark Worldwide, which operates the NAP of the Americas in Miami, a state-of-the-art internet hub, and is a direct beneficiary of growth in the region.

“2004 was a fantastic year,” said Keith Goodwin, president of the Cisco Americas International, which also encompasses Canada. “But the question now is Is it sustainable? That’s always the challenge in Latin America.”

Since many if not most international business executives with experience in Latin America have been frustrated and burned in the past by the region’s volatility and unpredictability, there is a tendency to hedge one’s bets. As this conversation began to unfold, that’s exactly what this group did. We were all reminded of the region’s chronic failings.

“The short-term for Latin America looks good,” said AIG Latin America CEO Hamilton da Silva. “The long-term, however, is a big question.” Despite the recent economic success, Da Silva emphasized the region’s lingering disabilities. “A lot of countries grew substantially in 2004; they are moving in the right direction. But there are still lots of social problems poverty, unemployment, crime.” And when referring to his native country of Brazil, he lamented the massive shortcomings of the public education system. “What really concerns me is that government still doesn’t invest big-time in education.”

Many Medina, for many years one of Miami’s biggest commercial real estate developers, opened the NAP of the Americas in 2001 and is today one of Latin America’s biggest boosters. But he, too, was far from upbeat about the region’s long-term prospects.

“What really concerns me,” says Manny Medina, “is the insignificance of Latin America vis-a-vis the rest of the world. When you get away from Miami, the Capital of the Americas, you realize that Latin America is more like a sore thumb than an economic epicenter. Latin America is just not that important. The people who count in this country don’t wake up in the morning thinking about what’s happening south of the border.”

“One reflection of the low importance of Latin America,” concurred Da Silva, “is how slow we are moving in terms of FTAA.”

Joining the chorus of cassandras was Keith Goodwin, who pinpointed Latin America’s underachievement in hi-tech investment. “If you look at investment in Latin America in technology, specifically information technology, Latin America is significantly under-invested. Latin America invests about 1.5 percent of GDP in IT, while the U.S. invests 5 percent, Europe invests 3.5 percent and Asia invests about 2.5 percent. So, if you believe that the global economy is going to be an information-based economy, the question becomes Will Latin America step up in terms of IT investment in order to become competitive?”

But, then, Goodwin suddenly changed the tone of the debate by adding “For all of us here, that is the challenge and the opportunity.” By framing the question over the region’s future not just as a challenge, but also an opportunity, Goodwin underlined the stake that his company and other multinationals, such as those represented around the table, have in the success of the region. The pervading mood of pessimism started to give way to optimism, as the CEOs sketched a recipe for long-term success for Latin America.

Perhaps no multinational company is more concerned about and committed to the future of Latin America than Spain’s Telefonica. Over the past 12 years, said Pete Pizarro, CEO of Telefonica USA, Telefonica has invested some $72 billion in Latin America half through acquisitions and the other half in capital improvements making it, by far, the largest single corporate investor in the region. Latin America now accounts for nearly half of the telecom giant’s global annual revenues.

Given that kind of investment, Telefonica cannot even consider the prospect of Latin American failure. Instead, it is committed to helping Latin American governments make the right decisions to foster competition, investment and growth. “There are four drivers of long-term success,” said Pizarro, “education, regulatory framework, intellectual property rights and social and healthcare reform.”

Telefonica, he explained, has set up a firm in Washington as an advocacy group for these four broad policy areas. The objective is to build awareness about what is happening in the region. “Doing business in Latin America is second-nature for the United States. But there’s a great market out there that needs more focus and attention from this country.”

Telefonica is convinced that, if progress can be made on these four fronts, Latin America’s recent spurt of economic growth can be sustained. “If education is improved,” said Pizarro, “if intellectual property rights are more respected and more uniform across the region, and if regulatory transformation is balanced, it creates a much better market. And that’s going to allow all the countries to grow, which means our companies will benefit, too. Instead of Latin America accounting for just 7 percent [or often less] of total revenues for global companies, maybe it can jump to 10 percent or 15 percent. Who knows where that number could go.”

“That’s the exciting part. That’s the opportunity,” chimed in Goodwin. “When you think about the emerging global economies, you talk about China, you talk about India and Russia. Brazil, too, is now on that list. The question becomes Is this the time that Brazil will sustain some of this positive momentum that has been building in recent years?”

One way to help make sure Brazil and other Latin American countries do sustain the momentum is to applaud and reinforce their achievements, suggested Goodwin. “One thing we can do as companies is to help identify the best practices and promote them across the region. There are great examples in Latin America, Chile being one, of environments that are extremely conducive to investment. We are seeing that, in telecommunications, Chile attracts the kind of investment that the country needs to move forward.”

Manny Medina brought to everyone’s attention two other cases of best practice that deserve praise and encouragement. One was a recent initiative by newly re-elected president of the Dominican Republic, Leonel Fernandez, to provide broadband internet access to 135 communities throughout the country. “I believe that investment in IT infrastructure is what is really going to make a difference in these countries. The way we can help is by encouraging them,” said Medina.

And one way to do that is by fostering partnerships. By way of example, Medina mentioned several partnerships that his company, as well as Florida International University and the University of Miami were developing with various educational institutions around the region to promote investment in IT infrastructure. “At the end of the day, investment in IT infrastructure trickles down,” said Medina, “IT is the enabler.”

The case of the Dominican Republic, said Medina, “goes to show you how someone can make a difference in just a few months. [Leonel Fernandez took office in August 2004.] It also shows you that the initiative comes from the top.” Medina gave high marks to another Latin American leader, President “Lula” da Silva of Brazil. “When Lula inaugurated his free zone for software, he made a point that his country is not just going to be about potential, but about capitalizing on that potential. And he is demonstrating that. It’s encouraging.”

Medina said he has faith in Brazil’s potential as a software exporter. “Brazil has one of the best e-platforms around; 98 percent of taxes are filed online; 30 percent of government procurement is done online. And there is no reason why they can’t export the software.” Brazil, explained Medina, exports only $100 million in software each year and the goal of Brazilian Trade & Development Minister Luiz Fernando Furlan is to bring exports up to $2 billion a year.

Having run through the list of recent accomplishments in Latin America, the group was feeling more sanguine about the region’s future, when Rene Mendez of UTStarcom suddenly brought China into the equation.

Mendez reminded everyone that all sorts of infrastructure and legal deficiencies can be overcome if there is an underlying desire to encourage business and foster development. “As far as regulations and intellectual property rights are concerned in China,” said Mendes, “there are none. When we started there in the early 1990s it was like trying to grab a bar of soap. But just look at the growth and investment now.”

What it comes down to, said Mendez, is identifying real business opportunities. “Even though regulation is important and the cleaner the rules the better, in the end companies need to see the potential for growth. “You can have the clearest rules in the game, but if you don’t have the potential for real growth, the investment is not going to come.” In China, agreed Cisco’s Goodwin, the “perceived potential for growth overcame everything.”

And that, he said, is a good lesson to all of us. Goodwin punctuated the discussion with an emphatic vote of confidence in Latin America. “As the market sees the potential in Latin America, you will see a lot of positive inertia to overcome some of challenges.”