WorldCity Business Magazine

(5) CEO Roundtable - When Good is Not Good Enough

by WC

At WorldCitys monthly CEO Roundtable, top regional executives from HUGO BOSS, Nokia, Regions Bank, Resources Global Professionals and Colliers International focused on Latin Americas fatal flaws

First came the good news.

Growth in the past four years has been crazy, said Maurizio Angelone, head of Nokia Latin America, which last year moved the regional operations from Dallas to Miami. His sales were up a whopping 40 percent in 2006, giving Latin America the distinction of being the global cell-phone giants fastest growing market. And while Angelone is worried about competition from cheap, no-name Chinese competitors and expects softer growth this year and beyond, there is still plenty of pent-up demand in Latin America. Cell-phone penetration is now at 50 percent—up from less than 5 percent a decade ago—and is forecast to reach 80 percent by 2010.

The commercial real estate market, while not quite as hot as the cell-phone business, is also on a roll from Buenos Aires to Bogota. In my 15-year career in Latin America, I have never seen anything like this, said Luis Lira, managing director of Colliers Internationals regional office in Miami. The economies of the region are doing well, theres lots of money from triple-A clients chasing properties, vacancy rates in major cities are below 1 percent and office construction is minimal. The result? Last year, Colliers Latin America grew by 20 percent. And theres no sign of let-up. Right now, said Lira, we have five clients looking to set up call centers in the region.

Similar positive tunes were sung by the other three participants at our latest CEO Roundtable, held at the Azul restaurant inside the Mandarin Oriental on Brickell Key. Regions International Bank president David Konfino said that four years of steady economic growth in the region had been good to the bank. Not only is trade expanding and opening more opportunities for trade finance, but even the trouble spots, such as Venezuela, have been good news for private banking operations. The big money in Venezuela has always been offshore, said Konfino, but now we are seeing the middle class take theirs out, too.

As for the upscale mens fashion market, business is also brisk throughout Latin America. Sales for Germanys HUGO BOSS, the leading global brand in the mens fashion segment in the region, were up a healthy 16 percent in 2006, reported Jacob Bjerregaard, the companys managing director.

Finally, Mindy Cunningham, by her very presence at this gathering, was proof that Latin America, because of its economic turnaround since 2002, has finally caught the attention of many of the worlds leading companies. The firm she heads in South Florida, Resources Global Professionals, is a global professional services firm, that until two and a half years ago had totally ignored Latin America. Cunningham opened a Fort Lauderdale office in 2004 and expects to add a Miami office this year or next. Her clients are the Fortune Global 100 and, as they expand, so do the fortunes of RGP. Our business is growing based on the challenges and opportunities that our clients face in the region, said Cunningham, adding that, while Asia-Pacific had grabbed most of her companys attention in recent years, Latin America is the next area of growth.

Once we had dispensed with the initial pleasantries, however, it was time to drop the gloves. Latin Americas trade barriers and regulatory mazes came under attack first. Then our CEOs compared security nightmares, particularly in Mexico and Brazil. And, finally, there were some rather somber projections for the regions economic future and relevance without a fundamental change of course.

Now that Nokia must start to get used to less-than-spectacular annual growth rates in Latin America, the ugly parts of doing business in the region are becoming all too obvious. The regulatory barriers in trade, transportation and logistics in all the key markets are huge, complained Angelone, who ran Nokias Italian operations before being brought in to handle the Latin American expansion four years go. We are constantly fighting with Customs and with government bureaucracies. Its the biggest headache we have.

Jacob Bjerregaard of HUGO BOSS has suffered similar headaches. We have done an internal study in the company which shows that four of the five most complicated countries in terms of importing goods are in Latin America Argentina, Mexico, Brazil and Ecuador. Angelone backed
up the claim. Latin America is the only place in the world where you have such huge restrictions. Not even in China do you have these kinds of barriers.

On the issue of security, the alarms were even louder. In Latin America, said Angelone, we have the highest security costs globally. He was referring to security measures for Nokias offices, its factories, its vehicles and also for executive protection. Latin America, Africa and Russia are the three critical areas in the world in terms of security, he added.

Everyone around the table shared the concerns about security. Nothing compared, however, with the HUGO BOSS horror stories from Mexico, the only country in the world where the clothing company contracts eight armored guards in four armored cars to accompany every shipment that leaves the Mexico City airport en route to its distributors.

Mexico is also the only country in the world where HUGO BOSS has now had to order specially-rigged trucks that can only be opened by a GPS-satellite link. Thats because, despite the armed guards, the company was still losing entire shipments to organized gangs. In a recent heist, a truck laden with $800,000 of the latest HUGO BOSS designs was hijacked as soon as it exited the airport gates. The truck, along with six hostages, was discovered just over two hours later, wiped clean. I lived in China and in Russia. In terms of personal safety, they dont compare to the risks that you face in Mexico or Brazil, said Bjerregaard.

When it comes to risks, however, global companies are usually happy to endure them, when the potential rewards are correspondingly high. But on that score, our roundtable was decidedly pessimistic. Sure we are growing our business at 15-16 percent a year, said Bjerregaard, but Asia is booming, Eastern Europe is booming and even our mature markets are growing fast. Germany is growing at 12-14 percent, the U.S. market at 18 percent and their bases are much bigger than the Latin American market. The result, concluded Bjerregaard, is that Latin America is getting smaller and smaller. The fact is, 4-5 percent GDP growth is just not good enough.

Even Nokia, which has enjoyed an incredible run over the past four years, is preparing for what Angelone called a dramatic slowdown in growth. He predicted that the Latin American share of Nokia global sales would fall as competition increases and the cell-phone market becomes increasingly saturated.

Those conclusions gave rise to some broader considerations of Latin Americas underlying societal flaws, especially the regions vastly unequal distribution of income. The only way for Latin America to grow, said Bjerregaard, is to develop a strong middle class. And the only way to develop the middle class is to move to the left and spread the wealth.

As often happens, discussions about Latin America perennially not living up to its potential often lead to that conclusion. But Regions David Konfino, who has been involved in many of these kinds of debates over the past 15 years since he began covering the region, intervened.
Theres no question that wealth needs to be better distributed, but the question is, How? The fact is that globalization is working in Latin America. So, do you let the global economic forces play out or do you try the Chavez model? Not waiting for an answer, Konfino concluded: Its been proven time and time again in Latin America. The populist model does not work.