Understanding cultural differences is essential if treasury is to achieve its objectives
by Rita Cook, Head of North America International Treasury Sales, Commercial Banking, Bank of America Merrill Lynch and Ana Diaz, Head of Latin America Global Commercial Banking, Bank of America Merrill Lynch
U. S. companies, especially in the middle market, are increasingly optimistic about their growth prospects. According to Bank of America Merrill Lynch’s 2015 CFO Outlook survey, 65% of CFOs forecast sales growth in 2015 compared to just 54% last year. To encourage and foster growth, 96% of companies are implementing growth strategies, including overseas expansion. For the first time, participants in the CFO Outlook Survey indicate that Latin America is the preferred location for US manufacturers’ new operations.
“Companies have traditionally focused on Europe and Asia when they expand, but now Latin America is the favoured destination: 16% of US manufacturers are looking to establish new operations there,” explains Ana Diaz, Head of Latin America Global Commercial Banking at Bank of America Merrill Lynch. “The change reflects the stable macro-economic and political outlook in many countries in the region, an increasingly large and affluent middle class, and an attractive demographic backdrop.”
Companies establishing a foreign operation in Latin America need to recognise that it differs considerably from the US. “Perhaps the most important issue, which is often overlooked, is the cultural differences with the US,” says Rita Cook, Head of North America International Treasury Sales, Commercial Banking at Bank of America Merrill Lynch. “Cultural misunderstandings can have a major impact on the success of an operation.”
Understanding how businesses and individuals interact is critical to success. “The human element is what makes business work,” notes Cook. “The motivations and behaviours of staff, clients and vendors in Latin America differ from those that companies might encounter in the US.” For example, in the US it is acceptable to interact with suppliers via phone and email. In most Latin American countries, however, only face-to-face meetings, at least initially, will establish a fruitful relationship.
Another important consideration for companies expanding to Latin America is that it is extremely diverse. At a basic level, while most countries in the region speak Spanish, the largest – Brazil – speaks Portuguese. “Clients might assume that they can operate a shared service centre (SSC) in Brazil to service the entire region,” says Diaz. “However, hiring staff in Brazil with appropriate language skills and sufficient cultural understanding of other regional countries is challenging and can be costly.” Similarly, political risk varies considerably across Latin America, with Venezuela and Argentina requiring rigorous due diligence, for example.
Understanding what happens on the ground
The diversity of Latin America is perhaps most evident when considering the practicalities of doing business in the region. Every country has its own currency, regulatory environment, tax laws and payment instruments. In some countries, cross-border transactions may be seen as lending transactions with consequent tax implications; or invoicing in foreign currency may be complex, for example. Failing to observe such rules could prove costly.
A company establishing new operations in a country must take time to understand – at first hand – the environment: it is not possible for the company’s headquarters to impose a rigid template on a local operation. Companies should also select legal firms and tax advisors with a presence on the ground. “There is no substitute for the depth of understanding that comes from being in-country,” says Diaz. “Business practice and what is written down in regulations can differ substantially and frequently changes. Also, in an evolving environment, local knowledge can provide a competitive advantage.”[[[PAGE]]]
Similarly, it is important for a company to work with a bank that knows Latin America well – and also understands the company’s existing treasury structure and requirements. “A company should find out what capabilities their bank has in the region,” says Diaz. “Their bank already understands their strategic goals and working capital and payment practices and can help translate that into a new market. They are also able to provide effective global solutions that are familiar to a company.”
In some instances, a company may need to work with a local bank to access specific services or locations. “Working independently with a local bank alone makes it difficult to achieve a centralised treasury, which is the goal of most US companies expanding in Latin America,” says Diaz. “Instead, a company’s global bank should co-ordinate that relationship and have agreements in place with the local bank. Having centralised co-ordination is crucial to companies entering new markets. Companies should expect to see a plan which explains how their global relationship bank will achieve it.”
Choosing the right market
Operational considerations will determine where a US company decides to expand in Latin America. Nevertheless, there are some well-established paths in terms of expansion. US companies usually target Mexico and Brazil as entry points to Latin America given their size, with Colombia, Peru and Chile also favoured; Panama and Costa Rica are traditional secondary choices for expanding companies.
“Mexico is the easiest market for US companies to operate in since it is the closest to their home market in terms of regulations,” explains Cook. For example, in contrast to many other Latin American countries, it is possible to establish a non-resident account in Mexico, so business can be conducted without establishing a corporation, allowing companies to test the water before committing resources.
Historically, many companies have entered Latin America by growing organically, enabling them to retain maximum control over their entry strategy. However, in order to accelerate entry into Latin America – and benefit from the opportunities available as rapidly as possible – companies are increasingly merging or acquiring local firms or creating a joint venture with a local partner. A survey of some of Bank of America Merrill Lynch’s multinational clients shows that 33% of respondents favor organic growth, 33% acquisition, 17% a merger and 17% a joint venture.
Getting to grips with practicalities
The specifics of running a company and a treasury operation in Latin America are often surprising to US companies. For example, in Brazil only a resident – not a foreigner – can be named on legal incorporation documents. Similarly, all FX transactions require a legal contract and local authorisation, making it challenging to manage FX automatically through a treasury system based outside the country. More generally, while it is possible to create regional hubs to manage payments, it is important to note that not all payment types can be centralised.
In terms of payments, Latin America is a region of extremes. Brazil has a payment system that is among the most sophisticated in the world. For example, it uses the Boleto, an automated collections instrument, which is issued by post or email and can be paid electronically or at any bank branch. Uniquely, the payment terms of a Boleto can be renegotiated online (based on flexible terms set by the invoice issuer). In addition, a Boleto has a barcode, enabling electronic receivable reconciliation.
In contrast, much of the rest of Latin America remains heavily dependent on cash and cheques. Typically, vendors will expect to be paid either in cash or by cheque (partly because in most countries a cheque is a legal document, unlike an electronic payment) in preference to electronic forms of payment.
Most countries in the region are establishing automated clearing houses (ACHs) and some governments are encouraging electronic payments. However, typically only high value electronic payments are common. Debit and credit card acceptance and usage is generally lower in Latin America than in the US and reporting tends to be less detailed, creating reconciliation challenges and making it harder to block certain types of spending on corporate cards, for example.
“Cash creates handling and fraud risks while cheque processing can be inefficient,” says Diaz. “We encourage clients to challenge all the parties they work with to explain why they won’t accept electronic payments. A vendor that can accept a cheque has a bank account and may be able to accept an electronic payment. Similarly, a vendor that is only prepared to accept cash may not be the best possible partner for a US company.”
Ensuring best practice
Addressing the myriad challenges of entering a new market – both from an operational and treasury perspective – can be overwhelming, especially given the markedly different financial and business environment in each country in Latin America. Often the sheer number of decisions required can lead to companies accepting sub-optimal arrangements, such as payment in cash or cheque, because it is understood to be market practice and therefore should be accepted. “Our experience shows that it always pays to dig a bit deeper and see if alternative practices are possible,” says Cook.
“Cultural sensitivity is essential when entering a new market, otherwise a company will not be able to achieve its operational and treasury objectives,” says Diaz. “However, at the same time, the company must ensure that its new Latin American operation is true to the company’s principles.” Moreover, to the extent possible, treasury in Latin America must be structured in a way that delivers comparable standards of efficiency to the US, by ensuring that industry standard formats and common enterprise resource planning systems are used where possible.
To ensure that companies adapt to local conditions while maintaining group-wide standards, it is essential to apply regional best practice. “Companies must work to understand local practices and establish payments services, for example, that reflect them,” says Diaz. “They must also be aware of local restrictions around non-resident and resident accounts or FX movements. But at the same time they must seek to optimise efficiency by establishing SSCs. It’s a tough balance to get right, which is why it is crucial to work with a trusted, and experienced, bank provider.”
