Published: January 01, 2000
For companies expanding into Latin America, there are many factors to consider. But the real key to enabling a successful transition is upfront preparation. Without it, companies may find themselves wasting valuable time and money dealing with obstacles as they arise.
When expanding into Latin America, the first decision to be made is on which country, or countries, to focus. Decision factors will vary by company and usually encompass variables such as the company’s operating structure and industry sector.
Typically, when choosing a country, companies will consider market specific factors, such as the economic environment. But a country’s economic performance is only one dimension. It is also important to consider other aspects of the country including whether it has a stable political system, the cost of doing business and the infrastructure that exists.
If a company has manufacturing output, for example, distribution is a consideration, not only within the country but also internationally. If the company has a distribution centre or warehouse, it may want to look at options for storing its goods, such as the tax-free zones that exist in Costa Rica and Panama.
It is important to note, however, that economic considerations and sales potential are not, and should not be, the only considerations when making a decision. While a country may initially sound attractive from a sales point of view, after consultation with tax and legal advisors, it may become clear that the location has drawbacks which outweigh the benefits.
It goes without saying that expanding into a new region is a major business decision and one that should not be taken lightly. For some companies, a lot of pre-work is required to make sure there is an understanding of what the company is getting into, particularly when entering emerging markets, while others have a well-established process in place for entering new markets. An example would be that once the company’s sales team proposes a location, all of the relevant groups, including finance, tax and legal, work together to research the feasibility. Once this research is compiled, executive sponsorship may then be sought.
A company has a number of options when entering a new market. For example, it might choose to go in as an incorporated legal entity with its own people on the ground. Or it may decide that it would be more effective to begin with a non-resident entity, holding a nominal account, with lawyers handling the initial phases.
When opening a subsidiary, the company should consult it's legal, tax, regulatory and accounting advisors to discuss requirements. It should then consult with its banks to better understand what it can and cannot do in that particular market in order to determine whether its goals are achievable. For example, while a non-resident entity can be set up in Brazil, it is likely to be of little value due to the fact that non-resident accounts within the country are not very efficient and are only useful for specific niche markets.
As previously mentioned, some companies, particularly those with a history of expansion, may have a standardised process in place for entering new markets. Where treasury is concerned, these companies will typically reach out to international banks they do business with to discuss expansion plans and to inquire whether the bank can provide the necessary cash management capabilities in a particular country. The bank, in turn, should be able to help advise the company on regulations, including central bank regulations, of which it needs to be aware in order to support its operations. The bank should also be able to provide all required documentation and highlight any regulatory limitations.
From a treasury standpoint, a major consideration is the repatriation of funds and any foreign exchange (FX) hurdles that may exist. Other considerations include difficulties with respect to accounts receivable and the different types of payment instruments available in each market. The company’s liquidity management requirements will also need to be assessed in order to determine the most efficient structure.
Most companies adopt a phased approach to expansion, choosing to appoint legal and accounting firms to handle certain aspects of their business for the first six to nine months before installing a local treasury team.
Perhaps one of the biggest treasury hurdles to overcome is visibility over the company’s accounts. Having a true understanding of the cash position is a top priority for a CFO or treasurer, and the only way to achieve this is by having efficient and proper visibility over cash flows. Cultural differences and language barriers may cause the head office to rely heavily on local representatives to provide and manage the process.
Regulatory obstacles can also be a challenge. In Chile and Colombia, for example, foreign exchange restrictions prevent companies from making foreign currency payments out of those countries. In addition, FX conversion must be done onshore – unlike in other markets, where it may be possible to purchase currencies from the US and send directly to the relevant countries. Central bank requirements can also present a challenge, as documentation is required in many markets whenever an FX conversion is carried out and every time funds are sent to the subsidiary.[[[PAGE]]]
Another issue faced by companies pertains to account signatories. Many multinationals have internal policies which state that any international account must have an officer of the head office as part of the signing structure. However, some Latin American countries require that signatories on accounts be local.
Companies which have already expanded internationally know that what they set out to achieve on paper isn’t always reflected in the end result. But for companies new to the region, perhaps with little or no experience of working internationally, it is important to understand that expectations and reality don’t always match, particularly where timing is concerned. Processes that take a matter of days in the US may take weeks or even longer in Latin America.
In other cases, companies expanding into the region may find that there are inconsistencies in terms of local country capabilities compared to other worldwide processes. For example, when using a local bank, a company may find that the reporting tools available may use different formats from the company’s global tools. In addition, there may be an increased need for third-party systems for things like local tax and payroll payments. As long as a company has a good team, it should be able to address and work through the challenges.
While the process of entering Latin America can be more challenging than other markets, particularly as it relates to different documentation in different languages, and residency requirements for account signatories, having the right local advisors is key. A best practice approach is to start with local legal and tax advisors who can cover everything from ease of entry and regulations, and treasury considerations – such as FX and central bank requirements – including the best legal structure to use.
Banks that companies do business with are another essential source of information. When entering a new market there is much to be gained by consulting both local and global banks. In looking at the local market, advice from a local bank is second to none. If a head office is looking to have an independent subsidiary that operates only within a particular market, the local bank can be an excellent source of very detailed local knowledge. However, it is important to remember that a local bank will not necessarily have knowledge of what the parent company might be planning to do in the next two to three years or how this might affect the local entity.
For companies planning to operate on a regional or global basis, or which require a greater connection with the parent company, involving a global bank in the process is crucial. A global bank will take into consideration more factors than just the local sales, and will look at the entire relationship – factoring in the company’s strategic initiatives and objectives from a global perspective. In addition, it is advisable to consult a number of different resources, including peers, and analyse all the information in order to better understand the new market and make sound strategic decisions.
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