Published: January 01, 2000
Middle market companies (typically companies having annual revenue below $2 bn a year), make up a huge part of the global economy. Given their size, they are typically more nimble than multinationals - and, globally, they have enjoyed rapid expansion in recent years. In Latin America, US middle market companies are becoming an increasingly important force in many countries as their economies open up.
While some middle market companies have put in place aggressive expansion plans to leverage the benefits of globalisation, expanding to Latin America represents an enormous challenge. For many, there is little knowledge of how countries within the region differ from one another, or from the US. To achieve their goals, companies need advice not just on treasury practicalities, but also on countries’ banking systems, the economy, political risk and even the cultural differences that affect how businesses operate.
Middle market companies tend to have different characteristics and attitudes to risk. Often they are less bureaucratic, more flexible in how they adapt to new situations and opportunities, and less set in their ways. Many such companies have proved themselves willing to change rapidly in order to capture growth opportunities in Latin America.
Within the region, Mexico and Brazil are typically the primary expansion targets for most companies, given that they are far larger than other countries in Latin America. Brazil is currently generating huge interest given its hosting of the World Cup football tournament and the forthcoming Olympics in 2016. The country offers opportunities in different industries, such as technology, media, and telecom and is a huge retail market. However, Brazil is a complex and challenging country in which to operate: companies need significant support to successfully navigate its business and banking practices.
In contrast, Mexico is generally seen as the easiest country for US companies to operate in within Latin America, given the existing close business links between the two countries and its membership of NAFTA.
In addition, Mexico has an open market and while there is withholding tax, strategies can be employed to minimise costs. Moreover, US companies can operate a non-resident account, and reporting requirements are minimal. Mexico’s attractiveness as an investment destination has recently been boosted by a series of reforms aimed at opening up the energy market to external companies [1]. These moves are likely to presage a broader liberalisation that could benefit US middle market companies.
Chile, Colombia and Peru are often secondary target markets once a company is established in Mexico and Brazil. All three countries have strong GDP growth and an attractive business environment.
While multinational corporates and middle market companies face the same challenges in understanding regulatory or tax requirements when they expand in Latin America, some middle market companies often face additional challenges that stem from limited international experience.
Some middle market companies need extra help to understand how other countries differ from the US: multinationals, by definition, are international and already have structures and strategies in place to facilitate new operations. For example, multinationals are likely to be comfortable with giving a degree of local autonomy to a Latin American operation. In contrast, a US middle market company may want to retain control at its headquarters to as great an extent as possible, including making decisions on structures, sales strategy and banking relationships. However, there may be circumstances where complete control at headquarters level is impossible. For example, in Brazil middle market companies need to understand that they must have someone on the ground who is responsible for every aspect of local operations, from its legal incorporation to its banking arrangements.
Companies also need to consider local market practises and conditions: in Brazil, for example, hiring well qualified people can be expensive. Similarly, while many US companies relocate an executive from head office to manage a new entity, they need to take into account cultural differences between the two countries: Brazilians value face-to-face contact and few sales are possible without building trust over a prolonged period. It can be helpful for banks to facilitate a conversation with one of their local clients to share their experience of entering Brazil with a company expanding to the country.
Companies also need to differentiate between different levels of financial and political risk in the region. In Venezuela and Argentina, for example, apparently attractive sales opportunities may be a chimera: companies run the risk of not having their invoices paid because of FX and regulatory risks in those countries.[[[PAGE]]]
More generally, middle market companies need to maintain an open mind and take a fresh look at each country within the region. While there may be superficial similarities in some instances, each country in Latin America has characteristics that can have important consequences. For example, opening a bank account in Latin America can be lengthy and cumbersome and, in some countries, know-your-customer requirements can require company officers to divulge personal information, including their income and home address. Companies need to work with a bank that understands local requirements and can make it as easy as possible to stay in compliance with the requirements.
While there are a wide range of opportunities in Latin America for US middle market companies, it is important to work with a bank that differentiates between the business activities of clients rather than simply assuming the needs of all middle market companies are the same. For example, many middle market companies are in the general industries sector, which comprises sub-sectors such as automotive parts, construction and engineering and logistics, which all have different banking requirements. Similarly, significant opportunities exist in the technology, media and telecommunications sector and customer retail in Latin America, each of which may require different banking services.
Latin America is one of the most diverse and challenging regions of the world. However, it offers enormous opportunities for US middle market companies. To achieve their objectives in the region, companies must first stop regarding it as a region: while there are some shared characteristics, the financial and business environment in each country is markedly different and should be considered separately.
To overcome the challenges posed by Latin America, it is essential to work with a bank that understands and has expertise in the region. On-the-ground expertise is necessary to ensure that regulations and market practices are followed. However, it is equally important to work with a bank that understands the requirements of the company expanding to Latin America. Companies need to select a banking provider that distinguishes between client industries to ensure that their needs are understood and solutions are tailored to those needs.
Note
[1] Mexico Presidencia de La Republica, http://presidencia.gob.mx/reformaenergetica/#!reforma-si
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