Creating an Effective Treasury in Latin America
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.”