Overcoming Hurdles for Latin America Expansion


Latin America is gaining popularity among U.S. companies planning to establish or expand their international operations.

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That key finding of the Bank of America Merrill Lynch 2015 CFO Outlook is not surprising, given the fast-paced growth of many of the region’s economies and improvements to local infrastructures and technology. According to the World Bank, for instance, Latin America’s middle classes will outnumber the region’s poor next year.

At the same time, there are a number of challenges specific to Latin America that can disrupt growth plans for middle-market companies, ranging from regulatory challenges to economic uncertainty and a lack of local market knowledge. However, middle-market companies are often nimble enough to move quickly to capitalize on new opportunities abroad, as they are often less bureaucratic and more flexible in adapting to new situations than their larger counterparts.

It’s important to understand that strategies and operations that work in a home market may be less effective overseas. For instance, in the United States, it is acceptable to interact with suppliers by the phone and email, but in most Latin American countries, face-to-face meetings are necessary (at least initially). Human capital can mean the difference between success and failure, and therefore it is important to be flexible and understand potential nuances.

The following are some of the critical opportunities and challenges middle-market companies must address to execute a successful Latin America expansion strategy:

Setting Up the Local Workforce

In many cases, companies spend most of their time and attention during the expansion phase on identifying a target market and setting the right strategy. When it comes time to set up operations, trusted senior managers often step in to start an office or operations, which can provide continuity with the home office.

But at some point, companies will have to fill new positions with local hires, and that can present challenges in Latin America. That’s because managers often overlook the cultural differences between their in-market talent and employees from the U.S. and other existing offices.

The cultural intelligence of a company’s target market should be a primary consideration when building an international strategy. Key questions to ask when establishing a local workforce include:

  • Is your company’s industry strongly represented in the new market?
  • Will there be an adequate talent pool?
  • How much will you have to invest in training?
Consider the example of Mexico, and how it is becoming a manufacturing powerhouse by creating industry clusters in autos, appliances and aerospace. Mexico houses 89 of the top 100 auto part makers, and according to the Boston Consulting Group, Mexico rivals China with its wage and energy costs, higher productivity and free-trade agreements with the U.S. and other developed economies.

As a result of these strong capabilities, companies that expand into Mexico are finding a capable and ready workforce, which is vital to ensuring the business has the right talent to execute on the growth strategy.

In addition, language can be an issue, even though Spanish is spoken in most nations. But in Brazil, an economic leader, Portuguese is the official language. Companies must be sure to consider the language abilities if they seek to set up shared services centers.

Mitigating Infrastructure and Supply Chain Vulnerabilities 

As the economies across Latin America continue to grow, the quality of the local infrastructure is improving. But there are still concerns, and in many parts of the region, the quality of the roads, public transport and distribution networks will lag behind those of the United States. As a result, companies must consider carefully how the regional infrastructure may affect business performance along with distribution networks, efficiency and product delivery.

Consider the case of Brazil, one of the brightest spots for economic expansion and one that is showing significant improvement in the quality of life for its growing middle-class. There is agreement among officials that the work has not gone far enough, so the Brazilian government is focusing on investing in the local infrastructure to provide greater accessibility and opportunity.

For example, Brazil unveiled a $10 billion infrastructure budget to prepare for next year’s Olympic Games in Rio, according to Reuters. The investment will be made to upgrade urban developments as well as public transport, new roads and railways. Separately the government also offers tax incentives for domestic and foreign development.

 In addition to improving the overall public transport infrastructure, Latin American countries have also focused on improving their telecommunications infrastructure. That has led to innovations in the technology industry: consider that U.S and Latin American companies, such as Samba Tech and Netflix, are offering streaming videos and programs over the updated infrastructure.

In other cases, companies have worked to increase the infrastructure to benefit consumers and drive more business. In 2013, U.S-based software company Evernote partnered with Telefonica to offer the company’s Vivo subscribers a year of Evernote Premium service. Through this partnership, Evernote was able to reach millions of new potential customers, while also helping to improve the telecommunications infrastructure in the regions.

Managing Capital Locally

Finance executives are at the table with the rest of the company’s leadership to drive strategy and set priorities in new markets, which is an exciting role for many executives. But they cannot lose sight of one of their most important jobs: to ensure the company can access the money earned in a country efficiently.

Even though a business strategy for Latin America may include different countries – and there are some similarities in markets – companies must consider that each country has its own currency, regulatory environment, tax laws and payment instruments. In some countries, cross-border transactions may be seen as lending transactions, which can pose tax implications. Failing to follow the individual rules in each country can cause significant problems for the business agenda.

In addition to understanding local regulations and tax implications, having the right financial resources to support international expansion is crucial. Before pursuing an international strategy, companies should understand global financial requirements, while also being able to articulate a global plan with an understanding of where cash will be generated and any restrictions for moving capital.

For instance, in Argentina and Venezuela, local regulations prevent companies from making foreign currency payments out of those countries without going through an arduous process that can sometimes leave companies with trapped cash. In Brazil, by comparison, companies do not need prior authorization for foreign exchange transactions, although a record of the transaction must be filed online with the central bank.

Brazil has other rules, however, that can affect a treasury strategy. For instance, only a resident, not a foreigner, can be named on legal incorporation documents. Similarly, all FX transactions require a legal contract and local authorization, making it challenging to manage FX automatically through a treasury system based outside the country

Understanding the regulatory environment, operational realties and risks is critical when entering new markets such as Latin America, and companies should seek to identify tools and resources that help them understand the latest developments and emerging trends. Many banks and consulting companies offer tools, such as Bank of America Merrill Lynch’s World Markets Entry Map, that make it easy to keep track of the best ways to manage global finance.

Capital Planning

Ultimately, the question will be whether to raise capital onshore at headquarters or offshore where the company is expanding. But the process of raising capital should begin with a full review of the organizational design, including the benefits of being able to access supply chain financing, credit and treasury facilities that can enable a company to get more efficient with liquidity.

It is important to consider the differences among countries when handling liquidity. For instance, according to the business environment rankings from the Economist Intelligence Unit, Chile was the top-ranking Latin America country due to its “well-functioning market economy, open foreign investment regime, strong fiscal position, sophisticated capital markets and the world’s most extensive network of free-trade agreements (FTAs).”

Furthermore, Mexico, with its close business links to the United States and its membership in NAFTA, is often considered the easiest country to operate in.

Conclusion: Think Long-Term and Build Relationships

No matter the country for expansion, U.S. companies must think long-term when moving into new markets. In particular, business relationships are most important, as customers, partners and would-be employees need to know the companies are committed to a region and its communities.

When managing operations in Latin America, the sheer number of decisions that must be made can lead to sub-optimal arrangements. That’s why it is important to be informed about the myriad rules and cultural sensitivities that can pose problems. By focusing on the relationships, middle market companies will be able to drive the expertise needed to navigate the political, business and cultural landscapes in Latin America successfully.

Lesley White is head of Global Commercial Banking International for Bank of America Merrill Lynch