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Business As Usual Won't Work Anymore For Latin America's Multinationals

Business As Usual Won't Work Anymore For Latin America's Multinationals

Posted by Juan Gavasa on October 31, 2014

One might say of Latin American multinational firms what a zoologist said once about domesticated animals: The question is not why they exist, but why we do not tame more animals.

Taming those different animals, however, has always been easier said than done. Not many management teams have the right local partners, the ability to fine-tune operations on a cultural level, or the backing of strong capital flows (or shareholders willing to cover initial losses) to sustain them until they have that winning combination.

From that perspective, the growth of Latin American multinationals — multilatinas — is the fruit of a remarkable process that for the most part has taken place within a framework of economic acceleration and a general drop in poverty levels. The region's governments did their part by promoting exports of goods and services, steering away from "economic nationalism" and establishing legal frameworks to protect foreign investments. The availability of cheap and abundant credit helped too, as did real increases in people's incomes in many countries and a boom in new communication technologies allowing firms to manage their operations cheaply and in real time.

When future economic historians look back at this period they will surely be surprised by how easily all of the aforementioned conditions came together, how widely accepted they became and how natural and permanent they came to be seen.

Except they aren't necessarily permanent. The current situation may not deteriorate entirely, but certain aspects of it are likely to weaken or change.

One thing Latin American firms would do well to consider is how their businesses will be impacted by the more "normal" growth rates (4-5% annually) forecasted for China. The slowdown may not happen next year, but it will eventually take place. It's simply unrealistic to think that the 9-10% growth we're accustomed to seeing in China will continue. If it does happen again, it'll be in the form of a rebound following a bout of recession.

That said, the current paralysis in Europe won't last forever either. When it does lift, demand will likely recover. Latin American mining companies may also have reason for optimism. Tecnological innovations are making exploration and exploitation easier and more cost effective. Scientific advances are also, in some cases, creating new minerals markets. The current race to develop a new generation of batteries to store solar-generated electricity, for example, could boost demand for materials such as lithium.

Food and retail multinationals will also have to adapt to changing conditions. They should confide less in the seemingly steady rise in real incomes and also be more cautious regarding the vast amounts of household debt families are accruing to pay for all their new consumer goods.

One thing owners, directors and managers can do to prepare for these changes is adopt a business model that is costly now, but fruitful later. On the demand side, that means starting to view consumers as co-creators of the goods and services provided them. Rather than the "pushing" strategies of the past, which tended to be copied from the U.S. and involve big budget marketing and publicity, companies could focus more on rapid response strategies in the supply chain by periodically "re-creating," for example, their various products.

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