Author: Fred Hoyt

Buenos Aires, the harbor city situated on the enormous delta of the Rio de Plata, has a population of around 3 million.  The area around the city is roughly 13 million of Argentina’s 40 million.  Thus, it gave us a wider look at life in Buenos Aires when we went about an hour out of the city to visit a factory.  It was an easy hour on an expressway, until we got to an industrial district for our visit.

The company smelled good—Saporiti manufactures flavors and colors for food manufacturers. Today, chocolate was one of the flavors being produced, and as a chocoholic, I was ecstatic.   Founded in 1927, Saporiti’s  current CEO is 3^rd generation, who left a profession as an MD to take over the family business, and discussed some of the carryover between the two types of jobs. With 130 employees, $70 million in sales, and branches in a number of Latin American countries from Mexico to here, the owner discussed his plans for expansion, which included a look at the substantial Hispanic market in the United States. He did note, however, that as a mid-sized company, he was limited in his ability to supply a vendor like Coca-Cola, which demands similar taste around the world.  He stated that he was able to supply some niche products to big brands (I thought he mentioned a yellow cola, Inca Cola, in Peru).  The most interesting thing I learned from this manufacturer (surprisingly, manufacturing employs just over 20 per cent of the work force, while agriculture, a big exporter, employs 5%) was that one of his efforts to create business, if not competitive advantage, is moving downstream.  He will work with a manufacturer to create a new flavor, and (for a fee?) not sell it to others in the same product category, providing research and development assistance to the small and medium sized companies he serves.  In addition, he will provide his expertise to his clients purchase the right machinery. Forecasting has got to be a great challenge since he has no “captive” audience; it’s difficult to get new business, but he said if the manufacturer is satisfied, he seldom changes supplier—too much risk of a “different” taste. Some of his ingredients take 2 or 3 months enroute (cocoa comes from Africa) further muddying his ability to manage supply and demand.  As he pointed out, he has a large warehouse to anticipate demand.

The second business was a service business that exemplified the flat world.  It was an advertising agency that stressed its ability to deliver creative services globally.  One ad they showed us found a market in Canada, the United States, and Thailand, for example, proving, as one CEO I met in India in 2001 pointed out, the right business can be headquartered anywhere.  The two entrepreneurs who integrated their production company forward, adding an advertising agency, were passionate in their presentation about their creative abilities, and some of the spots they showed us certainly demonstrated that they’d taken a lot of film-making skills and added them to the world of marketing.  My favorite was a coffee ad with a hand coming out of the coffee cup slapping someone awake.  I did not need it for their presentation!

It really hit me as we drove through their neighborhood looking at wonderfully solid homes of the rich (their office was a converted one-family many-room mansion that still had some elegant touches) that we were in the southern hemisphere.  As I looked up the street, I saw a beautiful sugar maple that was orange and red, rather like the one outside my home in Bloomington—in late October.  Here, 31 degrees south of the equator, it is climatologically mid-November.  If you love fall (and I do) you might consider moving to the southern hemisphere when it’s spring up North—if that’s not too confusing!

When I went for a walk this morning, I got really confused; I could not tell whether I was in Vienna, Budapest or Paris.  I had been warned that the city was deceptively European, an impression confirmed later when we walked between our visits through the main square—with statues of San Martin—surrounded by palaces built by land barons late 19^th century with Empire roofs that could have been in any one of those cities.  As our local guide gushed, this is the “Paris” of South America. The area where our hotel is located is on Reconquista (maybe referring to the Spanish reconquest of Iberia from the Moors, maybe referring to the independence movement in Latin America, a by product of the Napoleonic wars, started when Napoleon put his brother on the throne of Spain) and Paraguay streets, but could—with its cobbled narrow streets and small shops be somewhere in Europe.  But in the 19^th century EVERY civilized city wanted to be Paris. (Not sure what that says about Chicago….)

Our first visit today was in a building that could have been a palace; built in 1914 to house the Navy Department, its gilded doorway, wooden library, comfortable old boy chairs was in fact nicer than some of the palaces I’ve been in in Europe.  Coincidentally, it was the 100^th anniversary of the opening of the building, and there was a celebration welcoming brass from the South American navies.  I felt a little out of place without gold braid, but we were there to visit with a lawyer who has sat on Argentina’s judicial committee for a number of years, a body instituted 20 years ago to provide choices for judgeships to the President, who until then had put his own men (usually men) in for life with few checks or balances.  Remember, I said the civilian rule in this part of the world is fairly recent—remember the Falklands War?

His talk brought to mind some of the hazards of the flat world—hazards especially to the losers.  As I’ve told my students, neither organizations nor people react well to change, and the existence of the nation-state and political parties and different interests serves as speed bumps in that flat road.  In the case of Argentina—a country of 40 million, 13 million of whom live in the environs of Buenos Aires—there’s a tug (as there is in most countries) between the protection of jobs and the protection of consumers, for whom the flat world means greater access to goods, usually for less.  As in Brazil, the effort to protect jobs has sometimes prevented businesses from adapting to competition.  In addition, the system is riddled with corruption and businesses with inefficiencies.  As in other Latin American countries, there is an election in the next year, and businesses, we were told, were reluctant to invest until then.

Lunch was in an Argentine restaurant with pasta and the ever present grass fed (90% of the cattle are grass fed), with some concession to the vegetarians in our midst (pasta).  The steaks were huge, as usual, and about half of it would have stood in for a meal for three days.  We were also introduced to a pancake called dulche la leche, a sweet crepe with caramel sauce that our guide said was too sweet for most Americans.   I had to confess to her that “my name is Fred, and I’m a sweetaholic”, but I confess (as did half our group, that the meaty lunch precluded much for dinner!

The second visit was to an entrepreneurial company that provides IT services in 30 countries, but is based in Argentina, showing that the flat world reaches here too.It is the largest provider in Mexico and Argentina, third largest in Columbia, and has the largest number of Spanish speaking consultants for SAP.  They pointed out that the GDP has been rising, but so has inflation, ranging from 25-35% (wow), which led to a major devaluation in January, and the intervention of the government to control prices. The exchange rate last year ranged from 6 (legal) to 12 (black market), but the government has pegged the peso to the dollar ratio at 8-1.  I understand that you can go to the black market, though, and still get 10 or 11.  The government has also limited the outflow of dollars, which has led to a thriving black market in dollars, which bring a better ratio on the street.  The government is controlling prices, and pushing some industries more than others—e.g., IT services.  Neovis, the company we visited, is one of 1600 firms, employing 80,000 in Argentina. Still, the major exports are agricultural—machinery and soybean, and the major imports are gas and oil.

I had a real treat—a dinner with one of my advisees who is studying this semester in Buenos Aires.  We made plans to meet before I came down here, and he took me to a local restaurant, and talked about the difficulties of doing business here, and shared his observations about what he’d learned, as much about himself as about Latin America.  He lived the Confucian saying, “It is a pleasure to welcome guests who come from afar,” and it was good to catch up with an IWU student.  He’s looking forward to going home (he studied in Barcelona as well, and says this is a tougher place to live than Europe), but admitted “it’s a great place to visit.”  As long as you don’t overdo the steak. As I said, Argentina is a great place for meat, but I can feel my arteries hardening….I had pasta tonight.

Se habla espanol aqui.

We’ve left Sao Paulo for Buenos Aires, about a two hours by air from sao Paulo, and crossed the Pope’s line from Portuguese indebted colonies to ones that were once part of Spain’s global empire. The ride in offers a tantalizingly different feel than the city we just left—even in the dark.  It seems more open and less claustrophobic, but it may look totally different in the light of day tomorrow.

We discussed the question I raised, “If you were to have a postcard to send to others that said ‘This is Sao Paulo, what would be on it,’’’ and the question stumped us.  It’s a difficult city to characterize.  We did leave with a pretty good picture of the economy, partly a result of our visit today to an asset management firm that laid out pretty well the macro economy.  One factor that’s important in evaluating these countries we’re visiting is that their conversion from dictatorships do democracies (Roosevelt famously described one Latin American dictator as an “S.O.B.—but he’s our SOB”.  As I recall, Brazil rousted the generals in the 1980, and despite rampant inflation that reached 15% a month, doesn’t seem ready to reverse history.  The politics are contested (there’s an important election in October), but the system seems viable.

The economists at Rio Bravo, the asset management fund confirmed much of what we’d been reading recently about Brazil’s economy.  The most impressive single fact to me was the relative importance of Foreign Direct Investment brought by multinational corporations, which employ 2% of the work force, but produce over half the GDP, which is to say Brazilian industries are neither globally competitive nor productive (I wish I had asked about some of the great companies, including what used to be AmBev, which bought Stella Artois-Inbev—and Anheuser Busch, forming AB Inbev), indicating the need to improve worker productivity, which has stalled.  The most pronounced trend, though, was the reduction of financial inequalities, which are due more to labor earnings than to social programs.

They were also expansive on some of the directions they thought the government needed to take the economy—in particular, spending on transportation/infrastructure/education (especially in the primary grades.  The universities are free, but the needs are great before college).  Legal  and labor issues, as well as taxes,  have also, they argued, impaired the economy. One example they gave was the difficulty in firing people—courts tend to be friendly to labor, so people laid off sue, and companies settle out of court, making doing business costly (as I said, 79^th worst place to do business).  The other area of concern is savings, which are really low.  Interestingly, the country ranks #1 in optimism about the future.  Perhaps the coming World Cup and the Olympic Games will fuel the optimism, but the events will sorely test the infrastructure of Brazil.  We were a little surprised to see so few advertisements or trinkets touting the coming games.

Their conclusion was that one needs to take a long-term view of the Brazilian economy, so maybe that’ll be my excuse to return in a few years.

In the meantime, it’s “Buenos noches” from Buenos Aires—it’s 1230 at night

Having a “real” good time in Brazil

It’s hard not to have a “real” good time—the currency is the “real.”

The day in this overwhelming city was spent at two businesses (or on the highway going between the two) which gave us some interesting views of life in Brazil.

The first was with two operations/marketing people from Azul airlines, Brazil’s equivalent to Jet Blue.  In fact, the airline was founded by one of the Jet Blue entrepreneurs, who left the US airline in something of a cloud, but who had a good enough reputation with investors to parley 235 million dollars into the start of what is Brazil’s 3^rd largest airline.  If you think of the size of Brazil (5^thlargest country) and population (5^th largest country), and the poor infrastructure,  air travel makes a lot of sense.  Donald Needleman recognized that need for business travelers, and copied the Jet Blue model here in 2008. In six years, the  company has grown to the point where it has filed to fly to Miami and New York, using secondary airports (Fort Lauderdale and Newark) ala Jet Blue’s model.  The founders set a nearby city of 7 million, within driving distance of San Paulo (it’s apparently easier to drive away from the city than into it; Sao Paulo has the second largest number of helicopters for in city travel in the world—and when the Azul executives go into the city, they travel in a bullet proof car; most of the industrial factories, and some of the homes, and even a few of the malls, are fenced with razor wire at the top), as a hub, and have managed, through efficient computer programs, to capture about 85% of business traffic on smaller planes with more frequent service than the existing domestic airlines.  They demonstrated that it’s cheaper (as well as faster) to fly than to take a bus or a car, though rates are also subject to equations that maximize revenue.

They painted an interesting picture of the airline industry in Brazil, describing it as akin to the balance of mass destruction in the Cold War. If everyone is rational, all can survive, but if one lowers fairs, it could ruin them all.  They also described some of the problems peculiar to airlines in Brazil—the high taxes on fuel (which led to experiments with local manufacturer Embraer in an ethanol friendly plane, ethanol being one of the domestically-produced alternatives to fossil fuel) and the short runways or the lack of fire trucks which makes it difficult to expand.  The government did privatize the major airports they said, which has reduced the amount of bureaucracy (Brazil is the 79^thworst country in the world to do business) , but the presence of Petrobas, the gasoline monopoly, makes aviation fuel almost 40% more expensive in Brazil than in the United States.  They also discussed the possibility of carrying freight, but they said it would require larger planes, though they do carry small packages. We also saw the command post where they work on scheduling maintenance, arranging luggage in  plane (from the corporate headquarters) etc,  When I asked about corporate social responsibility—almost invariably the first topic any of the Indian companies mentioned—they were ambiguous, mentioning “education and kids.”  As for reducing carbon footprint, they said that they would embrace it when customers were willing to pay for it, because in the long supply chain the airlines were much less profitable than the manufacturers or the airports….it’s not India.

The second visit gave us a glimpse into the retail/consumer goods economy—at the French retail/online chain, Sephora.  The general manager for Brazil (a recent addition to the company; trained as a chemical engineer and bored with manufacturing—“it’s the same thing every day”—she got an MBA in marketing, worked for banks and L’oreal before coming to Sephora.  She is part of the Americas division (US, Canada, Mexico, and Brazil) and described what we in business call “glocalization”—the adaptation of a global model (French in this case) to meet the needs of a different target market (in this case, Brazilians).  Her numbers and observations on the marketplace were interesting.  Despite the recent slowdown in the economy (despite high employment, there is high inflation, and discontent with the money spent on the World Cup and Olympic facilities at the expense of addressing social issues) as women move into the middle class, one of the early purchases is fragrance—and especially, in Brazil, hair care.  While something like 70% of the women have curly blonde hair, they purchase an average of 5 products to straighten their hair and care for it.  There are only 14 or so stores, and 40% of the sales are on the internet, but the company has fostered ecommerce with free shipping in Brazil.  She talked as well about developing some products in Brazil as a way of bringing the price down and catering to local tastes. Most of the products come from the United States, France, or China—meaning high tariffs on imported cosmetics.

Dinner was at a local barbeque, with something like 19 different cuts of beef for sampling.  I probably ate more beef tonight than in the last three months. Our guide promised nightmares, but I’m hoping for pleasant dreams, which I wish on you too.

We have another visit tomorrow morning, then leave the “real” world for Argentina.

bom dia from Sao Paulo

Just before I left Bloomington, my son David said,”Dad, you’ve never been to Brazil, Argentina, and Chile. I expect I’ll be reading a lot from the Lonely Planet.”  I want to assure him that I don’t have a copy of that standby, so what follows are sleepy observations over 6,000 miles south of Bloomington Normal.

I’d like to say it’s an easier flight than Asia, and it certainly is shorter—by about 3-4 hours.  In addition, the time zone change is only 2 hours (it’s two hours later in Sao Paulo than in Bloomington, lying south but also East).  But David is right: it is a new experience for me.

I can sort of thank the Pope that I’m in a Portuguese-speaking country.  Early in the age of exploration, he divided the world between his two major Catholic countries—Spain and Portugal—and what is now Brazil fell into the Portuguese partition.  That’s made the Portuguese language one of the most popular in the world because Brazil’s population is nearly 200 million, surprisingly overwhelmingly urban.  I think the figure I saw was 85%, with Sao Paulo at around 12 million, and the more famous—and once capital city, Rio de Janiero, around 6 million.

Sao Paulo owes its founding nearly 460 years ago to the Jesuits, who came to convert the Indians. One byproduct was that the fields and mines that fueled the growth of Brazil (this was the age of mercantilism, when colonies existed to enrich the mother country) were staffed by African slaves, adding to what proudly has emerged as a multinational society.  Sao Paulo has Jewish, German, Japanese (yes, there’s a Japantown, but not a Chinatown) areas, among others.  In return for the language and the religion, Brazil made Portugal richer; Lisbon suffered a major earthquake in the middle of the 18^thcentury, and it was rebuilt in Baroque, made more baroque by the import of gold from Brazil. The churches in Lisbon are incredibly gilded!  Ironically, it was gold that led Brazil to declare independence from Portugal.  During the French Revolution, the royal family fled Portugal to settle in Brazil when Napoleon took over the Iberian Peninsula.  Apparently, when the King returned to Portugal, his son remained as Emperor of Brazil.  Son apparently got annoyed when dad raided Brazil gold to pay debts to Britain (the Brits should have settled for port wine, I think), and declared independence from Portugal.

Sao Paulo owes its prominence initially to agriculture.  There’s not much left from 450 years ago (the churches, though, are quite classic; the main Cathedral, the Se, is supposed to resemble Notre Dame in Paris), but there were some nice mansions once owned by coffee barons.  Brazil is one of the leading countries of the world in coffee production, which we savored at a local non-Starbucks stop on our tour of the city.  It’s also a major producer of sugar cane—and ethanol—which has led to a number of auto plants located in the Sao Paulo area, partly because the car engines need to be adapted to burn the “cleaner” ethanol fuel (ethanol from corn is expensive because the corn needs to be converted to the sugar that comes from sugar cane).

It is fall here, and getting cooler; which means the large homeless population is camping in the public parks.  There were a few squares downtown that I would love to have explored, but our guide exercised caution and kept us on the bus.  It will be interesting to follow the world’s greatest sporting event—as the world cup is (probably accurately, except in the United States) billed here, given the cost overruns and deadlines for facilities that might not be met, which begins in 33 days.  I’m glad we’ll be gone by then.  Someone said there ar e 8 million cars on the streets of Sao Paulo, but the government will probably do something like Beijing did (license plates dictated when people could drive); we may get a sense of the potential nightmare when we start our serious visits tomorrow.

I hope you all had a wonderful mothers’ day.  It’s celebrated here too.

Associate Professor of Business Administration Fred Hoyt traveled to Argentina, Brazil and Chile as part of a Faculty and Professional Development in International Business Program to raise U.S. business professional and faculty awareness of the social, political, economic and business environments that exist in South America. The Mercosur program is offered by the Center for International Business Education and Research (CIBER) at Florida International University.