Where Are Spanish Companies Headed?

Nowadays, Spanish companies like Zara (Inditex), Telefónica and Santander do not need any letters of introduction. It wasn’t always that way. Over the last decade, Spain has gone from being a net recipient of foreign investment to a country that has growing significance as an investor in foreign markets. Indeed, Spain has become the eighth-ranked investor in the world, behind only the U.S., the U.K., France, Germany, Hong Kong, the Netherlands and Switzerland. Over the past two years, Spain has overtaken Canada and Japan. The Circulo de Empresarios (Businessmen’s Circle) in Spain joined with the Wharton School to take the pulse of the Spanish enterprise in the global environment. The two organizations recently published the annual 2007 edition of “The Globalization of the Spanish Corporation.”

The report also provides results of a new survey about the most outstanding foreign investments made by Spanish companies in 2006. The award winners were Acciona’s investment in Australia, where it is constructing the Waubra wind power park; Ebro Puleva’s acquisition of the Minute Rice chain; the acquisition by Ferrovial of BAA, the British airport management firm; the arrival of Santander in the U.S., where it acquired Sovereign Bank; and Telefonica’s purchase of O2, the British cellular operator.

Universia-Knowledge@Wharton spoke with the report’s author, Mauro F. Guillén, a management professor and the director of the Lauder Institute at Wharton, and Belén Romana García, who heads the Circulo’s economics department. The goal was to explore the achievements and challenges presented by globalization in the past, present and future.

Universia-Knowledge@Wharton: What factors were responsible for transforming Spain from a net recipient of foreign investment into a country that has growing influence abroad?

Belén Romana: It is a logical consequence of the fact that Spain has undergone an almost unforeseeable economic and social transformation that has had enormous significance. In the realm of economics, the most important thing was the opening of foreign markets: The entry into the European Community (1986), the establishment of a single [European] market (1993) and the adoption of the euro (1999). All this led to a change in the country’s economic structure by quickly introducing a large dose of competition into Spanish markets. This process permitted Spanish companies to make experiments at home before going abroad. [This happened, for example,] in the financial sector … and also in the infrastructure sector. Over the years, Spanish companies have learned how to compete for managing, financing and constructing infrastructure projects. All of the changes in the Spanish economy are associated with opening its economy to the world. We Spaniards do not improve ourselves simply on our own. Instead, we are compelled to open ourselves to risks that come from outside Spain. And when we do that, the Spanish economy has a great capacity to react.

UK@W: What role has Latin America played in that change?

Belén Romana: Latin America has been a second testing ground. Spanish companies learned [their lessons] at home; Spain is a country which had undergone political and economic changes. But in Latin American countries, which have a similar culture and the same language [as Spain], those companies immediately began to undergo exactly the same processes of political as well as economic change as a result of the privatization process. They also promoted democratization and a market economy. Those Spanish companies that go to Latin America are quite capable of developing themselves because the environment there is quite similar to their own.

Mauro Guillén: The sequence of events is very important. First, there was competition in the Spanish market. Before that happened, Spanish companies could not jump into the European market for two reasons: their [small] scale of operations and the fact that Europe was very protectionist in every sector — and continues to be so. Latin America was an opportunity that presented itself at the right moment because there were two completely separate and distinct processes, and they enabled companies to acquire experience and scale. Latin America was the last resort, the only hope …. Nowadays, we see the greater scale of operations, thanks to Latin America, and it enables Spanish companies to make acquisitions in Europe and the U.S.

UK@W: According to the report, in 1997, 50% of Spain’s foreign investments were in Latin America. In 2006, that figure was only 4%. Which regions are currently the targets of Spanish investment, and why?

Belén Romana: Nowadays, Spain’s outward investments are basically directed toward Europe; in 2006 the United Kingdom took in 56% of the total [value of Foreign Direct Investment from Spain]. The United States came next with 10.5% and Southeast Asia was somewhat lower. Spanish companies have tried to take advantage of the modest deregulation that has occurred in Western Europe. The United Kingdom is the European country that has taken market deregulation most seriously. When Spanish companies try to enter other European countries, they do it where they can. In Italy, for example, their attempts have failed to some extent.

Mauro Guillén: It should be emphasized that Spain’s four most important foreign operations took place in the United Kingdom — Santander’s takeover of Abbey, which opened the doors; Telefónica’s takeover bid for O2; Ferrovial’s deal with BAA; and Iberdrola’s deal with Scottish Power, the utility, in 2007. In Europe, it might have been simpler to make acquisitions within the euro zone but it turned out to be much easier in the U.K. because of regulatory factors and issues of competitiveness.

UK@W: Is Spain missing the boat in the competition against the faster-growing BRIC economies – Brazil, Russia, India and China?

Belén Romana: There is the case of Brazil and then there are the others. In Brazil, Spanish companies do have a presence. However, Brazilians are also beginning to go abroad and, in some cases, they’re going to Spain. In Russia, there has been an effort but only with rare success. In China and India, Spanish companies face very complex challenges. I believe that you pay a high price for having a [strong] cultural tradition. All of the countries that have had colonies in Southeast Asia know how to operate in that region because they have had a presence there for 100 years. But the Spanish have not. In addition, there are some negative factors; it [Southeast Asia] is a part of the world whose culture is very foreign; that acts as a very clear constraint.

Mauro Guillén: Large Spanish companies have a presence in Brazil, such as Santander, Mapfre (insurance), Telefónica and some small companies that supply auto components and machinery. In China, smaller companies also have a presence. However, Spanish companies still have much ground to make up in the BRIC bloc, except for in Brazil. Moreover, these companies usually don’t have the managers they need in order to carry out the expansion process.

Something interesting is happening in China, although it has yet to bear fruit. When it comes to infrastructure development, the Chinese are interested in Spain’s role in Latin America. That’s because China depends on Latin America for its raw materials. Take, for example, the case of Telefónica, which purchased a minority interest in Netcom, China’s second-largest phone company. In return, the Chinese got their own board member in Telefónica Internacional S.A. in 2005. That deal was motivated by China’s desire to have an influence on infrastructure decisions in Latin America.

UK@W: In your latest report, you note that Spanish companies have yet to project themselves fully onto the global scene, even those companies that have high visibility and a strong image in the global financial press. How has the image of Spanish companies evolved in such influential publications as the Financial Times, Wall Street Journal Europe, and the Economist?

Mauro Guillén: A decade ago, they had very little visibility, which reflected the small size of the Spanish economy. Over the last 10 years, their image has grown considerably. In 2006, more than 3% of all the articles in those four publications mentioned at least one Spanish company. At the time, the Spanish GDP supplied something less than 2% [of the world economy’s GDP]. That means that we are over-represented. That’s a good thing. The companies that are mentioned a great deal are the big companies; it’s always Telefónica, Santander and so forth.

At first, when Spanish companies began to invest abroad, especially in the mid-1990s, the media couldn’t believe it. They thought that Spanish companies would “only last a short time” abroad and that they “were going to crash.” Later, confidence in Spanish companies took an upturn but that subsequently collapsed after the Brazilian crisis of 1999 and the Argentine crisis of 2001. People started to say things like, “We told you so.” Starting from that point, however, the image [of Spanish companies] has improved a great deal.

Belén Romana: In addition, there is a clear imbalance. Companies that have assets in the United Kingdom stand out from the rest. Nevertheless, [Spanish companies’] success in Latin America has helped send the message that these companies were staying for the duration. You prove that you really are a global company when you survive and when you demonstrate that what you’re doing is relevant. The press has recognized that.

UK@W: Spain’s foreign account deficit is one of the largest among developed countries. Does Spain have a competitiveness problem? In which sectors are Spanish companies most competitive on a global scale?

Belén Romana: Clearly, the fact that Spain has both a trade- and current-account deficit reflects the country’s competitiveness. Deficits cannot be attributed entirely to this, however, just as in the case of the United States. When it comes to Spain, some portion of the deficit results from its unusual position: The country trades above all with the European Union, but while Spain has been growing lately, the EU has not grown [much] for 10 years. When that sort of thing happens, you wind up buying more than you sell. That’s part of the problem. On the other hand, Spain is poorly positioned when it comes to trade because it sells to countries that are not expanding while other countries sell to faster-growing markets. We’re in a very complicated position because our trade pattern does not match up much with the trade patterns of China and India. There is very little to sell them that we produce here [in Spain].

Spain does, however, have a problem of competitiveness as a result of pricing differences. What can you sell when your prices grow continuously for a decade, and your prices wind up being no longer competitive? Traditionally, our approach to selling merchandise was based on this strength — our labor was cheaper. Nowadays, that approach is impossible when it comes to Poland and ridiculous when it comes to China. Our trade pattern doesn’t work out for us because it is based on a factor where we are no longer the best. We have to change that pattern and, yes, that is a problem of competitiveness.

It’s quite natural that a lot of companies have noticed this change in global trade patterns and have globalized as a result. They realized that national markets defined by borders are dead nowadays and that you have to look at the world as a single market. The Spanish companies that have changed their perspective are the global companies. Many of them originated in the public sector, but others did not.

Mauro Guillén: Next, there are the midsize companies. Some of them continue to be competitive by exporting from Spain but manufacturing some kinds of products in other locations. The important thing is that there is a lot of variation; some have figured out how to respond to incentives but others have been left behind. This happens in every economy, not just in Spain. On the other hand, the headlines are always about the banks, telecom companies, utilities… There are perhaps 200 or 300 first-rank global manufacturers in Spain — in machinery, food, optics and so forth. All of this changed because of deregulation and because opening the Spanish market to foreign companies has been a positive process, not only in those three sectors. In practically every sector, there is a Spanish company that has made progress. It’s not that there are just a handful of geniuses; these companies have created institutions and conditions that improve their competitiveness and the economy. This has enabled a very wide range of companies to move ahead. When and if they succeed ultimately depends on the dynamics of the market.

UK@W: What factors do you need to keep in mind when it’s time to make a foreign acquisition?

Belén Romana: First, you have to figure out where you can enter; which markets you can get into. Next, [you need to find out] whether you will have a competitive advantage in know-how if you decide to enter that market where you are better than your competition. Third, you have to identify what factors will help you acquire prestige, muscle, financing and global scale, and what factors will enable you to jump to the next stage.

Mauro Guillén: When you create a multinational company, you don’t become competitive right away, not in just one or two years. You have to look for new opportunities to do business and make investments that enable you to learn new things. The sequence that we were talking about is something very important — going first into Latin America and then into Europe, and so forth. You need to have the mentality of going up the rungs of the ladder and opening one door at a time, identifying new choices to make. This is a very dynamic process, and you need to have a vision that looks ahead for five or 10 years.

UK@W: Some Spanish companies have stood out by making important acquisitions around the world. Is this a growing trend or are these just isolated cases?

Mauro Guillén: What we are seeing is just the beginning. My prediction is that Spanish companies are going to make important acquisitions in the U.S., partially as a result of the strength of the euro. Within a few years, we are also going to see the first significant acquisitions in Asia. Assuming that there is not a global recession, Spanish companies will continue to make headlines with these acquisitions. Nevertheless, there will be some Spanish companies that will also become targets, and they will be acquired. That is the case with Endesa, the electric utility that is now Italian-owned. There is also talk that Iberia [Airlines] might be acquired. There is going to be a process of give-and-take, and that isn’t a bad thing. It will be mostly European companies who come to Spain to make acquisitions.

UK@W: What challenges do Spanish companies face as a result of globalization?

Mauro Guillén: Spanish companies are going to face the same sorts of problems they have faced until now, but on a greater scale. You see that in the case of Ferrovial’s acquisition of BAA, a company that operates airports. The problem was that the deal was financed with debt and was leveraged. Secondly, the company’s prestige was at stake. BAA was a company that had a lot of problems, and it was poorly managed. If it fails now in the United Kingdom, it will be very hard for BAA to penetrate the U.S.

Belén Romana: In any globalization process, you have the problem of bringing together a distinctive market and business with another culture and another organization [that are quite different]. Some of these companies have more business activity outside Spain than they do inside it. In addition, personnel management is a very complicated issue.

Mauro Guillén: Regarding that final point, companies are very poorly prepared because programs for managing employee rotation have only recently begun to be implemented. Outside Spain, you have a pool of people who speak Chinese and Russian in Holland, Switzerland, Sweden and the U.K. Not so in Spain. The problem is that it takes decades to develop internal training programs for rotating employees in four or five countries and creating managerial cadres that have great operational skills. The big Spanish companies began to do that only four or five years ago. They haven’t had much time yet. This is the most important bottleneck that Spanish companies have, and you can’t resolve it overnight; you need to invest five to eight years.

Belén Romana: In Latin America, companies learned that they have to place a great deal of trust in local managers. After all, they are the ones who know all about the company you just bought as well as about the market and the regulators. In contrast, there is no natural reserve [of such people] in Spain. People don’t speak languages [in Spain], and they don’t have any special calling for global management. Everyone wants to live in Spain. It is a cultural problem that we will have to address.

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