When representatives of major regional and global companies met at the Wharton Global Alumni Forum 2005 in Santiago, Chile, in early July, they agreed that Latin America offers favorable prospects for local and foreign investors. Oscar Von Hauske, director of operations for Telmex, the Mexican giant, and Bruce Catania, Latin American corporate director of Citigroup Venture Capital International, spoke about their areas of activity — telecommunications and risk capital. They also discussed business conditions in the region, the opportunities that exist there, and the keys to achieving a successful investment strategy.


Julio de Quesada, director general of Banamex, the Mexican bank, moderated a panel on “Investing in Latin America.” Quesada said that economic growth was fundamental for generating a flow of investment both from companies within the region and from other businesses. “Volatility can be a problem, and there are many future challenges regarding corporate governability. However, the key is to make a consistent effort to achieve growth,” noted Quesada, adding that every foreign investor must make an effort to be perceived as a local company.


Leadership is a requirement for achieving economic growth, noted Claudio Engel, president of the organizing committee of the Forum, in his welcome letter to participants. The world is interacting with Latin America, added Engel. Free-trade agreements have been signed both within the region and with business partners in Europe, Asia and the United States. “Leadership is the only way that the region can become organized, and we can begin to participate in the world order,” Engel said.


Optimism in the Present and Future of Telecommunications


Von Hauske, who heads Telmex, the telecom company owned by Mexican tycoon Carlos Slim, warned that the low penetration rate of personal computers in the region isolates Latin America from the global economy. However, he emphasized that the industry is growing, thanks to mobile telephony. “The mobile market in Latin America grew by 10.4% in 2004, and there are now 150 million cell phones in the region.”


Latin American companies in this sector are modernizing to compete, Von Hauske noted, but he warned that much remains to be done in the telecom sector. “One of the challenges to becoming a world-class company is to expand the supply of broadband services,” he said. According to Telmex, broadband services in Latin America grew by only 1.9% last year. Now Telmex is betting on the “great change that comes from Wi-Max technology.” The development permits high-speed connections without cables, and at a much greater distance than possible with the Wi-Fi protocol. “This technology brings important opportunities,” Von Hauske suggested.


Until now, he added, Telmex has based its success on prepaid mobile telephones, which represent most of the cell phones in the region. América Móvil, the company’s subsidiary in this sector, has a presence in eleven countries in Latin America, “with a universe of 61.6 million cell phones. We have had an extraordinary success.” achieve that success, he said, the company invested $6.3 billion between 2001 and 2004. For this year, the company has an investment budget of nearly $2.5 billion.


And that’s not all. The group has developed a $10 billion, five-year investment plan for the Latin American mobile market. One of the first results could be the arrival of América Móvil in Chile, possibly by acquiring Smartcom, a mobile company that belongs to Spain’s Endesa group. “Chile’s mobile market is very attractive. The 60% penetration rate is very high. One option for entering that market is to buy another company,” Von Hauske said.


How have Telmex and its América Móvil subsidiary achieved such a high penetration in the region? Von Hauske attributed his company’s success to “The three E’s– execution, execution, and execution.” One key is the way it takes advantage of local human resources. It not only maintains local managers in key posts but exports what they learn to other markets [where the company operates]. “For example, development and experiences in the Chile subsidiary (Chilesat) are taken to Mexico and vice versa. But this always takes place with a regional point of view.”


According to Von Hauske, his company also provides products that are tailor-made to meet the needs of each country’s population. And it leverages economies of scale because “in Latin America, we are one of the biggest buyers of cell phones.” This gives Telmex major power to negotiate purchasing conditions and look for opportunities. “In recent years, we have seen that information technologies are having a major impact in our region, and that will continue,” he said.


A Fundamental Theme: Overcoming the Digital Divide


Because Internet access rates and PC ownership rates in the region are low, “a large part of the population is staying outside this wave of growth,” Von Hauske said. However, Telmex has introduced a mechanism for financing PC purchases over a three-year period, and the results have been very good. “This strategy has allowed us to sell about 600,000 units over a period of four years.” Telmex has gone even further, developing a unique computer that does nothing but surf the Internet. “This device sells for $100, and it can be financed over a period of 36 months,” he noted.


Another key issue is content creation. “Mexico and Peru are Latin American countries that share a common language and have a similar origin, but they are also quite different. You have to respect the cultures of each country, along with their peculiarities and idiosyncrasies.” It’s not just the supply of products that must be creative. “Companies must also adapt themselves to the purchasing power levels within the region.” Countries such as Chile have managed to overcome the digital divide by developing training materials for electronic government. They have also developed tools for online tax collection, and a web portal for purchasing in the public sector, known as Chilecompra. “Both experiences are exportable to the rest of the continent,” concluded Von Hauske.


Risk Capital, a Sector Still Young


The risk capital sector faces many challenges in the region, said Bruce Catania, Citigroup Venture Capital International’s group director for Latin America. Starting in 1997, his organization has become the largest investor of corporate capital in the region, managing close to $1 billion in private assets. “In the first place, venture capital is still a young industry which began only in 1990. It is a market dominated by local institutional investors, such as pension funds.” A key factor is that most companies in these countries are family-owned. “As a result, this is a region where there are not a lot of IPOs and debt restructurings. Many of the limitations of this sector in Latin America have to do with access to debt,” Catania said.


Private equity in Latin America is a cyclical business, he added. “In the mid-1990s, there was a great deal of optimism but after that, we experienced hard times.” Nevertheless, fund administrators have made progress in the region. In the past, people said that “there too many sorts of strategies. And nowadays, risk capital is much more concentrated in intermediate markets.” According to Catania, Latin America is far away from developed markets where capital investors constitute a multimillion dollar industry, especially from investors in Asia, where this sort of activity has been growing very rapidly. “The important thing for Latin America is to continue to make management decisions on the macro level, and one of the main things is to invest in its people.”


Catania believes Latin America is a region with “many opportunities for many investors,” where it is possible to develop unique approaches to risk financing within the informal structures that often characterize family-owned enterprises. There is also a favorable macroeconomic environment. Catania discounts the international business community’s fears that “populism in countries such as Argentina and Venezuela will affect this sector.”


What remains to be done? The private capital market is significantly smaller in Latin America because of the major role of family companies. So Catania suggested that the region get to work modernizing its management structure so companies can grow. “Private equity brings younger companies and markets together.” Second, he called for improving the debt restructuring process, and for “a more robust legal process” in capital markets that, he predicted, could generate a significant amount of new activity.