The questions from the audience came first, a rapid-fire delivery for the panel of senior executives charged with discussing the challenges Latin American companies face when exporting to, or operating in, the United States.
What particular challenges do small companies experience when trying to enter the U.S. market, one of the largest in the world? What distinguishes companies that have been successful? What can we learn from companies that have tried to enter the U.S. market and failed? To what extent have Regional Trade Agreements (RTAs) facilitated entry into the U.S. market? What industries or sectors are the most likely to succeed in penetrating this market? How do companies gain access to U.S. capital markets, and how can they best leverage their product? How do companies recognize and move past cultural barriers? Are there trade secrets that small companies should know in order to minimize taxes and maximize profits?
The panel, part of the recent Wharton Latin American Conference and moderated by Wharton marketing professor Yoram (Jerry) Wind, included three experts representing diverse backgrounds in consumer products, entertainment and financial consulting. They ultimately focused on similar key messages:
When exporting to, or operating in, the United States, the U.S. market should be seen as part of a global strategy, not the only strategy; it is critical to understand the different cultures and expectations of the consumers a company is targeting; no matter how successful a business is in its home country, exporting products requires adequate funding in order not to fail; and forming the right partnerships and understanding the importance of corporate governance are critical.
What Works, What Doesn’t
Alonso Martinez, senior vice-president of Booz Allen Hamilton, asked the audience to “think about what it takes for companies to successfully export and penetrate the U.S. market.” He cited several factors. First is that a company must have a strong core business at home before it even considers going abroad. “You don’t say, ‘My business in Argentina is going poorly, the Argentine economy is in trouble, I will export to the U.S. and see if it works.’ That does not work.”
Second, understand your own capabilities and whether or not they can translate to the U.S. market. “There is no such thing as the Hispanic community in the United States,” said Martinez. “It is very difficult to compare the upper class Colombians who are escaping kidnappers in Miami from the laborers who came across the Mexican border into Texas. What is clearly translatable is that the low-income community of Hispanics tries to replicate their [lifestyle] in the States. Those markets are easier to penetrate, because the consumers buy the same types of products in the same patterns. They want to feel at home.”
Third, Latin American companies that export to the U.S. “do this in steps, not in jumps. You don’t usually go from being a major player in Brazil to being a dominant player in the U.S. You find a place where you have an advantage.” And fourth, when you need help from partners, find the right partners. Only enter into a joint venture “if the joint venture complements some of the capabilities that you need to be successful in the U.S. market that you don’t have in your home market.”
To illustrate his points, Martinez cited The Arcor Group, a chocolate, candy and food product corporation headquartered in Argentina, and Corona tile manufacturers, located in Colombia. Both had excellent businesses in their home countries and partnered with U.S. firms in order to enter the U.S. markets. Arcor partnered with candy giant Brach & Brock Confections, and actually produced a candy line in Argentina for them, capitalizing on Arcor’s ready access to sugar production. The company is the world’s leading candy manufacturer and now has 31 industrial plants in South America, 10 subsidiaries in America and one in Spain.
According to Martinez, Corona — “which has 90% of the tile business in Colombia” — began a distribution partnership with Home Depot in the U.S. “Once they felt comfortable sourcing with Home Depot, they acquired a company in the U.S. to go from lower income products to progressively higher income products. That’s an example of going step by step, and finding the right partners.”
“Amarte Es Mi Pecado”
Martinez also pointed to Univision Communications, the leading Spanish-language media company in the United States, as an example of how a Latin American company can successfully enter the U.S. market. Panel member Beatriz Rangel certainly agreed. As former vice president of the Cisneros Group of Companies, one of the largest privately-held media, entertainment, technology, and consumer products organizations in the world, Rangel reviewed how the former Venezuelan-based company acquired Univision in 1992.
According to Rangel, in the early 1990s it was clear to Cisneros Group executives that the company would not be able to make money producing entertainment content in Venezuela. There, the market was too small, talent was too expensive, and costs were too high. Also, changing technology “could help this very successful television network in Venezuela distribute products over Latin America,” she said. As the Cisneros Group began to regionalize and grow, the Latin culture began to permeate the entertainment business in the United States. “Rock was no longer only rock, but rock with salsa,” Rangel said. “And artists were beginning to be Latin artists, and they were making inroads into Hollywood.” The Cisneros Group “foresaw that the market was about to merge, and they entered at the appropriate time” when they acquired Univision.
Today, Univision Communications is the premier Spanish-language media company in the United States, and includes Univision Network, the most-watched Spanish-language broadcast television network in the U.S.; TeleFutura Network, a general-interest Spanish-language broadcast television network launched in 2002; Galavision, the country’s leading Spanish-language cable network; Univision Radio and Music Group and Univision Online, the leading Spanish-language Internet destination in the U.S. The growing popularity of Spanish-language entertainment in the U.S. was highlighted recently when Univision announced that the two-hour grand finale of its primetime novella, “Amarte Es Mi Pecado” (My Love, My Sin) in October drew more viewers than the programming of five English language networks.
“But make no mistake,” said Rangel. There are several rules that you need to follow when entering the U.S. market.” The most important rule, she said, is to be “focused and know your market.” And focus here means you have to provide audiences with what they want.” Univision Network, Rangel noted, is “very simple entertainment. It is for the new arrivals in the U.S. market, the low-income groups who are escaping political and economic decline in their countries and pursuing the American dream. The Sammy Sosas of the world — that is what our audiences like. Univision has placed itself in that niche and other stations have had trouble competing.”
One particular challenge in entering the U.S. market in the entertainment industry, however, is that these “audiences are constantly changing. The children of these people are Generation X and Y, and they are completely different. Nationality counts less for them. Yes, Mexicans are still 60-65% of the U.S. Hispanic market, but once Mexicans live in urban areas, they marry Puerto Ricans, Dominicans, and Colombians. Their children are no longer Mexican Americans, but Colombian-Mexican Americans, so a new audience is emerging.” And this generation is changing rapidly. As this new market begins to assimilate with the American culture, “it will begin to demand entertainment content in English but with the culture of its own country. This is a big challenge — not for Univision alone but for the big U.S. networks, too.”
Rangel, a native of Venezuela and chief of staff to former Venezuelan President Carlos Andres Perez, moved with the Cisneros Group four years ago when it relocated to Miami and was then named managing director of AMLA Consulting, the Miami affiliate of Zemi Communications. AMLA Consulting was established in large part to help international companies understand and develop opportunities in the U.S. Hispanic market. “U.S. Hispanics are a growing economic, political, and business force in the United States,” Rangel said. “Unfortunately, too many international companies underestimate either the dynamism or the sophistication of U.S. Hispanics, and fail to recognize the unique cultural characteristics of what is fast becoming the largest and richest minority in the United States.”
But Rangel admitted that as the Spanish market grows, competition for the market will grow from all media players. “I think that Univision will be a target for acquisition, and right now, we are seeing some signs of that,” she said.
Cost of Capital Is Key
When it comes to competition, creating or capitalizing on a competitive advantage is one of the most important factors to consider when trying to enter any new market or export to that market, said panel member Luis Miguel Palomino Bonilla, a principal and senior consultant with Proconsulta International, a financial consulting firm based in Maryland, and former first vice president and chief economist, Latin America, for Merrill Lynch Pierce Fenner & Smith.
“In the long run, perhaps the single most important competitive advantage is your cost of capital,” he said. “Imagine that you have a competitor who is better at developing technology than you are, who has better marketing, and who is better at recruiting. Once you analyze this, it seems insurmountable, and you’re in a deep fix. But now imagine that your cost of capital is considerably less than your competitor’s. In that case, the answer to your problem is very clear — buy him out. He may be better than you are, but you have more money. In the long run, the staying power is defined by who has the lower cost of capital.”
Bonilla gave several examples of companies in Latin America that were able to grow due to access to capital, despite the risk factors that make capital more expensive in their native countries. “If you take that first step, your competitors are usually way behind,” he said. “You have a huge advantage when you take a large lead, and you ultimately reduce your cost of capital. Just like you differentiate your products and marketing strategies, you do exactly the same things with securities. And in a market that is so underdeveloped, you have a huge lead. That advantage can be crucial.”
Bonilla cautioned that “when you are trying to sell Latin American securities to the United States, you have to be very realistic. It’s like when Latin Americans talk about how foreign companies don’t understand how to work in Latin America. It’s the same story. You won’t change the U.S. financial markets and analysts – so deal with them.” He also emphasized the importance of good corporate governance when a company looks to export or expand. “Analysts look for growth, first, and second, they look for some level of trust, for good corporate governance … That’s always good for business — at home or when trying to enter another market.”