EconSouth (Third Quarter 2007)
EconSouth (Third Quarter 2007)Latin Multinationals Become Global Headliners
Emerging-market multinationals are grabbing the spotlight in the world economy. Gaining ground on firms from Asia, sophisticated Latin American companies are becoming giants in their industries, acquiring firms and tapping into the fertile markets in developed economies like the United States and Europe.
Most Americans hear plenty about immigration and outsourcing. Those politically charged issues are as close as the nearest television or radio.Chances are that far fewer people have heard of Gerdau Group, Cemex, Telmex, CVRD, and Embraer. Yet those companies embody a powerful, if quiet, phenomenon that is dramatically affecting international economics. Those firms are Latin American–based powerhouses that are aggressively expanding into the United States and other industrialized nations. The Latin multinationals—or "multilatinas," as they are commonly known—are part of a global movement of large companies from emerging economies that are pursuing profits and market share in developed nations, often through acquisitions.
This trend reverses the long-standing North-to-South flow of investment from rich, developed countries to emerging nations. The newer South-to-North foreign direct investment is fueled by myriad forces. For multilatinas, those forces include freer trade and economic liberalization policies in Latin America, greater competition from global players in their once-protected home markets, the quest to expand their markets, and easier access to global capital markets.
Growing up global
Many Latin American countries, led by Mexico, Brazil, and Chile, launched structural reforms during the 1990s designed to increase the role of the market in their economies. Privatization of once state-owned enterprises has been a major element of the reforms. According to Javier Santiso, deputy director and chief development economist at the Paris-based OECD (Organisation for Economic Co-operation and Development) Development Centre, 20 percent of the 500 largest enterprises in Latin America were under government control in 1991, but less than 9 percent were a decade later. One prominent example of this trend is Embraer, the world's No. 4 commercial aircraft maker, which was founded by the Brazilian government in 1969 and converted to the private sector in 1994.
Meanwhile, foreign competitors have made significant inroads in Latin America. Foreign transnational companies accounted for 27 percent of these 500 biggest enterprises in 1991. That number rose to 39 percent early this decade, said Santiso.
Economic liberalization has made it easier for Latin American companies to expand, and foreign competition in their home markets has spurred them to look beyond their own borders. In fact, said Santiso, the biggest multilatinas have become so thoroughly international that they are really no longer Latin American companies at all but rather hybrids of various nationalities.
For example, the financial and economic operations for cement giant Cemex are centered in London and Madrid, not in Monterrey, Mexico, the company's home. More than three-quarters of Cemex's 54,000 employees are from countries other than Mexico, according to a Cemex spokesperson.
Not surprisingly, Santiso notes, multilatinas like Cemex are highly sophisticated. Known as a leader in logistics, Cemex was a pioneer in the cement business with a global positioning system–based service that dispatches mixing trucks to construction sites to fill orders quickly, like taxicabs answering a call.
Cemex, Gerdau, Telmex, and Embraer, which are large technology- and capital-intensive multilatinas, "are so big they can't afford not to be world class," said Jerry Haar, a business professor at Florida International University in Miami who studies Latin multinationals.
Those companies and other multilatinas have climbed onto the world stage in two phases, Santiso explained. First, during what he calls the "trade expansion phase" that lasted through the 1990s, the companies dramatically boosted exports. Subsequently, the companies entered what Santiso terms an "investment phase," acquiring companies and other strategic assets abroad.
Building brick by brick
Companies from the "BRIC" countries—Brazil, Russia, India, and China—plus Mexico announced foreign acquisitions totaling a record $72 billion in 2006, Santiso said. That record will probably be surpassed this year, he added. Cemex and Gerdau (Latin America's largest steel producer, based in Rio de Janeiro) made major acquisitions in the United States and Australia during the first half of 2007.
|Photo courtesy of Cemex|
|Photo courtesy of Embraer|
"We used to think of the center and the periphery," said Santiso, who has extensively studied multinationals from emerging economies. "Now the center is less and less the center, and the periphery is less and less the periphery. Times are changing, and these emerging-market multinationals are part of that change."
When the OECD was formed in the 1960s, the "center," or the developed nations, accounted for 75 percent of the world's economic activity, Santiso said. Today that share is less than 60 percent as mutinationals are helping to push emerging economies toward the center. Foreign direct investment, such as corporate mergers and acquisitions, from Latin America and the Caribbean climbed from an average of $18.9 billion a year from 1994 through 1999 to an annual average of $30.4 billion from 2000 through 2005, according to the United Nations Conference on Trade and Development (UNCTAD).
This expansion is not happening in a vacuum. Greater investment abroad by Latin American firms reflects a global trend: In 1990, only six developing and transition economies reported outbound foreign direct investment stocks—the total invested in all years to that date—of more than $5 billion, according to UNCTAD. By 2005, 25 developing and transition economies topped the $5 billion level. Latin American nations among UNCTAD's top 15 emerging countries in outward foreign direct investment stocks—excluding offshore financial centers like the British Virgin Islands and Cayman Islands—were Brazil at No. 6, Mexico at 12, Argentina at 13, and Chile at 14.
Multilatinas rise to stardom
Asian firms dominate the ranks of emerging-market multinational firms, but Latin American firms come next, according to UNCTAD and other sources. Six multilatinas were among the top 25 nonfinancial emerging-country multinationals in 2004, the most recent year for which UNCTAD data are available. Three of those are from Mexico, two are from Brazil, and one is from Venezuela. On that top 25 list, Latin America trails only Asia, which is home to 16.
"In the future, the success of [Latin America's] multinational corporations could equal that achieved by the Asian emerging markets and bring about further successful multilatinas," Santiso wrote in a March 2007 report for Deutsche Bank Research.
Haar agrees. In particular, he figures more multilatinas are coming to America. Even during economic lulls, the United States is still the world's most fertile consumer market, with stable, predictable legal and financial systems, Haar noted. Thus, as more big Latin companies saturate their home markets, they will naturally look north.
More multilatinas are likely on the way because those companies are a manifestation of a more fundamental shift at the root of the global economy, Santiso said. What's more, suppliers to today's multilatinas might someday follow them across the world.
The major forces behind the Latin multinationals' global expansion have existed for at least a decade. But "the explosion of foreign direct investment" from developing countries, as Santiso calls it, is a more recent phenomenon. He is researching why the emerging-nation multinationals have begun moving so aggressively in the past three or four years.
The big difference from the 1990s is that today, despite some recent developments in credit markets worldwide, companies can secure financing on far more favorable terms because emerging-market credit spreads have narrowed and liquidity has expanded. "So those companies . . . are now in a position to match their ambitions and vision with access to capital that is much easier and much less expensive," Santiso said.
For instance, JPMorgan, one of the world's biggest investment banks, is providing $4.6 billion in financing for Gerdau Ameristeel's planned $4.2 billion acquisition of Texas-based Chaparral Steel Co., an agreement announced in July. Gerdau Ameristeel is the Gerdau Group's U.S. operation. For its planned $14.2 billion acquisition of the Rinker Group of Australia, Cemex secured financing commitments from leading international banking groups, including Citibank and the Royal Bank of Scotland.
Learning the culture
Even as multilatinas are prospering and appear likely to continue doing so, they face challenges.
Politics can sometimes intrude when global companies want to expand into new markets. In the United States, Chinese or Middle Eastern firms are more likely to confront that problem, Haar said, but sensitivities surface in other cases. In Miami, for example, a French company that is bidding to work on a tunnel project has encountered problems because the company works in Cuba.
Patriot Act regulations, Sarbanes-Oxley rules, and other measures have also created more bureaucratic hurdles for multinationals, Haar noted. So the companies must judge whether the business they are pursuing is worth the work. In most cases, Haar said, they conclude that it is.
One way to help blunt the cultural and political challenges of entering new markets is to acquire or partner with existing domestic companies, an expansion method preferred by multilatinas.
Gerdau, for example, knits together its international acquisitions by applying a set of practices and principles it calls the Gerdau Business System. Established by the company in 2002, that system was designed to institute a "common language" among the Gerdau Group's operations in 13 countries and encourage an exchange of knowledge across borders, according to Gerdau's Web site.
Beyond cultural issues, expanding through acquisition often makes the same business sense for a multilatina as it does for any large company. As a Gerdau spokesperson pointed out, building a new steel mill can take three to four years, which in many cases is too long to allow the company to seize market opportunities. Further, buying a company gives Gerdau an instant customer base.
Acquisitions have helped make Gerdau Group North America's second-largest mini-mill steelmaker. (Mini-mills use scrap metal as a raw material instead of the iron ore and coal used in blast furnaces.) Gerdau entered North America in 1989 with the acquisition of Canadian steelmaker Courtice Steel Inc.
Like many emerging-country multinationals generally, and multilatinas in particular, Gerdau's global advance has accelerated in the 21st century. Today the company operates in 13 countries, up from five in 2000 and three in 1990. International revenue accounted for only about 10 percent of Gerdau's total sales through the end of the 1990s. By 2006, sales outside Brazil accounted for 59 percent of Gerdau Group's total, according to the company's annual report. The company did more business last year in North America—46 percent of roughly U.S.$11.1 billion in total revenue—than it did in Brazil, which contributed 41 percent of revenue.
Breaking into U.S. markets, Southern style
The 106-year-old company cracked the U.S. market through its 1999 acquisition of Tampa, Fla.–based Ameristeel, thus establishing the multilatina's American base in the Southeast. (Gerdau Group owns 67 percent of Gerdau Ameristeel, which is traded on the New York Stock Exchange.)
Since then Gerdau has built a substantial presence in the Southeast. In addition to its U.S. headquarters in Tampa, the company acquired a steel mill in Cartersville, Ga., in 2002 and a rebar firm in Knoxville, Tenn., in 2006. Gerdau operates a wire mesh and nail factory near New Orleans; in the wake of Hurricane Katrina, the company opened an additional one-stop shop in the area for rebar and other steel construction materials. The company also makes steel in Baldwin, Fla., and Jackson, Tenn.
A wider audience
Like many other multinationals, Gerdau has extended its reach into geographical markets and sectors of its industry via a string of acquisitions. The company entered the European market in 2005 by acquiring a Spanish steelmaker and entered Asia in June 2007 via a joint venture in the booming Indian steel market.
And in the first six and a half months of 2007 alone, Gerdau invested roughly U.S.$4.7 billion to acquire companies in the United States, Venezuela, and Mexico and form joint ventures in India and the Dominican Republic.
Gerdau Ameristeel's largest deal, and the largest ever by the parent Gerdau Group, came in July when the company bought Chaparral Steel Co., another mini-mill steelmaker, for $4.2 billion to increase its output of metal used in bridges and office buildings.
Cemex is following a similar path, acquiring its way to its position as the biggest cement producer in North America. As recently as the late 1980s, Cemex was a privately held company with fewer than 10,000 employees, most of them in Mexico, and annual revenues well under $1 billion.
Today the company trades on the New York Stock Exchange and generated revenue of $9.2 billion in the first half of 2007. That number will rise sharply because in July Cemex closed the $14.2 billion purchase of Rinker Group Ltd. of Australia. That acquisition by itself will boost Cemex's annual sales 28 percent to more than U.S.$23 billion, according to Bloomberg News. Much of that new business will be in the United States, where Rinker generates 80 percent of its sales, according to news reports. The deal also provides Cemex inroads into Australia and the thriving cement market in China.
Rinker is just Cemex's latest purchase. In 2000 the company bought Houston-based Southdown for $2.8 billion. Since 2000 Cemex has also snapped up cement companies in Puerto Rico, Thailand, and Trinidad. And in 2005 the company greatly expanded its presence in Europe with the $5.8 billion acquisition of RMC Group PLC of the United Kingdom.
This acquisition spree has helped to push Cemex's annual revenue from $5.6 billion in 2000 to $18.2 billion in 2006. It's also brought new talent to the company. According to Lorenzo H. Zambrano, the Cemex CEO, in 2006 roughly 40 percent of the senior management team was from acquired companies.
The secrets of their success
Beyond the motivations unique to the multilatinas, global companies are animated by the same forces as sprawling corporations based in the United States, Europe, Japan, or other large economies. Gerdau Group and Cemex, for instance, are trolling the globe for acquisitions because they want to be long-term players in consolidating industries.
To reach their current thriving status, the first generation of multilatinas has quickly traveled a great distance. "These companies were in very, very difficult shape in the '80s and '90s, having to manage in environments that were very volatile—with ethics volatility, hyperinflation, [fluctuating] exchange rates," Santiso said. "In order to survive in those environments you have to be very innovative."
That experience appears to be serving them well.
This article was written by staff writer Charles Davidson and Stephen Kay, the coordinator of Latin American analysis at the Atlanta Fed and coordinator of the bank's Americas Center.