(Editor’s note: This article was originally written for ENX magazine’s Mexico and Latin America magazine. To view the original version of this article in Spanish, click here.)
David Ramos
While the United States and Europe fret over huge deficits and threats to a fragile recovery, this region has a surprise in store. Latin America, beset in the past by debt defaults, currency devaluations and the need for bailouts from rich countries, is experiencing robust economic growth that is the envy of its northern counterparts. The International Monetary Fund used to bail out deadbeat nations in Latin America. Now, in a role reversal, the IMF’s new director, Christine Lagarde, is seeking the region’s help in containing Europe’s worsening debt crisis. Officials in Brazil, now the world’s seventh-biggest economy, say they’re putting together an IMF loan. And the IMF believes the whole region can provide Europe with lessons on how to manage the economy. How and why did this regional transformation take place?
Our region is growing in global strategic importance while remaining a region of diverse opportunities and challenges, “ says Marisol Argueata de Barrillas, senior director and head of Latin America for the World Economic Forum. There is growing consensus that the coming years will be ‘Latin America’s decade.’”
Strong demand in Asia for commodities such as iron ore, tin and gold, combined with policies in several Latin American economies that help control deficits and keep inflation low, are encouraging investment and fueling much of the growth.
Recent growth spurts around Latin America have surpassed the expectations of many governments themselves. Brazil, the region’s rising power, is leading the regional recovery; their economy grew 7.5 percent in 2010, the nation’s fastest expansion in 24 years.
Latin America’s GDP has grown at higher rates than the world average of the past seven years. From 2011 through 2015, the IMF estimates that Latin America’s will grow an average of 4 percent annually. That compares with an estimated 2.7 percent in the United States and 2.1 in the EU during the same five-year period.
A region that had become a caricature of itself—the place that gave us words such as junta and banana republic–attained a new level of political and economic maturity. Most countries found a workable economic formula, addressing poverty without repelling investors. In most nations, democracy grew strong roots.
Not everyone has ignored the Latin American miracle. China has been busy developing diplomatic relations and increasing economic ties. During years when the United States paid little mind to relations with Latin America, home to 600 million people with economies worth $5 trillion, Beijing set their sights on the American hemisphere. Beijing engaged in an aggressive economic push, becoming a top customer for Latin American natural resources, loaning billions, developing infrastructure and building trade ties.
The results have been spectacular. China wows the world with double-digit economic growth, but Brazil has suddenly become the world’s seventh largest economy, on its way to displace the U.K. as the sixth. Brazil’s Gross Domestic Product grew 7.5 percent last year. Argentina’s soared 9.2%. Others expanded just as fast. Paraguay’s GDP climbed a stunning 15 percent and Uruguay’s more than 8 percent.
Two –Track Trajectory
There are two groups that make up the region overall. The ‘Brazilian cluster’, those countries including most of South America and the ‘Mexican cluster,’ those countries, including Central America and most of the Caribbean, which are generally commodities importers and are undergoing a slower recovery, mostly because of their greater trade exposure to the U.S. and other industrialized markets.
Overall, countries in the Brazilian cluster have reaped the benefits of the commodity super-cycle. Prices of both soft and hard commodities have swiftly recovered following the 2008-09 slump thanks to strong Asian (and domestic) demand, and are expected to stay high. Reports state that the price of oil, metals and foods are 23 percent, 8 percent, and 35 percent higher, respectively, than prevailing levels in 2006.
Southern American countries are strong exporters of agricultural products, such as soy and wheat, while Andean countries, such as Chile and Peru, are important world exporters of metals such are copper and gold. The Brazilian cluster’s reliance on China has grown, and the Asian powerhouse is now Brazil’s top trading partner. China is the second-most-important trading partner overall for Peru, and is Chile’s top export destination.
The rebalancing of the global economy has favoured those Latin American countries that have developed ties with leading Asian and other BRIC (Brazil, Russia, India and China) emerging markets. The trend in terms of trade has accelerated rapidly. While Brazilian exports to China, India and Russia only accounted for 9 percent of Brazil’s overall foreign sales in 2006, the proportion almost doubled (to 17%) in 2009. Mexico’s exports to the BRIC countries accounted for just 3 percent of its total in 2009 (91% of Mexico’s foreign sales were directed to industrialised countries, mostly to the US).
Expectations of future growth performance further underscore the importance of the ties to emerging markets: market forecasts for average growth of the Brazilian cluster countries are significantly better (at 4.4%) for 2010-11, according to reports, than for the Mexican cluster (2.7%).
The Mexican cluster bears other differences. Besides mostly being importers of commodities (though Mexico exports oil) and relying more on the U.S. and the EU as export markets, they are also dependent on these countries for foreign direct investment, tourism and remittances income. With U.S. and EU growth subdued, these countries have bounced back from recession more slowly.
At the same time, the Mexican cluster is far more vulnerable to competition from China, both in its export markets and at home. Many of the manufactured goods produced and exported by Mexico and the Central American and Caribbean countries, such as apparel and other goods assembled in export-processing zones, have been losing market share to more competitive Chinese goods for some years.
Transformation of the Imaging Industry
One need look no further than a company like Xerox to see that they are trying to transform into a services-based business, as the rise of digital technology has cut into companies traditional hardware line.
“In three years, two-thirds of company revenue will likely come from “services,” or contracts to manage other companies’ back office operations such as printing, human-resources and other areas of their business,” states Xerox CEO Ursula Burns.
The cornerstone of Ms. Burns’s strategy, Xerox’s 2010 acquisition of Dallas-based services company Affiliated Computer Services for $6.4 billion, was initially criticized by shareholders and industry observers for being too costly in the midst of a recession and too large—ACS had 74,000 employees to Xerox’s 54,000 at the time.
A year later Ms. Burns has been lauded for the move. The service side of the business now brings in nearly half of the company’s total revenue. Profits in the services segment were $266 million in the first quarter, up from $203 million the previous year.
But part of any of the manufacturers focus to transformation will be targeting growth in the emerging markets. Example; where does Xerox want a greater presence?
When posed this question in July of this year by the Wall Street Journal Ms. Burns notes: “Brazil. We have a good brand in Brazil, but our ability to extend our reach in the document technology outsourcing space and definitely in BPO (business process outsourcing) are really something that we’re pushing hard. It’s a relatively untapped, underdeveloped market and we have a good position there. Mexico is next. We’re well positioned and have a strong team operating there so we’ll do the exact same thing.”
WSJ: Are countries you’re pinpointing attractive because they have [multinational corporations], or because of local, small businesses?
Burns: They have multinationals there, they have governments that are fairly well-organized and rule of the law counts, and they need these services themselves. They also have a good, small and midsize business growth. One of the biggest providers of services in [Brazil and Mexico] is Telefónica. It’s huge. We should be able to do business there with Telefónica, which we’re trying to do. Another business is Banco Santander. So we’ll follow Telefónica and Banco Santander and we’ll provide to them.
Recent InfoTrends’ end-user data shows business confidence is high in Brazil and Argentina. One hundred and fifty IT decision makers from each region were asked to compare their confidence in their business prospects over the next 12 months with the previous 12 months. Almost 90 percent of respondents from Brazil indicated they were much more or slightly more confident. 82 percent of Argentineans expressed the same confidence levels.
This renewed business confidence is leading to investments in new technology. In 2010 63 percent of respondents from Argentina and 55 percent from Brazil purchased a new printer or multifunction device. The primary reasons for purchasing the new device were an expanding business and a need for updated technology. Approximately 60 percent of these respondents plan on purchasing another device within 3 years, with over 35 percent purchasing within two years or less.
As companies continue to expand adding more devices to their technology fleets, a need will arise for more sophisticated workflow solutions and services like managed print services, DocuWare or other electronic content management solutions. Document management and managed print services were among the top choices for future investment plans.
For vendors and service providers looking to diversify their product and services reach into alternative and lucrative global markets, Latin America is a prime target for profitable business growth over the next ten years. To develop a better understanding of the opportunities and challenges for solutions and services in Latin America traditional imaging industry manufacturers are investing resources into getting the pulse of this Latin American market to capitalize on end-user behavior and buying patterns, which are unique in each of these regions and understanding these differences is critical for business growth.
David C. Ramos is a consultant with Strategy Development, a management consulting firm specializing in sales strategy and process, advanced sales training, performance improvement strategies, (www.strategydevelopment.com). He can be contacted at ramos@strategydevelopment.com
