Latin Americas top corporate executives are getting a
reality check. After several years of booming growth, thanks in
large part to their success in tapping burgeoning demand in
emerging markets, top Latin executives are now feeling the
knock-on effects of a recent slowdown in those markets as well
as the persistent woes dogging Europe and North America. The
slump in demand is forcing corporate leaders to pull in their
horns, or at least recalculate their trajectory.
The two largest Latin American economies are both feeling
the slowdown. The International Monetary Fund forecasts that
Brazil, a darling of the emerging markets for the past five
years, will grow by only 1.5 percent this year, against 2.7
percent last year and a galloping 7.5 percent in 2010. And the
IMF says Mexico, which some investors have seen as an
alternative to Brazil, will grow by 3.8 percent this year,
faster than Brazil but virtually unchanged from Mexicos
3.9 percent growth rate last year and down from
5.5 percent in 2010.
In general, Brazilian companies are reacting to the new
international and domestic environment by reining in costs.
Consider Brazils Vale. The mining conglomerate is one of
the worlds largest producers of iron ore and copper,
among other minerals, and it has benefited in recent years from
surging Chinese demand for metals. But slower global growth has
sent commodity prices tumbling, causing a 20.8 percent
decline in Vales second-quarter operating revenues, to
$12.15 billion, and a 58.7 percent plunge in
earnings, to $2.7 billion.
For a company that had planned to ramp up its capital
spending by nearly 17 percent this year, to $21 billion,
that revenue hit has prompted a hardheaded rethink. In August
the company canceled plans to invest $3 billion in a new
potash mine in Saskatchewan, Canada.
In October, Vale also put on hold the $1.3 billion
development of the Zogota mine in Simandou, Guineas
richest iron ore deposit. The mine was supposed to have started
output by the end of this year. The company paid
$2.5 billion for the concession in April 2010 but its
plans were thrown into doubt, following the end of military
rule in the country in November 2010, as the new civilian
government decided to review the mining licenses that had
already been granted.
In this environment, its vital that we manage
cash flows carefully, says Luciano Siani, who replaced
Tito Botelho Martins as CFO in July.
Such responsiveness is valued by investors. Vales
chief executive, Murilo Pinto de Oliveira Ferreira, was voted
the top chief executive in the Metals & Mining segment by
both buy-side and sell-side analysts surveyed by Institutional
Investor for its 2012 Latin America Executive Team, the
magazines third annual ranking. Vale tied for 22nd among
Most Honored companies in the rankings. Sweeping honors for
best CEO, CFO, Investor Relations Professional and IR
Team were Cielo, a nonbank financial services company, and
Klabin, a pulp and paper manufacturer.
In addition to reducing capital spending, Vale is taking
steps to improve the efficiency of its supply chain to compete
more effectively with rivals in Australia, especially BHP
Billiton. To enhance its ability to meet demand from the Middle
East and Asia, for example, the group is opening new plants and
distribution centers in Oman and Malaysia, which are
closer to its operations in those target regions than its
existing facilities in Brazil.
The companys new $1.36 billion distribution
center and pelletizing plant at the Port of Sohar
Industrial Complex in Oman, which has a maximum production
capacity of 9 million metric tons of direct-reduction pellets
per year, enables large amounts of raw iron ore to be stored
for just-in-time delivery. It will serve as a hub for iron ore
products in the Middle East, North Africa and Asia. Asia
accounts for 50 percent of the groups revenues, with
a third coming from China alone.
To maximize the distribution centers capacity,
Vale entered into a partnership with Sohar Industrial Port Co.
to build a 1.4-kilometer (.87-mile) deepwater terminal. This
terminal will be one of the first ports in the world to receive
very large ore carriers (VLOCs), huge ships able to carry up to
400,000 metric tons of iron ore.
The Oman distribution center and pelletizing plant,
together with a floating transfer station in the
Philippines Subic Bay, a distribution center and
port being built in Malaysia and the VLOCs, are part of
Vales strategy to increase its flexibility and
competitiveness, even as it exerts tighter control over
Brazil-based Klabin is also trying to drive costs down. It
started this process at the start of last year, when the
external environment was better, and that foresight has been
rewarded by investors, who have sent its share price up 112
percent during the past 12 months.
The move followed the appointment of Fabio Schvartsman as
CEO in February 2011.
Schvartsman, voted the best CEO in the Pulp & Paper
segment by both buy-side and sell-side analysts, had spent most
of his career at Brazilian conglomerate Ultrapar
Participações, where he was most recently CFO. At
Klabin he initiated a cost containment process called Matrix,
developed by the Institute for Managerial Development (INDG), a
Brazilian management consultancy, that places top managers in
charge of specific items such as energy, labor and
Its a very simple process that enabled us to
create a ladder line of control, says Schvartsman, who
notes that the process will remain in place for the foreseeable
future and that it has allowed Klabin to reduce costs by
hundreds of millions of reais a year.
During the first half of this year, Klabins earnings
before interest, taxes, depreciation and amortization climbed
35 percent, to 593 million reais
($291.3 million) from 439.3 million reais, as its
profit margin expanded to 27 percent from 20 percent
last year on the strength of declining unit costs.
But Klabin isnt just cutting costs: It plans to invest
$3.5 billion, the most in its history, in the construction
over the next two years of a pulp mill, called the Puma
Project, close to the groups 250,000-hectare
(965.3-square-mile) forest plantation in Parana state. The mill
will be the first in the country to produce both long-fiber and
short-fiber pulp. Because both types of fiber are needed for
paper production, the group will have a competitive advantage
when it markets the pulp.
Cielo, the largest Brazilian credit and debit card operator,
is yet another group that has decided to reduce operating costs
in light of the challenging economic environment in Brazil this
year. Like Klabin, it has used INDG to help institute cost
control measures. Also like Klabin, Cielo is making new
investments and as a result saw its domestic market share grow
to 61.1 percent in the second quarter of this year from
56.9 percent in the fourth quarter of 2010.
Cielo has little choice but to reinvest in the business, as
it is facing new competition in its home market of Brazil after
losing its government monopoly on Visa card processing in July
2010. To fend off competition from its main rival, Redecard,
and take share from it for MasterCard and Diners Club
transactions, Cielo used $670 million of the
$4.13 billion it had raised through a June 2009 IPO, at
that time the biggest ever in Brazil, to acquire Merchant
e-Solutions, or MeS, of Redwood City, California. MeS, which
has a full-service payment platform for financial institutions
and merchants, processes more than $14 billion per year in
domestic and international payments for more than 65,000
merchants. The acquisition increases the number of Cielos
merchants by less than 6 percent, to 1.2 million, but
enhances Cielos ability to attract more, says CEO
Rômulo de Mello Dias, voted the top chief executive in
the nonbank financial services segment by both sell-side and
MeS has state-of-the-art e-solutions for
merchants, says Mello Dias. It shows that we are
committed to growing our business in the long term.
In particular, he notes, MeSs technology should help
Cielo secure its domination of online payment processing. The
company already has 90 percent of that market, but
e-commerce accounts for only 7 percent of sales in Brazil
today. That is expected to rise to 20 percent by 2020.
The top executives of another Brazilian company that ranks
highly in IIs survey are also adjusting to slower growth
by seeking to expand market share.
Localiza Rent a Car, which is headquartered in Belo
Horizonte, Brazil, and is the largest car rental company in
Latin America, has seen its revenues this year decline by 13
percent, reflecting the slowdown in the domestic economy. Last
year, its retail division saw its annual revenues increase by
25 percent while its fleet rental division rose by
21 percent. The retail division normally grows at five to
six times Brazilian economic growth, but the countrys GDP
grew a mere 0.4 percent in the third quarter from the
Yet CEO José Salim Mattar Jr., voted top chief
executive in the Transportation segment by sell-side analysts
surveyed by II, vows to accelerate the companys growth by
driving smaller competitors out of business. Localiza currently
has a 37.5 percent share of the car and fleet rental
market in Brazil and operates out of 253 distribution
centers there. Going forward, the company plans to open 20
company-owned and another 20 franchised distribution
centers per year for the foreseeable future.