Site selection in Latin America: Things are looking up
Distribution in Latin America has always been a challenge. It's still not easy, but things are getting better for companies seeking a distribution site in that region.
By Toby B Gooley -- Logistics Management, 8/1/1998
Distribution in Latin America ... the very thought used to be enough to scare away the most stouthearted of shippers. Visions of impenetrable jungles, trucks stuck up to their axles in mud, and bands of roving thieves and revolutionaries made many companies reluctant to establish operations in the Southern Hemisphere. But as Latin American economies have stabilized and trade with North America continues to soar, shippers are taking a second look at the region.
Latin America's newfound stability is creating unprecedented demand for foreign-made goods. As a result, investor confidence in Latin America has risen, says a report by the International Finance Corp. (IFC), an agency of the World Bank. "With a more stable environment and business opportunities beckoning, U.S. corporations see Latin America as a region to be given more attention by site-selection and investment managers alike," the report says.
As trade burgeons, of course, the region will need to improve its distribution strategies, physical infrastructure, and transportation services. Both governments and private enterprises, in fact, are making great strides in those areas, so things are looking up for anyone choosing a distribution site in Latin America. Many challenges remain, however, and they will continue to be problems for some time to come. With that in mind, here's an update on factors affecting site selection in the region.
Four Factors
When choosing a location for logistics operations in Latin America, there are many matters to consider. These can vary from company to company, depending on the business's strategic plans, products, and markets. Some issues, however, are important to all companies, regardless of what they make and where they sell their products. For anyone considering locating in Latin America, the following four factors provide a framework for evaluating changing conditions throughout the region.
* Geography and physical infrastructure: Stretching from the southern border of the United States almost to Antarctica, Latin America's vastness is daunting. Broad rivers and the towering Andes Mountains are formidable barriers to transportation. Weather, too, varies from virtually no rain in northern Chile to daily downpours in some parts of Brazil.
Shippers that are distributing products in Latin America must accept that these and other physical barriers can make it difficult to get their shipments to their destinations on time and in good condition. Recent improvements in infrastructure and services, though, are making freight transportation more reliable and less costly throughout the region.
Most highways run north to south, linking cities on the east or west coasts of Central and South America. A few major roads run east to west, such as the highway connecting Buenos Aires, Argentina, with Santiago, Chile. Road conditions often are poor, though, and what would be a three-hour drive in the United States can be an all-day affair in Latin America. Some countries are turning roads over to private enterprises, which finance maintenance from toll receipts. Privately run toll roads generally are in better condition than public ones, permitting higher speeds and faster delivery times.
Railroads always have formed an important link between major cities and agricultural and mining areas. In most countries, however, the state-run railroads have suffered from poor maintenance, outdated equipment, and unreliable operations. In Guatemala, the national railroad in 1994 shut down altogether, leaving the country with no rail service.
That is all changing, as countries like Mexico, Guatemala, Brazil, Chile, Peru, Bolivia, Paraguay, and Argentina award franchises to private rail operators. Some well-known U.S. rail executives, including former Illinois Central CEO Edward Moyers, former RailTex president and chief operating officer Henry Chidgey, and Henry Posner III, chairman of Railroad Development Corp., now are trying to bring U.S.-style efficiency to Latin American railroads.
Argentina was first to privatize its rail system, and Mexico last year awarded regional concessions to several U.S.-Mexican joint ventures. Brazil now is following in their footsteps; under its "Brazil in Action" program, seven regional operating concessions will be awarded, and the government will construct additional rail lines, bridges, and intermodal connectors. Guatemala, meanwhile, has brought in Pittsburgh-based Railroad Development Corp. to revive its passenger and freight service. Posner says he expects to reopen a rail link with Mexico this fall.
Intermodalism is starting to take root in Latin America. With the exception of Mexico, however, most intermodal services are short-haul operations. For example, a joint venture of two Brazilian terminal operators runs daily scheduled intermodal service from the Port of Santos to the nearby industrial center of Campinas. A similar service between the Port of Santos and Rio de Janeiro also has met with success. A rare example of a longhaul service is Grupo Libra's rail link between Buenos Aires and Santiago, via the Pino Hachado Pass in the Andes Mountains. Grupo Libra, a multimodal transportation firm, says its five-day service costs up to 20 percent less than services over other routes.
Privatization also is improving service at Latin America's ports. By the end of this decade, almost every major port in Mexico, Central America, and South America will be privately operated. Already, Argentina, Brazil, Colombia, Ecuador, Mexico, Panama, and Venezuela have privatized some or all of their seaports. Privatization has brought more efficient operations, faster turnaround times, improved labor relations, and updated infrastructure. Some ports still haven't modernized, but on the whole, the situation has greatly improved. (For more on port developments in the region, see "Latin ports fight to keep pace with trade growth," Logistics Management, Nov. 1997, Page 69A.)
In South America, two river projects that will cut freight costs by up to 50 percent now are under way. The Hydrovía project in Argentina and Uruguay and the Tiete/Paraná project in Brazil and Paraguay involve dredging as well as building locks, rail bridges, and port facilities for both bulk and container shipping. These two massive projects will allow barges and small ships to travel far into the interior, carrying out agricultural and mining products for export and bringing in consumer goods, fertilizers, and machinery.
Availability of warehousing that meets North American standards is spotty. Some local companies operate well-furnished and spacious facilities, but they often lack necessary information systems. A best bet is a warehouse or distribution center operated as a stand-alone or joint venture by a third-party logistics company or major international freight forwarder. These companies are investing millions of dollars in warehousing so they can provide the same level of service in Latin America as they do in the rest of the world. (For details, see "U.S. third parties hit the Road to Rio," Page 87.)
* Proximity to suppliers and customers: Capital cities like Buenos Aires, Mexico City, and Santiago are obvious choices for anyone wanting to be where the consumers are. Manufacturing and raw-materials suppliers, though, often are located in industrial cities far from urban areas. Transportation costs to and from such inland sites in Latin America can be very high and service is less consistent than in major cities, factors that must be considered when choosing a distribution site.
Rather than maintain a large headquarters in Latin America, many companies, including logistics services providers, choose to manage their operations from a base in Miami or Dallas. Depending on individual circumstances, that may offer better control over costs and inventory, more transportation options, greater efficiency, and better security. MSAS Cargo International, for example, last year built a new 65,000 square-foot Miami Logistics Center that is dedicated to handling cargo moving to and from Latin America. Also last year, Emery Worldwide built its 120,000 square-foot Latin America Logistics Center in Miami. UPS Worldwide Logistics, meanwhile, will move its Latin American gateway office from Miami to Dallas, to serve its growing transborder distribution business better.
* International trade conditions: Regional trade agreements are changing the way international trade is conducted in Latin America. Mercosur, the most important of them, is bearing fruit in its seventh year: Between 1991, when the free-trade area was formed, and 1997, trade between its four full members, Argentina, Brazil, Paraguay, and Uruguay, ballooned from $5 billion to $20 billion, says Thomas Andrew O'Keefe, president of Mercosur Consulting Group Ltd. of Washington, D.C. Other trade-promotion regimes, such as the Andean Community and the Central American Integration System, have been moribund for a while but now are being revitalized.
Mercosur, which also includes Chile and Bolivia as associate members, has not yet fully implemented its free-trade policies. Duties still are assessed on many products, including automobiles, sugar, and textiles, and there are many exceptions to the Common External tariff, under which member countries are supposed to assess identical duties on imported goods, O'Keefe explains. Member countries have, however, been unanimous in their efforts to make it easier to distribute products across their borders.
For example, for ocean freight moving between the four full member countries, shippers formerly were required to use vessels registered in the country of origin. Now, shippers may choose vessels flagged in any of those countries. And for the past two years, airlines have been free to offer direct service between provincial cities in both full and associate member countries, without having to route shipments via the capital cities. As a result, flights can connect the industrial centers of Rosario, Argentina, and Curitiba, Brazil, in two hours and 45 minutes. Before the new law, it required seven hours and two plane changes in Buenos Aires and Sao Paulo to fly that route. The Mercosur trading partners also have improved customs clearance procedures, in-bond cargo processing, and intermodal liability and contract terms within the free-trade area.
As a result, more and more companies are choosing one of the Mercosur countries as a home base for distributing to several markets. "In general terms, we can say that with the right associates and from the point of view of logistics, it is possible to supply different countries from one location, like all of the Mercosur countries from Argentina or from southern Brazil," says Armando Sosto, logistics business adviser for S.A. DeGiacomo, a logistics services provider in Argentina.
Andre van Bavel of AVB Trading Ltda., which provides similar services in Santiago, Chile, says whether a company can serve multiple countries from a single site within Mercosur depends on whether it is manufacturing or only distributing its products there. "If you only are distributing and do not produce products, I think companies should have operations in each country in South America," he says. "If the enterprise produces and doesn't simply distribute, then I believe it's better to take advantage of economies of scale and have plants in one country and distribute within that economic bloc, depending on the product and [volume of] sales."
* Political and tax considerations: Tax, legal, and political issues play a very prominent role in site selection in Latin America. Labor laws, investment restrictions, and the real-estate, profit, and employment-tax regimes can differ wildly from country to country. Bruce Arntzen, a partner in the consulting firm Global Supply Chain Associates, notes that tax burdens can be so heavy in Latin America that they cancel out any advantages a site might otherwise offer. "If you have a very profitable product, the taxes on those profits will swamp any savings you achieve on freight," he warns.
That's why it pays to work with a business partner that knows its way around the bureaucracy and national legal institutions, says van Bavel. "There are structures that are specific to each country, such as legal, labor, political, and other issues that would be very difficult to solve on your own if you didn't live here," he says.
A few countries offer tax breaks that encourage direct foreign investment. Some examples include Mexico's maquiladoras, tax breaks on sales and profits in Uruguay, and Brazil's deposito aduaneiro de distribucao or "DAD" system. DAD, used by such companies as Caterpillar, BellSouth, and Kodak, allows companies to set up a bonded warehouse with minimal restrictions, says Otto Valdes, trade lane development manager, Latin America, for forwarder Lep Profit International in Miami. Goods imported to the bonded area are not nationalized until they are consumed, Valdes explains. That makes the DAD warehouses ideal for staging goods destined for other Mercosur countries, because they can travel in bond from Brazil to Argentina, Paraguay, and Uruguay, he adds.
Free-trade zones (FTZs) offer many financial advantages to companies that distribute products in Latin America. These are customs-bonded facilities where companies may finish imported products by packaging, labeling, and otherwise configuring them before shipping to export markets. The importer pays no import duties on products that are exported from the FTZ. These facilities also can commingle imported and domestically produced items for shipment to a third country. One popular place from which to serve Latin America is Miami's Free-Trade Zone, operated under a joint venture of USCO Distribution Services and Miami Free Zone Corp. Miami's bilingual workforce, growing number of distribution centers, and excellent air and ocean connections make it the country's largest center for trade with Latin America.
Another free-trade zone that has developed into a focal point of Latin American trade is in the city of Colonia in Uruguay. "A lot of companies are using Uruguay's foreign-trade zone to serve Argentina and southern Brazil," says O'Keefe. "It's right across the Rio Plata from Buenos Aires. [Some of the companies that use the FTZ] are serving southern Brazil markets like Rio Grande do Sul and Santa Catarina, or even as far north as Sao Paulo," he adds.
The free-trade zone in Colon, Panama, has become a crossroads for commerce between Europe, Asia, North America, and Latin America. The Colon Free Trade Zone, which serves more than 250 companies, offers no tax on profits, excellent international banking, insurance, and ocean transportation, reasonable space and labor costs, and good security, says William Adsett, managing director of CUPFSA, which distributes French and Italian fragrances from the Colon FTZ throughout the Americas. Some matters, including availability of airfreight services, workforce skills, and basic infrastructure need improvement, but the gradual increase in privatization and infrastructure investment should help, he says.
Land of Opportunity
Latin America's soaring economic growth makes it the land of opportunity when it comes to selling and distributing products. And despite progress in developing transportation services and infrastructure, it still offers distribution challenges. The best joint partnership and the most sophisticated inventory-management software can approximate U.S.-style service levels, but they can't eliminate the cultural, legal, and political differences that make doing business in Latin America a unique experience. The key to proper site selection, then, is to seek the best operations, the best infrastructure, and the best management--and make sure that they incorporate the local expertise that is vital to success in this part of the world.
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