Return of the Jaguars

Latin America's high-flying economies-known as the "jaguars"-plunged into recession in late 1998. But they appear to be roaring back today, signaling increased demand for logistics services.

By -- Logistics Management, 6/1/2000

Just a couple of years ago, when Latin America's economies were experiencing high rates of growth, pundits often referred to those countries as "Jaguars"-a a comparison with the Southeast Asian economies that were known as "Tigers."

Like Asia, Latin America later was beset by widespread economic problems. In late 1998 and throughout 1999, trade volumes fell and carriers saw once-exhilarating growth dwindle. Air and ocean carriers cut back on service frequency, acquired weaker competitors, or left the trade altogether. Shippers scrambled to rid themselves of excess inventory and cut their operating costs. The "Gold Rush," it seemed, was over almost as soon as it had begun.

Latin America certainly is no stranger to recession, but this time around has been different. In the past, regional recessions have been painfully long. Since late last year, however, the region's economies have shown signs of a comeback. With economists predicting significant growth in most of Latin America this year and next, shippers, carriers, and logistics service providers that have remained committed to that market are optimistic that profits are once again on the horizon.

Battered Economies

By all accounts, 1999 was a bad year for just about everyone in the Southern Hemisphere. Real Gross Domestic Product (GDP) growth in some countries was in the negative numbers, reports Devi Aurora, senior international economist for the DRI unit of Standard & Poor's. Venezuela, for example, registered GDP growth of -7 percent. Colombia and Argentina were close behind, with -5 percent and -4 percent, respectively. Even Brazil, which had been the region's powerhouse economy, recorded a paltry 1-percent rise in its GDP. (See chart.)

Both the Mercosur region (Brazil, Argentina, Uruguay, and Paraguay) and the Andean countries (Venezuela, Colombia, Peru, Bolivia, and Chile) suffered last year, says Thomas Andrew O'Keefe, principal of the Mercosur Consulting Group in Washington, D.C. When Brazil devalued its currency, the resulting pricing imbalance caused trade with its neighbors-particularly Argentina-to plummet. Imports to Brazil fell sharply, but the devaluation kept northbound shipments to the United States moving. Meanwhile, Chile was heavily affected by Asia's recession, he says.

Presidential election years in South America traditionally have been times of turmoil and economic slowdown, O'Keefe points out, and Peru, Colombia, Venezuela, and Argentina all had to contend with those internal issues at the same time that global economic forces were battering their economies. Even the strongest economies experienced business bankruptcies and consolidations, along with rising unemployment.

The one bright spot, O'Keefe notes, is that those problems actually encouraged foreign investment. "It created ripe opportunities to pick up a firm in South America cheaply, " he observes. In Brazil, for example, direct foreign investment in 1999 reached $30 billion, down only slightly compared with 1998, according to figures issued by Brazil's Central Bank.

Hard Times

Transportation and logistics service providers certainly felt the pinch in Latin America when their customers' problems became their own in 1998 and 1999.

Ocean carriers, which had flocked to Latin America when the market heated up in the mid-1990s, were especially hard hit. A combination of overcapacity and a shrinking cargo base led many to pull out of the trade, reduce their sailing frequency, or merge with competitors. One of the biggest of those events was the purchase of Crowley American Transport's South American business by Hamburg Süd, parent of Crowley rival Columbus Line. Other major consolidations included Hamburg Süd's purchase of Brazil's Alianca Line and CP Ships' buyout of Ivaran Lines, which it folded into its Lykes Lines subsidiary.

John Abisch, president of Miami-based ocean consolidator Econocaribe Consolidators Inc., says his company's business was affected in several ways. For one thing, Econocaribe's exporter customers were selling less merchandise and needed to reduce holding costs in South America, which caused a drop in shipment volumes. "... [W]e saw some FCL (full containerload) clients become LCL (less-than-containerload) clients as they needed to reduce their inventory," he recalls.

Ocean freight rates also were affected by increased competition for cargo. "Because the market was shrinking and the number of slots remained the same, the rates went down," Abisch says. "At one point, the rates to the East Coast of South America got so low that clients who were shipping 15 cubic meters [about 529 cubic feet], which normally would move as LCL, found it to be more cost effective to send an FCL 20-foot container."

Freight forwarders and airlines also saw a drop in demand for their services. "In 1998, Argentina was going gangbusters and we were moving an entire 747 of air freight ourselves every two days," recalls Bruce Krebs, who spent four years as Argentina country manager for Danzas AEI before transferring to Mexico recently. By the middle of 1999, import volumes had dropped by 30 to 40 percent, he says. International airlines cut their service frequencies-for example, airlines that had offered four or five flights weekly cut back to just one or two. Some other airlines either pulled out altogether or switched to spot charters.

Third-party logistics companies, meanwhile, found the recession to be a mixed blessing. Although U.S.-based companies were able to weather the storm, some of their locally based partners were hard hit, says Michael Spong, director of international operations for GATX Logistics in Jacksonville, Fla. Some smaller customers, too, cut back on outsourcing as their sales volumes dropped, he says. As a result, many service providers shifted their focus from developing new business to retaining customers, says Frederick C. Stromeyer, vice president-international of Naugatuck, Conn.-based USCO Logistics.

Krebs of Danzas AEI, which also offers logistics-management services, says his company actually increased its business during the recent recession because customers saw outsourcing as an opportunity to reduce costs and consolidate suppliers. As a result, he says, "We didn't get more freight-forwarding business, but we did pick up more logistics business from existing customers."

Signs of Recovery

Since early this year, there have been clear signs that Latin American economies are on the rebound. Airlines and ocean carriers are projecting solid traffic growth, and logistics outsourcing firms report that they are receiving inquiries from potential new customers as well as old customers who cut back spending during the past two years.

Another positive sign is that a number of freight forwarders and carriers have announced new services or have restored discontinued services. Many also have shown their confidence in the region with cash investments, participating in joint ventures or purchasing all or part of their partners' businesses in Latin America. (For some examples, see the accompanying sidebar.)

Service providers that have stuck with the region through thick and thin are ready to grow again. GATX Logistics in February completed construction of a 300,000-square-foot distribution center in Santiago, Chile-and that space has largely been filled already. GATX plans to add another 200,000 square feet at the Santiago airport within the next year and is adding 85,000 square feet in Costa Rica, where its existing facility is "maxed out," says Robert Simcoe, vice president, international.

Although that may seem risky to some, Simcoe says his company's decision to add space was a realistic one. "We don't go on speculation," he says. "We make sure we have a client partnership in place before we expand." GATX also has been receiving serious inquiries from countries that are still new to logistics outsourcing, including Peru, Bolivia, and Colombia, he notes. That and continued demand in Chile and elsewhere leads Simcoe to forecast that his company will achieve growth of between 10 and 15 percent in Latin America next year.

Fred Stromeyer of USCO Logistics says another boost to the region's recovery is the influx of mid-sized companies from North America, Europe, and Asia. Until now, the big multinationals have dominated foreign investment in Latin America, but they no longer have the market to themselves. "Mid-sized business-to-business, high-tech, medical products, toy, and retail companies are beginning to penetrate these markets," he observes. These companies are relying heavily on outsourcing to help keep the cost of entry down, Stromeyer adds.

Another result of the region's improving economic fortune is that customers' service requirements are becoming more complex and specific. "What customers are really looking for are U.S. service levels," says Stromeyer. "In general, the service expectations are becoming more homogeneous, irrespective of the market."

Inevitably, meeting those demands will depend on information technology. "Everybody wants more and more technology and the visibility into their operations that comes with technology," says Spong of GATX Logistics. Not only multinational companies but also local firms now are expecting that kind of support, he says. The smaller companies need technology so they can meet the information demands of their foreign-based customers, but they often don't have the market mass to achieve economies of scale. That can make it too costly for third-party providers to develop, install, and maintain information systems on their behalf.

Still, it's clear that Latin American businesses will continue to follow their customers' lead and move into electronic commerce. Demand is so strong, in fact, that APL recently introduced Internet-based customer-support capabilities that are specifically designed for Latin American customers, and the company soon will appoint an e-commerce specialist for the region.

Questions Linger

Observers say that although there's reason for optimism, companies that do business in Latin America shouldn't forget that numerous concerns remain. "There are still questions about how entrenched this recovery in Brazil is," says Mercosur Consulting Group's O'Keefe. "Brazil is still on shaky ground ... and it has been able to hide things that have the potential to resurface," he reports. With the Brazilian government making a concerted effort to attract manufacturers that will use the country as an export platform, however, the country is moving in a positive direction, he says. The prognosis for Chile, meanwhile, is very good, says O'Keefe. That country's policy of promoting exports, industry and market diversification, and value-added services will continue to pay off in both the short and the long term.

Argentina may be the most worrisome of the major markets, says Krebs of Danzas AEI. The new government is struggling to control high unemployment and interest rates, a huge fiscal deficit, and the fallout from Brazil's decision to devalue its currency last year. Brazil was one of Argentina's largest trading partners, but with the Argentine peso pegged to the U.S. dollar, the price of Argentine products in Brazil doubled. Since then, dozens of foreign and local manufacturers have fled Argentina for Brazil. As a result, says Krebs, "I don't think you're going to see any huge logistics investments in Argentina in the next few years, even though demand for logistics services is definitely going to increase."

Despite those worries, a lot is going right in Latin America. Central American countries are taking a cue from the Mercosur giants and are quickly developing into international manufacturing and distribution centers. Mexico-on the verge of implementing a free-trade agreement with the European Union-is poised for further economic growth. And as countries benefit from steady foreign investment, the standard of living and income levels are likely to rise. The "Gold Rush" to Latin America may be over, but the region will continue to offer exciting possibilities for companies that take a measured, careful approach to investments there.

Service Options Increase as Region Rebounds