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Posted on October 2, 2012
Chilean companies have run out of room to expand and are looking abroad, says Henry Mance
It is precisely because Chile is so small that its companies, increasingly, are thinking so big.
Each year, the country ranks as one of the biggest sources of outward investment in the region.
Last year, local companies, having saturated their domestic market, invested almost $12bn abroad, more than from any other country from the region.
Take the foreign property companies that are rushing to Brazil. Paz, a house-builder has a head start. The family-owned group has sold small, cheap apartments in its home market for decades, and since 2010 has been doing the same in Brazil.
The floor plans are identical, and even the system of government subsidies is familiar, given that Brazilian housing policy was inspired by a pioneering Chilean scheme.
“We have something that didn’t exist in Brazil,” says Mario Navarro, Paz’s local head. “The smallest apartments in Brazil were at least 45 square metres, and we offered 32sq m.”
Paz is one of a growing number of Chilean companies seeking to bridge the gap between South America’s most affluent economy and its biggest, Brazil.
Chilean direct investment in Brazil totalled $5.4bn between 2007 and 2011, more than double the figure for the previous five years. Only Peru, Chile’s immediate neighbour to the north, received more.
Despite the difficulties involved in investing in Brazil, for many Chilean companies the attraction of the country’s 190m consumers is irresistible.
Luís Afonso Lima, president of Sobeet, a Brazilian think-tank, says: “The market is so much bigger. The economies are [also] complementary, although Brazil is more important for Chile than vice versa.”
LAN, Chile’s largest airline, is merging with TAM, its less-efficient Brazilian peer, to create the continent’s dominant player and the world’s biggest airline by market capitalisation.
Such new arrivals sit alongside established operations : Sonda, a technology company, has more than 5,000 employees in Brazil, with revenues exceeding $400m last year.
The most aggressive Chilean investment has come in retail. Cencosud, the largest supermarket chain in Chile, has invested in Brazilian stores, becoming the fourth-largest chain by sales. Its reach extends from the north-east to Rio de Janeiro.
So far Cencosud’s arrival has been low-key, especially compared with the two biggest foreign supermarket owners, rivals Casino and Carrefour of France, which have squabbled over a proposed merger.
Yet that may gradually change if Cencosud buys more small chains in Brazil, using some of the $1.3bn that it raised from the Santiago and New York stock markets this year.
Matías Brodsky, an analyst at Banchile, a Chilean bank, says: “Cencosud looks for opportunities where the big groups [Carrefour, Casino and Walmart] have low market share. Then, it gives the outlets a cleaner image, uses economies of scale and improves margins.”
Its experiences could encourage Falabella, the Chilean retailer that is present in Peru, Argentina and Colombia, to follow suit.
Falabella’s department stores have few direct equivalents in Brazil, although finding sufficient space to install them may prove problematic.
For other Chilean investors, Brazil’s allure is its resources.
The country has nearly 50 times the area of Chile’s arable land, with similar productivity for forestry.
Arauco and CMPC, Chile’s biggest forestry groups, have made investments. Like LAN, they can point to competitive advantages compared with Brazilian peers: they produce a broader range of products, and have been less affected by sluggish global prices for pulp and paper.
But taking advantage of Brazil’s expanse is not always easy. Since 2010, foreign companies have been blocked from buying large amounts of land there.
Carlos Bianchi, Arauco’s chief executive in Brazil says: “There’s interest in investing, but the legal framework doesn’t exist.”
So the company has turned to partnerships with local companies, taking a minority stake in a wood board factory in the southern state of Paraná.
Unpredictable regulation is not the only hurdle faced by Chilean investors in Brazil.
The complexity of doing business in the country led Farmacias Ahumada, a Chilean pharmacy chain, to abandon Brazil in 2006, after six fruitless years.
Brazil’s fluctuating currency is another issue. When Paz sought to raise money for its Brazilian foray two years ago, many potential Chilean investors wanted it to hedge against another fall in the Brazilian real.
“If you don’t believe in Brazil and in the real, don’t invest,” is Mr Navarro’s response. The rise in direct investment is a sign that many Chilean companies are indeed shedding their caution.
One frontier, however, may remain almost untouched.
Chilean winemakers have enjoyed success in Brazil, with Concha y Toro alone exporting over 5m litres a year. But there is no sign that they are prepared to invest in Brazil’s own vineyards.
“In winemaking, it’s the quality of the land that makes the difference,” says Francisco Torres, who runs Concha y Toro’s Brazilian distribution business. “That is why we stay in Chile.”