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Worldcity Business: Optimism Takes a Pause

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June 2008

During a Roundtable discussion organized by WorldCity's Business, Paul Gregg, Managing Director of our "America's Desk" in Miami, speaks on taking an optimistic approach when it comes to business in Latin America caused by the economic downturn in the US market.

While the economic outlook for the region is bright, doing business in Latin America can still be unpredictable, volatile and fraught with risk. And there’s the economic doldrums in the U.S. to contend with, too.

Over the past two or three years, WorldCity’s monthly CEO Roundtable breakfasts have been characterized by unbridled enthusiasm for the future of the region. One after another, multinational executives have recounted stories of unprecedented growth and profitability. At our latest CEO roundtable, however, clouds cast a shadow over the discussion.

The outlook for the region continues to be positive. Yet, the normal upbeat atmosphere was tempered by concerns about the economic downturn in the U.S. market, about the everchanging rules of the game in Latin America, particularly in Brazil, and about the heightened risks of doing business in Venezuela and elsewhere.

“2008 is still unpredictable,” said Samuel Israel, regional CEO of DHL Global Forwarding, the freight-forwarding arm of the German logistics company.

“We’re experiencing a wait-and-see attitude in most multinational companies here in South Florida,” said Paul Gregg, managing director of Boyden Global Executive Search.

“2008 is going to be a tough year,” declared Joe Sirven, Miami partner of the global law firm Holland & Knight.

“What keeps me awake at night is the almost instantaneous impact on our business because a government authority can decide to change the rules,” said Jim Hogan, who heads up Latin American operations for medical devices giant Medtronic.

Hogan was the newcomer in the group, having arrived in Miami just a few months ago after more than 10 years with Medtronic and other medical device firms in Switzerland. Hogan is learning the hard way that doing business in Switzerland and doing business in Latin America are like night and day. As he put it, “The business dynamics, especially the reimbursement climate on which our company is so heavily dependent, are so fundamentally different.”

In his short tenure in the region, Hogan has had some rude surprises. No sooner had Hogan taken on his new job, than Brazil’s national health insurance authority decided to change its policy for reimbursing certain medical procedures and costs. “We suffered a 20 percent price reduction on many of our products due to a change in local taxation laws funding the reimbursement sector,” said Hogan.

Brazil Customs authorities are also making life difficult for Medtronic and other medical device companies by requiring them to provide comparative pricing of their products in other markets around the world before they can be approved for sale in Brazil. And, as if that weren’t bad enough, the Brazilian government is also trying to eliminate patents on certain medical devices to allow Brazilian firms to copy the technology and produce them locally.

While Medtronic’s unit sales are expected to continue to grow thisyear, Hogan expects that dollar sales revenue in Brazil will be flat. “Brazil is such a dominant portion of our business in Latin America. So, if Brazil doesn’t do well, the region as a whole region doesn’t do well.” With Brazil dragging down performance, Hogan predicts that sales growth for Latin America will be less than 10 percent in 2008, which is “unusual for the company because we normally have double-digit growth.”

Welcome to the roller-coaster ride of Latin America.

Of course, Brazil is only one of the unpredictable and volatile challenges of the region. How about Venezuela? “Venezuela is a high growth market, but Chavez could do something tomorrow that could bring my business to a halt,” said Hogan.

Multinational executives who have been working in Latin America for any length of time know that this kind of risk comes with the territory. Samuel Israel, who studied Latin American economic history at the Sorbonne and has been working in the region since 1999, summed it up best. “Venezuela is high profits but high risk. These markets can be heaven or hell.”

While the last five years have been a bonanza for many multinational companies in Latin America, the challenges and the risks have not subsided. And it is not a bad thing for multinational executives to continue to remind themselves of that.

For Medtronic, the risk-reward trade-off is perhaps not as simple a calculation as it might be for other firms. “There are so many people in Latin America who are going to die today if they do not have access to our technology,” said Hogan. “So we have a sort of moral imperative to rush in as fast as possible. But I know that I may be rushing to the end of a cliff.”

Noted Israel, “In Latin America, it’s a very fine line between investing to take advantage of market momentum and being prepared with a contingency plan.”

But the vicissitudes of Latin America were not the only thing on everyone’s mind. So, too, was the impact of the economic downturn at home.

Joe Sirven forecasted challenging times for his law firm. “2007 was very strong for the first six months, then disastrous for the last six months.” The culprit, he explained, was the U.S. housing and financial crisis. “The sub-prime mess really affected the liquidity in the market and, consequently, the ability to incur debt to do deals.”

The result has been a slowdown in business for the law firm. “The pipeline is not as strong as we would like, so we are predicting a flat year,” said Sirven. “What that means in the law business is that partners’ profits will be flat, which is not a good thing.”

Another challenge this year has been business forecasting. Without a clear vision of where the economy is heading, Sirven lies awake at night concerned about recruiting decisions. “We promise our clients that we will put as many lawyers on a case as it requires. So you need to have a full stable of horses. But if theeconomy goes bad and you have lawyers sitting around not doing much, that is not a good situation.”

Despite the challenges, Sirven highlighted two silver linings for his business. One is the uptick in new business from European investors, especially from Spain, looking to take advantage of the strong euro. The other is Miami’s enhanced stature as the location of choice for international arbitration.

About 80 percent of the contacts that Sirven drafts these days contain arbitration clauses. “Our clients have found that it its cheaper, faster and more predictable than litigation. More importantly, Miami is very often chosen as a neutral site for the arbitration proceedings. “Miami is viewed as a place where people like to come and that, compared to London or Paris, is relatively inexpensive.”

The U.S. economy was also on the mind of Paul Gregg, managing director of Boyden Global Executive Search, one of the world’s premier search firms. Earlier this year, Gregg established the company’s Americas Desk in Miami to coordinate and assist with searches for C-level executives in regional and cross-border positions. “Despite the fact that Brazil is booming and Colombia is going like gangbusters, we’re experiencing a wait-and-see attitude in most companies here in South Florida,” said Gregg. “We’re in a recession here in the U.S. and the sooner we acknowledge that, the sooner we’ll recover.”

Another issue of concern at the table was the failure of the U.S. Congress to approve the Colombia free trade agreement. Gregg, whose wife is Colombian and who considers himself a Colombian at heart, said the lack of support for free trade will have a huge impact because of the negative message it sends to the region.

Pursuing free trade with Latin America, he said “is clearly the right move from a business perspective. It makes sense to push to open these markets. As a country, we still haven’t tapped into opportunities in our own hemisphere.”

Samuel Israel seconded the motion. “For us, the Colombia FTA is critical.” Colombia is one of DHL’s oldest markets. And, he noted, the Colombian export community is strong and vital to the country’s economy. “No other country, in my opinion, has this dynamic structure of small- and medium-sized exporters,” said Israel, adding that “the U.S market is key to Colombian exporters.”

Despite the continued obstruction of the Colombia free trade pact and “in spite of all the problems with infrastructure, which is still a challenge in Latin America,” Israel noted that imports and exports are growing at an average of 10-12 percent in most of the countries. That is good news for DHL. Israel expects his business in the region to grow in 2008 at a similar pace.

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