The Global Marketplace

Latin America and property

I am reading a wonderful three volume history of Mexico by Enrique Krauze, which among other items discusses the issue of land (and who owns it) in Mexican history.  The wars of Emiliano Zapata in the 20th century are one example of this problem.  Why do I find this interesting?  I am always looking for differences between the cultures of Latin America and the U.S., and property rights is a big one.

The history of property and ownership in Latin America is very different from the American experience.  This is not a history lesson; my point here is that the concept of property is fundamentally different in Latin America.  Since property and ownership get to the heart of the market economy you must keep this in mind if you work in the region.  As an example, in the 1990's a thoughtful Peruvian economist asked why Latin countries (among others) could tap residential equity as a source of capital for businesses.  I believe that one of the answers to this question is the different concept of property rights in Latin America.  It is impossible to transfer public policy solutions like this from the U.S. to the region without taking account of cultural differences.  That is the subject for another day.

I was recently involved with a company that experienced a catastrophic failure of one of their key products.  A couple of interesting observations from the sidelines.

Blame.  I was struck by the time wasted on determining who was at fault with this issue.  Accountability is important, and sometimes people need to be fired, but in this case I believe sheer bad luck was at work.  Fix the problem, prevent it from happening again (if possible) and move on.  The time spent on a crisis, while frequently appealing to our human nature, is time wasted.

Proportionality.  A crisis is frequently an opportunity in disguise.  In this company's case it provided them with the chance to look at their long-term strategy, as everyone's attention was focused and focused hard.  Always be looking for these chances to reinforce what you are trying to do, specifically when your people are wired in.  This is a key business point:  match strategy with human nature.

Mexico: How will it withstand this financial crisis?

All of us who are Mexicans in one form or another have experienced sad consequences of worldwide financial crises.  How will the country fare this time?  I have spoken with many contacts both inside Mexico and out, who crunch these numbers for a living, and you may be surprised at the good news.

Decade of good policies.  The consensus is that Mexico's economic policies over the past decade have been quite solid through different administrations and political parties.  My own personal experiences tell me that repeated crises from the 70's through the 90's taught the policy makers some hard lessons which they internalized.  I would be surprised if this crisis turns out to be excessively severe.

Home market.  I also hear Mexican policy makers have tried to increase the importance of the internal market to make companies less exposed to the problems of their northern neighbor.  This may seem counterintuitive (look at Chile's export driven success) but it makes sense, if you think about it.  Mexico has a tremendous tendency to be overly linked to the U.S. for obvious reasons, so kudos to the policy leaders for trying to reduce this.

Hugo Chavez: myth and reality

Sometimes worldwide events impair our judgment on local issues, as we forget to view issues and trends through a local lens.  Through my recent work in Latin America I have learned that the U.S. perception of Hugo Chavez is one such area.  A couple of points.

Why:  After the 9/11 attacks the U.S. had a tendency to view world leaders as either allies or enemies, with no middle ground.  With these two choices it is clear where Chavez would have ended up.  Chavez added to this through his ego and desire to use U.S. policy to expand his own influence.  Both of these tendencies were compounded by our ignoring the region and failing to understand local dynamics.

Reality:  My contacts tell me that most regional leaders do not view Chavez as a threat to their own governments.  He is seen as having his own problems to deal with in Venezuela and I would add that he lacks the infrastructure to spread problems far and wide.  Remember that Cuba had the support of the Soviet Union during the Cold War.

Lesson:  Watch stereotypes; they can lead you to view issues like these with your mind already decided, even if you do not realize it.  You may face investment risks in Latin America but I would not start with Chavez and his regional allies as the key problem.

Risk: smart people

Risk can appear where you least expect it.  I have been looking at risky companies run by smart people because I enjoy finding risks in unusual places.  These types of organizations are dangerous because we are naturally awed by intelligence (remember "The Best and the Brightest?") and assume smart people can solve anything.  Even worse is intelligence paired with good intentions.

Pitfalls.  Sharp people make very good consultants but can fail when managing companies.  They are unfairly blamed for lacking so-called people skills but this misses the boat.  The problem instead lies with what I described above; our respect for intelligence implies that smart folks usually carry the day because we trust them.  They get used to making their point and end up believing they are really that smart and that good.  How about an example.

I recently attended the board meeting of a company led by a smart person who was tremendously respected by his peers.  He suggested a strategy for getting a new product to market which was brilliant and ground breaking in many areas.  In so doing he ignored several key decision makers in this market who would have killed the idea upon arrival; his strategy ignored the stresses they were living under which drove their decisions.  Nobody challenged him; I remember thinking that was more frightening than the strategy itself.

Latin America and the Baroque

The baroque era, when you speak of architecture, does not get the high praise given the Gothic or renaissance periods.  My interest in the baroque has little to do with the art itself but instead is directed to what it says about Latin America, my favorite part of the world.

Appearances deceive.  Baroque architecture frequently contains connections that are not easily seen, obscured as they are by the abundance of detail which characterizes the style.  The same can be said of personal relationships and organizations in the region.  You cannot judge power by an org chart, nor can relationships be so easily evaluated.  I have touched on this them before, but today I am thinking of images.  Perhaps the connection to the baroque era in colonial Latin America exists, perhaps it is a coincidence.  Does it matter?  Think about it.

Never a straight line.  The other point of the baroque is that complexity of architecture also translates to the shortest distance between two points; it is never a straight line.  Moving from the imagery to Latin America you see this is in personal relationships.  Issues take time to address, conversations endure, and after a while you reach your destination.  Remember the facade of the last baroque church you saw if you are frustrated in a meeting.

Sunday musings - Evelyn Waugh and Scoop

Sundays I try to dedicate to thinking about the important matters of life, primarily through those books that provoke thought in me.  I just finished rereading Scoop by Evelyn Waugh, his satire on the press industry with a lesser focus on European colonialism.

Folly.  One of the messages in Scoop is the folly of much we do;  how much of it really matters.  In Scoop the folly is chasing news stories in colonial Africa that are truly meaningless but which sell in this silly world of ours.  I wonder;  was this really a conscious message by Waugh or did he instinctively grasp this point?  As with all literature the process is interactive and different readers will draw distinct conclusions from the same book.  I have always suspected that great writers are like other artists in that they see the work in their minds and project it on the medium--be it paper or canvas--without too much thought.  If this be true with Waugh then perhaps I am using Scoop to shine a light on the dark corners of my own life?

The world grabs our attention at all times, and it is so easy to fall into mental traps that blind us, truly blind us.  Sunday Mass is my favorite hour of the week and perhaps I cherish it because the ancient rituals and prayers make me stop my uninterrupted focus on silly things to contemplate what is important.  This is quite the journey we undertake through life, isn't it?

State owned enterprises and risk

I recently completed a study on state enterprises in Latin America, PEMEX in Mexico being a large example, from a investment point view.  Specifically, I asked whether or not these firms would be good investments if they are privatized.  As a second issue, I looked at the benefits of doing business with these firms.  While many of my conclusions were obvious and known to most of you who successfully work with these firms, my sources pointed out one thing which had not occurred to me: the importance of employee attitudes.

The post office, not a firm.  Most employees of these companies view themselves as state workers.  This is not to say that they are lazy or inefficient--not at all.  The problem is their mental framework and the pressure points they respond to.  For example, they spend more time worrying about political trends in the ruling party because this drives much of what they do.  Middle and senior managers are also following the same political hot button issues, and are frequently respected by rank and file employees for their political connections and not their ability to deliver results (and consequently more money).  The market indicators we are used to following rarely grab their attention.

Conclusion:  I finished this study thinking that firms who lack this experience with parastatals should tread cautiously when considering business in this area.  My sources told me these firms were surprised, time and again, at the mentality they faced and were not well-equipped to maintain a long-term relationship.  Stick to what you know.

Sunday musings

The recent crisis, and our reaction to it, brings to mind some thoughts about the modern world.  As you know I am conservative by nature which means I harbor a healthy suspicion of the power of government to remedy the ills of the world.  All that said the nature of the modern world and its industrial economy makes me keep a few points in mind.

Powerlessness.  One of the downfalls of the modern economy is the sense of powerlessness provoked in normal people.  We lose jobs and investments to factors we could not have predicted let alone understand.  The world can also be, as noted so well by Nassim Taleb, a capricious and unfair place at times.  As such we need to believe the government is on our side against these forces.  This has nothing to do with rational thinking or justice;  I am concerned with preventing revolution, as the alternatives always lead to rabble rousers like those who brought down the Roman republic.  We need a government that is strong during a crisis.

True government.  All this in mind we cannot forget that the state's authority is always coercive in nature.  Governments pass laws to rule, and if any of us resist the power of the state the result, at the extreme, is death.  Given that force and the state are joined we cannot believe that the government represents society and our better interests; other groups in society do this.  We would do well to remember this point.

Latin America and emerging finance

I had a discussion recently about early stage financing in Latin America that was quite fascinating.  In essence the venture capital model as created in Silicon Valley, where you have an entire ecosystem that encourages new companies,  does not exist in Latin America.  Two interesting points.

Family networks.  The preferred way of raising money is via family members, with close friends as a second option.  Leaving out the pros and cons of this approach, using family members reveals a very important cultural fact about Latin America.   Networks are everything, far exceeding their importance in the U.S.  This can be seen by the intense social activity in Latin American business circles which American friends of mine have critiqued as excessive and a waste of time.  Now we can see, via the informal early stage financing model, why this is so important.

Ecosystems.  As all of you who work in the VC field know, Silicon Valley is an ecosystem with several different parts that produce great products for the IT field.  Europe has tried to imitate this in certain countries but the jury is still out on how successful this will be.  As for Latin America, the system just does not exist right now.  Thus many great products are brought to the region from outside, which is how to get into this game.  Find out which American products, for example, will sell well in the region then work that angle rather than looking for homegrown ideas.  These need to brought out to prosper elsewhere.