The Global Marketplace

Learning from failure

Recently I was asked to make an early stage investment in a Latin American IT firm, through the informal manner of investments common in the region.  The firm had suffered a serious of spectacular failures yet I am still contemplating a position--what did I see that was noteworthy?  Two things.

Learning from failure.  The gentleman who ran the firm's day to day operations had an amazing capability to look back at his mistakes and draw the right conclusions.  Why?  I believe his ability to check his ego at the door allowed him to rationally view his errors.  I have touched on this issue before, i.e. the need to strip out ego from decision making, and how truly rare this quality is at senior levels of corporations.  When you find it, you have found something valuable.

Mental flexibility.   Despite my admiration for the above quality, being mentally flexible and open may even be more important.  In this gentleman's case he spent many years as a technology analyst where he was forced to keep up on IT changes while not becoming wedded to any specific product.  "Falling in love with the gear" is the biggest pitfall to avoid with new products and/or companies, as it frequently clouds judgment.  The point is there are many reasons why individuals can have the mental flexibility to adapt--just recognize it when you see it.

Latin America and China: not our backyard anymore

I spent the better part of this decade working in Europe which took my focus off Latin America.  As I refocus on the latter one of the advantages I have is looking at the region with a fresh set of eyes.  One thing I have noticed is the surprising growth of China in the region.  What have I seen and why does it matter?

Military spending.  The Chinese have made inroads with some countries regarding arms sales.  This is not as cut and dried an area as you might think, as it effects other industries as well.  Once a country which does not produce arms becomes dependent on a producer like China it is practically impossible to switch to other nations like the U.S.  Most annual expenditures are upgrades to existing systems which force you back to the original supplier, for decades at a time.  This will give Chinese companies involved in both defense and non-defense industries a permanent presence in the region for years.  Watch and see.

Embassies.  The Chinese are putting diplomatic presences in all sorts of new places like the Caribbean.  Combine this with all of the historical baggage associated with the U.S. presence in Latin America, then add in American indifference to the growing Chinese presence (as compared to the Soviets during the Cold War), and what you get is a long-term power shift which will change the business dynamic in the region.  Remember the Chinese are concerned with growing their export industries as opposed to simple political power.

Risk: politics and business are not always the same

If you look at recent press articles Iran-Venezuela trade agreements have been the flavor of the month.  Several clients thought they spotted potential opportunities and asked me to explore the situation.  The situation looked promising, for two reasons.  First both countries have difficulties with the U.S. and thus a perceived common interest.  Second, and more importantly, both regimes are authoritarian (to some degree) and thus should be able to push their private sectors towards mutual cooperation.  Once I started digging I found through my sources that the situation was not so rosy.  Why and so what?

Business realities.  A state-owned company in Iran can be told by the Foreign Ministry to cooperate with a Venezuelan counterpart as part of a trade agreement.  The reality could be that the Iranian company operates under different pressures inside Iran, i.e. some other government organization wants it to make money to support the economy.  This fundamental business fact will trump a political desire not based in reality; perhaps it does not make sense for the Iranian firm to export to Latin America.  The bottom line is that economic conditions in a business environment will always trump political needs.

Common sense.  Once I looked at the information on these countries the truth seemed obvious, even though I missed it at first.  Always look at business realities and not at the political logic.  Tremendous opportunities exist in these countries, but not for reasons you glean from the newspapers.

Risk: a business model

My business colleagues know that I specialize in risk management focused on Latin America.  What does this mean?  The following series of posts are based on some questions I fielded in recent weeks, especially relevant given what is happening in the world's financial markets.

Definition.  I will not define risk in the larger sense, since despite some common definitions companies and organizations view this problem differently.  I specialize in identifying non-quantifiable risks for incorporation into both corporate models and overall strategy.  I do this in Latin America because culturally this is my home--I know how the region works.  I spend a lot of time in Washington, D.C. because the U.S. government plays a large role in many Latin American issues and I need to stay up on what is happening in the policy arena.

Business model. Per the above definition my business is rolodex based.  For my European clients (picked up while living in Luxembourg) I bring connections in both the Washington community (government and various other organizations around town) and throughout Latin America.  Having been lucky enough to sell a successful European consultancy before the bubble burst, I also have my own capital to invest in the region which adds to my credibility with clients.  This is not just an academic exercise.  Lastly my economics training helps me understand risk models and how they incorporate the product I provide.

Next, we move on to various practical examples of what I am seeing in this business.

Are emerging markets and Americans a fit?

One of the reasons that I have a job, or even a career, is the difficult time that Americans have understanding foreign cultures.  The stereotypical answer is that we are not sophisticated when compared to other cultures; this is what I heard while living in Europe.   I disagree, and believe that our difficulty stems from one of our strengths as a nation:  the openness and transparency of our culture.

The U.S. is a rules based society for getting ahead.  If you get good grades and are involved in many activities as a high school student then you will gain admission to a good university.  Thus it starts and continues through the working world.  We live in a world that is very predictable which is a great statement about the strength of our society.  Unfortunately the rest of the world is not quite so organized, nor is it predicable in the ways we would like.  Many countries in emerging markets are not so lucky, as people try to survive with rules that change for reasons which rarely get predicted.

How have I seen this noble quality trip us up in emerging markets?  Sometimes we don't understand power relationships which don't follow org charts.  We mistakenly identify organizations which do not exist, while ignoring those that do.  Somethings can only be seen and learned the hard way, on the ground.

Strain

The current financial crisis is affecting all businesses;  this is obvious.  As I speak with my clients in the U.S. and Europe what I find interesting are the side issues arising in emerging markets.  Here are some examples.

Market Doubts.  Underlying the financial strain are doubts about the value of certain instruments.  With some people these doubts have spread to emerging markets in general.  How can I trust what I am hearing about my market in this country?  Do I know the managing director enough to believe what he is saying?  I don't speak the language in these countries so can I believe anything that I read about them?  I have heard these questions and more in recent weeks.

Paranoia.  Under this pressure some have also started to believe any number of odd theories.  I have dealt with fears that local governments are undermining foreign businesses and that some companies have enlisted the support of the own governments to help them in uncertain times.  By help I mean all manner of things said and unsaid.  All of these fears have a basis in fact but appear to have gained traction with the additional financial strain.

These have taught me that at times like these you can use your competitive advantage in emerging markets to bring value to customers.

Emerging Markets

As many of you know I have started working on emerging markets, with a particular focus on Latin America and security issues in general all over the place.  This is a fascinating area for me and I hope to share some of my insights as we grow this business.

1.  Knowledge of the region.  As I have stated elsewhere in this blog there is no substitute for local area knowledge.  While I do at present live in Latin America, my many years in the region and Africa have built up the contacts and understanding of business practices.  If you don't have this experience you can only build it up my living there.

2.  Knowledge of you.  The flip side of this is making sure potential customers know who you are.  Despite linkedin and other social networking sites the world is frequently not a logical place.  Why should we expect foreign cultures to work the way we work?  You have to get known to get business, which you will find in the most unlikely of places.