The Hidden Costs and Opportunities in LATAM

**This article was published in Global Corporate Xpansion. See the posting at GCXMag.com here**

CGI is a manufacturer of medical devices, selling into the Latin American (LATAM) region. The first country the company entered was Argentina. When negotiating the first sale of 10,000 units together with the training service, it seemed like a walk in the park to get the company to agree to the product features, price, delivery and distribution terms. However, the terms of payment opened a whole new phase in the talks. Much time was spent structuring and going back and forth. And if this wasn’t enough, 21 days into the transaction they asked to renegotiate the terms of payments.

This is just one example of a reoccurring problem in Latin America, and in other regions as well.

The economic growth in LATAM is expected to be around 3.5 percent between 2013 and 2025. This presents companies with opportunities to expand globally and take advantage of an expanding region. How are you going to take advantage of these immense opportunities and overcome the cultural barriers that can make or break the deal and your future business involvement in the region? A region where there is a strong emphasis on family values, group ties and decision-making, loyalty, the elasticity of time, the attitude toward contracts and agreements — all these will affect your interactions and chances of following the contracts and getting paid.

Most companies view extending international credit as a function of risk management. Look and treat this as a relationship building opportunity and a tool to implement the company’s strategy and grow globally.

What can go wrong?  How do you avoid leaving money on the table?  How do you do things right?

The general starting point for most companies is zero risk, which means no credit. However, in order to be competitive, you need to offer credit. Other countries around the world have solutions, so how are you going to increase your chances for success, and be more competitive in cross-border markets?

When A Credit Report Is Just Not Enough

While credit bureaus worldwide provide valuable data, such reports share a number of drawbacks:

• You cannot assume each report examines the same risk policy
  • Usually these reports are costly
  • Many companies globally are not represented in the reports
  • Accounts can go bad from the date of the report to real time
  • World regions and countries are volatile and interpreting the information is more complex

A few general rules of the road:

• Whether you are new to international business, or just new to a region, you need to be aware that in most cases there are actually two stages of negotiations: it is easier to reach an agreement about a transaction/sale, pricing and other delivery details. However, when it comes to terms of payment, this becomes an issue. These issues may lead to the termination of the deal, unless you understand the game, the rules and the players. In short: you need to understand the mindset.
• You may be well aware of the different financial modes of payment existing, and the other side is as well. However, what stands between you and actually getting paid in a predictable and orderly way, simply said, is culture. Ethics are not absolute, they are relative — again, cultures are different as well as how people treat business transactions.
• The haggling, or as we call it negotiating, is found throughout Latin America, which means that in many circumstances, it is simply part of the game. In this market, you almost take the pleasure out of doing business if you don’t negotiate and cause some drama.
• If you were thinking that you got it all written down, signed and sealed, it may come back to bite you.

Why is that?

There is a mismatch between buyer and seller goals: When do you want to get paid? When do buyers want to pay?

Negotiations Across Borders

Outside of the United States, the act of negotiating and how the process proceeds is of much greater significance than any legal document the negotiations will ultimately provide. Internationally, legal documents are routinely tossed aside and never enforced. So when negotiating the payment terms and sealing them in a legal form, their faith is about the same.

Companies/people keep making the same mistakes, thinking doing business internationally is the same as in their home countries. So whether you are a U.S. company doing business in the region or a European company, the cultural mindset is different.

The process and decisions you make in terms of extending, maintaining and controlling credit in new, existing and future markets have a direct effect on your company’s strategy and growth plans. A company cannot continue growing or even simply being present if there are unresolved issues in collecting payments, and at times, a credit report, as great as it may be, is simply not enough.

Overcoming the Challenges and Making Sound Decisions

Latin American countries have a different way to reach and execute agreements — a different ‘dance.’ What are the dance, the rhythm, and the steps? It can be learned by observing, listening and being prepared.

A country in the region can enjoy good credit, but review the company itself and the people you will be dealing with. So, what do you need to know in order to make an informed decision and avoid costly mistakes?

By reviewing a few countries business practices, you can start assembling the pieces of the puzzle. Looking at the recent Doing Business Index published by the World Bank, and the Transparency Index published by the organization’s Transparency International, we can examine a few countries in Latin America. The higher the number, the more corruption exists and the more difficult it is to do business. In a simply logical line it basically means that the higher the numbers the more a company needs to look into cultural issues that may affect the risk factor and therefore be prepared to be flexible, and turn on the panoramic lenses.

There are perils many of us forget to integrate into credit and country assessments. These measures indicate the different forms of political violence most likely to be encountered by businesses.

Terrorism and sabotage — includes any act/event that disrupts your ‘business as usual’

• Strikes, riots, civil commotion and malicious damage to property
• Insurrection, revolution, rebellion, mutiny, coup d’état, war and civil war

When adding these tools to your strategic plan, your chances for success are bound to increase and your transactions globally will be smoother, you’ll have developed a solid rapport with your counterparts, and take the stress and mystery out of getting paid. This will also help you understand your counterparts and why certain transactions take the direction they do, so you don’t feel puzzled, upset or ridiculed.

First, the high Power Distance Index (PDI) that Geert Hofstede developed in regard to most Latin American countries has important ramifications. In practical terms, high PDI means that social courtesies and formality are more important in Latin America than in the United States. Latin American managers are expected to be gracious and respectful, and the hierarchy is more noticeable.

Meetings in Latin America are typically not thought of as a way for supervisors and employees to exchange ideas. Instead, information flows primarily from the top down in meetings. In other words, it would generally be considered inappropriate and disrespectful in Latin America for an employee to correct a supervisor or make a suggestion in front of other employees.

That means that you’d better make sure you talk to the right person, since otherwise indecision and inaction will be a result.

Know who you are doing business with, i.e., if it is a locally owned company or a MNC/global firm that may work more in the style you are familiar and comfortable with.

The deference afforded to managers often has an impact on attitudes toward formal rules and regulations in Latin America. Persons in authority are more likely to be obeyed than a written policy, because of the respect they are given and the position they occupy. This attitude contrasts with the United States, where most people tend to believe that rules should be applied impartially and without exception, in order to ensure fairness and justice. 

In addition to PDI, it is important to mention the Low Individuality (IND) rating that predominates in Latin America. In the workplace, low IND means employees tend to value harmony and good relationships more than personal advancement, and are expected to be loyal, hard-working, and willing to do whatever they are asked to do.

In return for their hard work and loyalty, Latin American workers generally expect their employers to be loyal to them as well. Because of the group orientation, the employer-worker relationship tends to be more paternal and companies typically treat employees as a sort of extended family, which again, makes the decision-making process, dealing with and handling problems more of a group thing.

Another cultural contrast is a very high on Uncertainty Avoidance Index (UAI), which suggests that most Latin Americans prefer security and avoiding risk. They also value more traditional ways of doing business, such as a hand shake and personal relationships. 

Lastly, the importance of family and personal relationships also impacts the workplace. For example, it is more common in Latin America to seek employment with family members, hire family members, and look to the family for help in times of need. In addition, many Latin Americans feel more comfortable doing business with people they know personally, and developing that relationship is often considered an essential first step.

So when U.S. businesspeople try to move things along more quickly, act “by the book,” and “get to the point,” they may become frustrated and/or offend Latin Americans. This means that establishing business contacts and closing deals are best done in person, and may take more time than is customary in the United States.

Know How to Ask For Money

Have a process in place so you can understand the role of culture and relationships in global markets; conduct proper due diligence; gather the right information/data; and make strategic decisions according to yout appetite for risk. Develop a framework to manage risk.

In order to make the right credit decisions, negotiate and build sustainable business relationships, use the above tools as a starting point to determine risk/opportunity, and understand the cultural foundations for global decision-making. This will help you assess, manage and mitigate risk, while taking advantage of the great economic opportunities.