After almost three years of very challenging market conditions in Latin America in which companies had to cope with falling government budgets, cash-strapped customers, sharp currency depreciation, rising inflation, and an oftentimes volatile political and regulatory landscape, multinationals are finally seeing the light at the end of the tunnel. The strategic focus is slowly but steadily shifting towards how to better capture upside potential in 2018.
To that end, FSG convened a group of Latin America regional executives in Miami to discuss our economic and business outlook for Latin America next year. The second objective was to foster discussion around the key strategic imperatives that general managers should consider as they finalize their 2018 plans with their local teams in the region. Five strategies emerged as top-of-mind for executives in the room:
- Increase profitability to secure corporate investments: Although growth in Latin America is slated to accelerate in 2018 to 2.6% from 1.3% in 2017, the region will continue to underwhelm relative to other emerging markets (average growth in emerging markets will be 4.5% and 4.8%, respectively). In addition, because of Brazil’s political crisis and the higher exposure of Mexico to changes in US trade and immigration policy, corporate headquarters see Latin America as a riskier place to do business. In this context, improving profitability levels will be key to compete for corporate investments, especially in markets such as Brazil, Argentina, and Colombia, which continue to be plagued by operational bottlenecks in areas such as logistics, tariffs and taxes, and access to talent
- Focus on top-line improvement: When asked which lever would be most important to increase profitability, 57% of executives in the room said that they would focus on improving top-line in 2018 either by growing volumes or increasing prices. Twenty-nine percent would focus on reducing operational costs, while 14% would concentrate on higher-margin markets, products, or customers. While strategies to increase profitability are likely to vary market by market, this overall trend suggests that companies expect financial pressures on customers to ease and purchasing power to increase, both aided by the fall in inflation and interest rates already observed in 2017 and economic recovery in key markets
- Become more granular in market prioritization: Seventy-five percent of companies will expand into new territories in 2018. Of those, 42% will expand into new regions/states/ provinces/cities within existing countries, 8% into new countries only, and 25% into both new countries and within existing countries. As multinationals engage in subnational prioritization, assessing not just risk-adjusted opportunity but also business fit will be paramount, which should include an assessment of the operating environment, industry landscape, and internal and channel capabilities needed to win in each new territory
- Continue to localize through local manufacturing: Thirty-six percent of regional executives reported that their companies are planning to expand local production in 2018, while 28% already expanded local manufacturing over the last few years or are assessing the need for further localization right now. The ongoing trend towards localization, despite the recent appreciation of local currencies against the US dollar, is not surprising for a simple reason: multinationals do not see local players as their fiercest competitors in the region anymore. Only 27% and 7% rated local companies and “multilatinas” respectively as their most powerful competitors in Latin America. Other western multinationals (47%) and Asian companies (20%) are perceived as multinationals’ biggest threats. As such, local production can provide companies with an invaluable competitive edge on pricing, speed-to-market, or market access
- Focus on value-added services: Half of the executives in the room believed that the main value-proposition lever to outcompete market players is the provision of services, followed by product (42%), and pricing (8%). Companies will need to make sure that they have good processes in place to monetize the provision of value-added services and to avoid costly mistakes in the service inception and market launch phase, and on service delivery. Companies should also strive to introduce changes to their value-added service offering, allowing it to remain profitable as competition intensifies and customer demands evolve
With multinationals relying heavily on distributors for growth – 41% of multinational revenues are generated via distributors in Latin America – ensuring strong alignment on the above strategies with local partners will be essential. FSG believes that the best way to ensure high alignment with local partners is by evolving transactional relationships into strategic partnerships in which information and resources flow fluidly in both directions, for which proactive channel management is becoming increasingly important.
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