China may be the market of the future, but Latin America is the market of today. Demographics, economic policy and competition levels all favor Latin America as the market of choice for global companies in search of growth.
In the end, it will be China, not Latin America, that prevails as the world’s largest economy. China, both culturally and politically, thinks long term by investing in its competitiveness, starting with education and infrastructure. China’s climb in the world competitiveness rankings in recent years contrasts the fall of most Latin American countries over the same period, including Chile, Peru, Colombia, Mexico and Brazil.
Yet, present global conditions are kind to Latin America. Surging global demand (starting in China) for commodities favors Latin America, home to more than a quarter of the world’s mining investment, 10 percent of its oil reserves and close to 45 percent of the globe’s arable land. Latin bourses, dominated by its resource companies, have led global equity growth since 2003, when measured in dollars.
With few exceptions, Latin American countries have taken an orthodox approach to managing their trade surpluses, enabling export and FDI earnings to strengthen currencies and recapitalize banking, unleashing historic consumption levels. In 2010, private consumption in Latin America was measured at $3.1 trillion, versus $2.2 trillion in China. Some predict that China will need until 2016 to outpace Latin American private consumption levels and even longer to overtake on consumer spending. In 2010, the average Latin American consumed more than three times the average Chinese citizen. Latin America boasts three times more than China the number of households earning above $15,000, considered the threshold at which families begin purchasing global brands. Thanks to Latin America’s distorted income distribution, it has six times more households than China earning above $75,000 per annum.
Part of China’s impressive story is owed to a demographic zenith it is currently experiencing, with more than 72 percent of its population of working age (15-64). Over the last 20 years, that statistic has grown from a level of 65 percent as the single-child policy reshaped household structures. Going forward, China’s population will rapidly age, bringing new burdens to households. China’s future growth will rely on the challenging task of integrating its rural masses into the urban economy. By contrast, Latin America is urbanized, a painful transition that it undertook from the ’50s to the ’80s. Latin America is just now entering its own working-age growth wave, thanks to more working women and fewer children. Over the next 20 years, the percentage of working-age Latin Americans will grow from 63 percent to 71 percent, boosting household consumption.
The most compelling reason to focus on Latin America, however, is its weak but relatively fair competitive business environment vis-à-vis that of China. In all of Latin America, only one home-grown car assembler exists, a kit sports car maker in Mexico that sells exclusively to Europe. By contrast, in China’s burgeoning car market, more than 50 domestic brands compete with global brands. Competition helps explain why Ford Motor Co. struggles to make a profit in Asia ($1 million in Q2, 2011, with losses in China) while it flourishes in Latin America ($267 million profit in Q2, 2011). PepsiCo earns close to 20 percent of its global profits in Latin markets, but flounders in China. In 2010, Pepsi’s Beijing joint venture had a 0.1 percent profit margin, and its newly acquired Shenzhen operation reported a 1.5 percent net profit margin. By contrast, Pepsi LatAm Foods posted a 14.5 percent net profit in 2010. In spite of having its largest operations based in Hong Kong, HSBC, a leading global bank, makes more profit ($1.8 billion in 2010) in Latin America than in mainland China ($215 million). For more-mature product categories, the contrast is even starker. Whirlpool, which markets its white-goods brands across 120 countries, tallies 24 percent of its global sales and about 40 percent of its profits in Latin America while barely selling 4 percent of its volume to Asian markets. Latin America is home to a handful of impressively competitive companies, but, by and large, domestic Latin brands do not compete effectively in most consumer and business categories. By contrast, Chinese companies are competitive, if not always for the right reasons.
Both Latin America and China are challenging business environments where intellectual property can be stolen. However, in Latin America, U.S. and European companies can still apply diplomatic pressure to help enforce their IP rights. In China, the government often is the greatest perpetrator of IP theft — high-speed train technology “transfer” representing the most recent and tragic example. The proliferation of international trade agreements signed by Latin countries provides a legal framework for protecting investments and arbitrating disputes. Resolving disputes with powerful Chinese companies or the government is by comparison a far more daunting task. It is little wonder that experienced global firms are rethinking where to bet on growth.
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