ARGENTINA: INSIGHTS AND OPPORTUNITIES
October 9–11, 2011 Master Class
Day 1 Notes and Key Lessons
Information Economy/Human Capital Panelist Final Thoughts:
- Argentina is not one country/one culture – it is a complicated, diverse and segmented
country with differences between those in big cities (or city: Buenos Aires, where 14
million out of 40 million live in the metropolitan area) and those from more rural, smaller
towns and villages
- Agriculture has highest productivity because it is largely unregulated (higher productivity
than Brazilian agricultural industry) – an underlying theme was that Argentine
government control/regulation was largely an impediment to business growth/foreign
investment
- Infrastructure – as an underdeveloped industry, there is room for growth and
development, as well as growth in social networking services and other innovations
- Human Capital – people are well prepared to run businesses (though exportation of
talented professionals an issue), human capital is a strength
Wharton Fellow Takeaways/Reflections (by pairs)
- Fred Dohn/Ahmadu Mu’azu:
o Good talent pool: well educated/flexible/dealt with ups and downs, but difficult
labor market (unions) and government does not help – businesses need visibility
and stability – need to know what rules are, but this seems to be market where
rules can change – “Do you invest here or not?”
o Good place to invest if you are in a non-regulated agri-business – productivity
good/resources good
o Manufacturing is a no-go unless producing goods that domestic market could
consume
o Will continue to do business but from distribution standpoint (sell to
country/consumers, not locate businesses in Argentina)
- Shanti Poesposoetjipto/Jeff Jackson:
o Impact of government on business related to political infrastructure bringing both
instability/insecurity from perspective of foreign investment (one way to mitigate
this is to partner locally) – adverse impact of corruption and gov.
intervention/nationalization
o Growth figures – 25% inflation, 4% or 8% annual growth? A lot of inconsistency
surrounding this data
o Good human capital/educated work force
o Lack of exit strategy: weak stock exchange, difficult regulations for moving
money out of country – lower industrialization capacity b/c of largely agribusiness economy
o Argentina needs more long term strategy and infrastructure development –
endurance for marathon, not a sprint
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Doug Porter/Nimisha Savani
o Gov. seems to impede business
o Where is emerging middle class? Seems that is where investments should be
made by foreign companies, but where are they, why aren’t there more
opportunities to sell to them? Is there a growing middle ground economy
between wealthy/high-end goods and lower classes?
o Because labor cost are so high, hard to increase manufacturing (which could
build middle class)
o Health care business is risk based, so needs large capital reserves, but will they
be nationalized?
o Good creativity/talent/innovative people looking for opportunities to thrive but
need to fix other issues
John Meduri/Hendrarto Poesposoetjipto
o Political themes – when looking to invest, want to reduce exposure and learn true
level of government control – what is the regulatory environment? Important to
go above/beyond with due diligence
o Need to understand flow of goods/following the money – double taxation when
crossing border, what is economics of opportunity?
o HR seems to be available, but lack of middle management – need someone with
proven track record in Argentina to lead effort along with someone on the ground
from the foreign company
Various thoughts:
- Business success too dependent on deals being struck with, and favoritism from
individuals in government, but if that person gets voted out or leaves/is removed from
position of power, suddenly your position could change for the worse = very uncertain
business environment
Jerry’s Thoughts:
- Innovation: Argentinean’s are creative (game/software design suggested by panelist as
example of good industry to invest)
o Biggest predictor of innovation is “tolerance for ambiguity” – so while
counterintuitive, government may actually enhance innovation/creativity of
workforce because of ambiguous/unstable business environment
- Partnerships: “let’s not invest/go it alone” – too dangerous/uncertain – so need for local
partner
o Fuji/Xerox example in Japan – looked for a partner in each city, partner did not
need to be office equipment or tech expert, but a respected business with the
right political ties/credibility (this was most important criteria) – very successful
outcomes with this approach
- Options Preservation – when evaluating different options/business opportunities, go
beyond pros/cons and ask “if I am taking this course of action, am I leaving myself open
to still pursue other options?” – how can I pursue one route while preserving other
options? (a diversification method)
Directly related to “portfolio approach” – strong need for portfolio perspective in
Latin America (do not think only Argentina but greater Latam market – “could
Argentina be good gateway to Latin America”
 (But consider: with double taxation/double regulation when crossing
borders, is multi-country strategy economically viable? Perhaps
individual business only connecting back to USA in order to avoid Latam
cross-border messes)
Argentina could be great source for design (logos/corporate paraphernalia) because of
creative/innovative workforce – when thinking of “portfolio approach”, learn/recognize
one country’s strength from another
Network Orchestration (way of bridging silos) – example: Li & Fung – 12,000 factories in
45 countries – developed orchestrated network in order to “decompose” manufacturing
process so it is clear where least expensive production/assembly is for individual piece
of greater product (eg: buy jean buttons in one country, zipper in another, denim in
another, assemble in another) - network spread across multiple countries
o They do NOT own factories, but contract – gives them flexibility and separation
from local risk factors (strike/natural disasters)
o 30/70 rule: they will take at least 30% of a factory’s capacity, but never more than
70% à this way factory is not dependent on Li & Fung (maintains leverage) –
factories are then forced to secure other business which exposes them to other
demands and enhances the factory’s learning and development of production
processes
Timing/Local methods – “lot of wisdom in this” – contrarian type approach/perspective
(but avoid group think/challenge mental models – if everyone is investing in Argentina,
that is WRONG time to invest) says that biggest opportunities are during time of risk (be
the first one to a market)
o Lot of wisdom in working with locals and employing their methods
o Example: dealing with hyper-inflation – Brazilians new to nimbly move money
around, American corp. bureaucracy forced delays until currency was worthless
Data – be careful of data and its reliability – lesson for all emerging countries
o Some speakers did not want to give estimate of inflation, when panelist provided
number and it was questioned, immediately backed away – double and triple
verify – “go behind data” – talk to customers (and other stakeholders) to
understand company, and do not outsource this due diligence or at least remain
heavily involved
Constraints: governments/unions/environment – remember that creativity is enhanced
under constraints (eg: architecture: the most difficult land plots force the most creative
buildings)
o Instead of dismissing environment b/c of constraints, ask yourself how you can
get around them
o Experimentation – how to design an experiment to learn how to capitalize on
opportunities
Think “Latam”, not just Argentina – and remember that markets are heterogeneous
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Day 2: Notes and Key Lessons
ARCOR – the world’s Nº 1 candy producer, and first exporter of sugar confectionery in
Argentina, Brazil, Chile and Peru. It is also the largest cookies & crackers company in South
America, in partnership with the Danone Group.Exports to over 120 countries in five continents.
Arcor has sales offices throughout the Americas, in Europe (Spain), in Asia (China) and in Africa
(South Africa). Grew both organically and through strategic partnerships/acquisitions
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Strong international footprint – export to over 120 countries
Diversified portfolio of products across candy/sweets spectrum
Strong sense of social responsibility and consideration of stakeholders – commitment to
environmental protection and sustainable production
o ARCOR Foundation: provides opportunities for small children with out-of-work
parents enabling them to have the same opportunities as other children
Challenges:
o Production – advantage in Argentina/Brazil/Latam, but barriers in other countries
 US – corn subsidies cheapen production of glucose making competition
difficult for international companies
 India imposes 30% duty on candy, which creates impossible market
conditions for foreign companies
 European regulations on candy and “chemicals” used, this also creates
very challenging market conditions for foreign companies
o Recognition - little to no international recognition (exports 40 million annually to
US, but no recognition)
o Cost advantage in Latam and brand recognition – both do not yet exist
internationally
o Location of Argentina increase fleet/shipping costs, another variable that
adversely affects international prospects
Innovation – quality of food/ingredients come first, no concentrated efforts on innovation
articulated, except with attempts at healthy food innovations
Branding – scrapped standardized branding across companies, now target different
markets with different branding
Social Responsibility communication – committee created to hone communication of
social responsibility actions so it is not entirely a marketing function and company can
spread awareness of its actions
Grupo Los Grobo - In 1984 Adolfo Grobocopatel founded Los Grobo Ageopecuaria S.A. a
family business, whose final owners would be his four sons. At the end of the year 2000 the
brothers decided to become partners and with the approval of the founder started to build Grupo
Los Grobo. Through the years they have consolidated themselves as large producers, stockers,
and service providers and agroindustrialists. It is the first wheat producer in the country and
second producer of soy. Gustavo Grobocopatel is known as “King of Soy” throughout the Latam
region.
Discussion Notes/Questions:
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In order to continually improve bio-fuel technology, what percent of revenues spent on
R&D? Roughly .5% goes toward “applied research” – testing (quality control separate
item) – especially in new production area, to find the right seed, conditions of soil,
geographic latitude = significant testing to find the right seed. There are other vehicles
for shareholders to do specific research – fund management methodology, eg a fund to
enhance wheat’s ability to withstand draught, another fund dedicated to research
Portfolio approach is very unique agri-business model – 2 major advantages:
o Better risk management because of portfolio approach (other corporate farmers
beginning to replicate, but not widespread)
 Yield risk is significantly reduced b/c of this diversification
o Return on Capital Invested/Employed significantly higher
 “Asset light” company because they do not invest in equipment and
instead lease/contract
The agricultural market itself very efficient system – no asymmetry of information or
other factors working against efficiency
Network Orchestration: base of landowners, farms come up for lease every year, high
rate of renewal if you can prove you are leaving farm in better condition
(sustainable/renewable practices)
o “Swap Agreements”/”Coopetition” – exchange of information and even exchange
of assets in order to enhance portfolios of both companies rather than purer
competition that may weaken both companies
Argentina only country in the world that taxes agricultural exports – 20% on a ton of
wheat, but a ton of flour is not taxed, so it pays to turn wheat into flour in country
o “holding positions across value chain allows you to capture value even as it
moves”
Jerry: One of the most sophisticated business models in the world – network
orchestration instead of traditional management
Is there interest in Africa? They have looked into Africa/West Africa/South Africa –
conclusion from assessments is that there is plenty of room for development in Latam,
so no need to get distracted
Has Grupo Los Grobo thought to license their business model? Software already
developed, but there has not been the biggest market for it yet
Is strength in business model itself, or execution (ability to execute)? Mindset needs to
be different, cannot execute by copying from text book – need to understand local
communities, have local relationships (degree of cultural significance) = execution is
paramount
Productions/logistics/grain trading are 3 revenue streams – grain trading has highest
ROI – significant time invested to evaluate/adjust returns of “Risk Adjusted Rate of
Return”
o Production may have higher return in absolute terms, but when adjusted for risk,
“origination” has higher return
Any rules that have been learned while developing model? Exposure to certain regions –
hectare ratios, eg wheat should not be below 15% (ideally not below 30%) of 100
hectare plot – minimum amount of hectares to have with each partner in different region.
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o 1 year planning period/climate forecasting
Competitors? Different sets of competitors b/c different competitors at each point of
system
o Example: compete with small farmers (1000 to 2000 acres) – they use machinery
for 15 days at a time (good cost control), try to lease land from nearby farmers –
essentially unpredictable behavior so hard to compete with at local level,
especially since smaller farms do not compete so intensely with each other, as
opposed to large corporate farmers who act more rationally
o Input distribution: compete with Monsanto networks and other large corporate
farm networks
o Origination: compete against large grain traders (everyone competing for the
same grain)
Alejandro Stengel moved from agri-business to financial services – what are the major
differences between the two? At end of day, both involve managing people and
allocating capital, so from that perspective not so different, also not very different
because must be mindful of risk in both industries – portfolio mindset commonality
between Grupo Los Grobo and finance industry
o Tempo/culture very different between the industries – financial services are
transactional (short memory/fleeting business relationships) whereas partnership
and cooperative relationship among farmers/sense of community that helps
someone in trouble
Buenos Aires Capital Partners
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Very few “strategic alliances”, mostly M&A so people can maintain control.
Potential markets for ConvaTec:
o Chile most developed emerging country in Latin America – good potential market
o Brazil “a world in itself” because of size
o Columbia, Peru, Uruguay (small, though stable institutional frameworks)
o Argentina – “have to know how the system works”, so cannot use your local
country rules to develop strategy – common theme: need for local
partner/expertise
ARC International
o Looking for acquisition target in Latam for manufacturing – ideally one north and
one south
o Would not recommend an alliance in a minority position, always maintain
controlling stake
Most successful transactions have had specific driver of transaction: “distribution
network”, “sourcing material”
Post Merger Integration – what comes next after foreign multinational buys Argentine
company? Currently not part of M&A consultancy business model/offerings, but
suggestions:
o Would be mistake to drastically and immediately change everything – very
important to maintain expertise of local customs/ways of doing business
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Important to blend company cultures and manage relationships (as distinct from
imposing one company culture on the other)
A large number of Argentine to Argentine acquisitions, which comes with other
issues (not cultural) into play
Net Oil & Smart Oil Ventures
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What does SOV do differently than large company, in terms of management?
Management team/services is structured based on profile of the asset – customized
approach for each well
o Put a lot of resources/money into analyzing the asset in order to structure the
right approach
Who does analysis? Outside firms hired to do evaluation analysis – very pivotal first
step so as not to oversell deal and get involved using incomplete/overstated information
o Identifying asset and structure for that specific target is crucial
Argentina has been in the oil business for around 100 years
o Multiple regions that produce oil, however not at great volume
o No offshore wells – do not have the technology for deep sea exploration/drilling,
but industry is exploring shallow areas
Evaluated 42 locations, 14 were successful – evaluations are inexpensive, so do not
adversely affect costs/margins
Jerry Reflections
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Jerry reflecting on Net Oil model: idea of “marginal assets” is not new – a 30 million
dollar company owned by a 3 billion dollar company is infinitesimal and they tend to be
sold, however this is huge opportunity for smaller players, especially if buyers can find
talent who understands the specific business – related to this is reliance on local
knowledge (common theme from agri-business to oil industry) – importance of local
knowledge cannot be understated
Fred Dohn: level of taste specific to Argentina leaves opportunity for different business
models
o Company introspection: Does ARC company/leadership have strong
engagement at all points of value/company chain in order to ensure execution
Jerry reflecting on ARCOR – relies on vertical integration, but no evidence that this is
optimal solution
o Fred agrees 100% - had exact same experience in Europe with vertically
integrating European chain, now in process of undoing it, lack of return on capital
o Jerry: 300 cities conducts most trade around the world – forget global, instead
approach “300 city” strategy and ask how you would engage this city
 Does not make sense to be spread thin over 100+ countries (ARCOR) –
more rational to penetrate deeply city by city (or country by country)
 ARCOR’S portfolio strategy makes sense – vertical strategy did not make
sense – massive product line did not make sense
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Wharton Alumni at lunch – Uruguay may be much better market than Argentina – very
hard to financially invest in pesos in Argentina, instead done in other currencies
M&A session – Jerry: discussion was interesting however does not seem to be huge
opportunities – shocking that no due diligence done for post-merger integration as this is
incredibly important and allows company to demonstrate M&A success
o Could learn from Cisco which has incredibly advanced integration system – they
acquire small companies with goal of integrating engineers and leadership (many
former CEOs sit on Cisco leadership team) – second step is to very quickly
implement the “Cisco system” into new acquisitions, well oiled machine
Net Oil – regardless of market, regardless of government interference – if you can hire
good entrepreneurs who will re-think business (contrarian strategy – grab marginal
assets other companies are dumping and fit business model to assets) – “link financial
model with business model” – establish plan between financing-managing-exit strategy
Just remember: data data data and make sure you can trust it – “What is inflation
rate???” Multiple figures provided throughout master class, which is a problem.
Concluding Dinner Takeaways/Final Impressions
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Passion and intensity of panelists and speakers was impressive, as was candor about
[dire] state of economy and country’s governance, yet sense of hope and optimism for
better future was apparent
o Example: regarding unions, a realistic approach is taken, they are a reality to be
dealt with a “sit down and strike a deal” approach, and if one can’t be reached,
move on
Flor (in country coordinator): Multiple crises where people feel “unprotected”, so a
healthy skepticism remains that has created “survival of the most creative” business
culture
o Consider the tango, a dance where trust in the leading partner is critical, yet it
developed in a country with no trust in the ruling class (a paradox?)
o Military regimes created worrisome tolerance for low economic levels and toohigh levels of poverty, there is no stomach for violent demonstrations to upend
system, even with palpable social tensions
Related to “survival of the most creative business” – there is an expectation that
government will not work, so you must work around it
o Even so, a general sense that it will get better (hope) remains, though no one
thinks it will get better under the current leadership or economic system
Middle class remains the victim and continues to be squeezed
o Most had no option but to trust banks, then crashed devastated savings
o Regarding political/economic system: approximately 8 million people are on
some type of welfare, add that to government controlled unions and it works to
keep political system in place
“Artificial democracy” in Argentina continues to parallel democracy in Indonesia, where
party politics/ruling class without true grass roots/popular support continue to rule
Interesting dynamic developing of generally religious country with strong Catholic
influences starting to erode as divorce rate increases and families split
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Various thoughts:
o Resilience of people remains inspirational
o “The US government does not look so bad”
Final Thought: One of the Wharton Alumni from Tuesday’s lunch said Argentina’s constitution is
derived from the US constitution, and that the country works better when it stays within its
constitutional constraints – it is when the constitution is ignored to accommodate the powerful
that things take a downward turn.