Trans-Latin value chains in Asia: the role of small and medium-sized enterprises (SMEs)

Andrés López and Daniela Ramos CENIT / UNTREF

Santiago de Chile

29 de abril de 2015 ECLAC

Context

• The participation of East and South-East Asia in global FDI inflows increased steadily after 1970. FDI outflows from Latin America are much smaller and have grown less.

• An increasing share of international production and trade is organized within global value chains (GVCs)

– design,

– production,

– marketing,

– distribution and

– support to the final consumer.

• East and South-East Asian countries are well integrated in global value chains, not only in the manufacturing industry but also in the services sector (Backer and Miroudot, 2013).

Trans Latins • Trans-Latins are much less internationalized than their Asian peers.

• Activities tend to be mainly horizontal

• Invest abroad mainly to diversify country risk or access new markets (market and resource seeking FDI)

• High concentration of FDI in a few basic industries (hydrocarbons, extractive mining, steel and cement), food and beverages, and some services (transport, retail, electricity and telecommunications) (ECLAC, 2014) as compared with Asian multinationals (automobiles, chemicals and high-tech industries). (99% of the 67 main Asian transnational corporations operate in the ITC and electronics sectors, vs. only 2 of the trans-Latins (UNCTAD, 2013)).

• Obstacles:

– Large Latin American firms are often small compared with their peers from Asia.

– Incomplete markets and structural weaknesses:

• relatively small, incomplete and shallow domestic capital markets

• short-term finance,

• educational systems that are not generally producing the kind (and amount) of human power and management required for competing in open economies,

• weak innovation systems and

– Poor infrastructure

– Institutional and macroeconomic instability

• Their presence in Asia is still scarce

• However, an increasing number of firms from Latam have productive and commercial investments in Asia.

• Most of these companies are leaders in their respective business sectors

Home country Company Industry

Host countries with

Production facilities Trade and technical assistance activities or sales offices

Argentina

Techint Steel; engineering and

construction; oil

China, Indonesia, Japan, Kazakhstan, Qatar, Republic

of Korea, Saudi Arabia, United Arab Emirates

Bahrain, India, Iraq, Malaysia, Singapore, Turkmenistan,

Viet Nam

IMPSA Metallurgy Malaysia China, Hong Kong SAR, India

Tecna Construction and engineering Oman, Saudi Arabia

Grupo Insud Pharmaceuticals

China, India Indonesia, Malaysia, Philippines, Singapore, Thailand, Viet

Nam

Brazil

Vale Mining

China, Indonesia, Japan, Malaysia, Oman, Philippines,

Republic of Korea, Taiwan Province of China

India, Singapore, Thailand, United Arab Emirates

Petrobras Oil China, Japan Singapore

Votorantim Mining and metallurgy China, India Japan

Embraer Aircrafts China Singapore, United Arab Emirates

Marfrig Food China, Malaysia, Republic of Korea, Thailand

Weg Electrical equipment

China, India Indonesia, Japan, Malaysia, Republic of Korea, Singapore,

Thailand, United Arab Emirates

Chile

Soc. Química y Minera

(SQM) Chemical and mining

China, India, Thailand Japan, United Arab Emirates

Molymet Chemical China

Banco de Chile Banking China

Antofagasta Mining China

Mexico

CEMEX Cement

Bangladesh, China, Israel, Malaysia, Philippines,

Thailand, United Arab Emirates

Bimbo Group Food and beverages China

GRUMA Food and beverages China, Malaysia

Carso Group Automobile parts, electrical

equipment

China

SOME EXAMPLES OF LATIN AMERICAN FIRMS WITH INVESTMENTS IN ASIA

Participation of SMEs in GVCs • Survival of SMEx depends increasingly on their ability to enter and upgrade in

these GVCs?

• Challenges: stringent requirements in terms of: – quality, – delivery times, – traceability

• Opportunities

– better access to credit, inputs, information, and technical assistance granted by lead firms – opportunity for learning, especially when they are direct suppliers to lead firms – take on more complex functions (upgrading) – become independent sellers for different clients in local and foreign markets

• GVCs are usually governed by large firms (MNCs)

• More accessible route for SMEs is to export indirectly by participating in GVCs

created by trans-Latins that sell products or services to Asia? • understanding of the specific characteristics of Asian markets • adopt their management and marketing strategies. • meeting quality, delivery and technology standards imposed by the trans-Latin firms.

Methodology

• Four case studies of Argentine firms with investments in Asia: – Tenaris (steel), – IMPSA (metallurgy), – Arcor (foodstuffs) and – Grupo Bagó (pharmaceuticals).

• To analyze:

• (a) the extent to which local SMEs supply goods and services for the firms’ foreign direct investment (FDI) operations;

• (b) the availability of SMEs that have the potential to become efficient suppliers for their value chains; • (c) whether SMEs have had to adapt new technology and business requirements to participate in their value

chains and whether Asian markets require specific adaptations that need to be transmitted to suppliers; • (d) whether large firms offer technical assistance to their suppliers; • (e) whether participation in value chains helps SMEs to increase their technological and marketing

capabilities and enhance their export potential, and if so, through what mechanisms?; • (f) the obstacles that prevent a better integration of SMEs in value chains governed by trans-Latins operating

in Asia; and • (g) the policy instruments that could help to improve that integration.

ARCOR

39 Industrial plants (México, Perú, Chile, Brazil)

Sales offices (Venezuela, Canada, China, Colombia, Ecuador, Paraguay, Bolivia, South Africa, Spain and the United States)

Sales increased from US$ 800 M in 2003 to US$ 3.4 Bn in 2013

Exports: US$ 340 M.

Employment (2013): 20,000 people (98% in Latin America).

16,000 suppliers, (95% are SMEs)

10,000 SME suppliers are located in Argentina

3,800 in Brazil,

2,000 in Chile

500 in Mexico

Arcor buys around 35,000 items (no single supplier provides more than 2%)

Shanghai sales office inaugurated in 2006.

Goal: to centralize operations in Australia, China, Hong Kong SAR, New Zealand, the Philippines, the

Republic of Korea, Taiwan Province of China, Thailand, Viet Nam, and the rest of South-East Asia.

2011: representation office.

Home offices in South and East Asia (India, Thailand and Viet Nam).

Sales in Asia amount to US$ 50 M

US$ 18 M to West Asia and India

US$ 30 M to East Asia.

Exports to West Asia and India increased 440% since 2002.

Products: chocolates, confectionery and crackers.

Vertically integrated (flexible

and corrugated cardboard

containers, milk, fructose, glucose, cereal ethanol and

sugar).

TECHINT

Internationalization started in late 1970s with exports to China and ex USSR. In the 1990s, the firm acquired facilities in Venezuela, Brazil, Italy and Mexico.

Tenaris currently has manufacturing plants in Canada, China, Colombia, Ecuador, Indonesia, Nigeria, Romania, Saudi Arabia, Scotland and USA

It also has five R&D centres employing more than 230 scientists and engineers in Argentina, Brazil, Italy, Japan and Mexico.

It has commercial offices and service centres in more than 30 countries (Australia, Bahrain, Dubai, India, Iraq, Malaysia, Qatar, the Republic of Korea, Singapore, Turkmenistan and Viet Nam).

In the early 1990s, the company opened offices in Beijing and Singapore.

Asia’s share in Tenari’s sales is still relatively low.

Far East and Oceania region represented 5% of total sales (2013)

Middle East and Africa accounted for 20%.

Indonesia and Japan have the highest shares of personnel (3% and 2% of the firm’s total, 2013).

The region’s importance for Tenaris has been growing in the last few years.

Siderca engaged in a joint venture with NKK Corporation (Japan)

Tenaris operates two manufacturing plants in Indonesia

Tenaris invested in the construction of a manufacturing plant in Qingdao (2008). Seamless pipes and premium

connections

Exiros: 12,000 suppliers

employs 500 people.

operations are divided by markets and supplies

Employs almost 60,000 people worldwide

Revenues US$ 25 bn.

Tenaris (2013): 27,000 employees,

Sales: US$ 10.6 billion.

The company is listed on the stock exchanges of Buenos Aires, Mexico

City, Milan and New York.

Tenaris, Ternium, Tecpetrol and Techint E&C (Engineering

& Construction)

Tenova (technology for the metal and mining industries)

Humanitas (medical services)

IMPSA First operations in Asia (delivery of port cranes and execution of hydroelectric projects in China) in the mid-1980s.

Regional headquarters in Malaysia. Big expansion of activities in Asia in the 1990s.

Joint venture with Malaysian investors for the installation of a manufacturing plant to produce cranes, generators, turbines and components.

Several hydroelectric projects in China, India, Indonesia, the Philippines, Taiwan and Thailand

It also delivered more than 100 cranes and related services such as operation and maintenance, retrofits and upgrades.

Has offices in Hong Kong SAR, New Delhi and Shanghai (the Jakarta and Manila offices have been closed).

Agreement with PetroVietnam to manufacture wind turbines in Bin Thuang, Viet Nam

2004: 30% of the company’s revenue originated from the Asian region. The crane business was later abandoned due to fierce competition from

low-cost Chinese suppliers

Today: 2% of the sales worldwide.

operation.

Cluster of 600 regular SMEs suppliers in Argentina

2,000 SMEs working for the wind division in Brazil

Cluster of 60 specialized suppliers in Mendoza (wind farm).

IMPSA plans to reach 500 domestic suppliers in Argentina by 2020.

Internationalization strategy based on: capabilities of HHRR; development of business

models for delivering services; accumulated technology and innovation capabilities; and

partnerships with leading foreign firms

Five business units:

IMPSA Hydro, IMPSA Wind and IMPSA Energy, (sustainable power generation)

IMPSA Process,(an equipment manufacturer)

IMPSA Environmental Service (waste management and treatment)

Revenues: US$ 220 M (2007) to US$ 1.150 Bn (2011). US$ 750 M (2013).

Employs: 8,000 workers

2 manufacturing centres in Argentina

2 in Brazil (Almost 75% of total assets of IMPSA are located in Brazil.)

1 in Malaysia (hydromechanical components and turbines).

Bago 11 manufacturing plants

10 in Latin America (Argentina, Brazil, Chile, Colombia, Mexico, Paraguay and Bolivia)

1 in Pakistan

Sales offices in 22 countries in Latin America, Europe and Asia (including Sri Lanka).

Some of these investments are joint ventures with local partners

Bagó sells its products in 47 countries (including China, Japan, Kazakhstan, the Philippines, Korea, Singapore, Taiwan, Thailand and Viet Nam)

Latin America is still the company’s main market.

Biogénesis Bagó (animal health business unit) is currently building a factory to produce the foot-and-mouth vaccine in Yangling, at the heart of the agricultural region of China. Biogénesis owns

40% of the stock of the new company, while HILE, a Chinese firm, holds the other 60%.

The Chinese plant will be twice as big as the Argentine one. The investment is projected to be US$ 60 million, and it will employ 150 people.

Around 5,000 suppliers in Argentina.

Provide very different kinds of goods and services (technologically complex ones such

as reactors, laboratory and production equipment, measuring instruments and

chemical compounds).

It was the Chinese firm that offered Bagó the opportunity to work with them on the basis

of the technological capabilities held by Bagó.

It is estimated that the total Chinese market for the foot-and-mouth disease vaccine is

more than triple the Latin American market.

Employs 6,500 people worldwide (2012)

Argentina: 1400 people

Total sales: US$ 713 million (2009)

Sales in Argentina: US$ 200 million (2010)

In the 1960s, the company began to export to Latin America and became the major

pharmaceutical firm in Argentina’s market. In the 1970s, Bagó made its first FDI in Latin

America.

Extent to which local SMEs supply goods and services for the firms’ FDI

operations

• Arcor is looking for suppliers of inputs, raw materials and capital goods in Asia • An area in which some Asian operations have materialized is packaging. • Arcor is interested in finding cheaper sources of supply in East Asia for its different purchase items.

• IMPSA has a high level of integration within the domestic markets in Argentine and Brazil. • About 1/3 of the inputs are manufactured by IMPSA • The other 2/3 are purchased from domestic suppliers • Local integration is somewhat lower in Malaysia but IMPSA has developed local suppliers as a way of getting

access to a significant share of that country’s market in areas such as cranes. (The Malaysian government was very interested in increasing the domestic content of IMPSA’s operations).

• IMPSA has developed a high level of domestic integration in all its manufacturing locations and has also been developing local suppliers in Asia.

• In the case of the Chinese plant of Bagó, presumabily the bulk of the suppliers will be Chinese.

Provision of regular inputs exists But companies are increasingly interested in developing suppliers in the incumbent regions (Asia, Brazil,

etc.) The main driver are costs and efficiency gains Other drivers are legal requirements of minimum local integration (to receive funds, public support

and/or permission to operate) To solve scale limitations

Availability of SMEs that have the potential to become efficient suppliers for their

value chains

• In general, al the companies have strict rules to select suppliers • Arcor selects on the basis of internal procedures related to products, processes and facilities. The selection is based not only on

cost, but also on quality, safety and delivery times. • The company audits suppliers (533 during 2013). • “Supplier Potential Index” was specifically developed to evaluate the reliability of Arcor’s suppliers. • The main limitations of local suppliers are not so much their technical skills, but their lack of scale and inability to meet high

volume requirements.

• IMPSA does not have great difficulty finding qualified suppliers in Argentina or Brazil but in some cases it had to create some of these suppliers practically from the bottom up. When it set up its first wind park in Brazil in 2009, there were only two suppliers capable of making towers for windmills.

• The company is aimed at developing 500 domestic suppliers for its wind division in Argentina by 2020 in the cluster of specialized suppliers in Mendoza (at present it has 60 firms)

• Bagó has around 5,000 suppliers in Argentina that provide very different kinds of goods and services, including technologically complex ones such as reactors, laboratory and production equipment, measuring instruments and diverse chemical compounds.

• Only in the areas of molecules and active ingredients is domestic supply limited. • Tenaris’ suppliers are hired by Exiros . This requires long-term partnerships and strong interactions with both suppliers and

customers. • Strict controls, timetables and targets are required to qualify as and remain an Exiros supplier.

These firms are able to find competent suppliers of inputs, raw materials and services in Argentina Long-term relations with these suppliers. Low turnover ratios. Higher presence of foreign suppliers in the area of capital goods. In some cases they had to “create” suppliers (requirements of minimum local integration standards)

abroad. Technically, suppliers have the capacities to provide inputs to MNCs abroad but the limitations of

scale and costs are very relevant obstacles

Necessity of SMEs to adapt new technology and business requirements

to participate in their value chains and specific adaptations to Asian

markets that need to be transmitted to suppliers

• Arcor: both packaging and products had to be adapted to the local markets (translation, consumers preferences -for example, communication styles, colours and packaging materials- and legal requirements.

• New technologies for some products (cold-seal technique, which allows for a better conservation of the product). • Changes in the colour of some candies (to adapt to consumer tastes in Asia) • Easy-opening cans (Japanese consumers do not use can openers).

• IMPSA’s competitive advantage lies in its ability to use its knowledge about every part of the different value chains in which

it participates to manage its suppliers and train them to make products according to the specifications required. • This strategy is more effective at reducing costs and decreasing the cost of capital needed, although it poses potentially

costly risks in terms of delays and quality failures.

• Bagó had to adapt its packaging and prospectus and other inputs to enter into distant markets such as the Russian Federation and several Asian nations.

• To translate the information to different languages, to comply with the specific requirements of domestic legislations. • Local suppliers of Bagó’s group had to adapt their processes and products to these new requirements. • Because both Bagó and Biogénesis are subject to constant audits by their customers, the requisites imposed on them are

transmitted to their respective suppliers. • Specifically, firms in the value chain must comply with the so called good manufacturing practices (GMP) that are required

for getting authorization to produce and distribute pharmaceutical products.

Trans-Latins have had to adapt to the different legal and business requirements of each market where they compete.

Trans-Latins often help their suppliers undertake these adaptations. It seems not to be problems with this issue

Technical assistance of large firms to their suppliers

• Arcor works with suppliers to jointly elaborate plans to solve the detected problems during the audits. • Also conducts international audits of suppliers located outside Argentina. • Programme for toll manufacturers (“àfaçon”), which produce a branded product of Arcor or contribute to producing it • A corporate social responsibility programme for suppliers (2007) :

– (i) to align suppliers with the company’s CSR practices and contractual policies; – (ii) to guarantee minimum common standards in the company’s value chain based on sustainability; and – (iii) to increase and improve Arcor’s supply sources while favouring the inclusion of vulnerable groups..

• Sustainability strategy for 2013–2015 has been adopted (identifies critical issues in all stages of the value chain and incorporates environmentally innovative practices by in suppliers)

• Specific sustainability programme for transport providers

• Techint • Supplier development efforts began in the late 1980s. • Former objectives: implementing a just-in-time system and ensuring that suppliers had ISO 9000 certifications. Training activities were organized to

achieve these goals • Current efforts: programme for small and medium-sized enterprises (ProPymes). • Created in 2003: increase the exports of SMEs and improve their performance in the domestic market. • It was later extended to Mexico and Venezuela. • 660 clients and suppliers have participated and almost 7,000 people from those firms were trained • 460 firms have participated in trade missions organized under the programme. • Offers support in terms of access to information and guidance for the presentation of projects (the firm’s Argentine suppliers have exported over US$

130 M to Techint affiliates around the world). • Tenaris offers help to firms wishing to do business in Asia, including those not related to the oil industry (facilitating the use of its meeting rooms;

providing information and contacts with clients, suppliers and consultants; arranging international travel, joint shipments) •

All four have implemented supplier development policies for many years They have standards and procedures for evaluating the performance of their suppliers not only in terms

of cost, efficiency and quality, but also in the environmental and social areas. Some of them have launched programmes aimed at incorporating suppliers belonging to vulnerable

groups.

Technical assistance of large firms to their suppliers (cont.)

• IMPSA is organizing specific technical assistance for SMEs (in collaboration with INTI and other firms of the wind farm cluster).

• Firms belonging to this cluster have obtained five grants from the Ministry of S&T to develop innovative projects

• IMPSA requires its suppliers to meet quality, environmental and efficiency norms —some of which are established by IMPSA and others are based on market standards such as those of the International Organization for Standardization (ISO)— and undertakes periodic inspections to verify their compliance. IMPSA suppliers must also sign agreements committing not to hire child labour and guaranteeing a safe working environment for their workers, including the application of health and safety regulations, freedom of association and the absence of discriminatory treatment in the workspace.

• Systems to monitor the performance and commitment of suppliers in areas such as human rights and labour relations are implemented, including quantitative and qualitative metrics.

• Bagó conducts three exhaustive audits to verify that SMEs comply with the requirements.

• The group has an inclusive purchase programme aimed at involving local communities, which mainly supply basic services.

• The Fundación Empresa Global de Investigación y Capacitación en Competitividad (FEG) is a non-profit institution created by Sebastian Bagó with the aim of doing research on and fostering the competitiveness of Argentine SMEs.

• One of the projects of this institution is the Dynamic Entrepreneurship Programme, co-financed with the IDB

• The SMEs Competitiveness Support Programme is oriented towards improving and expanding SMEs productive and export capacity

– grants assistance in areas such as management, design, productive processes and access to foreign markets.

– provides support by facilitating access to preferential credits

– provides help in the form of information, orientation and consultancy services for SMEs that are developing projects aimed at accessing seed capital and government grants.

Obstacles that prevent a better integration of SMEs in value chains governed by

trans-Latins operating in Asia

• SMEs need to fulfill very strict norms. Some Asian markets, such as Japan, have stricter food safety standards than Latin America • The traceability of some inputs (such as oils) had to be improved in some cases. • The lack of commercial information is very relevant • Techint created in 2002 the Argentine Group of Suppliers of the Oil Industry, which includes around 80 SMEs selling goods and services

for the oil and gas industry (which are also clients or suppliers of Tenaris). This group was created to help its members identify and take advantage of market opportunities abroad. As a result of this initiative, some firms have been able to generate business in the Middle East and other regions. Both group and individual visits have been made to East Asia, but so far no sales have materialized for that region.

• Latin American SMEs supplying IMPSA cannot directly compete in Asian markets given their competitive disadvantages in terms of costs and scales. This is generally also the case with other SMEs that sometimes ask IMPSA staff for advice on how to penetrate Asian markets (especially China).

• Only SMEs selling commodities have been able to prosper in that region. In the medium and long run, Chinese suppliers could threaten the position of Argentine and Brazilian suppliers, given their cost and scale advantages.

• Bagó shows a limited involvement of local suppliers (Argentinean) at the manufacturing plant in Pakistan due to the limitations of scale. • The involvement of local suppliers is limited to those few that can supply large volumes of inputs. • The new Chinese plant: the bulk of the suppliers will be Chinese.

The bulk of inputs and services are supplied by local firms in the host countries. Argentine suppliers are not competitive with their Asian counterparts The main limitations of local suppliers are not so much their technical skills, but their lack of scale and

inability to meet high volume requirements. It is almost impossible for Latin American SMEs to engage in independent business operations in that

region (except when they sell commodities). Some firms stated that they are actively looking for suppliers in Asia This could threaten the position of their domestic suppliers in Argentina. Advantages of geography and long-term relations with their trans-Latin clients could be eroded as

trans-Latins identify capable Asian suppliers.

Policy instruments that could help to improve that integration.

Need to foster the microeconomic competitiveness of these firms (technology, skills, capacities)

To improve the mesoeconomic and macroeconomic environment in which they operate

Specific initiatives could be undertaken with individual trans-Latins to expand their supplier development programmes with an eye to exporting to Asian markets, although prospects are not promising in this area.

Commercial intelligence, market information

Standards and certifications

Development of managerial skills

Financing ?

Which are the proper incentives to foster more co-working between SMEs and trans Latins?

0

5

10

15

20

25

30

1970s 1980s 1990s 2000s 2011–2013

Figure V.1 FDI inflows to South-East Asia and Latin America

(Percentages of global FDI)

FDI inflows to South-East Asia FDI inflows to Latin America

0

5

10

15

20

1970s 1980s 1990s 2000s 2011–2013

Figure V.2 FDI outflows from South-East Asia and Latin

America (Percentages of global FDI)

FDI outflows from South-East Asia FDI outflows from Latin America Source: UNCTAD