Small Market, Big Plans

Now that I have been in Santiago for about two days, I feel I have absorbed enough to make some observations about the culture and business climate.  Our meetings with executives from banks, forestry companies, airlines and even chocolate stores have been extremely helpful in generating a better understanding of what doing business in Chile is like.  If you don’t have time to read the rest of this blog post, let me sum it up for you in one word:

Efficiency.

It feels almost as if all the executives we meet with have coordinated their messaging to ensure that we are repeatedly reminded of this defining trait of the Chilean economy.  Coming from a very large market – the US- where there are various population centers, geographies and climates it’s hard to understand the constraints under which Chile has managed to do a stellar job of growing its economy.

As I mentioned in my previous post, Chile’s population is right around 17 million people.  And according Juan Pablo Castro, Head of Research at Banco Santander Chile (the second largest commercial bank in Chile), the average income per capita has grown over the past 40 years from roughly $9,000 in the 1970’s to upwards of $17,000 today.  While this growth is remarkable, it still only amounts to about $248 billion in total income.  This is a very small market compared to a country like Brazil or Colombia.  What this all boils down to is Chile’s need to be an exporter of both goods and services.  Because the domestic market reaches saturation very quickly, the country is one of the most open economies in the world today and has free trade agreements with over 90 countries.   Though not directly related to the Chilean economy, a particularly interesting point brought up during our discussion was the challenge this local subsidiary of the large Spanish firm Groupo Santander, SA, has faced from ratings agencies eager to reduce its rating because of ties to its parent.  The case of Banco Santander highlights the critical role of corporate governance and creating appropriate separation between parent and subsidiary, especially when one is disproportionately affected by a market downturn while the other is reporting strong growth.

Chile’s laser focus on only producing goods in which it has a competitive advantage is very impressive.  For example, the country used to assemble cars and trucks domestically.  However, it was eventually decided that this was not a best use of Chile’s labor force and resources, and today the country imports virtually all of its vehicles.   On the other hand, the Chilean climate gives this country a unique advantage in the lumber and paper pulp market.  As we learned during our visit to Arauco, where we met with CFO Gianfranco Truffello, certain types of trees grow significantly faster in Chile than in North America.  This gives the company a tremendous advantage and allows it to get higher yield out of its land holdings in order to produce the paper pulp.  The mining industry, which I look forward to learning more about later in the week, is another good example of how this small country is a net exporter of raw materials to the world but imports almost all of its finished goods.

In the services area, Chile faces similar growth ceilings.  One of Chile’s best known companies, LAN, is a perfect example of the need to expand outside of the country’s borders.  The airline recently merged with Brazilian giant TAM to become LATAM Airlines.  The challenges of integrating with a Brazilian firm- with substantial language and cultural barriers- is one of the most interesting parts of the new company and learning about how LAN prepared for and continues to manage the integration process was a highlight of our discussion.  LATAM Airlines now servers a substantial part of the South and Central American market, allowing what was a small Chilean airline founded in 1929 to become the leading airline in Latin America.  Today the combined company serves over 60 million passengers a year and recorded a combined revenue of nearly 3 times that of its closest regional competitor.

Though we have yet to dive in to the large-scale retail experience here in Chile, we literally got a taste of what the entrepreneurial climate is like for aspiring retails today when the founder and CEO of La Fete Chocolate, Jorge Mckay, came and spoke to us about his business as well as the challenges of starting and growing a small venture in Chile.  What was most impressive about our discussion, aside from the delicious chocolate we all received (yum!), was Mckay’s passion for optimizing the customer experience.

A La Fete store in Parque Arauco, one of Santiago’s large, upscale malls.

The expertly decorated and laid out stores looked like they could have been on a chic corner in Soho and the focus on providing an optimal selection of products for customers, even at the risk of complicating the production process, was what really impressed our group.   He concluded his presentation with a few words that really stuck with me: “First build a dream, then you can build a business.

Though we have not had much free time, our guide managed to squeeze in a trip to the Mercado Central as well as the Plaza de Armas, the main square downtown.

We also attended an outdoor movie last night, which was a lot of fun and made for a great opportunity to experience Santiago as a consumer.  The event allowed us to see how companies market themselves in Chile since the outdoor space was surrounded by promotional booths for wines, food and other goods.

Thus far Chile has been everything I expected and more. This country has a surprisingly sophisticated and developed feel.  Everyone has been very welcoming and seems to really want to show us how much this country has to offer.  Tonight we are off to a reception with CBS alumni (being abroad is no excuse to stop networking after all) so there will be more updates to come.

Abrazos,

Hannah

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