Los Vencinos [The Neighbors]

Since arriving here in Santiago, it has been emphasized time and again that Chile relies strongly on its open, export-driven economy.  While the open economy strategy has worked very well here over the past decade, there are complications on the horizon.   Los vecinos- or the neighbors- of Chile include Peru and Argentina as well as regional partners such as Colombia.  While Peru and Chile have a very strong working relationship that I will discuss later, Argentina is facing a number of its own challenges that are beginning to impact the way other countries in the region perceive it. And the Colombian market is heating up quickly, making entry expensive.

As Chile’s second largest and formerly most significant trade partner, Argentina’s trade regulations create complications for a country where exports are key.  While Chile is all about efficiency, Argentina has a number of protectionist policies in place as well as a very powerful unionized labor force. In 2008, the Argentine state repossessed assets from a joint venture with Spanish energy company Repsol, sounding alarm bells for the international investment community.  Among the biggest critics of these problematic policies has been formerly close ally, Chile.  When asked to comment on recent movements toward a further closed economy in Argentina, Gonzalo Arenas, president of the Chilean parliament’s Economy Committee  said, “The protectionist policies not only generate disappointment but also attack free markets and free international trade principles. We should begin thinking in reciprocity measures.”

We heard a more tempered but still very concerned attitude toward Argentina and future investments there almost every time we spoke with a company representative.  Particularly interesting was our conversation with Falabella, Chile’s largest retailer.  It should also be noted that the company has diversified into a number of sectors including home improvement stores, private label credit cards and retail banking services.  Our speaker mentioned a number of interesting facts on growth of Falabella’s sales in Chile, Peru and even Colombia but took a long pause when glancing to the near side of the map at Argentina.  “It’s difficult to manage our product mix in our department stores there because there are many restrictions on the types of goods we can bring into the country.  And banking services there are a substantial challenge. At present, we do not have plans to grow in Argentina simply because we view the risk as excessive relative to the potential growth in profitability.”  While prospects for continuing investment in Argentina are not strong, there are others in the region that Chile seems very interested in.

Peru has been mentioned by almost all of the companies we met with- whether Banco Santander, retailers Falabella, food producer Carozzi, even the Western world’s biggest copper producer Codelco– as a strong candidate for future growth.  Chileans also seem to view Peru as a trailing indicator of their own progress.  Chile seems eager to integrate its economy further with that of Peru.  For example, as we learned at a meeting with Superintendencia de Pensiones (Pension Oversight Board), Chile has passed legislation allowing Peruvian workers to move their pension withholdings back into a Peruvian pension plan if they choose not to stay in Chile. Time and again we heard that Peru is still between five and ten years behind Chile but that it is showing strong signs of moving in the right direction.

And then there’s the more distant but  dynamic Colombia. One of Chile’s largest food product producers, Carozzi, expressed a strong desire to move into the market but pointed out a number of challenges. “We have to make an investment in Colombia or we won’t remain regional market leader. But we need to make it worth our while. That means strong brands with strong multiples and high volume.  We don’t see that company available for acquisition in the Colombian market right now at a price we consider exceptable.  Most candidates have valuation of upwards of 20 times EBITDA.” said Gonzalo Carozzi, partial owner and CBS ’10 alumnus.

Though we have been extremely busy attending mining presentations, speaking with tech startups, touring factories and even tasting wine, we did find time to fit in some fun.  Below are photos from a number of events and sightseeing activities we’ve done over the past few days:

CBSers hanging out in front of La Moneda, the equivalent of the White House in Chile
Data from Cochilco Mining presentation
Group shot after an amazing diner at the family home of our TA, Carmen Concha!!

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