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MESOAMERICA Our Region’s Challenges What We’ve Learned July 2009 Harry Strachan DRAFT This information is confidential and was prepared by Mesoamerica solely for the use of our client; it is not to be relied on by any 3rd party without Mesoamerica's prior written consent. Topics •Perspectives and Challenges? •Lessons for Business? •Lessons for Leadership? 1 - CFR Red.pot 2 Who “we” are … Mesoamerica … Our history Bain & Co. CR Our region MESOAMERICA • Mesoamerica’s roots (1993-1998) - Bain Costa Rica – Consulting - Mesoamerica Fund 1 (1996-1998) • Mesoamerica (1998 – present) - Strategy consulting, - Mergers & acquisitions - Private equity - Mesoamerica Foundation • Offices: San Jose (1998), Bogota (2008) “Core” countries • 35 Professionals: 13 Nationalities; variety of educational and work backgrounds Offices Topics •Perspectives and Challenges? - Survey re Global Crisis - Key challenge & CAFTA - $64,000 Question •Lessons for Business? •Lessons for Leadership? 1 - CFR Red.pot 4 The Survey (12/08 – 2/09) 1 Screnarios & probabilities in U.S. • Typical “V” Recession • Prolonged “U” Recession • Severe “L” Recession or Depression 2 Impact of the crisis in Central América • Worse in Central America • Better in Central America 3 Evidence of the crisis in your company • Yes • No 4 Actions taken as a result of the crisis • Defensive • Offensive 5 Leadership in the crisis • Advice to our governments • Advice to the International Agencies & other countries Probable scenarios? # responses (Percent) Optimistic (>30%) In middle Pessimistic (>30%) All 21 (20%) 72 (69%) 12 (11%) 105 49% 16% 13% 22% 39% 65% 42% 57% 12% 19% 45% 21% A. Typical Recession • Recovery by end of 2009 • Dow Jones ↑ >11,000 • Credit available B. Prolonged recession • In recession until 2010/11 • Dow Jones @ 8,000 has hit bottom ↑ above 9,000 by end of year • Crédit available but expensive C. Severe Recession • Profound recession > 3 years • Dow Jones not hit bottom Goes bellow 7,000, doesn’t recover quickly • Crédit hard to get Historic correlation is a fact … Ciclo Económico en EE.UU. y América Central (% de desviación sobre la tendencia) 6 América Central Correlación: - Contemporánea: 0.62 - Un trimestre rezagado: 0.72 4 2 0 -2 -4 EE.UU. -6 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Fuente: Estimados BID, Bancos Centrales, Reserva Federal. * Calculado sobre la base de los Indices Mensual de Actividad Económica (IMAE) y el Indice de Producción Industrial de EE.UU. El componente cíclico fue estimado con el filtro Christiano-Fitzgerald. 2009 Impact of crisis in Central America? # responses (Percent) Optimistic (≥60%) In middle Pessimistic (≥60%) All 53 (54%) 9 (10%) 36 (36%) 98 69% 48% 30% 52% 31% 52% 70% 48% A. Better in C.A. than U.S. • Region less linked to U.S. China & India new motors of growth • Region less vulnerable, more diversified economically • Government reserves high and local banks are healthy. B. Worse in C.A. than U.S. • “When the U.S. gets a cold, we get penumonia.” • Governments don’t have much counter cyclical capacity. Our major challenge – closing the gap The economic Gap between Central America and developing countries has increased in the past 40 years … GDP / Capita Constant Yr 2000 US$ CAGR GDP/Capita $40K 30 '60-'00 (2000) 2.8% $35K 1.7% 1.0% $4.2K $1.7K G7 20 10 0 1960 Central America 1970 1980 Source: World Development Indicators 2002, The World Bank Group Latin America 1990 2000 In education and poverty, the gap is significant … Poverty levels* 60% Illiteracy Rate 30% 58% 23% 40 20 36% 20 10% 10 7% 0 CA LA G7 * % of households whom income is less than double the cost of basic family needs Source: World Bank, ECLAC, PNUD. Information to December 2003 0 <1% CA LA G7 06 The key cause -- lost decades In spite of strong periods of growth, internal conflicts and lack of sustained strategies often destroy much progress … CAGR: Real GDP Growth / Capita Real by Decade 6% War, instability 4.5% 3 2.5% 3.1% 2.6% 2.4% 1.7%1.6% 0 -3 G7 CA -2.0% '60s '70s Note: 1979 is included in the 80s decade Source: World Development Indicators 2002, The World Bank Group '80s '90s CAFTA increases the likelihood of sustainable growth … Percentage of countries with Economic Growth > 3% (89 Countries in Development, 1970-1989) Trade policy 11 / 15 Always Open 1 (73%) Not Always Open 4 / 74 (5%) 0 20 40 60 80% % of countries with GDP CAGR >3% A country is “always open” if it has: a) Non-tariff barriers on less than 40% of trade, b) Average trade tariffs less than 40%, c) Difference between official and black market figures is less than 20% d) non-socialist economic system, and e) Open market in its main exports Source: Economic Reform and the Process of Global Integration, J.D. Sachs and A. Warner, Harvard University 1 CAFTA contributes to the elements of a strategy for sustained development Social: Economic: • trade and investment • employment and salary levels • productivity and competitiveness • growth and incomes in equitable manner • consumer prices • poverty Impact FTA CA-US • training and opportunities for development • investments in education and health Institutional: • transparency and improve/ strengthen rule of law • corruption • political stability $64,000 Question in 2009 Will the current crisis lead to protectionism in the world and populism in the region that undercut CAFTA and the progress of the last two decades and send us into another “lost decade?” 1 - CFR Red.pot 14 Topics •Perspectives and Challenges? • Lessons for Business? -Magnitude of the Challenge 1993 -Strategies that worked 1993-2008 -Tools for the future? •Lessons for Leadership? 1 - CFR Red.pot 15 The business challenge in 1993 What is the magnitude of change that globalization will require? 2.0 2.0 Indice 1.5 1.0 0.5 0.0 Calidad 2.20 2.00 1.79 1.0 Costo y Calidad 1982-85 Fuente: Bain & Company, muestra de compañías globalizadas 0.5 Costo 0.46 0.52 0.50 1992 Key to Competitiveness The formula that worked for companies that met the globalization challenge… Potential Value Strategic Focus ROIC > WACC Strategic position (RMS) Sustainable growth Current Value Operating Excellence Benchmarking Best practices Organizational effectiveness 030827-JAS-XCD-INTEL PREEZ6 17 Benchmarking and best practices’ was a very powerful tool for rapid improvement … Vehicles Per Day 4 Vehicle repairs per day per mechanic 3.04 3 2 1.14 1 0 Fuente: Bain & Company 1.00 0.86 0.79 0.77 0.66 Average 0.87 Taller 1 Taller 2 Taller 3 Taller 4 Taller 5 Taller 6 Benchmark USA 030827-JAS-XCD-INTEL PREEZ6 18 The focus of our consulting today … Consulting • Typical projects: - Review of business portfolio - Evaluation and redesign of strategies and business models Competitiveness - Business planning and performance monitoring • Typical projects: - Full potential analysis: core business and adjacencies A winning business strategy and a solid business model - War planning - Turnarounds - Benchmarking - Growth strategies - Strategic due diligence and integration of Core business’ acquisitions full potential Sustainable and profitable growth • Typical projects: Productivity Corporate governance best practices • Typical projects: - Organizational redesign - Role of the center - Family-company relations Organizational Effectiveness Critical Paths In order to achieve leadership, implement best demonstrated practices, and acquire competencies, local companies must often engage in strategic alliances, mergers, or acquisitions Strategic Alliances Acquisitions Mergers NON COMPETITIVE POSITION Exit Strategies 030827-JAS-XCD-INTEL PREEZ6 20 Lesson 5: Negotiation Process It is critical to understand the objectives and interests of the parties in order to determine if there is a common ground to reach a mutually beneficial agreement Families - Mutlinationals Dividends Succession issues Local/Nacional Loyalties Others - Enterprise value - Continuity and professionalism - Multicountry loyalties - Others Case A: ZONE OF MUTUAL BENEFIT Case B: NO MUTUAL BENEFIT 030827-JAS-XCD-INTEL PREEZ6 21 An Important Business Question Where will companies find the “gold” in the future? Superiority in the basics: cost and quality? Innovation? M&A and regional expansions? Financial engineering? What sectors? 1 - CFR Red.pot 22 Topics • Perspectives and Challenges? • Lessons for Business? • Lessons for Leadership? -INCAE 1981 Seminar “Live cases in leadership in chaos” -Participants List of lessons -Personal implications 1 - CFR Red.pot 23 The “Live” Cases • Some examples: -Automobile Inventory as Managua is taken by the Sandinistas -“Under the gun” pay raises in a maquilador -What to do about the New Office Tower? – Complete, Distressed sale and Miami? -Rural hardware stores in the civil war 1 - CFR Red.pot 24 Effective leadership in crisis: •Realism and critical analysis •Proactive action •Care for your people •Energy and optimism •Audacity Source: Participants INCAE Seminar 1981, Leadership In Chaos based on live cases Becoming an effective leader in crisis Pesimistic Analytic Intuitive Optimistic Left Brain Right Brain