Globalisation: Latin America has been the stepping stone

Financial Times

By Mark Mulligan

In a business park on the outskirts of Madrid, Spanish inspection and certification company Applus is celebrating a milestone.

For the first time in its 13-year history, the company this year will derive more than half of its estimated €900m ($1.2bn) turnover from outside the domestic market.

Joaquím Coello, the chief executive, says the idea now is to build on this until Applus becomes a global brand in its specialist fields, “like Lloyds in insurance”.

Mr Coello’s goal is to be fourth in the world by 2011 in terms of sales, up from sixth now. If it makes the top five, Applus will be in good company.

After transforming themselves from largely domestic concerns in the 1980s into the most important investors in Latin America in the 1990s, Spanish corporations now figure among the world’s biggest banks, telecommunications operators, energy groups, real estate companies, fashion houses, hotel operators, and infrastructure managers.

Telefónica, the former state telecoms monopoly, is now third in the world by subscriber base, and the largest integrated telephony group in Europe and Latin America.

Its transformational deal, among dozens of acquisitions over the years, was the 2006 purchase of O2 of the UK. The €26bn price tag made it the largest foreign takeover by a Spanish company, a record unlikely to be beaten in the near future.

Santander, once a small regional bank that acquired scale in Spain before building a Latin American empire, today has an important presence on UK high streets, is growing in the US, and is the eurozone’s largest financial institution by market capitalisation.

Iberdrola played second fiddle in Spain’s electricity market before the acquisitions of Scottish Power and Energy East of the US in 2006 and 2007 catapulted it into the world’s top five electricity generators.

According to the the Organisation for Economic Co-operation and Development, net outward foreign direct investment from Spain was $181bn between 1997 and 2006, compared with total outflows of $2.3bn between 1985 and 1995. In 2006 alone, Spanish companies invested $89.7bn, the largest amount after the US and France.

This aggressive expansion, driven by European Union membership, privatisation and increased competition in the domestic market – and helped by easy credit and tax breaks on acquired goodwill – has been virtually stopped dead by the financial crisis.

However, the wide geographic and business diversity cultivated during the credit-fuelled boom years has provided a cushion against the sharp downturn in Spain and other key markets.

Telefónica, Santander and BBVA, the second-biggest bank, recently highlighted the resilience of their Latin American franchises as they reported relatively solid first-quarter results.

“Latin America has been a life-saver for a lot of Spanish companies in the current downturn,” says Luis Riesgo, managing partner at the Jones Day law firm in Madrid.

“The global financial and economic crisis has not quite caught up with the region, and this has helped offset weakness in Spain, the rest of Europe and the US.”

Some Spanish groups have been less fortunate, and are being punished for paying lofty prices for foreign assets at the height of the financial bubble.

Metrovacesa, briefly Europe’s second-largest property group, was forced to sell the emblematic HSBC tower in London’s Canary Wharf at a loss last year, after being squeezed between an over-leveraged balance sheet and the collapse of Spain’s residential real estate market.

Infrastructure group Ferrovial, too, has been badly bruised by the credit squeeze, which torpedoed plans to refinance with bonds part of the £10.3bn ($16.5bn) it and its partners paid for BAA, the UK airports operator, in 2006.

With less stretched balance sheets, competitors such as Acciona, FCC, Abertis and ACS are now eyeing opportunities in the US, where the administration of Barack Obama plans to spend more than $140bn on improving highways, bridges, airports and other ageing infrastructure over the next three years.

Mexico, too, may dust off plans for a new round of infrastructure investment.

A number of Spanish companies have also trained their sights on Asia and the Middle East.

Inditex, the country’s largest integrated clothes maker and retailer, is one such case. Pablo Isla, its chief executive, told the FT recently that about half the new stores planned for its emblematic Zara brand this year would open in Asia, “with the emphasis on China”.

The company also recently signed a joint-venture with the Tata group of India to roll out the Zara franchise from next year. Spain’s clothes retailers have also been leading the way into the Middle East.

“Despite the difficult times, we see great potential for growth and have identified interesting opportunities in the region,” says Alex Cara, head of franchising at Cortefiel, another clothes retailer.

Mango, the Barcelona-based fashion group, is also building an important presence in the Middle East.

By contrast, most of Spain’s large listed companies have made only tentative moves into Asia and the Arab states, buying small stakes in local entities or opening representative offices to service Spanish or Latin American clients.

After dealing first with the linguistically and culturally similar Latin American markets, and then learning to operate in English-speaking countries, most chief executives admit that understanding Asia is the biggest challenge of their careers.

Spain’s large listed companies and global fashion brands are the most visible examples of the corporate sector’s expansion abroad. However, many of the small and mid-sized family companies that predominate in the industrial regions of Catalonia and the Basque Country have also pushed their way into foreign markets.

Roca, the Barcelona-based ceramics group, became one of Europe’s biggest suppliers of bathroom fittings through a series of acquisitions that have helped it survive the stark downturn in Spanish housebuilding.

Meanwhile, growth at Applus will also come mainly through acquisitions, according to Mr Coello. He says privatisation of vehicle inspection services and other quality testing and certification processes will throw up buying opportunities.

Market liberalisation and globalisation of health and safety standards are the company’s closest allies, even as the world hunkers down against financial crisis and recession, he says.

“Many Spanish companies were unable to deal with the opening-up of the Spanish market that came with membership of the European Union,” says Lluis Renart, a professor at the Iese business school in Barcelona.

“So they were either sold or disappeared. In contrast, there are those which have risen to the challenge and taken advantage of the situation.”