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A Special International Report Prepared by
The Washington Times Advertising Department - Published on April 21, 1999
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Advertisers
(1) Bell South
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Doing business in Ecuador
Why then have a whole host of multinational corporations opened offices here? Some, such as PriceWaterhouseCoopers have been around for 28 years. Others, such as Bell South have entered the market aggressively, negotiating initial agreements during transitory presidents. While others, such as Microsoft, are slowly but surely penetrating the market and creating new ways to do business. These companies have all decided that Ecuador is worth the risk. They don't focus on short-term gains, but make the long-term decisions to commit themselves to Ecuador. Why invest in Ecuador Bob Moss, President of the Ecuadorian American Chamber of Commerce, is an American who has made Ecuador his home. His banking software company uses Ecuador as a base to export to 15 different countries. "One of Ecuador's biggest challenge is to ask itself, 'Why invest in Ecuador?' We are looking for investment, but there are other Latin American countries with huge economies of scale." Fundacion Ecuador is a private company made up of business leaders who want to be actively involved in the destiny of the country. Pedro Aguayo, former Vice President of Ecuador and current Executive Director of the foundation, thinks that "now is the best opportunity for investors. The profitability of projects is much higher than in other more advanced countries where projects have already been done." Where to invest in Ecuador "Ecuador is an interesting country from a production point of view," says Moss. "It is extraordinarily diverse in terms of climate, culture and economy." He sees agribusiness, specifically shrimp, flowers traditional and nontraditional fruits, mining and tourism as sectors with a solid future.
Francisco Alarcon, President of the Guayaquil Chamber of Industries, sees the future in anything that involves high and medium technology and services that are not yet offered, such as software development and non-traditional, value-added agricultural products, including canning fruit, preserves and juices. Joaquim Zevallos, President of the Chamber of Commerce in Guayaquil, would add the construction industry to the list since there is a deficit in housing and a very high demand. The type of industry is not the only question. Another is, "In which city should I invest?" Ecuador's three major cities, Quito, Guayaquil and Cuenca all offer productive capacities and challenges for the investor. In a nutshell, Quito is headquarters to many of the major multinational corporations. It is often compared to Washington, D.C., because it is a governmental city. Guayaquil is home to the major agricultural industries, particularly bananas and shrimp, due in part to the year round, warm, sunny climate. Cuenca is the often "forgotten about" city. However, it is an entrepreneurial city with a high quality artesanal history. Cuenca's treasure is its well-educated, capable citizens. Its industrial park is filled with national and international companies. It is creating a massive Free Trade Zone. "Guayaquil is the entrepreneurial city of Ecuador," Alarcon says. "Ninety to 95 percent of Ecuador's exports come from the coast, while 80% of production is done in this region. We also have very little bureaucracy," he explains. Companies looking to enter into these sectors should consider the Guayas region for its rich, fertile soil, 12 hours of year-round sunlight and a plethora of manual laborers. Challenges for investors At the top of many investors' list of what to look out for in a new country are the labor laws. Latin America has a history, and an often wrong impression, that its laws prevent the voluntary firing and hiring of workers, that unionization can hold a business hostage, and that relationships between employers and employees are usually strained. On the whole, this image of Ecuador is incorrect. The government has done many things to improve the labor situation in Ecuador. Minister of Labor, Dr. Angel Polivio Chavez, is tasked with creating a social agreement between all sectors of society and generating more jobs through education and training. It is a tense time for the labor movement. Jobs are becoming scarcer as companies struggle to stay in business. National strikes and demonstrations are weekly events. "People's top priority is keeping their jobs in the midst of this difficult period," begins Chavez. However, the ministry is working with all sectors of society to make sure each side gets heard. "We are speaking with the owners of businesses and asking them to listen to what their employees are asking. We hope that the whole labor sector looks at its role in the development of the nation," he says. "We are working on a new vision - one that allows us to be more of a community working together." Chavez assures investors that there are fewer problems in the private sector. Though two days of national strikes led to bank and business holidays, many people went to work. According to Jean Daniel Benoit of Nestle, "Eighty percent of our people are here today, even though they were told that they did not have to come." Alarcon, a private sector businessman all his life agrees, "Though labor laws still need to be strengthened, the private sector doesn't experience much pressure at all. The problem is with the public sector." Striking is a prerogative of the public sector, although they can not paralyze sectors. In the private sector, workers have freedom of association with unions, but employers can also freely hire and fire people. Most companies admit that Ecuadorians are hard-working and dedicated. Though the Radisson hotel cites a zero percent turnover in two years, they admit that most people need to be trained. In response, the government is working with the private sector to provide better formal and professional education. Ecuador made a major change in its tax system in 1999 by temporarily eliminating the income tax and instituting a one percent tax on all financial transactions. This tax will be phased to .5% with a 10 to 15 percent income tax in the coming months. One of Ecuador's main problems is that only a small amount of businesses and individuals paid income tax. In a country with serious economic problems, a solution was needed. President Mahuad proposed the temporary tax, which was originally planned to be similar to a pre-payment of income taxes, in lieu of income and withholding taxes. PriceWaterhouseCoopers has been in Ecuador for 28 years. It answers investors' questions about taxes and the investment climate. Ramon Chiriboga, the principal partner, is also a tax consultant. "This one percent tax is an expense, more like a sales tax. If you move money around, it could be more than one percent," he begins. "We need the IRS to recognize this as an income tax, because as it stands the tax is not creditable to foreign source income. Some US companies prefer to pay the income tax, especially if it is larger than the one percent. If the financial tax is larger, then it should be declared a minimal income tax." Jaime Ardilla, Managing Director of General Motors believe it's "a very burdensome tax. Companies must spend a lot of resources managing their financial transactions or they could pay a lot more." He also supports a pre-payment of income tax, which helps improve the bottom line. "Ecuador could be getting more money, which is a good thing, but it could also be failing. We need to wait and see," concludes Chiriboga. The issue of intellectual property rights (IPR) is always an important one. Ecuador has neither had strong laws nor firm enforcement. The country passed comprehensive IPR legislation in May, 1998. Fundacion Ecuador has spent five years working to inform the country about it and IPR in general. "We believe IPR is important for the country and will encourage more research and development." The group has spent three years giving educational seminars while lobbying the government for a new law and the creation of an institute on IPR. How to invest in Ecuador Local and international companies that have been successful in penetrating the Ecuadorian market are very open to advising potential investors. The overall advice would be to "Think Globally, Act Locally," something that Chiriboga from PWC has been successfully doing for almost three decades. Michel Deller, GM of Quicentro shopping mall, has seen firsthand why many American companies fail in Ecuador's retail market and why European companies, such as Prada, have had better than expected results. Prada’s policy is to enter emerging markets early in the game in order to position themselves. This strategy saves them money down the line when the country is already established and prices for prime retail space are more in demand and more costly. American companies have taken a different tactic. They prefer to be owner/operators, which means they are at a cultural disadvantage, or they choose to work with Latin American partners, mainly in Panama, in order to penetrate the South American market. These added costs are often the reason companies fail. "Americans should work with local operators, perhaps in country groups. This makes it easier to access production, and provides cheaper prices and better service," explains Deller. "Furthermore, local partners are used to dealing with 70 percent interest rates and massive devaluations. If they can work with these returns, you are sure to make money." Deller has successfully worked with Tower Records' regional sublicensee to open a store in Quicentro. Nestle relies on its diverse products, in a variety of sizes and packaging, and its name, to attract and keep customers. Their chocolate bars come in bite size, regular and extra large sizes. When they enter a marketplace, they analyze the situation and decide how they intend to penetrate and expand, whether through acquisitions, as they did with four factories in Ecuador, or by building their own factories. Microsoft has only been in the market for about five years, but is already dominating it. The company has been growing at a rate of 50 percent per annum. Carlos Ignacio Robles, General Manager, explains that the company generates its own demand through information technology conferences and demonstrations and by showing other companies how to sell and support their products. Microsoft also had to create its own distribution channels and transfer their industry knowledge to buyers and distributors. In the meantime, the company follows standard North American business practices and holds itself to the high level set by the parent company, even when those rules are stricter than country rules. Eric Hertz, Executive Director of Bell South, a company that has been aggressively entering the Latin American market, suggests that investors be patient and flexible. "The decision to invest should depend on the type of business and whether a company is willing to take the risk. If you have a long-term, serious view then now is the time," he explains. Ecuavegetal is a local, Ecuadorian company that has successfully been exporting canned hearts of palm, guava paste, pigeon peas and other nontraditional products to Europe, Latin America and Miami. Walter Nimmocks, Export Sales Manager, is an American who has been helping develop new export markets. "Ecuador has more of a patriarchal business culture. There is less delegation. More day to day activities fall on the General Manager. The pyramid structure doesn't allow for much risk-taking." He believes it is important to learn to adapt and work within the local culture. Services for investors Ecuador is fortunate to have many chambers to help the investor. Each of the three major cities has an Ecuadorian-American Chamber of Commerce, a Chamber of Industries and a local Chamber of Commerce. Business leaders dedicated to helping industries expand and stay for the long-term are in charge. Zevallos runs a 110-year-old institution dedicated to promoting business and to presenting the government with strong, independent opinions. The Chamber is the "permanent advisor to the government on the productive side in the private sector." American companies often feel at home with names they can recognize. PriceWaterhouseCoopers has been helping companies successfully navigate the business maze of Ecuador. The company provides tax, human resource and management consultancy services. For small firms, they have an outsourcing business that takes care of all financial transactions and allows companies to focus on their core businesses. The World Trade Center in Quito provides many trade services to its members and local companies. Its international trade library has a directory of exporters, importers, manufacturers, magazines and directories. The WTC Network is also an electronic email service for business, which helps companies search for new markets, locate suppliers and potential joint investors, and stay informed about trade fairs and business conferences. The future Despite strikes, devaluation, freezing of accounts and the recent downgrading of the qualification of Ecuadorian banks and the investment climate by Thomson's Bank Watch and Moody's, there is hope on the horizon. Business leaders, such as Kurt Freund, President of Globatel, admit that President Mahuad took difficult, but necessary steps. "It is better to partially freeze accounts, than to have your money worth nothing the next day." Others, such as Deller see possibilities. "This is the biggest opportunity for anyone in the world. Ecuador is free." |
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Table of Contents (1) President Mahuad announces new economic plan |
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Everyone is familiar with the maxims, "Higher risk leads to higher returns," or "Buy low, sell high." These rules apply to the stock market, but they can also apply to Ecuador, a country that might look like a place for investors to avoid. At first glance, an entrepreneur might see a country in economic crisis, a fragile democracy, a history of corruption and a difficult business environment.
Aguayo agrees with Moss. "Ecuador could create one million new jobs in a variety of industries, including agriculture, rice, paper, etc. With the help of Israel and the new aqueduct systems, we can transform the dessert into a garden."