2013/06/27 | High energy costs make Latin America ripe for energy-efficiency solutions
WRITTEN BY WORLDCITY STAFF. POSTED IN CEO CLUB
In Latin America, electricity costs are so high that they often represent the second biggest expense for business after payroll.Prices per kilowatt hour run about 26 cents in Puerto Rico and as much as 50 cents in Ecuador, compared to roughly seven cents in Florida.The upshot: Companies that sell energy-efficient products stand to gain in the fast-developing Latin American region, especially if they can reach buyers concerned about long-term costs. Those were among the insights shared by George Calienes, senior vice president of Latin American operations at air-conditioner specialist Daikin.McQuay International at WorldCity's CEO Club on April 5.
Some participants were stunned by the numbers, because they pay little attention to energy costs. Calienes said in the United States, executives needing to cut costs often look first to lay off staff. But in Latin America, they could easily think instead: "If I upgrade my air-conditioning and save 25 percent on my electricity costs, I can save 10 percent of my workforce," said Calienes.
Educating buyers about energy efficiency and reaching decision-makers responsible for long-term costs are key challenges for Calienes and his team, who arrived late to the air-conditioning market in Latin America and sell mainly large systems to commercial buyers such as hotels. The team found contractors in the region typically did not focus on long-term costs for building operators and instead looked for the cheapest supplies to offer projects at the lowest-priced bid. In addition, many distributors already represented suppliers from China and elsewhere and has little interest to add a product that was higher priced and required sales staff to explain long-term benefits.
So, Daikin McQuay took a more direct sales approach, reaching out to real-estate developers and owners of commercial buildings such as hotels, office buildings, hospitals and big-box retail. The company employs engineers and other professionals as sales staff. It offers customers not only a premium product but "a solution," complete with system design, maintenance and service packages.
That effort is paying off, Calienes said. Daikin has scored such big contracts as Cancun airport and the Costanera Center in Santiago, a multi-building complex featuring the tallest tower in South America. It also has made gains with Chile's "multi-Latina" companies that are expanding into nearby nations and often prefer to deal with one vendor that knows all the markets rather than different local ones, he said.
The "solutions" model for sales resonated with Carlos Garcia, who heads up Latin American operations for health care giant Novartis. His company also is shifting more to a "solutions" focus, complete with consulting and other services, rather than trying to simply sell products.
Heavy equipment maker Caterpillar also takes a similar services approach to sell its wares and stand out from Chinese competition that often is cheaper , added Ken Roberts, president of WorldCity.
The lesson for other companies entering Latin America: "You can arrive late, but if you have better technology, service and better return-on-investment, you can have great success,' said Lorena Keough, managing director in Miami for Diversified Search, a retained executive search firm.
Discussion ranged widely at the CEO meeting, with questions posed about specific markets in Latin America. Calienes said Brazil has proven complex and expensive, while Mexico is easier for business.
"The illusion of Brazil was just that it was going to go gangbusters," spurred by its hosting the soccer World Cup in 2014 and summer Olympics in 2016, Calienes said. "The reality of Brazil has not met the fanfare."
Chile-based LAN Airlines also faced headaches in Brazil in its merger with Brazil's TAM airlines, said Fernando Poitevin, chief operating officer for LAN's cargo operations. "All the states are almost different countries" within giant Brazil, Poitevin said. "It's very unpredictable."
Joao Barbosa, chief executive of Giraffas USA, a restaurant chain from Brazil, said Brazilian entrepreneurs are frustrated with their own country too. Brazil's government tends to make business harder with complex taxes and rules, rather than helping companies spur creation of jobs. Many businesses lack permits, since requirements are often impossible to fulfill and some bureaucrats seek payoffs, he said. Brazil's economy grew by less than half the rate of the U.S. economy last year amid the problems.
John Price Of Americas Market Intelligence"They are losing a great opportunity" to develop the country, Barbosa said of his homeland, Latin America's largest nation with nearly 200 million residents and the world's sixth largest economy.
John Price, managing director of consulting firm Americas Market Intelligence in Miami, said prices for electricity in Latin America may rise in the coming years too, as a growing middle class uses more energy and investment by governments in energy-generating facilities lags demand.
"The growth of credit in Latin America fundamentally has changed business," spurring middle-class consumption, said Price. "Even households now can think about buying on quality, not price."
The CEO Club is one of six event series organized by media company WorldCity to bring together executives on international business topics. The CEO series is sponsored by the University of Miami School of Business Administration. The next session is set for May 3.