The jury is still out on the ongoing debate in the Latin American boardrooms: diversify and stay local or specialize and go global? Specialization, management consultants tell their clients, provides enormous scales of economy in production, marketing, administration and knowledge development. That certainly makes sense in the US market, where the sheer size of the market encourages specialization. But the theory can break down when crossing borders. In smaller markets characterized by flexible regulations and wealthy elites, high level political and corporate connections may be more important to the bottom line than economy of scale or industry knowledge. Mexico provides a useful laboratory for experiments with both of these theories.

Going global

On the one hand, there is the much-envied global growth of Cemex, the world's 2nd largest cement producer. The Monterrey powerhouse now derives 52.7% of its revenue outside of Mexico and 31.7% outside of Latin America. In September 2000, Cemex paid $2.8 billion in cash for Houston-based Southdown. Cemex now operates in 30 countries, most of which are emerging markets where cement demand tends to grow rapidly. Some question Cemex's gamble in the US market, which faces a slowdown after an 8-year construction boom. Cemex justifies the purchase on the grounds that Southdown is a highly profitable company that will contribute needed R&D knowledge to Cemex's global empire.

Diversifying at home

On the other hand, there is Grupo Carso, Carlos Slim's clutch of diversified and profitable companies that operate almost exclusively in Mexico. How does Carso deliver impressive ROI results across such unrelated industries as telecom, metals, restaurants, department stores, tobacco, electronics and banking? Slim wields enormous power in Mexico. Even the rumor of his entry into a new sector will drive away competitors. His ability to negotiate preferable terms in acquisitions is renowned and his timing is impeccable. He partners with global leaders in each industry, drawing on their industry knowledge and offering market access and contacts in return. Foreign companies line up to do business with him - Microsoft, SBC, Bell Canada, and Sears among them.

Leveling the playing field

For Carlos Slim and other Mexican magnates who enjoyed cozy relationships with Mexico's PRI party, the playing field may get tougher at home. This could happen if the Fox administration decides to enforce Mexico's abundant list of laws and regulations to the letter. Foreign competitors have long complained that they must abide by onerous labor, environmental, and tax regulations while politically connected Mexican firms finesse their way through compliance. With all their eggs in one national basket, firms like Carso face new political risks.

Going abroad, particularly to the US and Europe, also has its risks. Grupo Geo, one of the most successful and sophisticated low income house builders in the world, recently retreated in defeat from the US market. In Mexico and Chile, where it operates with great success, Geo taps into generous government low-income housing credit programs to virtually eliminate credit risk. The company can afford to build massive housing developments because it enjoys a captive market of poor but credit worthy customers. The US has no comparable large-scale housing programs. This forced Geo to rely on the credit worthiness of its target customers: low income Americans. As it turned out, customers did not honor agreements, defaulted on mortgages or could not obtain credit in the first place. Without a government program providing credit guarantees to their customers, Geo was operating in a much riskier environment.

Domestic market characteristics drive the choice

Looking across the region, a trend is evident. The larger and more open an economy, the more likely a Latin corporation will specialize. Brazil, in spite of its slow pace of liberalization and minimal foreign competition, is home to a number of highly focused industrial groups. They include Bunge (agri-food), Pão de Acucar (retail), Gerdau (metals), and Safra (financial services). Only Bunge has a long history of global operations while most of Brazil's specialized powerhouses have stayed home until now. That will change as the economy opens and growth options in Brazil grow scarcer. In contrast, Chile is dominated by highly diversified holding companies, in spite of its early reforms. In a small economy with power concentrated in the hands of a few dozen families, Chilean industrialists found it easier to diversify within their own borders than go abroad. It is noteworthy that Chilean entrepreneurs operating below the elite circles have been very aggressive in overseas expansion, albeit as exporters rather than investors.

Highly diversified family run industrial groups dominate most of the smaller economies in South and Central America. They control most of the basic industries in their own countries, including agriculture, food & beverages, retailing, construction, metals, financial services, telecom, transportation, and media. These countries have been slow to open their doors to foreign investment in key industries where the elite families operate. The only threat to their national oligarchies has been from within, when sometimes populist governments have nationalized assets or imposed restrictive policies. Most of these diversified groups are ill prepared for ventures beyond the safety of home. Notable exceptions include the Cisneros group (media) in Venezuela, Durman Esquivel (piping) in Costa Rica, and SQM (chemicals) in Chile.

Grooming for global expansion

So far, Argentina and Mexico have been the most successful Latin American countries in grooming their industrial groups for global expansion. Their sizeable economies gave their family conglomerates an early opportunity to learn how to specialize and focus. When their borders opened to foreign investment and global competition faster than the rest of Latin America, the best of the groups adapted quickly to export and invest abroad. As a result, the region's most successful global players - companies like Cemex, Bimbo, TMM, Savia, Techint and Arcor - come from Mexico or Argentina.