Research by the German Economic Commission for Latin America (LADW) with McKinsey Consulting revealed that companies in Brazil and other Latin American countries may be more profitable than those in Asian markets. The results considered Ebitda rates, which are the earnings before interest, taxes, depreciation, and amortization.
This index is used to evaluate the financial situation of publicly traded companies in which the capital stock is composed of freely traded shares in the market. The data is of great importance to investors, especially since it is a more accurate measure of health analysis of a business.
Thousands of companies around the world were analyzed between 2000 and 2017, and Brazil received 14% as a result, while countries like Malaysia and China account for 11% and 8%, respectively.
This means that companies from Brazil brought more profit than companies from China, which has a larger market when it comes to industries, and other emerging countries in Asia.
LADW, responsible for the study, represents the entire German industrial sector and this means a lot to Brazil and Latin American countries that stood out in the study since that research can support expansion decisions, new investments, and market growth of German companies within these regions.
What experts have to say about it
To analyze what this data really represents, João Alfredo Lopes Nyegray, a specialist in International Business and Professor of International Relations, Foreign Trade, Administration and Economics at Positivo University, gave an interview to LABS. In addition to explaining the economic aspects that led Latin America to conquer these numbers, the expert detailed the impact that the result could have for countries of the region.
1. What impact could this study have on Latin American countries?
Well, at first this study should not only be considered as a basis for reinforcing the presence of companies that are already here, but it should also increase the interest of those companies that have yet to come to Latin America. There are many under-exploited areas or even sectors where competition is much lower than elsewhere in the world, especially in Asia.
The fact that Latin countries were – and still are – closed economies has led many sectors to grow with low competition. Today, when many of these closed economies have started opening, these low-competition segments emerge as an investment opportunity. An example may be the Brazilian air sector, dominated by three or four major players. Until recently, there was a need for national capital for these companies to operate in our market.
Finally, as of May, the activities of companies with 100% foreign capital have been released here, which includes the possibility that these companies offer domestic flights. Thus, a sector that until then was characterized by low competition may become more contested. The same could and should occur in other areas.
2. Do you believe that Latin American countries can be more profitable for foreign investors than regions like Asia, for example?
I believe that, in certain segments, Latin American countries may be more profitable. This is due, on the one hand, to the low competition in some sectors, as suggested previously. On the other hand, greater profitability can be explained by the growth of consumption and also by the increase in income in several countries like Peru and Colombia, for example.
Both things are linked. When taken together, less competition, higher population incomes, and increased consumption lead to higher profitability. In addition, there are specific opportunities for specific demographics: people of the C and D classes also want to consume, the issue is that they are offered products and services compatible with their ability to pay. Until then, when one considered the consumption habits of such demographics, one imagined cheap and low-quality products.
However, technology and production at scale allow affordable products of higher quality. Also, technology-intensive sectors, whether for the production of affordable items or for the production of innovative items or services, present the greatest opportunities for high profits.
3. Do you consider that foreign companies should target Latin America for expansion and investments?
Certainly, their greater presence in Latin America is a key factor for the expansion of not only European but also Asian companies. The growth prospects of the countries are good: about 2% in 2019 and approximately 2.5% in 2020. In addition, many countries in the region have implemented reforms in relation to their own economies and fiscal policies. Other reforms were made to make the business environment more favorable, reducing the deadline for opening companies and simplifying the payment of taxes.
Another important point was a recent report by ECLAC (Economic Commission for Latin America and the Caribbean), which projected that the region could have a population of almost 800 million people by 2061. Thus, those companies that enter and settle here for the next few years can benefit from this wave of growth.
The potential of Latin America
In addition to highlighting Latin America as a place of greater profitability than Asia, the report also revealed other data that demonstrate this growth and that it is possible to make successful investments in Latin countries.
According to LADW, Latin America’s income growth rates range from 2% to 2.5% per year and, even though it’s below the market, the region is considered a great investment option with valuable opportunities for expansion and long-term profitability.
For those who want to take advantage of all this potential, it is interesting to focus on segments that are trending among Latin Americans. As for example the digital area which predicts that in 2020, Latin America will have 595 million smartphones according to Ericsson survey, entitled Mobility Report.
In addition to the rise of class C, mainly in Brazil, which makes buying intent to increase and brings a promising look to the future of business in the region.
So, it is a fact that Latin America is growing and should be valued among investors as a great region for business, but with a goal of long-term profit to take full advantage of current and future market potential.