22 July 2009

Uncertainty: The Only Certainty In Argentina Business

Doing business in Argentina means living with uncertainty. Due to the foibles of each government, long-term planning isn't really possible and one could even say shouldn't be attempted. Anyone initiating any kind of business venture in Argentina needs to think about recovering all the money invested (and making a profit) in fewer than 5 years. A few examples I can think of businesses that have been destroyed by the government's administrative decisions:
  • Lunch ticket companies (the government began to tax these tickets as normal wages and thus caused their elimination from the market)
  • Private pension funds (the government appropriated all "AFJP" funds)
  • All producers of products in the consumer price index (price controls)
  • Farmers (brutal increase in export taxes)
  • Utilities (price controls)
  • Airlines (price controls & official interference by the Transport Ministry)
  • Public transit (price controls / constantly changing subsidy regimes)
  • Energy (price controls)
The list goes on and on. These are just some recent examples I thought of in about a minute or two. If I were to put together a comprehensive list, it would be much larger. All these industries have seen their conditions change dramatically through decisions by the government to either impose price controls, increase taxes to confiscatory levels, or in the case of Aerolineas Argentinas, destroy the company outright by fomenting union agitation to a level that renders the company totally inoperable.

"Normal" Surprises
In addition to brutal government changes that can effect an entire sector (such as what I described above), businesspeople should be prepared for more "normal" surprises that can arrive in the form of union negotiated pay raises or government decrees giving pay raises or special bonuses to employees.

Needless to say, in labor-intensive businesses with a large payroll, a 20% increase in salary expenses can create a huge gaping hole in a company's profitability.

Extreme Profitability: An Essential Requirement for Argentine Businesses
When considering a new business venture in Argentina, even pessimistic forecasts should result in extreme profitability. A healthy profit margin is needed to make up for the uncertainty that is inherent in Argentina's business climate. Any project that depends on a thin profit margin or more than 4-5 years to recover the money invested is going to be troublesome. I, personally, wouldn't invest in projects with those characteristics and I don't recommend anyone else does either.

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