avistar International Corp. is a Warrenville, Illinois–based holding company whose subsidiaries make commercial and military trucks, buses, RVs, engines and vehicle parts. Its predecessors have had a presence in Latin America since the 1800s. Political unrest forced the company to leave Latin America about 30 years ago, but it returned during the 1990s. Today its operations include a major manufacturing plant in Brazil, a training center in Colombia, and many offices and dealerships throughout Central and South America.
D.T. (Dee) Kapur, President of Navistar’s Truck Group since 2003, recently sat down with FTI Journal to share his perspectives on how the region’s unstable past is giving way to a more promising future for patient investors who can identify the right opportunities and address challenges creatively.
New Opportunities from Free Trade
FTI Journal: Navistar has a strong manufacturing presence in Brazil. Why is Brazil a better place to manufacture engines than the United States? Is it simply an issue of cost?
Dee Kapur: Brazil is not a low-cost country anymore. In fact, if we could get a free trade agreement and ship to Brazil tariff-free, we would think hard about manufacturing in the United States and shipping to Brazil. To qualify for lower tariffs and government subsidies in Brazil, products must have 60% local content by value and 60% local content by weight. Without adhering to these guidelines, you can’t price competitively.
FTIJ: How attractive is the Latin American market?
Kapur: I think the fact that we are investing there speaks for itself. These are growing markets, and they are part of the Americas; they’re strategic trading partners in many ways. We intend to grow in those markets because we know we can be profitable there.
FTIJ: Are any other free trade agreements involving Latin American countries in the works?
Kapur: Free trade agreements with Colombia and Panama were approved by Congress and will take effect this year. They will largely eliminate the tariffs on imports from the United States, which will be beneficial. So we can now dispense with having to do strange things like manufacture in Mexico, get content from Colombia into Mexico, and then ship it back so it meets certain local content requirements to minimize tariffs.
FTIJ: A free trade agreement seems to give more certainty to investors in this capital-intensive business. Do these agreements influence whether you export or manufacture locally?
Kapur: Several considerations come into play. The most important is: Does this align with our strategy? Is it a growth opportunity? Is their market large? If the answers are a firm yes, then you look at the costs and benefits of local manufacturing vs. exporting. Generally speaking, for very large markets like Brazil, with great prospects and great growth, we make the commitment to invest in local manufacturing.
Business Makes a Comeback
FTIJ: In our roundtable session with Latin American business leaders (see page 44), there was a sentiment that the United States is turning its back on Latin America and letting the Chinese and others play a more dominant role. What’s your view on that?
Kapur: Ten years ago I may have agreed with you. But today I look at our own company, at GE, Caterpillar, Ford, IBM — they all are pouring on the coals and gaining traction, so I think the days of uncertainty about the Latin American legal systems, the level of crime and the institutions are receding.
FTIJ: How do you think opportunities in Latin America compare with opportunities in Asia?
Kapur: They are obviously very different. The appeal of Latin America is that it’s close to us, and in many countries they accept U.S. standards. We have some level of cultural alignment just by virtue of being close by. But you can’t turn a blind eye to Asia’s huge and growing population.
A Troubled Past Recedes
FTIJ: How hard do you look at social unrest, political and economic instability, and other risk factors when you decide whether to operate in a Latin American country?
Kapur: We look at them pretty rigorously. That’s not to say that we won’t make a bet anyway, but we will find a way to work around those risks. For example, we’re not going to invest tomorrow in Venezuela, but we still have a dealer there and we still look to ship trucks to them out of the United States or Mexico.
FTIJ: Do you think most Latin American countries are good candidates for investment and business relationships?
,Kapur: I think that the benefits from thriving manufacturing and trade are influencing people who might have in the past turned to crime and drugs. When the political classes reinforce that, it lays the groundwork for a stronger economy.
FTIJ: Can these countries also provide adequate skills and infrastructure?
Kapur: In certain markets. Brazil is growing so fast and qualified people are becoming very marketable, so they move. Providing great career opportunities and professional challenges can help manage that. In other markets, you have to go through the work of training these people, as we did in Colombia.
Poised for Future Growth
FTIJ: In general, what is your outlook on Latin America for the next decade?
Kapur: We’re bullish, obviously. The world’s growing economies, most notably China and India, will need the commodities produced in Latin America — its foods, its natural resources, such as minerals and oil. Consider also that Latin America is improving its ports, roads, rail systems and the Panama Canal, and that Brazil is getting ready for the 2014 World Cup and 2016 Olympics. It’s hard to see a fundamental dislocation in that part of the world.
FTIJ: What advice would you give to other companies that haven’t yet “put their toe in the water” in Latin America, but for which there might be a market?
Kapur: The growth in the region, and the skyrocketing demand for consumer products, bode well for people getting in at the right time and growing with the opportunity. But if you think you can go there tomorrow and be wildly successful the day after tomorrow — maybe that happens, but in all likelihood it won’t. Smart companies will stake out some territory there, work hard to seed the ground, fertilize it and then harvest.