With the Right Knowledge, Nearshoring Presents a Significant Industry Growth Opportunity

by Rafael Castillo-Triana & Juan Dodds Sept/Oct 2023
As global supply chains continue to shift in the wake of the pandemic, nearshoring presents an opportunity for the equipment finance industry. Rafael Castillo-Triana and Juan Dodds explore policies and best practices to guide investment in Latin America.

Rafael Castillo-Triana,
CEO,
the Alta Group

A major reordering of the world’s manufacturing supply chains is well under way. The pandemic and major geopolitical events have put a sharp focus on the risks that come with concentrating global manufacturing overwhelmingly in one region — namely, China. At the same time, the war in Ukraine has sparked an outflow of investment from Russia. Amid these dynamic shifts, the Latin American workforce has strengthened, presenting a stronger economic case for locating manufacturing closer to major markets in the Western Hemisphere.

As a result of this reckoning, foreign direct investment (FDI) in Latin America and the Caribbean is reaching unprecedented levels. In July, the Economic Commission for Latin America and the Caribbean (ECLAC) reported that in 2022, this region received more than $224 billion in FDI — a 55% increase over 2021 levels and the highest investment value on record for the region.

As an increasing number of companies act to capitalize on the advantages of centralizing

Juan Dodds, Senior Managing Director, The Alta Group Latin American Region

supply chains closer to major markets — a trend we now call “nearshoring” — the equipment leasing and finance industry has a tremendous opportunity.

Our industry can provide important leverage by becoming the financing partner to companies that make everything from automobiles to toys to electronics and semiconductors as they pour hundreds of millions of dollars into new and expanded plants in Latin America. We must make the case that by investing in the massive equipment purchases required to scale up in this market, we can help them preserve their cashflows.

Equipment leasing and finance firms that choose this market have an opportunity to grow their business and profitability in an environment of controlled market risks. Manufacturers can benefit from preserving cash when the equipment leasing and financing industry can undertake the needed investments in properties plant and equipment, including new technologies.

U.S. Policy in Play

Recent U.S. industrial policies are unleashing an unprecedented flow of investment into targeted industries through tax credits and other subsidies, helping feed the nearshoring trend.

  • The Inflation Reduction Act (IRA) provides $500 billion in direct incentives to facilitate the conversion to clean energy, including tax credits and grants for manufacturers, installers and investors.
  • The U.S. CHIPS and Science Act includes $280 billion in spending over the next 10 years, with the goal of making U.S. chip manufacturing less dependent on China.

Because of the many free-trade agreements that the U.S. has in place with Mexico and many other Latin American countries, this region stands to benefit from these landmark pieces of legislation. Both the IRA and the CHIPs Act could lead to increased trade between the U.S. and Latin America. This could create new opportunities for businesses in both regions and could help to boost economic growth.

In addition to these specific opportunities, the IRA and the CHIPs Act could also have a more general positive impact on the Latin American economy. By investing in clean energy and the semiconductor industry, these two pieces of legislation could help to create jobs, boost innovation and reduce the region’s reliance on imports.

Here are some specific examples of how the IRA and the CHIPs Act could create opportunities for Latin American countries:

Mexico could benefit from the IRA’s tax credits for clean energy production. The country has a large potential for solar and wind power, and the IRA could help to make these resources more affordable and accessible. This could lead to new investment in the Mexican clean energy sector, and could create jobs in the construction, manufacturing and installation of renewable energy projects.

Brazil could benefit from the CHIPs Act’s funding for research and development in the semiconductor industry. The country has a growing semiconductor industry, and the CHIPs Act could help to strengthen these ties and attract new investment. This could lead to the creation of new jobs in the Brazilian semiconductor sector and could help to boost the country’s technological competitiveness.

Chile could benefit from both the IRA and the CHIPs Act. This country has a wealth of renewable energy resources, and the IRA could help to make these resources more affordable and accessible. The CHIPs Act could also lead to new opportunities for collaboration between Chilean businesses and the U.S. semiconductor industry. This could create jobs in both the clean energy and semiconductor sectors and could help to boost the Chilean economy.

Additional synergies are evident in the fact that countries such as Argentina, Bolivia and Brazil have rich supplies of mined lithium and are actively positioning themselves to transition from being mere suppliers of raw materials to becoming a hub of manufacturing in the electric vehicle (EV) industry — a major beneficiary of the IRA.

The IRA and the CHIPs Act could have a significant impact on the exports of lithium, cobalt, copper and other minerals from Latin America. These two pieces of legislation could lead to increased demand for these minerals, as they are essential for producing electric vehicles, batteries and other clean energy technologies.

The countries that are most likely to benefit from the increased demand for these minerals are those that have large mineral reserves. These countries include Chile, Bolivia, Argentina, Peru, Mexico and Brazil.

For example, Chile is the world’s leading producer of lithium and is poised to benefit significantly from the increased demand for this mineral. Bolivia, also a major producer of lithium, and Argentina, a major producer of copper, could also profit from increased demand.

The Advantage of Equipment Financing in Nearshoring

As we regularly speak with large U.S. and European-based manufacturers who are planning large investments in Latin America, it is becoming clear to us that the equipment finance industry can do a better job of building awareness of the advantages they gain in offering equipment financing and related asset-management services.

By the time a large public announcement is made regarding a plant expansion, many of these companies have already allocated capital for buying the equipment to fill these new factories. When possible, we as an industry must make the case earlier in the process for having an informed financing partner who can shoulder the initial capital expenditure for the equipment, allowing the company to better leverage its investment in this new market.

The more players in the U.S. equipment finance industry turn their focus south of the Rio Grande, the better they will be in position to make this case. We see tremendous opportunities for OEMs and captive finance companies to help their customers in this way. And the industry is evolving in this area beyond just end-user financing, to models like floorplan financing and inventory financing within the supply chain of equipment manufacturers in Latin America.

Local Knowledge Is Critical

Understanding the opportunity in Latin America requires complex expertise. While the U.S. press is heavily covering the investment boom in Mexico, many other countries are also playing a large role in the nearshoring trend. ECLAC’s recent report, cited above, put Brazil at the top of the list of Latin American countries in terms of FDI received in 2022, followed by Mexico, Chile, Colombia, Argentina and Peru.

American finance companies have a history of activity in this region, although much of that activity dwindled around the time of the Great Recession (2007 to 2009). Now, we are beginning to see a rebirth of interest in serving the Latin American market.

For U.S. firms especially, pivoting to help companies navigate the Latin American market introduces a learning curve. From the way that contracts are written, to how to go about hiring local workers, time and resources put into understanding the customs of these individual markets, using knowledgeable and expert advisors with subject-matter expertise in the equipment financing industry will pay off in reduced risk-related losses.

The Alta Group’s Latin American Region is frequently approached by international OEMs wanting to replicate their successful U.S. or European financing programs in Latin America. Finding financing partners with the footprint or capabilities to match these programs’ characteristics in the region is quite a challenge. The lack of specific asset-based lending knowledge has led several OEMs to carry financing exposure on their books. The equipment collateral value is not frequently considered in potential financial partners’ risk decisions, and they may not know who is offering operating leases since it is only offered by a few lessors. Lenders with international relationships and experience in other regions will be able to lessen such difficulties in emerging nearshoring opportunities.

Advisors who know the region can assist in building a “cultural bridge” to swiftly move past common hurdles that can cost newcomers months of delay if not managed correctly. This includes specialized knowledge of how legal and contractual issues are handled in these countries, how to exercise rights in the event of delinquency, guidance on where to find appropriate manpower and management, and important insights that can ensure asset management runs smoothly, i.e., what happens if a piece of equipment is returned, and how might it be redeployed within this country?

The LESCANT model is useful for this kind of work. “LESCANT” is an acronym for the many areas that warrant attention when expanding to serve a market with different cultural traditions. Those are:

  • Language (How will you communicate?) • Environment (What are living conditions like, and how might they affect workers and business partners?)
  • Social Organization (How important are family, individualism, religion, etc.?)
  • Context (What assumptions or shared knowledge affect communication in this culture?)
  • Authority (What leadership style will be effective in this market?)
  • Non-verbal (What messages do style of dress, mannerisms and other behaviors convey?)
  • Time (How is the workday organized?)

This kind of knowledge can’t be attained overnight, but working with experienced guides who have longstanding ties within these countries, and who understand the cultures, can help U.S. finance companies in positioning to capitalize on the Latin American nearshoring trend.

ABOUT THE AUTHORS:

Rafael Castillo-Triana, CEO of The Alta Group Latin American Region, is an international attorney with more than 37 years in the leasing industry. His in-depth knowledge of international leasing law and extensive experience founding, developing and managing lease finance companies is invaluable to Alta clients that seek to establish and expand operations in Latin America. Beyond the legal and business issues involved in international finance, he is skilled in cross-cultural translation and balancing a lessor’s goals in a country or region with what the market can offer.

Juan Dodds, a senior managing director leading the Management Consulting Practice at The Alta Group Latin American Region, has spent 16 years in foreign trade for several multinational companies before joining the leasing industry more than two decades ago. During his career, he has been deeply involved in the international expansion and the startup of several companies in the region, from the business plan design to open operations, hands-on management and the implementation of growth strategies and best practices.

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