Spain-Chile Relationship – A SWOT Analysis

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Chile has been historically isolated as a result of its geographical and economic characteristics, with roughly 98% of all its imports arriving via ports. However, in the past 30 years the country has undergone a massive change, finding itself now in the vanguard of the Free Market movement – being a world leader in the signing of Free Trade Accords – and shedding its former protectionist economic policies.

As a result Chile has been at the forefront with respect to many Latin American countries when it comes to globalization and accessing worldwide markets. This in turn, has led to Chile sustaining economic growth similar to other emerging economies.

As part of this opening of the country to foreign markets the Chilean government recently redistributed political power on a regional basis with the incorporation of two new regions, the Arica-Parinacota and Los Ríos. The idea behind the creation of these two new regions was to foment revenues in tourism, mining, agriculture and communications, while at the same time aiming to empower the regions and decentralize power from the capital. The new regions were approved Mar. 15, 2007 by President Michelle Bachelet.

The government’s policies have translated in strong economic growth, with the GDP in 2007 coming in at 5.2% versus 4% in 2006. On the downside, the country is feeling effects from the current global economic malaise, with unemployment hitting 7.2% in 2007. Strong economic growth has also led to a sharp rise in inflation, up from 2.6% in 2006 to 7.8% in 2007 on the back of higher petroleum prices and the ripple effect on food prices, coupled with adverse weather conditions.

It should be noted that Spain’s economy is also going through a rough batch, with unemployment hitting 9.6% for the first quarter of 2008 – the highest it’s been in three years – the third consecutive quarter of rising unemployment. This sharp increase in unemployment has even stoked concerns the Spanish government may run-out of funds to pay unemployment benefits in September.

Still – and despite the domestic nature of current Spanish press with respect to the collapse of its construction sector and rising unemployment – the general perception of Chile in Spain is one of a Latin American country that has undergone a rigorous economic policy that has led to its being considered as an emerging country with a relatively low country risk.

In a roundabout way Chile could benefit from a struggling Spanish economy – which has been built on EU subsidies and a booming construction sector – as many Spanish companies feel they must diversify and look outside their borders for growth. Of particular interest are Spanish construction companies which have been heavily diversifying in Spain into the energy sector. Spanish companies are particularly interested in projects in Latin America, Middle East, Eastern Europe and Asia.

In Spanish business circles it is commented that Chile’s economic stability – in sharp contrast to that experienced in other Latin American countries – has made the country attractive for investment. While mining remains a sector of interest, Spanish companies are also attracted to the banking, telecommunication and electricity sectors.

Despite the strong rise in Chile’s inflation, Spanish analysts see continued economic stability in that country, with sustained economic growth, albeit at lower rates than in previous years given the current global economic downturn.

In general, it is viewed, however, that growth will most likely come from Chile’s continued emphasis on exports and a drive to entice foreign investment. To further encourage foreign investments Chile must continue to ensure not only the liberalization of its markets and financial transparency, but seek to optimize its Free Trade agreements.

That said, it is often mentioned in Spain that the downside of Chile’s economic growth is that wealth is not being equally divided among the Chilean population. More concretely, the difference between Chile’s wealthy and its poor is becoming increasingly pronounced. In this age of corporate responsibility, and with its growing importance in the Spanish corporate world, such discrepancies in wealth distribution could come into play with respect to future investments, either in positive or negative light.

With respect to Trade, Chile exports more than it imports, with energy representing around 63% of Chile’s exports in 2006, while it only imported around 25% in the same period.

Those figures are misleading, however as Chile has limited domestic energy resources, with the country importing the majority of its energy needs. Chile has shown a reliance on natural gas exports, in particular those coming from Argentina. Since 2004 – when Argentina began restricting its natural gas exports – Chile has been revising its energy policy.

Outside of energy, Chile also exports significant agricultural goods (fruits and horticultures), representing around 20% of all exports in 2006, while it only imported 7% in this category for the same year. In 2006, manufacturing goods represented around 10% of all of Chile’s exports, while it imported close to 60% in the same category of goods.

Or in other terms, Chile’s export structure is basically divided equally between industrial (45%) and mining (45%) and the remaining 10% in agricultural goods.

Within the industrial products, the largest export items are cellulose, methanol and chemical products. Of increasing importance in the last decade are forest products, salmon and wine.

It should be mentioned that while Chile is attempting to diversify away from its dependence upon the semi-manufacturing of copper – a product that represented 60% of the country’s exports in the 1970s – to 35% in 2004, this product is still overly represented in the country’s export basket and the Trade Balance as a result of global demands and rising market prices for this commodity.

Copper exports in 2007 represented roughly 45% of the total exports on a Trade Balance basis.

Chile exported $1.3 billion to Spain in 2007, down slightly from almost $1.4 billion in 2006. By comparison, Chile exported $8.4 billion in 2007 to the United States, slightly down from $8.9 billion in 2006. With respect to imports, Chile received $845 million in goods from Spain in 2007, up from $708 million in 2006. With respect to the U.S., $7.3 billion of North American goods were imported in 2007, up sharply from the $5.6 billion Chile imported in 2006.

PRESS ANALYSIS

Despite Chile’s positive economic story, that news isn’t hitting Spain – in fact, news coverage of Chile in Spain is close to non-existent. As an example, when several Spanish businessmen were asked to mention a current article that they had read about Chile they couldn’t name one. Almost invariably the response had something to do with the Dictator Pinochet or the current president, Michelle Bachelet, who is seen as a something as a novelty, in line with Argentina’s Cristina Kirchner.

Other recent news items related to Chile include: reports a Nazi “Doctor of Death,” could be hiding in Chile; the closing of an investigation in the death of popular actor and singer 35 years after his death; Chile and Hawaii are both trying to get a contract for a giant telescope; A Chilean gang was busted with objects stolen from Europe; Ongoing news coverage of Peru’s ex-president Fujimori who is being held in a Chilean prison; and the widespread access of internet in Chile.

There was widespread coverage of the EU-Latin America Summit in Chile, but again the coverage was geared for Spain’s domestic audience, with the primary news being whether or not Venezuela’s Chavez had apologized to Spain’s King Juan Carlos I – or vice versa – after the Royal told the President to “shut up” at a summit last year in Chile.

When Chile is covered in the press, it is almost always in terms related to Spanish businesses that are operating in that country. Specifically, there are repeated stories related to various Spanish energy and telecommunications companies, but in general they lack depth and are not in and of themselves the types of articles that would entice investors.

There have also been recent articles about threats to Spanish companies.

Specifically, there has been negative press regarding the US businessman Douglas Tompkins (owner of Patagonia and North Face) who it is reported is buying up land in Chile. Reports in Spain claim Tompkins is trying to buy enough land to create a wildlife preserve in the south of the country – and which would run from the Andes to the sea, effectively cutting the country in two. There are concerns this could affect Spanish company Endesa which has plans to build hydroelectric dams near the project. In typical Spanish fashion of looking for extremely bizarre details, the ABC newspaper reported speculation is rife in the Chilean region that Tompkins could be planning on exporting water or even building a new promised land for some Jewish sect.

There are occasionally articles related to tourism, but these are most often related to trade publications. In general, the perception is that there are more articles on the Caribbean, Mexico and Peru than those published on Chile. One person interviewed for this report, said they were shocked that a family member was thinking of going to Chile for holidays instead of some place more “exotic.”

There is next to no coverage of Chilean imports, although there is a moderate knowledge of the quality of that country’s wines – but this is covered in select media aimed an even more select reader, which is perhaps not surprising given Spain’s own personal, and abundant, history with wine.

This lack of knowledge is also backed up by a 2006 survey by the Spanish state agency CIS that noted that of those individuals polled on their viewing news habits, only 7.8% of the respondents said they watched “A Lot” of news related to Latin America, and 49% “Quite A Bit.” The most popular items in Spain are related to news about the European Union, followed by those about the North Africa. News items regarding Latin America were the fourth most popular items (EU, North of Africa, US, and Latin America, in that order). In general, Spaniards identify more with European countries, and North Africa, although there are some indications of change. In a late 2007 CIS survey, 31% of those Spaniards polled thought that Spain should develop programs in Latin America to foment economic growth.

However, just the previous year the CIS noted that in terms of international politics, 56% of the respondents thought European Integration was extremely important, with only 8.6% showing concern about relations with Latin America.

It is interesting to note that this shift has also been accompanied with a rise in Latin American immigrants in Spain, accompanied with rising unemployment.

Amazingly, despite 85% of those polled saying they had never travelled to a Latin American country the vast majority believed the principal problem in Latin America was a lack of democracy, weak economies and corruption. Of those who had travelled to Latin America, the vast majority visited Mexico (24.5%), while only 5.7% went to Chile.

With respect to the perception of which Latin American politicians are implementing measures to further their economies, there has been recently a dramatic shift in favor of Chile. In a CIS report released May 29, 2008 (administered in Nov. 2007), on a scale of 1 to 10, Spaniards rated Chile’s Bachelet as being the most effective Latin American leader with a 4.93 ranking. The next most highly ranked Latin American leader was Brazil’s Lula with a 4.61 out of 10 ranking. Bolivia’s Morales had received a 3.42 rating, while Cuba’s Fidel Castro got a 1.82 out of 10.

While this recent survey is not exactly measuring the same criteria, it is interesting to note that of those polled in a 2006 CIS survey, 19% of them gave Brazil’s Lula high marks, followed by Bolivia’s Morales (16%). Only 6.6% of those Spaniards polled in that survey valued the job done by Chile’s Bachelet, which in relative terms was only slightly higher than the 3.7% who amazingly thought that Cuba’s Fidel Castro was doing a good job.

Despite the improvement in the perception of Chile’s government, it remains clear that country’s message is not reaching the Spanish public, but then this is a public where 35% of the population has never heard of the Latin American Summits.

SWOT ANALYSIS

Strength

• As a result of its having the jump on other Latin American countries with respect to liberalizing its markets there is a generalized perception that in Chile there is an elevated sophistication and professionalism when dealing with Chilean businessman.
• The Chilean telecommunications and software sectors are viewed as being consolidated and highly respected.
• Tourism is a definite strength with not only majestic views, but also the added benefit that it’s viewed as safe to travel to remote locations, unlike in several other Latin American countries. After all, what good is a vacation if you can’t come home to develop the photos.
• As mentioned repeatedly in this report, Chile’s economy is seen as a definite bonus, with the government fully seeking to follow a Free Market model, and entice foreign investors.
• A willingness – and business code – to allow foreign investors buy or create businesses in Chile without any type of restriction of discrimination toward foreigners.
• A favorable tax regime, which avoids double taxation with Spain. Direct tax on Companies/Societies is 17% on profits; Indirect tax of VAT 19%.
• Patent protection: Chile subscribes to strict patent protocol, including that of the Paris accord and recognizes those patents that were issued in other countries. Patents should be registered also in Chile to receive full protection.
• Common language – Spanish – and in many respects a common culture and religion. This is not to be downplayed as Spaniards are notorious for there horrible grasp of foreign languages. o The current strength of the Euro also makes investments in Latin America attractive.

Weakness

• As mentioned previously, one area that will increasingly draw criticism from stakeholders and activists is in the area of distribution of wealth. In Chile the lines between those who have and those who don’t have are increasing.
• Chile’s energy network/grid has shown signs in the past (1999) of needing further investments to avoid shortfalls in production and supply.
• Chile’s energy portfolio is certainly a weak point, which while the country does have some renewable energy sources – most notably in the area of hydroelectricity – there is a deficit with respect to gas and oil, the result lending to supply shortages.
• While Chile is “an open market” there is actually tight control on the distribution channels – roughly 80% of retail distribution is handled by 20% of the distributors, which would suggest that this area needs to be liberalized.
• With respect to the above point, when introducing some consumer products distributors will demand additional support for publicity and promotions, for which the foreign companies will have to be willing to provide.
• Given the tight control on the retail supply chain and distribution at times it is viewed that certain participants hold too much power when it is time to negotiate business terms.
• While taxation is generally lower – except for alcoholic beverages (27%), there are also some barriers for the importation for motor vehicles and parts.
• There have been some reports tighter controls on press freedom. In Spain there was coverage recently of a Committee to Protect Journalist report (May 23) that Chilean photographer Víctor Salas suffered a serious eye injury on Wednesday when he was struck by a police officer as he was covering a protest outside parliament in the southwestern city of Valparaíso. Salas works for the Spanish state news agency EFE.
• While Chile’s economy is a positive, it is also showing some signs of growth slowing down, and unemployment and inflation both rising.
• For the most part Chile has avoided political financial scandals, although that has recently changed – and which oddly seems to be the product of a stuffy government process inherited from Dictator Pinochet. o Indeed, Pinochet remains a weakness in terms of branding and marketing, perhaps not helped by the ongoing leaks, trials and reports. On the other hand, Spain has something to offer in this area as it also seems to have recovered from a similar situation under Franco.
• Some Spanish businessmen said they cannot understand why there isn’t a full agreement between Chile and Mercosur, rather than just being an Associate Member.

Opportunities

• Given the current makeup of Chile’s energy sector – its dependence upon gas and oil, etc – this should provide the country an opportunity to invest in renewable energies, such as in solar and wind-power, areas in which Spain has several leading companies. Iberdrola, Acciona, Endesa, Gamesa, ACS amongst others are more than qualified to bring their technology and know-how to Chile.
• Chile is also diversifying into the LNG market, an area where Spanish companies are world leaders.
• Chile can be a platform to enter other countries given its vast Free Trade agreements. Specifically, foreign investors can take advantage of a Law signed Nov 23, 2002 that seeks to foment foreign investors to use Chile as base to enter other Latin American and global countries. Spanish companies and investors are especially suited to take advantage of such legislation given the cultural similarities and common language in the region.
• Chile offers growth and investment possibilities in the construction sector, especially in the area of building second homes.
• Chile continues to offer important investment possibilities in the area of tourism.
• Chile offers a stable and dynamic market that is supported by a professional manner of doing business.
• One sector that is currently undergoing spectacular growth, and which Spanish companies can bring their know-how and investments, is in the area of “green” projects, related to sustainable growth, corporate responsibility and environmental protection.
• The Chilean market is extremely competitive in terms of the relationship between price and product, which means that there is room when negotiating for value-added services or products when seeking positioning in the market and client-customer loyalty – something that Spanish companies can provide.
• The Spanish government has made it a priority to invest in science and technology, meaning there could be clear opportunities to do business in Chile given that government’s economic policies that also seek to foment investments in this sector.

Threats

• There are continued supply concerns with respect to not only electricity, but also in the area of agricultural products.
• Chile must resolve its outstanding border disputes with Peru and Bolivia.
• There does exist the threat of the influence from populist Latin American governments in Chile’s politics, most notably from Venezuela, Ecuador and Bolivia.
• Given Chile’s geography there does exist the constant threat of earthquakes.
• Environmental concerns:

1. Significant threats to Chile’s freshwater and marine habitats are caused by the ever growing aquaculture industry – primarily salmon farming.
2. The establishment of non-native tree plantations is considered by many to be the greatest threat to Chile’s native forests.
3. The primary environmental threats to Chile are air pollution from vehicle and. industrial emissions, water pollution from untreated industrial sewage.

COUNTRY PERCEPTIONS

With respect to what most positively affects a country’s perception in Spain it must first be stated that Spain is very nationalistic. There is a love-hate relationship – some would say envy – with various countries based on historical incidents.

In addition, Spaniards love rankings and continually are publishing articles to show that they are in the vanguard. This at times is extreme, to the point where there have been articles comparing how many cigarette butts, or trees – or worse – can be found on the streets of various European capitals.

More specifically, Spaniards might admit that certain products from the U.S. are top-quality, but they won’t let that sway them from still dredging up the Spanish-American War of 1898 and complaining of the loss of territories. Americans are consistently portrayed as being naïve and religious fanatics, while at the same time being hypocrites. It is a common game in Spain among American ex-pats to look for the “strange or bizarre American news story” that Spanish media routinely publish.

In the same way, there has been extensive news coverage this year to celebrate the 1808 war again France – which while it freed Spain from the French was also the beginning of its decline in influence in Latin America. A weakened Spain subsequently found itself facing Wars of Independence in Venezuela and Argentina.

All to say, that Spain – and Spaniards – have a long memory, and some would argue an inferiority complex.

Spaniards, besides being nationalistic, are also idealists. Countries with the most positive image perceptions in Spain have a strong record in Human Rights and Democratic ideals, fortified by solid economic models. In this respect of equal importance are countries that can contribute in the areas of Culture and Art, and High Technology. Spaniards are big spenders who love the latest high-tech gadget, and in that vein luxury goods.

With this in mind, it is interesting that according to a recent study by BBC, only 31% of Spaniards consider it a positive factor that China is an economic powerhouse. Indeed, according to that study out of all European countries it is Spain that holds the distinction of having the most negative image of China.

On the backdrop of the above information, the typical Spaniard tends to associate his spending by what is popular and trendy, rather than as being related to a specific country.

By Robert Steven Duncan

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