Venezuela, foreign companies are in Survival Mode

Photo: Wave

 

Many transnational companies fled the country, others are still trying to sell their assets to local capital, and there are those who decided to stay and adapt.

By Caracas ChroniclesMarianela Palacios

Jul 1, 2022

On June 28th, after almost sixty years in the country, Avon Venezuela informed that all the shares of the company were purchased by a Venezuelan group of companies, which took over the entire operation and payroll to pursue business under another brand. No more Avon products will be produced in Venezuela. 

But this doesn’t tell the whole story. After the 2007 stampede by transnational corporations that came with the wave of seizures and confiscations, some remained and others that had left decided to come back. Even new ones have come in the past few years to invest in strategic industries.

How can this be explained in a country without legal security, nor respect for private or intellectual property, with an economy coming from an eight-year recession, a four-year hyperinflation, and three currency redenominations?

Not all of the transnational corporations left, at least not all the way. Big companies are still operating in Venezuela, like the soft drink company Coca Cola-FEMSA; food producers Nestlé, Kraft and Mondelez International; Procter & Gamble: and Chevron from the USA; Spanish companies BBVA (Banco Provincial) and Telefónica (Movistar), about which there has been a lot to talk about in recent days because they acknowledged having tapped around 20% of their Venezuelan phone lines, at the request of the Venezuelan State.

The Ones That Left

During Maduro’s government, 21 multinationals have left, as estimated by several company associations in Venezuela. There’s no official data on the subject.

Irish paper giant Smurfit Kappa left in September 2018, after the government arrested several senior managers for “profiteering” and demanded the company cut prices, even if it meant selling below production costs. Kimberly-Clark, manufacturer of paper tissue and toilet paper, was seized in 2016, renamed Cacique Maracay, and continues manufacturing paper under the Scottex brand, without the authorization of the American company. Something similar happened to Kellogg’s in 2019, whose brands Zucaritas (Frosted Flakes) and Corn Flakes were even used for chavista propaganda.

The oil industry is another thing, but there have been farewells too, even from close friends: the Russian company Rosneft left in 2020. Of the American oil companies, the only one who stayed was Chevron. Exxon, ConocoPhillips and others, ended up leaving because they wouldn’t accept the terms that Hugo Chávez was proposing in the changed contracts. Chevron did accept the terms and was still operating until international sanctions were imposed on PDVSA. Now, the American multinational stands by for a more flexible operating license than the one they currently have – which doesn’t allow them to produce and export Venezuelan oil – so it can recover the debt owed by the Venezuelan State.

Some of the multinationals that left the country sued Venezuela in international courts and the country has lost most of those cases. The State owes around 30,000 million dollars (30 billion dollars), as estimated by lawyer Ramón Escovar Alvarado, who put together a database for Cedice, in which all cases are mentioned.

The Ones That Stayed

Other multinationals decided to stay, because stopping operations isn’t as easy as liquidating the staff, turning off the lights, and lowering the rolling doors. It means selling everything or abandoning it, like Clorox did; a particularly harsh thing to do for brands who built their presence for decades in the market. Besides, as long as their operations make a profit, they usually stay.

All of the senior staff of the Procter & Gamble head office in Caracas was relocated to Panama over a decade ago. Then they moved other key units to Chile and Brazil. The company’s Caracas headquarters, where successful global brands like Pampers and Pantene were developed, was sold and now entrepreneurs Luis Cifuentes and Carlos Aguilo are developing a technological innovations incubator there: the Wave Tech Hub, a risky bet in a country plagued by slow internet connections, power shortages, and an unpredictable corporate environment. P&G is still producing some lines in two plants in Venezuela.

Coca-Cola – Femsa reduced its staff to 40% after a lower demand, but it didn’t leave either.

The case of BBVA Banco Provincial shows how business space has shrunk in our country. When confiscations began in 2007, the financial industry was booming. By 2017, that was ancient history. Since then, the Venezuelan banking system has been reduced to its bare minimum. Spanish bank Santander, managed to at least sell its subsidiary, Banco de Venezuela, to the government, for 755 million dollars in 2009. BBVA kept Provincial, a brand that has existed in Venezuela for six decades, waiting for better times. 

For Telefónica, in spite of everything that happened in Venezuela since 2013, the telecommunications business had to make sense and with progress on the horizon, even, because of the massification of social media and phones in the country. “Since it was gaining ground against its rival, Movilnet (given that this national company plummeted) and they still had the opportunity to keep making business, maybe that’s what made them stay,” economist Leonardo Vera explains. Despite the fact that Telefónica was a big player in what was a booming telecoms domestic market, at the end of the third quarter of 2017, Telefónica Venezuela was reporting an income of 88 million euros, 96% less than the same period of the booming year of 2012, when its income reached 2.3 billion euros. Devaluation played a big part in this collapse of figures.

The Return of the Airlines

Almost all international airlines left the country in the past eight years. Air Canada and Alitalia were the first ones out, in 2014. Then came Lufthansa, Latam, Aeromexico, Tiara, United Airlines, Avianca, Delta, American Airlines, Continental, TAP, Iberia, and Air France.

But dollarization and flexibilization at this point of the pandemic, plus the fact that Venezuela will always hold an advantage in geographic terms, favor the airport recovery. The diaspora needs to visit their home country and that will generate ticket demands. Also, companies need human resources mobility, and it’s starting to show.

In that regard, Venezuela is again starting to look like a possibility for some companies. Now, according to the Instituto Nacional de Aeronáutica (INAC), seven international airlines operate in Venezuela (Copa from Panama; Turkish Airlines, Air Europa, Iberia, and Plus Ultra from Spain; TAP Portugal; and Cubana de Aviación), and seven others will start to do so in the next quarter. Air France could be among them.

Copa left when the government stopped paying a multimillion-dollar debt so they could bring back their capital, but it renewed operations in Venezuela in 2018. There are also low-cost airlines working in this area of the Caribbean. With Gustavo Petro’s victory in Colombia and the upcoming normalization of diplomatic relations with Venezuela, more air routes will be activated for sure: there are over two million Venezuelans in that country.

“There’s a window of opportunity opening up there and many airlines want to recover some old routes which they considered to be profitable,” the economist added.

One of those routes is Caracas-Miami, because of the huge Venezuelan colony in Florida and the links they maintain with Venezuela, not just from family members, but also businesses. The same goes for Caracas-Madrid, Caracas-Portugal, Caracas-Caribbean Islands. Airlines from the United States, because of the sanctions, will find it hard.

An Uncertain Future

Those that have stayed have had to deal with the market’s conditions. “We’ve had to start from scratch. From selecting a portfolio to import the products, with all the steps it implies: resume contact with customs agents, process sanitary permits for each product and comply with registration requirements. As well as taking back the shelves, regaining spaces, reaching a market that has new rules and learning to communicate with consumers with the new available tools,” said Michele Bovy, marketing manager for the multinational corporation Unilever Venezuela. The company responsible for brands like Dove, Sedal, or Pond’s, has had to adapt to the dramatic changes in purchasing power, but since January 2021, they’ve seen an increase of 40% and 45%, with measures like using smaller packaging. Sedal shampoos, for instance, are now being sold in 200ml bottles, instead of the classic 340ml.

The minimum wage announced by the Executive this year for Venezuelan workers is 30 dollars per month and for the private industry, base salaries go between 70 and 100 dollars per month on average. But multinationals try to keep their human capital by equalling their staff’s salaries to that in the rest of the region.

More strict currency exchange controls in 2013 and the subsequent shortages affected all companies, while GDP dropped by 80%. Many multinationals went on “survival mode” as most Venezuelans did, operating at minimum capacity without dropping out of the market, funding themselves with operations abroad. “Now they’re in a different situation, after taking that beating, they’re facing a very slow transition with a very anemic recovery.  With only the hope that Venezuela might enter a more stable recovery process in the upcoming years,” Vera points out.

However, from the economist’s point of view, the scenario is still negative. The laws that have come out of the National Assembly and the Executive, such as the Ley Antibloqueo (Anti-Blockade Law), aren’t enough to bring in quality foreign investment. “The only investment which could be entering Venezuela is the one being brought in by the Executive through bilateral agreements from allied countries, such as Turkey, Iran, etc. And sometimes these are companies whose background and service quality are unknown to us. It’s not really the best investment we could be receiving.”

In other words, while Venezuela continues to be isolated economically and financially, it’s going to be very difficult for it to become a hub for international investment, as it was in the past.

“Transnational companies bet on the long term. If there’s a war or there’s legal insecurity, if there are no laws, if they kill me, if they threaten or imprison my employees, if I can’t make a profit, because I’m forced to sell at a loss, they won’t stay either. With few exceptions. And maybe those exceptions will hold on for a while, but they won’t last forever. So when it doesn’t make any more sense for shareholders to stay, they will leave too,” says the former vice president of a company that no longer operates in Venezuela who asked to stay anonymous.

Read More: Caracas Chronicles – Venezuela, foreign companies are in Survival Mode

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