Archive for the ‘Entrepreneurship’ Category

Kaizen interview with Argentine entrepreneur Guillermo Yeatts

Saturday, November 29th, 2014

This interview could be subtitled Entrepreneurship from Buenos Aires to Tierra del Fuego to Houston and Bolivia and more.

Yeatts-smBilly Yeatts has had a long and colorful career, working as an analyst for Citibank in New York and an executive for Ford in Detroit and Massey Ferguson in Argentina, before launching his own entrepreneurial businesses in oil and gas.

Along the way he found time to co-found several nonprofit organizations and write ten books on topics ranging from the petroleum industry to the problem of poverty in Latin America.

Here is Billy Yeatts on entrepreneurship in Latin America.

For more of our interviews with leading entrepreneurs, see the Kaizen page.

Interview with Argentine entrepreneur Guillermo Yeatts

Friday, November 28th, 2014

Entrepreneurship in Latin America

Yeatts,GGuillermo “Billy” Yeatts was born in Buenos Aires and studied at New York University and the Harvard Graduate Business School. He has worked as an entrepreneur in SOL Petroleo S.A. (refining and marketing), Diamond Shamrock Boliviana S.A. (Bolivia; exploration and production of crude oil and gas); Cadesa S.A. (Tierra del Fuego; petroleum drilling), Joss S.A. (Buenos Aires; petroleum transportation) and as Chairman of Massey Ferguson Argentina (agriculture machinery), Ford (Dearborn and Buenos Aires), and Citibank (New York). He is also the author of ten books about the petroleum industry and about the causes of poverty in Latin America. He was the recipient of an honorary doctorate in philosophy from Universidad Francisco Marroquín in 2013.

Education

Kaizen: You’ve had a long career as an executive, entrepreneur, and author. But your story starts here in Buenos Aires?

Yeatts: Yes. I finished primary school in the United States in Danville, Virginia. My dad was born and raised there. My parents came to Buenos Aires in the early fifties. I finished my middle school and high school here in Buenos Aires.

I then spent two years in the University of Buenos Aires. Later I decided to go to United States to college.

Kaizen: Where in the U.S. did you first go?

Yeatts: To New York University, where I got a bachelor’s degree (B.S.) in finance and a master’s degree in economics. Later, I was accepted as a Ph.D. candidate in economics, but I never completed it because I accepted a job in Argentina.

Early Career

Kaizen: During your time in New York, you were also working?

Yeatts: Yes, I worked for Citibank in New York at their head office for six years in the commercial credit department, afterwards in the European district covering Italy and Vatican accounts.

Kaizen: What was your master’s work on?

Yeatts: My master’s thesis was on the automotive industry in Latin America, because the strategy in the 1960s was substitution of imports to create jobs and reduce imports from abroad. The effect of this was you had low sales volume and huge costs and therefore the creation of artificial industries that were non-competitive in the world markets.

Kaizen: Why did you pick the automotive industry for your thesis if you were working in banking?

Yeatts: I went on vacation to Argentina and saw about 30 assembly plants that were allowed to import provided they started manufacturing in a closed economy. As a result of this observation I said, “There is no way these will survive,” and in the end only five started manufacturing facilities. This was why I wrote my thesis on the auto industry. Later that year Ford came to interview college graduates, so I asked to be interviewed by them to inquire whether they were looking for college graduates in Argentina

Executive Career

Kaizen: Why was Ford interested in a graduate student from Argentina?

logo-fordYeatts: I was an Argentine married to an Argentine and had lived there, so my potential relocation should be rather simple, and I knew a bit of the industry because I did some research for my master’s thesis.

Kaizen: What did you see as a strategy in Argentina for the growth of an infant industry, and why would Ford be interested?

Yeatts: The thing I found interesting was the strategy of import substitution because you create local employment, reduce import requirements of the balance of payments. As a result, the cost of the vehicles was two or three times higher than in the States. The reason for this was that local content requirements were between 70% and 90% for each vehicle and in many cases you had a one source supplier. This is what constitutes crony entrepreneurs protected from competition with a closed market. Close to the government, far from the market. This strategy was developed by the think tank CEPAL headquarters in Chile and applied throughout Latin America.

Kaizen: Was this the law that required local content and banned imports to allow local manufacturing to prosper?

Yeatts: Yes, this was a law. Under this scenario you create millionaires because there is no competition.

Kaizen: It becomes a seller’s market — the person who has the regulation in their favor.

Yeatts: Correct. It’s like going to the zoo to hunt.

Kaizen: Ford eventually sent you to Buenos Aires. What were you to do for them?

Yeatts: I was named supervisor of cash management and insurance. One of the first things I did was try to reduce our insurance cost. I cancelled 20 insurance policies and started self-insurance. I received a lot of praise for reducing our cost on risks which were self-financing after a period of time.

Three months later on a Saturday, I see hail coming down. I was like, “Oh no!” I had cancelled hail insurance. [Laughs] There were about 1,000 cars out there. I called everyone in to look at what we had left as insurance coverage. We still had thunderstorm insurance, so we tried to understand if the hail caused the damage or the wind which had propelled the hail against the vehicles. We built a case that it was the wind and thunderstorms that caused the damage, not hail. We had a lot of evidence in the district that wind had thrown many trees, lampposts, and advertisement signs.

Kaizen: You were trying to squeeze it under your thunderstorm policy since you didn’t have the hail insurance.

Yeatts: We had the hindsight to keep thunderstorm and wind. We told the pilot insurance company that the damage was coming under thunderstorm policy and it was for them to challenge it; but if they did, they might suffer from a claim of unrealized profits because of the delay in sales of the damaged inventory.

Kaizen: Did the insurance company go for it?

Yeatts: Yes, I had proof of the damage caused by the wind and storm. They accepted our evidence and we got the check for the damage.

I went to see my boss, thrilled with the check. He looked at the check and asked me, “What am I supposed to do with this? Stop the production line and the paint tunnel to get these cars fixed? You better get your act together if you do not want to be a satellite.”

Kaizen: So you were almost back to first base?

Yeatts: Yes, I could not sleep that night, but the next morning I said, “I have the money” — the check was not deposited — and figured out that this represented a 35% discount of the price list for a new Falcon. I saw the marketing director and said “Let’s have a sale with a 35% discount.” The options would be that the dealer or the customer fixes the bumps and they individually negotiated the split of the discount. Let the market work it out. The plan was accepted and it was a success because it increased market share and future sales of the after-market for more vehicles.

Kaizen: So everybody ended up happy. Did you also reinstate the hail insurance?

Yeatts: No. In the previous 30 years there was no hail.

Kaizen: It was a one-off then. How long were you with Ford?

Yeatts: Six years. I went back with Ford to Dearborn Head Office to the Profit Analysis Department for Latin America. That’s the area where the affiliates come up from Latin America to review performance of the past year against the approved budget and submit next year’s budget for approval

Kaizen: Your wife is Argentine?

Yeatts: Yes, and we had four small children. My wife wanted to go back to Argentina. Ford did not want to send me back.

Kaizen: Were you locked in?

Yeatts: No. It’s a free labor market. I sent out about 100 résumés.

Kaizen: To companies here in Argentina?

Yeatts: No, to companies based in the U.S. with operations in Argentina.

I got three job offers, and I finally I took a job with Atlantic Richfield as Overseas Financing Manager, after turning them down twice because I did not like the Vice-President in charge of Personnel. At the time I turned them down, I had two job offers (Massey Ferguson and Xerox). I later called them to tell them I had accepted Atlantic Richfield.

Kaizen: How old were you at this point?

Yeatts: I was 38.

Kaizen: Did you ever see the Vice-President in charge of Personnel?

Yeatts: No, I never did.

Return to Argentina

Kaizen: How did you get back to Argentina?

Yeatts: A year later they called me from Massey Ferguson. MF had bought the company Hanomag Argentina, which we had discussed previously, and they offered me the job of Financial Director and Board member. The salary was 50% of my existing salary. I said I was not interested in the job or the salary. I said I would accept the offer of Chairman of the Board and a salary twice the amount offered, plus a defined performance bonus.logo-massey-ferguson

A month later they agreed with the following conditions: I would go down as Financial Director and Board member at the salary requested, and before six months I would be nominated Chairman or the contract would cease upon payment of one year and expenses incurred to return to New York. I accepted.

Hanomag is a known tractor in Europe — in Germany. They built tanks in the WWII. The company had been getting ready for production, naming dealers and production suppliers throughout the country.

The Argentine Secretary of Industry invited us to visit with him. He told us, “I’ve heard that you’ve started production and everyone is very excited. But you know that you cannot manufacture Massey Ferguson tractors.” The president of MF said “What do you mean?” “There’s a law here that does not allow imports and protects local companies such as Fiat, John Deere, Deutz and Hanomag against competition. The counterpart of this is that you have to source a high percentage of local content in your tractors like the rest of the industry.” The president of MF said, “We bought the shares to build MF tractors.”

Campbell, the president MF, then said to me, “We’ve got to fight the government and build Massey Ferguson tractors.” I said, “We are taking undue risks in building tractors that we cannot sell domestically or export.” Campbell said, “You are with me or against me. If you are against me, I will fire you tomorrow.”

Kaizen: A high-risk choice.

Yeatts: A very high-risk choice. This was about three or four months after I arrived here. I had bought a house and the kids were in school. And he’s telling me, “We are going to build these tractors as fast as we can and put them in front of the fence.” So the market starts to see us building tractors and we started developing supporters among our suppliers and dealers in this same quarrel.

Kaizen: Learned that lesson.

Yeatts: The government comes in; they caught us. We had tractors all over the place. It was the talk of the industry: “What are these guys going to do with the tractors?”

Kaizen: You were just building tractors? Were you waiting for the government to come to you?

Yeatts: Creating pressure. Not only did we have the tractors, but we had the suppliers on board. But we do not build to keep; this is not a museum. We build to sell. So the government says, “You guys are going to go to jail.”

My mind had started to change with all of this government stuff when I saw Falcon cars being sold in Argentina for two to three times more than they were being sold for in the United States—because the government is protecting these one-source suppliers.

Anyway, they said, “You can’t do it. You cannot sell in Argentina and you cannot export. We are the authority here.”
– “Do you believe in private property?”
– “Yeah, sure.”
– “Well, I am on my private property and on my private property I do as I like. And as a matter of fact, we are increasing our production.”
– “You cannot export; you cannot sell.”

The offices in the States, by then, knew that we had a quarrel. It was divided.

Kaizen: So it was head-to-head and who would blink first.

Yeatts: Right. The head office thought that this was a bureaucracy that could be fixed. So they transferred Campbell to a big job in Rome.

Kaizen: Even though this problem in Argentina was not yet resolved?

Yeatts: Not yet resolved. I said, “You can’t leave now!”

Kaizen: You were left holding the bag.

Yeatts: Yes. Campbell said, “I’ll tell you what we are going to do. You are going to go see the head of the Agriculture and Farm Show and say that you want this piece of land at the entrance of the show. They will say it’s not possible. They will refuse. You then give them a signed check by both of us and tell them you will write the price for the lease of 30 days. Tell them that Massey Ferguson is coming to Argentina to change the method that you work the land, and you should be with us. We have a lighter tractor with lighter implements and lower costs. We are bringing state of the arts to the agricultural sector.”

Kaizen: Innovation.

Yeatts: Yes, but not solely innovation — the price! Forty percent of all of our tractors have interchangeable parts. This means less money for us because when we ask for a valve, we can ask more from that valve and get it for a lower price. That means less stock for dealers. It means better service because they have the spare part available.

Kaizen: So the idea is that if you can get into this agriculture show you can demonstrate what you have, the customers will be excited, and you’ll have more pressure on the government?

Yeatts: Yes. If you want to get things done here — who do you have to be close to? The government. Even though the people would say that this tractor is very good, politics will block it.

So we got the piece of land right on the entrance, and in the opening the Minister of Agriculture comes to see a tractor he had not seen before. Pictures were taken of him sitting on a MF tractor. The following day, La Nacion, the most important paper in Argentina, printed a picture of the Minister of Agriculture sitting on a tractor that is not authorized to be manufactured. Well, it did not say that, but all hell broke loose.

Kaizen: Fireworks over policy?

hanomagYeatts: Yes. I’m like, “Look, we are bringing new technology to a closed market. Why don’t you have advances in technology? Because you have price controls! This is what happens.”

So we got the “Okay.” We could build tractors. One qualification: these dummies said, “They must be called Hanomag.” We had in small letters Hanomag and in big letters model Massey Ferguson. We went from the lowest market share of 7% to being leaders with a 35% share in four years.

Kaizen: A success story.

Yeatts: Yes. And all the board was under 35 years old, replacing a board of about 60.

Entrepreneurship

Kaizen: You then decided to become an entrepreneur in oil and gas. How did that decision come about?

Yeatts: After seven years at Massey and seeing all of the big bonuses I thought, “There is so much money to be made out there, and here I am working for a salary.” And if someone called and said, “I need you here in Des Moines, Iowa at 8: 00 a.m. Monday” — I’d have to go. So I said, I want to go out on my own.

I resigned and set up a company, putting in my savings, my personal credit line, and I sold shares to make a down payment for the purchase of German earth-moving equipment. I went into this line of business because front-loaders are similar to tractors. I obtained contracts from the two largest road building construction companies here in Argentina. I planned to discount these contracts with banks to pay the import tariffs for the machinery. In the meantime, the two construction companies went into Chapter 11 because the government was not paying for their road-building contracts.

Kaizen: Oh my.

Yeatts: So the bank says to me, “No money. Both companies are in Chapter 11, and they will not pay you and you will not pay me.”Tierro_Argentina-oil

So I decided after a lot of research to ship them to Tierra del Fuego, where there are no taxes at all.

Kaizen: There are no taxes in southern Argentina?

Yeatts: Yes, there are taxes except in Tierra del Fuego, which is a big island. The capital city is Ushuaia; it’s the southernmost city in the world.

I had never been there before and had no idea of what I might encounter as far as work is concerned. My maximum concern was I had no cash to nationalize the equipment in Argentina.

Kaizen: So be tenacious? Work the system to find the opportunity and push hard to make it happen?

Yeatts: Even in the middle you think it isn’t going to happen, but there is always opportunity. A lot of times you don’t find it, though.

Kaizen: Did you leave construction?

Yeatts: No, I went to Ushuaia (a city 3,010 kilometers south) where 14 pieces of equipment landed. This was in 1979. The whole town was at the dock asking if new roads, a new town, or what was going to be built. In Ushuaia the only thing that existed was deep-sea fishing and a couple of warehouses to assemble Philco radios for export to Argentina.

I decided to visit Rio Grande, in the north of Tierra del Fuego, which is an oil exploration small town. As I drove north I saw many oil pumps and drilling rigs which I had never seen in my life—nor did I know the difference between them. The next week I visited them to try enquire who the owners of the rigs were, who their customers were, where the rigs were bought, how much was invoiced per hour or meter, and how many days they worked during the month. After two days at my hotel, I realized this was a tremendous opportunity to make money, but my first step would have to be earth-moving to open roads and set up camps.

In the next three months I was the main supplier to drilling-rig companies for opening road and setting up camps, since I took a 40% discount to the going rate in Tierra del Fuego. At the end of the year, I was a sole supplier of four companies and “persona non grata” in Rio Grande.

After two years of earth-moving equipment in Tierra del Fuego, I decided I wanted to get into the oil-drilling rig business. So I went to the U.S. and visited 20 rig companies to see if they were interested in working in Argentina. None were interested. One of them had two rigs in Bolivia and they were bringing them back to Texas. I suggested that they leave them in Argentina because the rate here was US$ 30,000 versus US$ 8,000 in the States. They agreed and we (an Argentine friend and I in the oil business) set up Cadesa S.A. oil drilling. They kept the 49% and we held 51%.

Kaizen: They went for the deal?

Yeatts: Yes. We brought them to Tierra del Fuego and started drilling for the state company YPF, and other private companies. The main business came from YPF, and it was supplied by four drilling companies which now become our competitors. We sold the earth-moving equipment, invested in two oil rigs, and entered the government bids for exploration and production wells with 30% discount.

As a result of the collapse in the oil rig market, we decided to buy four oil rigs sold by banks in Texas at 20% of their value and brought them to work in Argentina.

A good friend of mine in the oil rig business said there was an opportunity to buy six horizontal drilling rigs as a package, since the seller was getting out of the business and there was opportunity abroad in countries such as Syria and South Africa, where U.S. companies could not work. We bought those rigs and set up a company abroad to work in the Middle East and Africa with Latin American staff.

Kaizen: What year was this now?

Yeatts: It was in the early 1980s.

In the late 80s I started to investigate why the Argentine subsurface was owned by the federal government and/or the provinces. In the United States, you own the surface and the subsurface. You can sell the subsurface for drilling. We found an Argentine company called Sol that had property rights including subsurface. That company was one of the first companies to find oil in Argentina. They went on the Stock Exchange in 1920 in partnership with the Anglo-Persian Oil Company (today British Petroleum). We started buying shares of Sol and sold the oil drilling companies, which gave us cash to buy 40 percent of Sol in the stock market.Yeatt-Four-Seasons

Kaizen: Who is the “we”?

Yeatts: I had a partner at the time we set up Cadesa, an oilman named José Esteves. Later, when we bought the six horizontal drilling rigs, we took on another partner called Peter Eberly who had extensive experience in finance and oil drilling business. We finally took on a fourth partner, José Estenssoro, who brought to the partnership extensive experience in the worldwide oil business, to buy a controlling interest in Sol. In order to raise cash to buy Sol, we sold both the domestic oil drilling and overseas horizontal drilling companies.

Once we bought Sol, we reach an agreement with ANCAP (Uruguayan State Oil company) to develop 350 service stations with the logo of Sol, acquiring gasoline to supply these stations from their refinery in Montevideo, Uruguay. Sol would issue shares to allow ANCAP to make a capital contribution to acquire 30% of the share capital.

After we bought Sol we knew that we needed to have a dependable supplier for upstream, so we decided to look in the domestic and neighboring countries where we could source energy demands

Kaizen: “Upstream” means?

Yeatts: Exploration and production. Exploring is looking for oil and gas which carries the biggest risks and production in bringing to the surface the oil found in the subsurface.

We heard from one of the partners that a U.S. company, Oxy (Occidental Petroleum Corporation) was getting out of Bolivia since they were not being paid for the gas they delivered to YPFB (the Bolivian state-owned oil company), so we went to talk with them and bought, together with Diamond Shamrock, all their operations in Bolivia 50-50.

We became the largest gas producers in Bolivia. The gas that we delivered to YPFB, the state turned around and sold to Argentina. So we negotiated with the Bolivian government that the gas that we supply to them and they sold to Argentina, we would get paid either by them or Argentina, since we were an Argentine company. The government agreed to pay us, and we operated the company for seven years and sold the Bolivian operation to a Dallas-based company

Kaizen: More political clouds?

Yeatts: We saw economic clouds coming, so that’s the reason we got out of Bolivia and started considering the same for Argentina. We offered the controlling interest in Sol to ANCAP, which held 30% since they had an interest in the Argentine oil market because of Mercosur. We established a price for Sol in year 2000 and offered to transfer our shares plus the board nomination for no down payment. In two years, the amount agreed upon had to be paid to the stockholders or return the company. All value added to the initial price we had agreed upon in 2000 would be theirs. If there was a lower price versus the net worth, we would absorb it, assuming good business practices had been followed during that period.

Kaizen: That was their value-added.

Yeatts: Yes. So we sold the company to them.

Kaizen: By now this is a very large operation; it’s been built up and vertically integrated. So this is a major transaction.

Yeatts: We would never sell a company without down payment and due diligence. We sold it under these conditioFundacion-Atlas-logons because it was ANCAP owned by Uruguay.

Foundation Work and Mentor Advice

Yeatts: So there’s the end. I’ve been involved in foundations since I arrived from the United States in 1972 as president of Massey Ferguson. At the beginning we were a group of eight trying to start free-market foundations. The first was ESEADE in 1978; I was a co-founder, treasurer, board member, and, later, Chairman. Later I joined Junior Achievement Argentina, where I was Chairman and member of the founders committee. In 1998 I was co-founder and chairman of Atlas, which develops ideas of a free-market society.

Kaizen: That’s an impressive organization.

Yeatts: If you are not involved in the general protection of individual rights, you will not have private rights to protect in the future.

Kaizen: Looking back onto your entrepreneurial career, you’ve been in some challenging businesses and had a lot of tough fights to make things happen. Is it part of your personality that you enjoy that rough-and-tumble?

Yeatts: Well, I wouldn’t say I enjoyed it.

Kaizen: But you could have had a successful career in a lot of places in the world, given your talents and abilities. But you did choose to go into Argentina, which is a tough business-government environment. And you chose fields that require a certain amount of tenacity and fighting, so it gets your adrenaline going. Is that just something you had to do, and since you had to do it, you made it work?

Yeatts: Let’s put it this way: The hail problem — it was something I had to do to get out of that, right? Otherwise, they would have kicked me out and I would have never gotten a job again because of making such a gross mistake. Massey Ferguson — the lesson was tenacity to get it through, because the ground rules of government were not logical.

Kaizen: The art of exerting the right kind of political pressure to get the changes so that the market opens up for you?

Yeatts: Yes.

Kaizen: Psychology at work.

Yeatts: Sometimes you get into a situation which you can lose, but if it happens you have a fallback alternative. You take on the challenge. This is what happened in New York where I had two job offers and I could play games. What would have happened if I did not have them? I would have acted differently.

Kaizen: But if the fight is brought to you, you don’t back down.

Yeatts: If I didn’t have a job offer, I would have had a very different personality. But I did have two job offers which would land me in Argentina, and this company was drilling for oil offshore, which is always a potential.

Kaizen: You said that in all of these battles and problems, when you are half-way through—that even when you don’t think it will work, you still fight on.

Yeatts: Yes. There is a saying in Argentina, “Never hang horses in the middle of the river.”

Kaizen: Why?

Yeatts: The trouble is that when I am in these situations, I don’t sleep well — I’m trying to think. The next day I am worse. Like I remember those 48 hours I spent on the goddamned hail. I went to see the general manager of the insurance company, who was also a stockholder, and I almost had the guy up against the wall because you’re telling me that it was the hail and you don’t know what the wind power was? But I had spent 40 hours without sleeping.

Kaizen: Your fighting spirit comes out.

Yeatts: Like when you get an animal in a corner. A cat, for example. Cats are usually very nice, but if you get one in a corner …

Kaizen: Right. Looking back again on the entrepreneurial part of your life, it sounds like you really enjoyed the wheeling-and-dealing, putting deals together, and spotting opportunities and the right people. Why do you find that as attractive as you seem to?

Yeatts: It’s like your brain’s game, you know. Like when the guys from the rigging company said, “We have no partners. We don’t want to deal.” But you have investors, right? What would your investors think when you could be making $30,000 instead of $8,000?

Kaizen: So there is an arbitrage opportunity for them and you spot that opportunity. You also know how to package it so that it is a win for you and also a win for them.

Yeatts: I try always to have a win-win for both. Because if it’s not, I don’t care how solid the contract is, you don’t have a deal — you have a headache.

Kaizen: And some salesmanship for you to put together the whole package.

Yeatts: Right. You need salesmanship and, also, what is the limit — the “deal breaker.”

Kaizen: In your career, you’ve had set-backs and challenges. You’ve also had to make some gutsy decisions; you’re always on the lookout for opportunities, you know how to package things to make connections, and you know how to talk to people and read psychology.

For entrepreneurial young people starting out, can you give them advice about how to best train themselves to be able to put that package together?

Yeatts: I would say Junior Achievement does a good job training youth (16-17 years old) to select a product and go out in the market and compete for the consumer’s dollar. You must be convinced that you are supplying a need or a desire, and then see who your competitor is and what he is offering on price, quality, delivery, assurance, etc.

Kaizen: Small scale.

Yeatts: Yes. You have different groups that are out to get the prize: the employees, the suppliers, the stockholders, the customers, the distributors, and finally, the government. No risk, just opportunity to share your ideas and profit. The entrepreneurship is a balancing act to make sure the ball does not fall.

I remember at NYU we had a course where you had an amount of money given at the start of the semester and you had to invest it in NYSE shares you picked. We would check them every week, at the end of the year, you were a winner or a loser.

Kaizen: So the actual boots on the ground, real-world experience is the best entrepreneurial training? Do you de-emphasize formal, business school education?

Yeatts: No. I would say that business schools should emphasize more courses connected to real-world experiences and help start-ups with mentors (entrepreneurs) to discuss, 15 minutes per month, their strengths, weaknesses, opportunities, vulnerabilities of their business, and receive an experienced opinion of their course of action.

Kaizen: But it has to include practical business education?

Yeatts: Practical. You make decisions and you make mistakes—practical. I remember seeing something like that in CalPoly, California, at an agricultural school there. Students would rent a plot of land and put tomatoes on it, or whatever. You lease land and pay, and when you harvest, if you have a profit you keep it but if you lose you pay. So it is a real-world experience, but very small.

Kaizen: About opportunity-spotting, you’ve been in a wide number of fields in different parts of the world. The cognitive ability to spot opportunities — is that something that can be trained. Or is it a matter of being a people person and talking to a lot of people? Or of reading a lot of stuff?

Yeatts: First, you need to pay attention. Why is this done here and not at home? That is absolutely key because human beings are all alike in the end?

Kaizen: So asking the right questions?

Yeatts: Observation. Yesterday I spent the day with sixteen startup companies. I’m in an organization, so I was seeing what they want to sell, what they are doing, what is their idea.

Kaizen: In a mentoring role or as an investor?

Yeatts: Mainly as a mentor, because they are very small. The first stage is $25,000 to get to the market.

I was talking to a guy from Colombia who had three days here. I asked, “Why did you come here?” He said, “Because the largest truck market in South America is in Brazil and the second largest is in Argentina. The third is Colombia. I don’t want to go into the lion’s mouth, which is Brazil.” I asked, “What’s the deal?” He said, “Twenty-five percent of the trucks in Argentina come back empty from whatever delivery they did. They bring wine from Mendoza and come back empty.” He saw an opportunity just like that and he had only been here for three days.

Kaizen: He wants to do a brokerage service for the return trips that are empty?

Yeatts: Yes, what he wants is to get a commission for getting business for the return trip.

I asked him, “How are you going to find trucks traveling without freight?” He wasn’t sure. I said, “Why don’t you go to the Rural Society in each town because people who have a farm normally have a truck — not their own, but the Chamber of Agriculture’s. So maybe the farmer who seeds corn can bring back an implement or whatever.” The point is that I was trying to test where he was getting his information.

Kaizen: When you are mentoring younger people, is there a piece of advice you find yourself giving to them most often?

Yeatts: Perseverance. And when you have a crisis, always look for the opportunity. But you need perseverance, and you need guts to continue to look when the wave is coming.

Kaizen: There is always an opportunity there?

Yeatts: I don’t know if always. But if you have guts and perseverance when things are about to fall, you find the best opportunities.Yeatts-sm

This interview was conducted for Kaizen by Stephen Hicks. For more information about Guillermo Yeatts please see his website.

Read more Kaizen interviews with leading entrepreneurs.

© 2014 Stephen R. C. Hicks. All rights reserved.

Sports entrepreneurship: Three interviews (Snider, Reinsdorf, Checketts)

Sunday, August 10th, 2014

Here are three of our Kaizen interviews on entrepreneurship and ethics in sports:

51546099 Ed Snider, owner of hockey’s Philadelphia Flyers and basketball’s Philadelphia 76ers: “I think when you’re young you’re a bigger risk-taker than when you’re older. And I think when you’re young it’s not the risk as much as it is you have this idea and you feel like it’s going to work. And then you go for it. When I was a kid I was always doing things—selling magazines, I had a paper route. In college I hired all of my fraternity brothers because I had these lots I could get Christmas trees or Easter flowers from. In those days all of the kids in the fraternities would go to work at the post-office for Christmas. So I’d hire them, I’d pay them more and say, ‘We’re going to have Christmas tree lots.’ Stuff like that—I was always looking to do something.”

Reinsdorf webJerry Reinsdorf, owner of basketball’s Chicago Bulls and baseball’s Chicago White Sox: “First of all, if you want to be successful, you have to follow basic business principles. The problem in sports that keeps people from doing it is that every move is chronicled by the media. There are so many people who own teams who are afraid to be criticized by the media, so they make stupid decisions just to make the media happy. I, on the other hand, delight in doing what the media doesn’t want me to do. And that’s not a good trait either. You have to make your decisions without regard to what the media thinks. Sometimes they’re right, and sometimes they’re wrong.”

Checketts webDavid Checketts, owner of soccer’s Real Salt Lake and hockey’s St. Louis Blues: “I live by a standard that Steve Covey taught me, which is that a person will do more with their bad idea than they will with your good idea. So I try to hire real capable, competent people, put them in place, make sure that they have the right incentives and motivation, and then give them the freedom to do the job. The skill that I had to learn was to hold them accountable, regardless of my personal feelings about them. Because I am somebody who builds friendships and relationships quickly and who really wants people to succeed. So it makes it hard. I stuck with some people too long in some instances.”

Working Papers in Ethics and Entrepreneurship — updated

Wednesday, June 25th, 2014

apple-88x50The Working Papers in Ethics and Entrepreneurship series has been updated to include Stephen Hicks’s “Educating for Entrepreneurship” working paper.

Previous working papers in the series are “Ethics and Entrepreneurship” (2008), “Entrepreneurial Ethics and Corporate Social Responsibility” (2010), and “Public Policy, Ethics, and Entrepreneurship” (2012).

“Educating for Entrepreneurship” — Stephen Hicks working paper

Friday, June 13th, 2014

The text is below and in PDF format. The essay is also forthcoming in Polish in the education journal Przegląd Pedagogiczny. Comments welcome.

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Educating for Entrepreneurship (Working Paper, June 2014)

Stephen R.C. Hicks
Department of Philosophy and Center for Ethics and Entrepreneurship
Rockford University
Rockford, Illinois, USA

Introduction: Japanese visitors to American schools

Recently a team of Japanese investigators come to the United States to study its school system. Japan is a successful nation — it is prosperous and dynamic in many areas. But the team had a question: Why does our country have so few innovators?

They looked to the United States with its many centers of innovation: Silicon Valley technology, Hollywood movies, New York finance, Broadway theatre, and others. In the business world, they noted the many entrepreneurs such as Steve Jobs, Bill Gates, Andy Grove, and Mark Zuckerberg.

So the Japanese investigators had a question: What are American schools doing so well to generate so many creative, innovative, entrepreneurs? What is their “secret ingredient”?

The question is important, because we live in an era that, for the first time in history, is taking entrepreneurism seriously.

The Business-Employment environment is different in the early twenty-first century. Business professor Steven Rogers has pointed out: “In the 1960s, 1 out of every 4 persons in the United States worked for a Fortune 500 company. Today, only 1 out of every 14 people works for these companies. Employment at Fortune 500 companies peaked at 16.5 million people in 1979 and has steadily declined every year to approximately 10.5 million people today” (Rogers 2002, p. 42). The employment market has shifted from a relatively few large corporations to many smaller entrepreneurial firms.

The Economics literature has been transforming itself into what economists Arnold Kling and Nick Schulz (2011) call “Economics 2.0.” For many generations, economics ignored or downplayed the unpredictable and idiosyncratic entrepreneur and focused on abstracted, impersonal models. Contrarians such as Joseph Schumpeter (1950) and Israel Kirzner (1973) argued the importance of entrepreneurship, but they were lonely voices in economics through most of the twentieth century. Only in the last twenty years has mainstream economics begun the project of recasting itself on the basis of entrepreneurship.

In the Psychology and Ethics literature, we see a movement toward understanding entrepreneurism’s importance as a vehicle for a flourishing life. Not only in one’s work life but in one’s overall life, more psychologists are stressing autonomy, self-directedness, and creative exploration as foundationally positive ingredients in a healthy life (Seligman 2012). And moral philosophers are increasingly making the connections between entrepreneurial character traits and moral virtues in the context of making one’s career an integral part of an overall flourishing life (Hicks 2009).

So in this new, entrepreneurial century, the question for us as educators is: How do we help students prepare for an entrepreneurial economy and an entrepreneurial life?

To return to the Japanese investigators’ question: I think it is important but mis-focused. The “secret ingredient” of entrepreneurism is not in the schools. Most U.S. formal school is government schooling, and most government schools are not good at teaching entrepreneurism. Some schools in prosperous neighborhoods are solid, but most schools are weak, some are poor, and many are terrible.

Consider the common phenomenon of kids who start school when they are five years old — they are full of energy and curiosity and excitement — but after a few years they come to dislike or even hate school. They are bored. They don’t like science and they don’t even like art. If you ask them, as parents do, what their favorite subject is, they will say that it is lunch and recess when they are allowed to go outside and play. And for several decades we have seen a decline in basic-competency test scores and an increase in students graduating with weak reading and math skills, minimal scientific and historical knowledge, and so on.

Yet the U.S. does produce a large number of creative individuals. How is this possible?

In my view, what American culture does well is what is does outside of school. After-school hours are busy with extracurricular activities such as drama and chess clubs and sport and debate teams (Petrelli, 2012). American culture is also characterized by significant parental involvement in music lessons, trips to museums and galleries, sports leagues, summer camps, and travel. And, of course, American culture is prosperous, which means it has much wealth to support all of these informal learning opportunities.

Music education in the U.S. is a good example. Everyone loves music, and American culture has much creativity in music — rock bands, jazz clubs, Broadway musical theatre, symphonies in most cities, and so on. But that musical activity did not come out of music education in schools. Kids naturally love music, but they typically tolerate or dislike their music classes in schools. When it is an elective, most students choose not to take it. Instead, those who become musicians and music enthusiasts are inspired from popular culture, by learning from their friends and families, or by extra-curricular lessons paid for by their parents.

All of this points to a challenge for formal educational reform. Schooling is currently characterized by two problems: (1) It wastes much of its students’ time, as measured by the students’ self-reports of how bored and otherwise disengaged from school they are; and (2) it misses the opportunity to use its considerable resources to develop young adults prepared for entrepreneurial careers and entrepreneurial living.

steve_jobs_by_februarymoonSteve Jobs — who as a young man disliked school and dropped out of university — perhaps put the entrepreneurial aspiration best: “Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. And the only way to do great work is to love what you do. If you haven’t found it yet, keep looking. Don’t settle. As with all matters of the heart, you’ll know when you find it. And, like any great relationship, it just gets better and better as the years roll on. So keep looking until you find it. Don’t settle.” (Jobs 2005)

So how can we re-focus the schools to enable students to take on that great life challenge? One element must be educating for entrepreneurship.

The entrepreneurial process

Let us start by articulating explicitly the nature of entrepreneurship. Consider the stereotypical entrepreneurial process.

The entrepreneurial process begins with an informed and creative idea for a new product or service. The entrepreneur is ambitious and gutsy and takes the initiative in developing the idea into a new enterprise. Through much perseverance and trial and error, the entrepreneur produces something of value. He or she takes on a leadership role in showing consumers the value of the new product and in showing new employees how to make it. The entrepreneur trades with those customers and employees to win-win results. He or she thus achieves success and then enjoys the fruits of his or her accomplishment.

To expand upon each italicized element in that description:

Entrepreneurs generate business ideas and decide which ones are worth pursuing. In the process of coming up with informed, creative ideas, entrepreneurs speak of vision, “thinking outside the box,” imagination, active-ness of mind, and “light-bulb moments.” Having generated ideas, they speak of exercising judgment: Which ideas are actually good ones? Can the product or service be developed technically? Will it sell? What does the market research show? Entrepreneurs exhibit a commitment to cognitive achievement—intellectual playfulness, research, experimentation, analysis, and judgment. As one venture capitalist put it, “Money does not get the ideas flowing. It is ideas that get the money flowing.”

Ambition is the drive to achieve one’s goals, to be successful, to improve oneself, to be better off, to be the best than one can be. Entrepreneurs feel more than the often-abstracted and idle wishing — “Wouldn’t it be nice if I were rich and independent?” — that many people experience. Ambitious individuals feel strongly the need to achieve their goals.

Entrepreneurship requires initiative. It is one thing to have a good business plan; it is another to turn the plan into reality. Entrepreneurs are self-starters who make the commitment to bring their good ideas into existence.

Yet a new enterprise involves venturing into the unknown, a willingness to take on obstacles — including the possibility of disapproval and mockery — and the possibility of failure. Consequently, entrepreneurial activity takes courage — the willingness to take calculated risks, to be aware of possible downsides while not letting the fear of failure or disapproval dominate one’s decision-making.

Entrepreneurial success is almost never easy and overnight, so it requires sticking with it through the difficulties and over the longer term. That is to say, perseverance is essential. Entrepreneurs must persevere through the technical obstacles in product development, in the face of the naysayers who say that it cannot be done or who are otherwise obstructionist, and in the face of their own self-doubts. Entrepreneurs must be good at short-term discipline and at keeping their long-term motivations present in their thinking.

The development process is almost always a trial and error process, requiring that the entrepreneur make adjustments based on experience. Successful entrepreneurs adjust to real-world feedback, which means being able to admit mistakes and to incorporate newly-discovered facts, rather than pig-headedly ignoring anything that is a threat to their pet ideas.

Productivity: The development process hopefully culminates in a working product. If so, the entrepreneur has added value to the world by creating a new good or service, making it work consistently, producing it in quantity, and continuing to improve the quality.

Those who transact with the entrepreneur, whether as customers or as employees, engage in win-win trade, exchanging value for value. Socially, trade is a process of dealing with others on a peaceful basis according to productive merit. It requires protecting one’s own interests and respecting the other party’s doing the same, exercising one’s skills of negotiation, diplomacy, and, when necessary, toughness in order to achieve a mutually beneficial result.

Entrepreneurs also add value by bringing leadership to the trade. Entrepreneurs are creating something new, so they are the first to go down a new path. Those who go first set an example for others to follow and, especially in the case of a new product or service, they must show new customers the value of the new product and service and they must teach new employees how to produce the new product or service. Accordingly, entrepreneurs must exhibit leadership in showing others the new way, encouraging them through the learning process, and in marketing the new. Part of the trade, then, is that the customer or employee is shown a new opportunity and is enabled to take advantage of it, and in turn the entrepreneur receives compensation for doing so.

Finally, the entrepreneur experiences success and the enjoyment of success. Entrepreneurial success yields both material and psychic rewards—both the goods that financial success can bring and the experience of financial independence and security that go with it. And of course there is the psychological reward of achievement: experiencing enhanced self-respect and the sense of accomplishment in what one has created.

If we put those traits in a table, we get the following:
E-success-trait

Implications for Education

Now let us turn to education. If entrepreneurship involves the successful exercise of certain traits, where do those traits come from in the first place? Can formal schooling instill, develop, or at least enhance those characteristics in younger students? If we take entrepreneurism as lens for education, then can we teach creative exploration, courage, initiative, and so on?

If we contrast much of traditional and current schooling, what do we see? We do not see much uniqueness, activity, or experimentalism. Instead, students sit in straight rows of desks. Students do what the teacher and textbook say. Every student does the same thing at the same time in the same way and takes the same standardized tests. That is, we see uniformity, obedience, passivity, and rote learning. This stereotype is perhaps often softened in practice, but it has been the default model for teachers with classes of thirty students and standardized, state-established curricula. So while there is useful knowledge in the curriculum, the embedded lessons students also learn are: Do what the authorities say, Do what everyone else is doing, and The correct answers are pre-set and already known. (And we sometimes wonder why we have so many unmotivated, dependent, and timid students — or students who, out of sheer boredom and the chaotic need to be themselves, rebel in destructive ways.)

So if an explicit goal of education is to cultivate the exploration mindset of entrepreneurship, as a first step let us consider getting the students out of the rows of seats and letting them interact with prepared materials on their own.

I have three suggestions in this direction.

1. Develop formal, age-appropriate exercises in entrepreneurial character-trait development

As educators, we fill in the following table with exercises appropriate for children of different ages.

E-success-trait-education

To develop one example further, let me focus on courage.

Courage is the virtue of acting as one judges best despite fear. Fear comes in many forms — fear of pain, fear of disapproval, fear of feeling like a failure, fear of loss of love, money, and so on. Life involves many risks, and risk is the potential for failure, so having the character resources to be able to handle risk is an important part of success in life. One direct connection to entrepreneurship is the many people who do not attempt it due to fear.

So one thread within entrepreneurial education is to develop formal exercises that embody risk and help the child learn to manage it.

For example, younger children learn skills that involve physical risks: going down a slide, jumping into a swimming pool, learning to ride a bicycle. Such activities and dozens more can be formally identified and introduced in schools as exercises. They can also be scaled up as children age and mature in their skill and character. Eventually, they will be able to handle mixing chemicals, climbing rock-walls, doing bungee-jumps, and driving cars.

Other risks are more psychological. For younger children, these can include greeting and conversing with new adults whom one’s parents have invited for dinner, raising one’s hand to ask the teacher a question in class, or expressing an opinion that differs from one’s classmates’. Again, exercises to model these can be introduced in schools and scaled up as children mature so that eventually they will be able to handle comfortably giving a speech before a large audience, asking someone for a date, and arguing civilly with their teachers about political and religious differences.

Courses in acting and public speaking are natural homes for some of the exercises for developing psychological courage, just as courses in physical education are natural homes for developing physical courage. So building consciously and systematically upon activities already present in those courses and extending them across the curriculum is a good starting point.

And what holds for developing courage also holds for developing initiative, experimentalism, perseverance, and the rest of the success traits.

2. Learn from the Montessori method

My second suggestion is, if one is not already aware of it, to explore the Montessori approach to education. Maria Montessori opened her first school in Rome in 1907, and for over a century her method has spread, mostly as a grassroots phenomenon, all over the world.

The scholarly literature is beginning to study Montessori’s results systematically and to pronounce upon them positively (e.g., Rathunde and Csikszentmihalyi 2005 and Lillard 2007), but for now let me just give two indicators.

Anecdotally, Montessori advocates point out that four of the leading entrepreneurs of our generation — Larry Page and Sergey Brin of Google, Jeff Bezos of Amazon, and Jimmy Wales of Wikipedia — were all Montessori educated (Brin and Page 2004).

More formally, Hal Gregersen reports a striking statistic about the proportionately large number of innovative entrepreneurs who were Montessori-educated. After interviewing a large number of entrepreneurs, identifying their shared characteristics, and investigating how they became innovative, Gregersen notes: “It’s fascinating when we interview these famous entrepreneurs to realise that they grew up in worlds where adults paid attention to these innovation skills. Most often these adults were parents and grandparents, but in about one-third of the cases they were master teachers at Montessori or Montessori-like schools” (Gregersen 2011, italics added).

3. Emulate the Network for Teaching Entrepreneurship and Junior Achievement

A third option is to incorporate methods from currently-supplemental education programs that explicitly tie education to preparation for entrepreneurship. Two examples are the Network for Teaching Entrepreneurship (NFTE) or Junior Achievement (JA), both of which have chapters all over the U.S. and in many other countries.

The methods they use can apply to all children, but as often as not NFTE and JA work with students in failing schools, perhaps because the administrators of such schools are more desperate and so willing to experiment.

Steve Mariotti (2009), the founder of NFTE, began his teaching career at one of the worst of New York City’s public schools. He began by using traditional methods but found that they failed to teach the students anything. Then he realized that children, especially poor kids, are often fascinated with money but know nothing about it or how to make it. So, drawing upon his own entrepreneurial experience, Mariotti changed his methods and explicitly began teaching his students how to start their own businesses. The students’ attitudes toward him and their education altered dramatically. Their profit motive kicked in, and they began to see a realistic potential for independence and a better life. Thinking about business led them to see the need for other skills — reading, writing, math, organizational, and social — and then they also became motivated to learn from their textbooks and their other teachers in math, writing composition, and computers. Students in Junior Achievement programs have achieved similar results (see e.g., Marty 2011).

Closing anecdote: dirt bikes and dads

In the above comments, I have focused on formal education and argued for an increased place for entrepreneurism within it. I would like to conclude, though, by not overlooking the important role that parents play in their children’s education by giving one, hopefully inspiring, example from my own neighborhood. It is an anecdote that I think captures the essence of education.

On my drive home from work I passed regularly some vacant land upon which kids with their bikes had created paths and piles of dirt to jump over. Over time, the kids’ efforts had become more elaborate. They had built some crude ramps with wood (likely stolen from nearby construction sites), dug shallow pits and let them fill with water, and they had extended the criss-crossing network of paths to ride upon. I confess to some envy at the sight of so much fun — being a middle-aged man who wanted again to be a kid out there riding my bike up the ramps and jumping the puddles.

But what really caught my attention was an evening when there was suddenly much more activity at the dirt bike site. The fathers had gotten involved. So I stopped and got out of my truck and went to watch. The ramps were now sturdier and safer, and the activity was organized. Kids with their bikes were lined up at the end of one long stretch of path, and each one would ride his or her bike fast up and over the ramp and fly through the air as far as possible.

That wasn’t all. One of the dads had a radar speed gun that measured how fast each kid’s bike was going when it hit the ramp. Another dad, working with one of the kids, measured the distance of each jump and recorded it in a notebook. And all of the kids were now wearing helmets. But each kid wanted to know how far he had jumped, how to improve his distance, and as the kids waited their turns they were all discussing the best air pressures for the tires, bike speeds and ramp angles, lubrication for their bike’s gears, and so on.

The point for entrepreneurial education is that the kids first showed initiative and pursued their interests. The adults got involved and both encouraged that initiative and facilitated a more structured activity. The kids were learning math and engineering, cooperation and competition, being creative and getting exercise — and they were having a whole lot of fun themselves and with their dads.
That is only one anecdote, though it points to a path for entrepreneurial educators to pursue. What some kids and their dads can do with a vacant lot and some creativity — we professional educators with our training and resources should be able to do even better.

Bibliography

Brin, Sergei and Page, Larry. 2004. “Google Founders Talk Montessori.”
Gregersen, Hal. 2011. The Innovator’s DNA. Harvard Business Review Press.
Hicks, Stephen. 2009. “What Business Ethics Can Learn from Entrepreneurship.” Journal of Private Enterprise, 24(2), 49-57.
Jobs, Steve. 2005. “Commencement Address.” Stanford University.
Kirzner, Israel. 1973. Competition and Entrepreneurship. Chicago: University of Chicago Press.
Kling, Arnold, and Schulz, Nick. 2011. Invisible Wealth: The Hidden Story of How Markets Work. Encounter Books.
Lillard, Angeline. 2007. Montessori: The Science behind the Genius. Oxford University Press.
Marty, Eduardo. 2011. “Entrepreneurship in Argentina.” Kaizen 15.
Mariotti, Steve. 2009. “Entrepreneurship and Education.” Kaizen 9.
Petrelli, Michael J. 2012 (February 23). “Memo to the world: America’s secret sauce isn’t made in our classrooms.”
Rathunde, Kevin and Csikszentmihalyi, Mihaly. 2005 (May). “Middle School Students’ Motivation and Quality of Experience: A Comparison of Montessori and Traditional School Environments.” American Journal of Education 111, 341-371.
Rogers, Steven. 2002. The Entrepreneur’s Guide to Finance and Business. McGraw Hill.
Schumpeter, Joseph. 1950. Capitalism, Socialism and Democracy. 3rd ed. New York: Harper & Brothers. See especially Chapter VII.
Seligman, Martin E.P. 2012. Flourish: A Visionary New Understanding of Happiness and Well-being. Atria Books.

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Go to the CEE Working Papers in Entrepreneurship and Ethics.

Unleash Your Inner Company — John Chisholm talk

Friday, January 31st, 2014

In this 20-minute “Unleash Your Inner Company” talk, entrepreneur John Chisholm (San Francisco) discusses:
* the values that motivate entrepreneurs; chisholm-john-headshot
* the mutually-reinforcing traits of passion and perseverance;
* finding unique customers needs;
* fitting those needs to one’s own uniqueness, strengths, and weakness;
* how entrepreneurs are leaders;
* his own entrepreneurial experiences;
* similarities and differences between major companies such as Apple, H-P, and IBM;
* and the ethics of entrepreneurship in contrast to predation and altruism.
Here also is the STAARRS doc [Word] that Chisholm uses as a self-assessment worksheet.

Chisholm’s talk is part of our Entrepreneurship and Values series. Other lecturers in the series include Alexei Marcoux, William Kline, Terry Noel, Robert Salvino, and me.

Cross-posted at StephenHicks.org.

American entrepreneurial culture in India

Thursday, January 2nd, 2014

In the New York Times, Sei Chong reports on how “American-Style Start-Ups Take Root in India.”

Related: Our Kaizen interview with Reena Kapoor, a marketing entrepreneur in Silicon Valley.

Interview with Surse Pierpoint

Monday, December 30th, 2013

Entrepreneurial Logistics in Panama

k28 thumbSurse Pierpoint is General Manager and shareholder in Colón [Columbus] Import-Export, a firm located in the Panama Canal Free Zone. Colón provides logistics, warehousing, and customized re-labeling services for a variety of international companies, including Procter & Gamble, DHL, Payless Shoes, Novartis, and Eli Lilly. Pierpoint is a third-generation Panamanian who received his undergraduate and graduate education in the United States before returning to Panama to pursue his business career, which now includes being President of the Free Zone Users’ Association and part of a consortium of investors developing a new marina on Panama’s Caribbean coast.

Background and Early Career

Kaizen: Your company is in Panama, which is famous for its canal. What is the significance of the Panama Canal?

Pierpoint: The Canal was an idea going all the way back to the 1500s, from the discovery of the Pacific Ocean. People were already trying to figure out how to connect the two oceans. It was evident to Balboa that there wasn’t that much land separating the two oceans.

Kaizen: About 60 miles?

Pierpoint: Yes, sixty miles from coast to coast. It is the narrowest spot in the Western Hemisphere.

It wasn’t until Ferdinand de Lesseps in the 1800s that people made an effort to build the Panama Canal. De Lesseps started to raise the capital, but malaria caused that effort to collapse.

The American effort didn’t begin until Teddy Roosevelt, who was an accidental president because McKinley was assassinated. Roosevelt became president and, having attended the Naval War College, was heavily influenced by a professor who said that any self-respecting empire needs outposts. Naval power was very important in the projection of that. The Spanish-American War was in 1898, but by the time the Americans’ Pacific Fleet got to Cuba, the war was over. So Roosevelt said, “This can’t be. We must have a quicker way of projecting our naval power.”

Kaizen: So military issues as much as economic drove the idea of cutting the canal?

Pierpoint: Yes. The U.S. needed outposts that projected its power abroad and gave its citizens comfort that their government would stand by them. Coaling stations also mattered, to resupply shipping vessels as they were going around the world. As a result of the Spanish-American War, the Philippines became part of the U.S. protectorate. This was truly a projection across the globe.

Kaizen: Your personal story also starts in Panama.

Pierpoint: I tracked my name, Surse, all the way back to 1833 to a town in Tennessee. Three brothers from there fought in the Civil War on the Confederate side. They wouldn’t swear an oath of allegiance, so they left Tennessee for Texas. From Texas, my great-grandfather decided to go to Panama because the construction was the biggest thing happening.

Kaizen: The canal was being built at this time?

Pierpoint: Yes. He was a doctor specializing in tropical medicine. The public health effort in controlling malaria was the important thing before they actually started building the canal. That’s how we got here.

Kaizen: So you’re third-generation Panamanian?

Pierpoint: Yes.

Kaizen: Where were you born?

Pierpoint: In a hospital in Panama City. I lived about a year in Panama City, and then our family moved to Colón on the Atlantic side.

Kaizen: What was your education like?

Pierpoint: Small-town Americana and very protected. It was great growing up in the Canal Zone — even now on Facebook there are groups of people who are wistful about their time growing up in the Canal Zone, because it was ideal, from our perspective as kids. It’s what I imagine growing up in a small town in the Midwest in the 1950s was like.

I jokingly refer to the Canal Zone as America’s socialist experiment, because they gave you a job, they gave you a home, they gave you entertainment, they provided food and clothing. You also had tropical pay differential, because working as a federal employee in Panama was considered a hardship — even though anybody who lived here said, “This is hardship?” You got fifteen percent on top of your pay grade. So, growing up was wonderful.

Kaizen: Malaria and the other tropical diseases had been contained by that point?

Pierpoint: Yes. Tropical differential should have been eliminated by the forties, but it was a holdover.

Kaizen: You went to college in the USA?

Pierpoint: I went to boarding school and then college in North Carolina. I met my wife there.

Kaizen: Where in North Carolina?

Pierpoint: Greensboro, North Carolina at UNC. I took the easiest path: liberal arts. I got a double major: Spanish and Latin American Studies and Literature. I’ve always been fascinated by magic realism — the literary term that is used for Latin American writers, with Gabriel García Marquez being the best example of that with One Hundred Years of Solitude. Literature was one major — and Spanish as a language. I knew Spanish and I knew a little about Latin America, so it was fairly easy.

Kaizen: At this point, did you have strong ideas about what you wanted to do for a career?

Pierpoint-fishingPierpoint: During my Communist Worker Party days, I had a Cuban professor, and he and I had some very heated arguments about how bad socialism had been. This is around the time of the civil war in Central America—Salvador, the FMLN.

Kaizen: You were arguing the communist position?

Pierpoint: Yes. My professor, Sanchez Boudy, was saying, “You don’t understand what you are saying.” One big satisfaction is that I got to speak to him last year. I said, “Professor, you were absolutely right.” That is one of those things that’s the little pebble in your head, like “If only I could go back to him and say … .” It was very satisfactory for me to do that. He said, “I’m so glad to hear about the work that you are doing.”

The opportunity came about through one of our supporters at Fundación Libertad. I was talking to him about my college experience, and he asked: “What’s the professor’s name?” I told him, and he said, “I have dinner with him once a week in Miami.” He gave me the phone number. So I called him up and apologized.

Kaizen: Nice. So you were a communist in college and taking the path of least resistance in your studies. Were you thinking at all about career possibilities?

Pierpoint: In my senior year, my father said: “There might be an opportunity. I think I can convince the board.” He was looking out for me and saw an opportunity where I could come into the company.

A lot of people confuse the fact that because I’m in the company that it’s our company. We’re shareholders; but we are not by any means majority shareholders. It’s a very close-knit group of families of the original Jewish families that came to Panama from Curaçao. There was emigration out of Spain to Holland to the Caribbean to Panama in the late nineteenth century. That family adopted my father. My father was an only child; he often referred to Clifford Maduro, the gentleman in that middle picture, as his surrogate father.

So my father said that there might be a job opportunity here, and I didn’t have anything else going on. There’s a saying in Spanish: “It’s better to be the head of a mouse than the tail of a lion.” After living in the United States, coming back to Panama where I had grown up had an allure. My father’s precondition was: “Get an MBA and then come back and you can start working.”

Kaizen: So you went to Thunderbird in Arizona for your MBA.

Pierpoint: American Graduate School of International Management, as it was known then, informally referred to as Thunderbird. Their outlook was that to be a well-rounded, international executive, you had to know not just business but culture and language as well.

Kaizen: Were you excited about the idea of going into business at this point — or was it just the least bad option?

Pierpoint: Yes.

Kaizen: The latter?

Pierpoint: Yes.

Kaizen: How long were you in Arizona?

Pierpoint: That was a one year program. Then I started working at Colón Import-Export on October 1, 1984.

Kaizen: You were about 26 years old?

Pierpoint: Yes.

Kaizen: So what was your first position at Colón Import-Export?

Pierpoint: In the warehouse. Dad said: “You’re not going to be an executive. You’re going to learn the business literally from the bottom-up.”

That was in pre-container days: goods arrived in a vessel, and they were taken off the vessel and loaded onto a truck, and from the truck into the warehouse, where they were unloaded onto a pallet.

Kaizen: All by hand?

Pierpoint: All by hand. I started with loading, unloading, and going to the freight house and receiving the goods that our clients would consign to us for mutual distribution.

Kaizen: What services was Colón providing to its clients?

Pierpoint: “Third-party logistics” is the technical term, which means that clients hire us for our facilities — warehouses and the people — to receive and ship their orders to their clients in the region, which at that time was mostly Panama and Central America.

Kaizen: So manufacturers anywhere in the world who want to sell in Central America will send their stuff to Colón Import-Export, and you will warehouse it and send it on?

Pierpoint: The beauty of it is that, because of the Canal, there were a lot of ships arriving in Panama. On the outbound side, you could also re-export those goods. The complexity of dealing with Latin America meant that it was better to have a regional inventory instead of a country inventory. So Panama was an attractive place to have a regional inventory for servicing all of those countries.

Kaizen: Colón operates in the Colón Free Trade Zone in Panama. How, legally and economically, does the free zone work?

Pierpoint: It’s a big bonded area which, from the Panamanian perspective, means that it’s duty free. As far as Panama is concerned, those goods have not been imported into Panama. They are in transit from where they were manufactured to wherever their final destination is going to be. So it’s a fairly easy place to set up operations, it’s centrally located, and your inventory then is that much closer to the final point of consumption.

The free trade zone was an idea that evolved from the Colón Chamber of Commerce. A director of Colón Import-Export was on that board. He was part of the board that created that idea and convinced the Panamanian president to sign it into law. We were one of the first companies to set up in the free zone.

Kaizen: When was that?

Pierpoint: 1948.

Kaizen: The free zone was established in 1948, but the company was established in 1912, over a century ago now.

Pierpoint: Colón Import-Export today is what I call version 3.0, because we’ve evolved over time. What we are today is a logistics company.

Kaizen: You began in the warehouse off-loading ships and repackaging. How long did you do that?

Pierpoint: Dad figured that after four years I had learned enough. I became general manager in 1989, about two weeks before the invasion. I remember because the board meeting where I was approved as general manager was the same day that General Manuel Noriega declared war on the United States. That’s something that gets seared in your mind.

Kaizen: Obviously, you had to prove yourself before becoming General Manager of a substantial organization. What were the big things that you had to learn or prove yourself on before you got that position?

Pierpoint: Dealing with employees is the biggest challenge that any manager is going to have. Infrastructure — buying forklifts, buying trucks — is easy. Getting people to respond in the manner that you hope they are going to is the biggest challenge — the empathy part of what it is that you want. What it is that I want, and how I can motivate you to do that for the company? Our company has always been known as a very stable place to work, with a great reputation. The average number of years of service is over ten years. We had one gentleman retire with 55 years of service in the company.

Kaizen: How do you do that? Is it a matter of understanding what goals they have personally and meshing those with the company’s goals?

SursePierpoint: One of my favorite sayings now is: “People respond to incentives.” About fifteen years ago we hired a consultant, who is still working with us. I almost consider him as a coach, in the sense that he’s very analytical. He’s an industrial engineer by training.

Kaizen: What’s his name?

Pierpoint: Humberto Linero. Humberto taught me that you can change processes, but you always have to align those processes to make sure that the triangle of incentives — shareholders, clients, employees — always mesh. Anything that is done has to satisfy all three parts or it is not going to work.

Kaizen: It has to be win-win-win.

Pierpoint: Really. Because at the end of the day the employees want to earn more, the shareholders want to earn more, but the clients want to pay less. So the challenge is, “Okay, if the shareholders want more dividends and the employees want more salary, but the clients want to pay less — how can you do that?” That seems like a tough nut to crack.

What Humberto taught me is to align your processes so that people want to chase that carrot. His philosophy is that you want to pay what the market is paying; but the additional “oomph” is going to come from people going the extra mile, because at the end of the day they want to earn a little bit of money.

Our company needs to be able to handle the volumes that the clients throw at us, and it is not an even-flow of orders. That was the challenge that brought Humberto on originally. One of our clients was saying, “We need to lower the order turnaround time. How are you going to do that, Surse?”

Humberto helped us to reorganize the processes from an industrial engineering perspective: What are the steps involved in processing an order? Who is involved? And why are they involved? What can we do to compress the time? Because at the end of the day, all we are selling is the time it takes to process the order. The faster we do it, the more competitive and attractive we will be to our clients.

Kaizen: You joined the company in the 1970s, on the cusp of the personal computing revolution. Computerization went to a whole new level in the 80s and 90s with bar-coding, the Internet, and all of that. How did that impact your business?

Pierpoint: “Warehouse management systems” didn’t exist as a term. We had to create our own software to be able to do that. I was working already when the fax came along, and I told my dad that we needed to get a fax. He said, “Why do we need a fax?” Because we had dealt with correspondence — orders would come in the mail, and then the telex came along, and then the fax came along. Everything sped up.

Then computers came along. We had a server and terminals connected to that server. Then we went to PCs. Dad bought the first IBM PC in 1984 or 1985. It was a piece of hardware without much software.

My dad had a very clear vision that we needed to be able to provide tracking and other information to our clients. But in the pre-Internet days that meant expensive long-distance phone calls. The Internet meant that we were actually able to fulfill that vision of being able to give our clients visibility online, which was the Holy Grail.

Kaizen: Can you measure the improvements in efficiency that computers have brought to your logistics?

Pierpoint: The revolutionary aspects of computers — that’s another thing that Humberto taught us. If you don’t measure, you don’t have a baseline upon which you have to improve and kaizen is continuous improvement. That’s what it is all about: how can we analyze and improve the process? That’s where I get interested in Deming and Lean Thinking.

In talking to our employees, we try to convey that our vision going forward is that we need to be fewer people with technology that makes us more productive, so that we get paid more. So you, the employee, have to think about how you can be more productive with the technology at hand and identify the inhibitors in the process so that we can take them away; that is my job as management.

Kaizen: You’re encouraging from the bottom-up so to speak.

Pierpoint: Humberto says, “Anybody can be an engineer.” He always emphasizes: “We hire you because it is a very labor-intensive business. We hire you to use your hands, but you don’t leave your brain at home. Analyze that process; look at it; criticize it; challenge the process.” When he came back on board, that’s what I wanted to do. I said, “I want you to develop a process where we can do continuous education.” We get that raw material that has a certain amount of knowledge. Let’s teach them to go to the next level. It’s like the Colón Import-Export University for a model. We want to do that continuous improvement.

Kaizen: How many employees do you have currently?

Pierpoint: We have 500 employees.

Kaizen: When you came on board in the 1970s, approximately how many employees did you have?

Pierpoint: One hundred.

Kaizen: So that is a quintupling. If it’s not confidential, can you say the sales numbers between then and now?

Pierpoint: If we express it as a fraction of sales, our net income is less than one tenth of one percent of sales because of the warehousing component, and we represent about twenty percent of the total Free Zone turnover of $15 billion (USD) in annual sales.

Kaizen: In your role as General Manager, you have people management responsibilities, process management, including all of the technology. Is another part financial, such as raising capital or loans?

Pierpoint: That’s where the board comes in. I’m the warehouse guy, and I will admit my deficiencies on the finance side. Fortunately, the company has always been able to fund itself. And now in Panama the cost of capital is fairly low. So if you have a good trajectory — the banks have always been very open, and we have a good relationship with the local banks to help us grow.

Kaizen: Another job is bringing in clients. Currently you have an impressive roster of clients: Procter & Gamble, Payless Shoes, and the partnership with DHL.

Pierpoint: And Novartis.

Kaizen: Yes. Do clients seek you out or do you seek them out?

Pierpoint: One of the challenges is how to get new clients. My experience is that word-of-mouth is the best way. DHL has certainly opened up a new opportunity, because DHL is the largest warehousing company in the world. Anybody who is looking for DHL to provide services for them in Panama — they will come to us. They’ll say, “Look, this is a client. Let’s see what we can do.”

Kaizen: What’s the nature of your relationship with DHL? They are the largest warehousing company in the world, so what is your value-added?

Pierpoint: They figured that it is easier for them to piggy-back on our established infrastructure rather than trying to replicate that. For them, we’ve done the capital investment in the Free Zone. So their relationship is: “We can plug-in to what you do. So you will be our agent for warehousing and we we’ll take the transport side of it.”

Kaizen: DHL is based in Germany?

Pierpoint: The Deutsch Post — the German post office. DHL was three surfer dudes out of San Francisco who figured out that a good way to get to Hawaii to surf was to take documents for shipping lines that went from San Francisco to Hawaii. DHL is the first letter of the last names of the three guys.

Kaizen: They have since been acquired by …

Pierpoint: The German Post Office, which said that they were going to be the largest courier company, so they bought DHL, the largest warehousing company. They also bought Excel out of the UK. We have a bank in Germany. In Germany, they have a monopoly on the post office, which is where they generated the funds to pursue this global expansion.

SurseKaizen: Two of your major clients are pharmaceuticals, is that correct?

Pierpoint: Yes. Novartis and AstraZeneca are the pharmaceutical clients.

Kaizen: Novartis is out of Switzerland?

Pierpoint: Yes.

Kaizen: What do you do for them?

Pierpoint: Like everybody else, they ship from their factories all over the world to Panama. From there we service their client-orders for the region, which is Central America, the Caribbean, Venezuela, Colombia, and Ecuador.

Kaizen: Sometimes it’s just a matter of re-routing the product?

Pierpoint: Those are in transit. They come in and then they stay for a while in the warehouse and then they are shipped back out.

Kaizen: On the warehouse tour yesterday, Eduardo Lazarus showed me rooms where everything was taken out of boxes and labels were applied. Is that another part of the service that you offer?

Pierpoint: That’s a value-added portion of the service that isn’t just moving the goods but doing something with the goods. The Standard Export Pack means that when the goods arrive to Panama, our clients don’t necessarily know where they are going to go at the moment, so they are holding that inventory.

Kaizen: It could go to Peru; it could go to Guatemala.

Pierpoint: It could go anywhere. That’s the beauty; it takes out the uncertainty of trying to anticipate what each country is trying to buy. But, in general, if you try to project on a regional level, the fact that one country may not meet that budget means that another country might take up that product so you don’t have to worry; it smoothes it out. You can say, “Okay, I expected to sell this much in this country and it didn’t happen, but I have a country over here.” So they just shift that product.

What that means is that that product can then be customized. In pharmaceuticals, the number one client in Latin America is the government. So government tenders tend to have specific requirements that require you to identify that the product is property of, say, the Honduran Social Security. So you have to do ink-jetting and labeling and that kind of stuff. That is what we do in that value-add portion that you saw.

Kaizen: Customizing it for each country’s specifications.

Pierpoint: At the moment of sale, which is a huge advantage. From a factory in Switzerland, you can’t anticipate that; and they aren’t going to deal with the nuisances of a small run, at least from their perspective. We can do that for them here.

Kaizen: Procter & Gamble makes personal care products, and they are based in the United States; but they send product to you in Panama, and you re-route it to all of the particular countries in Latin and Central America.

Pierpoint: Yes. It’s the same model, just a different commodity.

Kaizen: And Payless Shoes. Did that client also come through DHL?

Pierpoint: Yes. At first we thought: shoes? Traditionally we had been a pharmaceuticals company. Shoes were different. But that relationship has been tremendous. We’ve really developed systems, as you saw: everything gets scanned in and out.

Kaizen: Payless is an American company?

Pierpoint: Based in Topeka, Kansas.

Kaizen: Though the shoes are manufactured in China and then they come to Panama?

Pierpoint: The model before us was China to Long Beach, Long Beach to Topeka, Topeka to Miami, and Miami to the stores.

Kaizen: A lot of transfers.

Pierpoint: That was a very cumbersome supply chain. They saw Panama as an opportunity where it would be China to Panama and Panama to the stores. They took out that component of having to bring the shoes to the United States and re-exporting them out to Latin America.

Kaizen: If you bring your product into Long Beach and you want to get it to Topeka, would it be on trucks or trains?

Pierpoint: Trucks, typically.

Kaizen: Then all the way to Miami and back onto ships.

Pierpoint: They cut out that whole component and lowered their supply chain costs.

Kaizen: Right. Then it’s only on ships from China to Panama. Then?

Pierpoint: It ships from Panama to the country. As a mode of transportation, ocean is cheapest. So that lowered their cost. And as the name “Payless” implies, they don’t want to pay any more than they have to. They want to be able to sell a cheap shoe to their Latin American customer base.

Kaizen: Take a standard work week for you as a general manager. How do you typically spend your time? How much cultivating clients, dealing with existing clients, meeting with your board, on the floor?

Pierpoint: Dad taught me that the best kind of management is management by walking around and visiting clients. One of his favorite things to do was to go see an operation, like Novartis’s in Europe. And he would always pick up something from walking around and just looking. To be aware of what’s happening and then looking at it from the perspective of “What are you doing that I can copy and use in Panama?”

Once a month I have a board meeting. I will be in the office looking at results; meeting with the managers who handle the different operations. I have five executives under me and each one is in charge of a different area: finance, quality, operations, technology, and human resources. We’ll review what is happening with the clients. What are the issues?

There’s always a problem. We’ve got the push at the end of the month when we need to be able to ship everything out before the last day of the month in order to book sales. The last week is when the pressure is compressed.

Kaizen: Management by walking around means visiting clients …

Pierpoint: Or being in the warehouse, going to the different operations and talking to the managers. What is it that makes their job difficult and what can I do to resolve them?

Kaizen: How much travel is involved? Payless is in the United States, as is Procter & Gamble. Novartis is in Switzerland.

Pierpoint: In my dad’s days it was a trip to Switzerland to meet with Novartis. What the modern corporate world has tried to push that down to a regional level. So it is no longer going to Basel, Switzerland; it’s meeting in Guatemala or Costa Rica or Bogota with the regional managers.

Kaizen: So the travel is not as intensive and overwhelming.

Pierpoint: The travel now is more related to working as the President of the User’s Free Zone Association or going to the Mont Pelerin Society Meeting in Prague. Of course with Skype, email, and phone, there is not so much visiting. Maybe that is an area where I need to improve. There is still a huge value in face time and building relationships.

Panama Canal History

Kaizen: You talked earlier about the free zone and the history of the Panama Canal. There was a failed effort to build it in the 1880s or 1890s.

Pierpoint: 1880 to 1888 was the French effort.

Kaizen: Why did it not work?

Pierpoint: Malaria and yellow fever. De Lesseps was the king of the world because he had done the Suez Canal. He figured, “Heck, I did it in Suez. Panama is the next narrow spot in the world where a canal is needed, and I know how to do canals. So let’s go to Panama and do it.”

Kaizen: But he under-estimated malaria and yellow fever.

Pierpoint: Malaria, from the French mal air. People figured that it was the bad air from the swamp that caused yellow fever. Paradoxically, that was part of the lore from my great-grandfather. In the hospitals in Colón it was very typical to have little trays of water on the foot of each hospital bed because you didn’t want the ants to get into the bed. That little pool of water became a place where mosquitoes could breed. But they didn’t know any better. They say that the hospital is the worst place to get better.

Kaizen: The canal was built successfully and opened in 1914?

Pierpoint: Yes.

Kaizen: When did the American effort to build the canal begin?

Pierpoint: 1905.

Kaizen: So it was a nine year process from conception to completion. By then malaria and yellow fever had been figured out?

Pierpoint: Yes, during the Spanish-American War in Cuba—by Dr. Walter Reed, who has that army hospital in D.C. named after him. He, along with some Cuban doctors, figured out that the vector was the mosquito. That’s what was transmitting the malaria and yellow fever. That’s where my great-grandfather got involved, in the public health effort in trying to control the situation so that at least the challenge wasn’t going to be that workers were dying off. Incidences of death by malaria dropped precipitously as that public health effort took hold.

Kaizen: Wonderful. There were other engineering challenges. The Atlantic and the Pacific aren’t at the same sea level, and the interior waterways are also at different levels. So they built locks on the Pacific side and on the Atlantic side, and flooded the middle to make a giant lake.

Pierpoint: The original design was to copy the French effort to make it sea level. One engineer started the effort, but it was a mess. There wasn’t much digging going on and, of course, the tropical environment made it difficult.

John Frank Stevens, the second engineer, came along. He was involved in building railroads in the American West. I think he worked on the effort to put a railroad through the Rockies, so he was a brilliant engineer. He came through and figured out: “Okay. What we need to do is to get the dirt out of here as quickly as possible.” He came up with some very innovative ideas. The story is a PBS documentary that’s available online. It’s a fascinating story of how he came up with steam shovels and trains to move the dirt in a very efficient manner.

But his design was: “We aren’t going to do sea level. Let’s do locks.” The design is that 60% or 70% of the canal is the flooding of a river valley to create Gatun Lake. Then the portion of digging through the Continental Divide and out to the Pacific was the digging challenge. Parallel to the digging was the creation of the locks and the flooding. That was the inaugural moment — the blowing up of the dyke in Gamboa where the Chagres River met the dyke. Once the digging portion was completed, water flooded in. That was in 1914.

Kaizen: Awesome. What was the nature of the business arrangement between the United States and Panama? Revenues? Control of the canal? How did that work out?

Pierpoint: A friend of mine wrote a book called, How Wall Street Created a Nation. And that is an interesting story about the “black” legend of how Panama was created. Was it truly a bunch of Panamanian patriots who wanted to be free from Colombia? Or was it New York money that convinced and funded the revolution, and the United States backed them after Colombia said to the United States: “No. We don’t want to give you an option to build a canal.” The United States then chose the path of least resistance: “Well, if we can’t convince Colombia, let’s let Panama become independent and then we can negotiate with Panama and not with Colombia.”

Practically, one of the first acts of the Panamanian government was to sign a treaty with the United States to grant them, in perpetuity, a 50-mile wide by 50-mile long sector of the middle of the country to operate as they saw fit. So it was a piece of the United States in the middle of the Republic of Panama.

Kaizen: And that revolutionized world transportation. Shipping is suddenly coming through there instead of having to come all the way around South America. What is the average savings? Let’s say that you are sending something from China to the eastern part of the United States. Before the Canal, you can send everything to Seattle or to California and truck it across by land, or you can send it around South America.

Pierpoint: Or through the Suez.

Kaizen: Yes. Is there some average dollar number savings one is likely to get by going through Panama?

Pierpoint: It’s all about days of travel, so going through Panama certainly eliminated having to go around South America. But getting from Asia to Latin America you either go around through the Indian Ocean, the Suez, the Mediterranean, and the Atlantic — or you come across the Pacific to Panama, through the canal to the east coast. It’s faster through Panama. How many days, I’m not sure.

Kaizen: It’s a significant enough savings that there has been huge traffic through the Panama Canal over the last century.

Pierpoint: Well, the original lock design — the Army Corps of Engineers said, “If this is going to last a hundred years, how big can boats get into the future?” That’s what is really amazing, the foresight of these guys to say, “Let’s make it really big. There is nothing on the drawing boards for that size, but we have to think long term.” So that is what we saw with the expansion: 1,000 feet long by 100 feet wide. People were like, “You’re nuts! That’s crazy! That’s way too big” “Maybe it is now,” they replied, “but we don’t know what the future is going to be like.” That created what is known as the Panamax type of a vessel with the maximum weight and width that can fit through the locks.

Kaizen: How long does it typically take, to go from one end of the canal to the other end?

Pierpoint: The transit on average is ten hours.

Kaizen: How much does it cost to send a ship through? I know it depends on the size of the ship.

Pierpoint: It can be all the way up to $350,000 or $400,000 for transit. The off-set of that is that, though that sounds like a lot of money, if I had to go another way, those days of operation from the vessel makes the amount worthwhile.

Kaizen: $350,000 would be for the largest of the large? Cruise ships and so forth?

Pierpoint: Yes. You’ve got the bulk carriers, container ships, cruise ships, and car carriers. The Canal measures that. The biggest category is container vessels.

Kaizen: From the early twentieth century to Noriega, let’s say. What was Panama’s political history? Was it stable?

Pierpoint: Alternating governments in power — some populism, strongmen, and elections. 1964 was a watershed year because many Panamanians resented the fact that the United States controlled a portion of the country into perpetuity. Of course it depends on your world-view, but the nationalists and certainly the anti-imperialists saw the United States as an evil empire — amongst the student population especially. On January 9, 1964, some Panamanian students said, “We are going to Balboa High School to raise the Panama flag.” There’s Cristobal High School, where I went to school on the Pacific side, and there’s Balboa High School. The firebrands marched on the campus of the Balboa High School to raise the Panamanian flag because only the American flag was waving before then. That set off about a week’s worth of riots, and some of these students were killed.

Kaizen: Here in Panama City?

Pierpoint: Yes. But it spilled over to Colón as well. The president broke off relations with the United States. He said, “You guys have killed some of my students, and we have to talk about this issue because perpetuity isn’t going to work.” The president was tapping into nationalism from a political perspective, obviously. He was popular because he was backing our students, but it must have been a difficult situation. That began a process: in 1968 there was a military coup and the leader of that coup’s claim to fame is that he said, “One day I’m going to walk in the canal zone because it is going to be a part of Panama.”

Kaizen: What was his name?

Pierpoint: Omar Torrijos. He was politically very shrewd because he realized that that gave him legitimacy with the populace; that was his reason for living: “I’m going to push the fact that I’m going to sign the treaty where we will abrogate the existing treaty and renegotiate it in our favor.”

Kaizen: He was in power for how long?

Pierpoint: About 15 years. Jimmy Carter and Omar Torrijos sat down in the Organization of American States in Washington, D.C. and signed the treaty in 1977. That treaty established that by December 31, 1999 everything would be given back to Panama.

Kaizen: But then Torrijos died in a plane crash, and his second-in-command, Manuel Noriega, became the new military dictator. What was Noriega’s regime like?

Pierpoint: Noriega wasn’t as charismatic as Omar Torrijos. And if you remember the 80s, with massive amounts of cocaine moving north from Colombia — we are a natural transit point. It was rumored that Noriega was friendly with all parties: drug traffickers, the CIA — anybody he could make a buck from, he was willing to sit down and make a deal.

His regime coincides with a political spring where parties begin to come back into play. One was a gentleman who had been deposed in 1968 and went in exile, Arnulfo Arias. He came back, and elections were held in 1985, I believe.

Many felt that the election was stolen; the official candidate won by a narrow margin. But it created the effervescence where the losing side began a resistance effort to challenge the result and started lobbying the United States to do something about it: “You guys have been here so long; you’ve created this problem; now you have to help us get rid of Noriega.” That culminated in the invasion on December 20, 1989.

Kaizen: In what way was the U.S. seen as having contributed to the Noriega problem? Was there explicit support for him?

Pierpoint: There was an entendre because the U.S. thought, “Don’t rock the boat.” But then Noriega started getting out of hand. The Panamanians were very successful at linking him with drug trafficking and money laundering. So Noriega started clamping down. “The Crisis,” as it is referred to here, from 1987 through 1989, is when things got tougher and tougher, and the United States started applying measures. It was a downward spiral where people were resisting and Noriega was resisting going out.

Within the military, there was a failed coup attempt to take Noriega out. The plotters were captured and executed. That is the really dark portion. The trigger for the U.S. invasion was the arrest and manhandling of a U.S. military officer who supposedly ran through a police road-block. The car was fired upon and that US officer was killed.

Kaizen: So at that point the United States invaded and removed Noriega.

Pierpoint: And they installed the loser from the 1985 elections.

Kaizen: The 1985 elections that were thought to be rigged.

Pierpoint: Yes. After the invasion, Guillermo Endara was put into power, and elections, were held in 1989.

Kaizen: So democracy returned to Panama through the 1990s, and in 1999 the U.S. formally transferred ownership of the Canal Zone to Panama.

The decision to expand the canal — the engineers back in the 20th century had good foresight, but nonetheless technology has advanced far and there are a significant number of super ships that can’t get through the current canal. When was the decision for the expansion project made?

Pierpoint: A few years ago. There was a national referendum. You know the movie Cars?

Kaizen: Yes.

Pierpoint: The rise of the interstate highway system in the United States meant that Route 66 was no longer the main road. I use that example to highlight the fact that the carriers, especially the container carriers, are looking to lower the cost per container of moving a boat around the world. So from the year 2000, Panama took over the Canal, they started to think: We are coming up on 100 years, and we need to widen the canal because we are seeing the trends in the industry. If we don’t widen it, we’re going to be Route 66 instead of Interstate 40. A national referendum was approved overwhelmingly by over 70 percent of the population.

Kaizen: That was what year?

Pierpoint: October 22, 2006.

Kaizen: This is a multi-billion dollar project.

Pierpoint: About $5.5 billion.

Kaizen: Involving new locks at both ends.

Pierpoint: Two new locks and raising the level of the lake to have more water, deepening the draft for the bigger vessels—not just in the lakes, but in the approaches on both the Atlantic and Pacific sides coming into the new chambers.

Kaizen: Currently, how many ships can be in the system at a given time?

Pierpoint: Between 35 and 40 per day.

Kaizen: When the new locks open in 2014 or 2015, the current locks will still be in operation. What’s the anticipated number of ships that will be able to go through?

Pierpoint: By the time they’ve ironed out all of the kinks, they expect to be able to double the capacity.

Kaizen: 70 to 80 ships per day.

Pierpoint: Yes. And some of them will be much larger, and they are going to pay more money, so it is a huge economic benefit for the country as well.

Kaizen: Currently how much revenue does the canal generate in transit fees?

Pierpoint: It shifted over the years. The Americans always ran the canal on a cost-basis: “We are going to charge whatever it costs.” The Panamanian administration adopted a much more business-like attitude: “Let’s charge what the market will bear.”

One of the proud facts of the Panamanian administration of the canal is that what we’ve gotten from 2000 to 2011 far surpassed what we got from the United States as a stipend for running the canal from 1914 to 2000. We are talking about over a billion dollars last year that the canal gave to the national treasury. It is expected that when we double the capacity, it’s going to be more than two billion. Again, it’s a question of what the market can bear. So the tolls have been rising.

Kaizen: Most of that money gets invested in infrastructure?

Pierpoint: It goes into the kitty to deal with infrastructure: security, health, and education.

Kaizen: The Panamanian skyline is extraordinarily impressive, and most of the buildings look new. Is that Canal money or Free Zone money? A combination of the two?

Panama-skylinePierpoint: In the last five or six years, since 2007 or 2008, it made a lot of sense for Panamanians to reinvest in Panama. A lot of the banks in Panama — their capital base comes from Free Zone money. A lot of the skyline is due to the Free Zone. The profits generated are reinvested in the country.

Kaizen: I’ve never seen so many construction projects in one place.

Pierpoint: With this administration, it’s not just buildings, but also roads, overpasses, highways, and new airports. A lot of money is being reinvested in infrastructure.

Kaizen: How is the rest of the world reacting to the Canal expansion? For example, it affects the ports on the west coast of the United States. The super-ships that can’t go through the Canal currently might off-load in California and truck across the United States. But with the expanded Canal, lot of that traffic will start to come through Panama.

Pierpoint: There is a website called beatthecanal.com, which is an effort by a group of Californians worried about what the Canal is going to mean for Los Angeles-Long Beach traffic. It might mean up to 20 percent less movement through L.A.-Long Beach, which is the largest port in the United States. So they are very concerned about what is called the all-water route: Asia, through the canal, to the east coast of the United States. Demographically, most of the U.S. population lives east of the Mississippi. China is the United States’ factory. All of those goods have to get to the east coast and right now, L.A.-Long Beach is the preferred destination.

The longshoreman strike was a wake-up call for a lot of retailers. Because of today’s just-in-time supply chain, that type of interruption creates havoc. So people were looking at alternatives. What that means is if you can get to Savannah, Georgia, by boat, then that is going to be a cheaper landed-cost than off-loading it in L.A. and moving it by road or rail to the big box stores on the east coast that the Walmarts, Targets, and Home Depots have.

Kaizen: Is the east coast of the United States prepared for more traffic and larger ships?

Pierpoint: The Washington Post had an article recently that is a good summary of the different ports. A lot of federal money is being spent in getting prepared for the impact of an expanded canal. The Savannah River has to be dredged for the Port of Savannah; the Bayonne Bridge in New Jersey has to be raised because these larger vessels can’t currently come under the bridge. That article mentioned something like $6 billion in different projects along these major ports, which are all vying to be the destination for these carriers. Miami is investing money; Savannah is investing money; Charleston is investing money; the Port of New York-New Jersey is investing money. They all want to be the place where those big ships will stop and off-load their containers. So they are competing for the L.A.-Long Beach market as well.

Kaizen: Traffic going from Europe to the west coast of the United States: will the Canal make any difference in that?

Pierpoint: The main trade-flow is Asia to the east coast of the United States. There is a lot of stuff going that way, but not much going the other way. Grapes from Chile going to Europe — the boat comes back relatively empty. Banana ships going from Ecuador to Europe mostly come back empty.

But there is talk that now maybe because of these fracking fields on the east coast of the United States, the LPG tankers could go from the east coast, through the canal, to Japan. Japan has a huge demand and they pay a premium for LPG. So you have a lower cost. Put it on a boat and now you don’t have to go the long way around to get to Japan; you can go through the Canal and get to Japan much more quickly than it would be crossing the Atlantic. It just doesn’t happen right now. So there is a lot of speculation right now about what the new trade flows will be.

Kaizen: Fascinating. To come back to you personally: you have been GM at Colón Import-Export for 23 years. What will you be doing over the next four or five years?

Pierpoint: One of the challenges is to do the same thing my dad did. I came aboard right around the time he was looking to transition. So who’s going to replace me? That’s what worries me now.

Kaizen: You are in your mid-fifties now.

Pierpoint: Fifty-four.

Kaizen: What will the transition involve?

Pierpoint: To bring somebody on board who will have five or six good years of training so that he will be in a position to take over.

Kaizen: Are you planning to grow the business in any new directions? I saw the huge warehouse you just built. Do you plan to bring in more customers to grow the company?

Pierpoint: We’ve had a bit of organic growth. Procter & Gamble has been a tremendous client. They just came on board three years ago, and they are doing what Novartis did from 1960s. So I see a lot of opportunity.

Part of what we hear from our conversations with consultants is that Panama and the Free Zone can start looking northwards to the United States. We just signed a free-trade agreement with the United States. So there are opportunities there. The United States is kind of undiscovered territory, and the fact that Procter & Gamble has validated the model means that other people will also be interested in looking at Panama as an option for a redistribution point—not necessarily for this region, but for other areas.

Kaizen: Technologically, these are revolutionary times. A significant amount of what is done in your warehouses now is by hand. Do you see improvements in technology on your horizon?

Pierpoint: Kiva Systems was bought by Amazon. With Kiva, instead of a picker going to the product, the product is brought to the packer. Part of what I do as well is keep abreast of what is happening in the industry. It’s still the cost of the robot versus the cost of labor, and it’s still heavily in favor of the cost of labor.

But part of the challenge is that we need to have smarter laborers; a high school degree isn’t enough anymore. They need to have a university degree so that they are conversant with a PC, able to use Excel, able to use the scanners, and that kind of stuff. A big challenge is the very bad education system that we have; it means that we have to create our own education system so that we can bring our people up to speed.

Kaizen: The University of Colón Import-Export.

Pierpoint: Yes.

Kaizen: You have interests outside of work, including your busy family, and you are on the Free Zone Users’ Association Board (FZUA).

Pierpoint: I got on the board in 1988, and I was very honored. But my father said, “You are a fool.” The problem was that 1988 was one year before the invasion; it was terrible. There weren’t many executives who wanted to be on the Free Zone Users’ Association Board. My father thought it would make me lose focus on managing the business.

Kaizen: What is the FZUA’s function?

Pierpoint: It was created in 1980 as a place where all of the users could get together and have a channel to talk to the government. Every five years a new administration comes in, and that new administration, unfortunately, doesn’t know much about the free zone. The perception of the free zone is that we all have gold bricks in the warehouse and the streets are paved with gold — that there is a whole lot of money and it is the natural place to come get money. What we say is that the FZUA is like the firehouse: When the bells go off, we are the guys who jump in the truck and try to put out the fire — in this case, the government trying to hit us up for funds.

Kaizen: Is educating each new administration straightforward? They can see the economic impact?

Pierpoint: We need to educate them because, while it is true that we’re part of the country, we’re not immune from losing competitiveness as more fees are tacked on. It makes us uncompetitive because it’s a huge drag. Then people start saying, “Well, why are we shipping to Panama? Why not just let it go through?” And you can do that today — China direct to Venezuela — without having to unload the container. And if that happens, you are talking about 30,000 people working in the Free Zone. The Canal’s labor force is around 11,000 people. So we are three times the size of the Canal. A lot of people know the Canal, but we are a significantly more sizable employer, especially in an economically-depressed zone like Colón.

Kaizen: So you make the economic case, and typically administrations understand, but it has to be redone on a regular basis.

Pierpoint: Exactly. Every five years.

Business Success and Rest of Life

Kaizen: What have you enjoyed the most about being GM at Colón Import-Export?

Pierpoint: One of the things that frustrates my wife — she runs a furniture store — she says, “Oh, you’ve got people for that.” Because she’s the chief cook and bottle washer in her operation. I accidentally got into logistics; but what is interesting to me is the international nature of the business, and how what you read in the newspapers impacts what we do. It really is a globalized world, and I’m a fan of current events.

Kaizen: Is there one area in your job as GM that you’ve consistently struggled with or found challenging? Or you wish that you didn’t have to do it?

Pierpoint: The most important part is dealing with people, and that is the challenge: dealing effectively with people. You have to be careful about everything that you say because it can be misinterpreted.

One of the benefits of being on the Free Zone Users’ Association Board is dealing a lot with politicians. You realize how they are very good about going on and on about nothing. That’s not necessarily what I do, but you begin to realize the nuances of what you say. That’s opened up not just sticking to the inside of the job. That was one thing my dad did; he didn’t like extraneous issues. But I think that is part of the marketing: get out there, get known, and you’ll be the go-to guy when an opportunity pops up.

Kaizen: The skills and character that people need to be successful in business: people skills, clear communication, aligning incentives. Also being able to deal with frustrations, make gutsy decisions, admit mistakes, and so on. Which traits, in your experience, stand out?

Pierpoint: One thing that I’ve learned is that if you’ve made a mistake and it’s going to be really expensive, you still have to say, “I screwed up.” That’s a hard decision. It’s in line with business ethics: at the end of the day, you have to be as good as your word.

One thing that makes me look at the ceiling at three a.m.: we have very expensive products being handled by people who don’t make as much as that product is worth, and a screw up can be a huge cost. So making sure that everybody is motivated to do their best is a challenge.

And the skill-set, I think, is just to be a guy who is very transparent and doesn’t have a hidden agenda and is sincere. So one of the things I’ve tried to develop is empathy and try making the other guy understand what my situation is and to try establishing a relationship. That has been one of the teachings of the free market is the free exchange between two parties where we both benefit. And that is a challenge, certainly, with this environment with big corporations that are always trying to squeeze, squeeze, squeeze — is to convince the other side: “Let’s not compromise quality for cost.” It’s a challenge.

I think as you get older, you get tired. There is this natural cycle, and I’m an anachronism in the sense that I’ve been at the same job all of my life. What you need to do is be energized, and that is where innovation comes in. That’s another thing my coach Humberto — I refer to him as a coach more than as a consultant — has been helpful with. I’ll look to see what the latest and greatest and currently topical book is, and I’ll buy that book and he’ll read it and we’ll discuss it. What’s the applicability of that idea in the company?

Kaizen: Keeping yourself young through innovation.

The first thing you mentioned was being able to admit when you’ve made a mistake. We all struggle with that; we don’t like to admit that we are wrong. How does one cultivate that in oneself? Is it a courage issue? An honesty issue?

Pierpoint: I think those are the two key words. “Courage” because it is a scary conversation to say “Yes, I screwed up.” But the more you do it, the easier it gets because people generally understand that you are being frank and honest.

Kaizen: You’ve mentioned several people who have been mentors to you in various ways. Is there any one piece of advice or a mentor who stands out in your mind?

Pierpoint: My father, obviously. It was a blessing to be able to work with him. Not everybody has the opportunity to work with their father. Looking at him and his work ethic. Also Humberto, the life coach, and the Board of Directors who have been very supportive. Those constant conversations are especially important, particularly with the Board of Directors because they are such a diverse group; they are always giving insights.

But one thing I learned from my father is: You have to be on time and you have to go the extra mile. Finish the job.

With Humberto, I’ve learned to be more analytical because he’s the engineer. My dad was a history major, so he had no special training for the job that he had. But Umberto as an engineer affected me so much so that my oldest daughter is now an engineer because I thought being analytical was so important. Humberto says, “Remember, what isn’t measured can’t be controlled, and what can’t be controlled can’t very easily be improved.” Those are stand-out points that stick in my mind as far as how I’ve been able to be relatively successful up to now.

Kaizen: What advice would you give to young people about their careers and lives ahead of them?

Pierpoint: One thing I’ve struggled with — and I’ve realized I’m an old-fogey — is the fact that in the résumés you see today, young kids jump around. I have to understand that today that is good because you have to keep your options open.

But there is that saying that to be an expert at anything, you have to have spent 10,000 hours doing it. That’s a long time to become good at something. So you have to pick something that you like — and I’m not saying that I’ve loved being a logistician my whole life — but you learn to like it because you see the challenges and the opportunities to get better at it.

I don’t know if you’ve seen the documentary, Jiro Dreams of Sushi. I highly recommend it. It’s about a Japanese gentleman who owns a sushi shop in a subway station in Tokyo. It has a Michelin three-star rating, I believe. In the Michelin guide, that means it’s worth going to that country to eat at that restaurant. He says, “I’ve been making sushi for 60 years, but I still feel like I’m not as good as I could be at making sushi.”

I still feel like that: I have so much to learn. I have been here for about 30 years, so you would think, “Isn’t that enough time to have learned?” No.

Kaizen: Always striving for excellence; always striving for improvement.

Pierpoint: Yes. Kaizen. [Laughs]

This interview was conducted for Kaizen by Stephen Hicks. For more information about Surse Pierpoint, please visit his company’s website. An abridged version of this interview was published in Kaizen, Issue 28, December 2013.

© 2013 Stephen R. C. Hicks. All rights reserved.

Kaizen 28: Surse Pierpoint, Logistics, and the Panama Canal

Wednesday, December 18th, 2013

k28 thumbThe latest issue of Kaizen [pdf] features our interview with Surse Pierpoint on the theme of Entrepreneurial Logistics in Panama. Stephen Hicks met with Mr. Pierpoint in Panama City to discuss the Free Trade Zone, the Panama Canal’s history and major expansion project, and worldwide trends in transportation and logistics.

Also featured in this issue of Kaizen are guest speaker Professor Nicholas Capaldi, the High School Business Day, and Professor Shawn Klein’s initiatives in Sports Ethics and Sport Studies.

Print copies of Kaizen are in the mail to CEE’s supporters and are available at Rockford University. Our next issue will feature an extended interview with Zol Cendes on the theme of Entrepreneurial Software.

Titanic compared to a contemporary cruise ship, Allure of the Seas:
titanic-allure

More Kaizen interviews with leading entrepreneurs are here at our site.

Paul Theroux on ending aid to Africa

Monday, December 9th, 2013

150 years of aid to Africa has not helped much — and may have hurt more than it helped — argues writer Paul Theroux in Barron’s. (1) If goods are provided free by foreigners, local small businesses cannot compete, and they go out of business. A cycle of dependency is thus created. (2) Corrupt government is the other major problem — bribery, oppressive regulations, extortion, and theft on a grand scale are endemic.

So Theroux calls for fresh thinking about how economic development occurs: “the self-sufficiency of ordinary people” must be enabled, by getting the politicians off their backs and ask the well-meaning to stop creating dependency.

See also Magatte Wade on entrepreneurship as the fundamental route out of poverty for everyone, not only Africans.