Posts Tagged ‘argentina’

Interview with Federico Zorraquin on Entrepreneurial Resilience in Argentina

Tuesday, December 11th, 2018

[This is the full interview with Federico Zorraquin which was published in our Kaizen newsletter.]

Federico Zorraquin on Entrepreneurial Resilience in Argentina

Federico Zorraquin is President of Rheem S.A., a manufacturer of water heaters based in Buenos Aires, Argentina.

Kaizen: Zorraquin is an exotic, Spanish-sounding name—an adventurer’s name. Where were you raised?

Zorraquin: I was born in Buenos Aires in 1959. Most of my family came to this part of the world between the late 18th century and the beginning of the 19th.

Kaizen: Long time Argentinians.

Zorraquin: Most of them. About 70% of the family are French Basques and Spanish Basques. My great-grandfather and all the line that come from him—my grandfather, my father, and myself—have all been involved in business. I run today a company that was founded in the late 19th century.

Kaizen: An old company by new world standards.

Zorraquin: Yes, but it doesn’t resemble the business that it started as, though there is some spirit and tradition that comes from those times.

Kaizen: As it’s a multi-generation, family business, was there an expectation that you would go into the family business? Were you the eldest son?

Zorraquin: I was the eldest son. I have an older and younger sister, and the youngest was a boy. I was pretty much taught the business from the very beginning. I used to travel with my dad to visit different companies that we owned at the time. We had a large ranching operation, and I used to spend time in the ranches. I liked to see my dad being involved in business. I didn’t have a chance to consider becoming a doctor. I always say to my kids, I would have enjoyed being a good doctor.

Kaizen: What kind of businesses was your family involved in the time of your father? This would have been the 1960s and 70s?

Zorraquin: Yes, and the 80s. The company got various work in the steel trades in the Buenos Aires stock exchange. That started in the late 19th century. It became a publicly held company in 1946, with my grandfather and later my dad always being the controlling shareholders. From the 1960s to the 80s the business was one-third industrial companies, one-third banking, and one-third ranching. In the 80s, the chemical and petrochemical side of the companies became very big, as did the banking. The farming became relatively smaller.

In the mid-80s, we were the largest private group in petrochemicals and manufacturing of plastics in Argentina. We were probably the number one or two group in banking. We were a small player in farming.

The 80s was a very difficult time for Argentina because GDP growth was zero. The last three years with hyperinflation were very damaging for our business. By 1989, we had gotten rid of the banking business at a big loss. We came into the 90s basically without the banking business and as an industrial group with a small ranching operation.

Kaizen: Going back to your youth. You’re traveling with your father a lot, but what was your formal schooling like?

Zorraquin: I went to primary and high school in Buenos Aires. Then I went directly into industrial engineering school. Since we don’t have the liberal arts college education in Argentina, when you leave high school you have to choose if you will either be a doctor, a civil engineer, or a lawyer, and so on. You go into specific schools.

Kaizen: Professions.

Zorraquin:  Right. I decided to be an industrial engineer, because it gave me not only a technical background but also an in-road into management. I could go into the industrial companies we owned at the time and eventually get an MBA or management or financial degree.

Kaizen: Does anything stand out in your early education as especially formative or useful to you in your career and adult life?

Zorraquin:  I was probably very responsible and dedicated to anything I could learn. Every summer I would spend time at one particular large ranch that we still own. It was a very fun place to be, but I worked for most of the time in the summers.

Kaizen: In what part of Argentina is that ranch?

Zorraquin: It’s 300 miles south of the city in Buenos Aires province. I worked at the farm a few times a year. I was there during some audits that the company did in these farms, and I would travel with my dad and do the audit to work with him.

Kaizen: Was your university a blend of business and engineering education?

Zorraquin: No, with the industrial engineering school, you leave the school just knowing about how to run or optimize a manufacturing facility—logistics, organizing work, layout of factories, production. You are involved in human resources, people issues, economic issues, but this is all mostly related to the performance of a factory.

Kaizen: Was it when you finished that degree that you went to the United States to Wharton Business School?

Zorraquin: No. When I finished my degree, I worked in Argentina for two and half years.

Kaizen: This was when you were in your early 20s?

Zorraquin: Yes, and I went to the south of Argentina to work at a petrochemical complex for one year.

Kaizen: Somewhere in Patagonia?

Zorraquin: In Bahía Blanca, in the northern part of Patagonia, the tip of the province of Buenos Aires. That’s where the largest petrochemical complex of Argentina is today, as it was at that time. I worked in that facility and in Buenos Aires in finance.

Kaizen: You were just out of university at this point. What were your responsibilities?

Zorraquin: Since our business group was a very large group, I was convinced that to work my way through the ranks I would have to start from the very bottom, and I would have to learn and experience what it was to be working at a factory. This factory had shifts, and I worked in different shifts—day, night, et cetera—in different positions.

Kaizen: You had a sense for all of the aspects of the business?

Zorraquin: Yes. And what was more important for me was getting the respect of the people. The people knew that I was the son of the owner, but they also knew I was working hard to learn the basics.

Kaizen: You’re earning their respect.

Zorraquin: I think that really helped me a lot over the years. I felt confident with my work on the factory floor. And when I went up through the ranks in a fast way, there was some legitimacy on my end.

Kaizen: Now we’re into the 1980s, and your family company still has the three major divisions.

Zorraquin: Yes.

Kaizen: But it was a difficult decade—the banking and financial sector were very bad in Argentina.

Zorraquin: Very difficult.

Kaizen: You worked for a couple of years there, and then you went for the MBA? What was your motivation for that?

Zorraquin: I knew that I wanted more skills in finance. I went to Wharton.

Kaizen: Why Wharton?

Zorraquin: I wanted to start in January, and the only two of the top universities had a January admittance—Columbia in New York and Wharton. I was accepted in both schools, and I decided on Wharton because I knew a couple of people in Argentina who had gone there. Not for any other reason.

Kaizen: The Wharton MBA was a two year program?

Zorraquin: Yes. Before going to Wharton, our petrochemical operations in Argentina were run with a technology license that we got from Union Carbide Corporation. I spent time working in the Union Carbide labs in New Jersey. During that time, my wife and I lived in New York City and commuted every day to northern Jersey to work in technical labs that were doing some research on plastics.

I also got to learn that technology from the very basic aspects, and I got to know the people working in Carbide who were involved in the relationship with our company. From there, I went into business school.

Kaizen: What things did you find most valuable from your MBA experience? You mentioned finance was important.

Zorraquin: For me, finance was critical. I would say that I came out of school with a financial mind. For me, it was a big change. I really started to understand what was the P&L of a company, and not only finance and accounting. After school, I could read a balance sheet and could understand how to assess the state of a company and the value of a company.

Kaizen: Now you’re in your mid-to-late 20s. You have the hands-on experience from the ranches and working at the factory in Patagonia, both the agricultural side and now the technical side. You’ve spent some time with the research people in New Jersey. You have your MBA degree and know the financial side of things. Were there other issues of, say, leadership and human resources, being able to deal with people in a managerial way?

Zorraquin: Yes, and I took some of those courses in school. But it was interesting to know the science behind it. My training with people was more at home, because of the way I was raised, and from working with people on the factory floor.

Kaizen: Learning by dealing with your employees.

Zorraquin: Yes, becoming part of the teams. The other aspect of the school that was very rewarding was the learning from peers. Wharton was a very fun place to be in all aspects. There were a lot of very interesting people that I got to know and become friends with. The exchange of ideas was extremely powerful to me. I would say that probably the highlight of the school was the way all the MBAs interchange.

Kaizen: Nice.

Zorraquin: The social life was very rewarding.

Kaizen: After your MBA, you returned to an Argentina going though very difficult times politically and financially. Zero GDP growth and inflation. What were you doing in the company at this point, during this crisis?

Zorraquin: I had the opportunity, though I did not pursue it very strongly, to stay in the U.S. for a couple of years and work for a consulting firm. I regret not having done that, because I think the opportunity of working in a company where I was not seen as the son of the owner would have been important for my self-esteem. On the other hand, the problems that the company was facing in Argentina were very serious, and I thought that my dad needed some help. I would not say he needed my advice because he was an able and experienced business man, but I was very instrumental in a lot of things and decisions that were taken in those years with my little work experience and my MBA.

Kaizen: How old was your dad at this point?

Zorraquin: My dad was born in ’33, so he was maybe 55 or 56 years old. My age now.

Kaizen: Would he have been thinking about succession issues coming down the road?

Zorraquin: Not really in those years. He was active. I had always said my dad was never a manager and never a CEO—he was a deal maker. He was always thinking about buying this and selling that. Every time he faced major management issues—because a lot of company failures have a big management component—he would not do well in those. On the other hand, I have never seen myself as a deal maker, but mostly as a manager.

Kaizen: You complemented each other.

Zorraquin: We complemented each other very well. The fact that I came down from the U.S. after business school was important, because I helped him survive through the banking crisis. I helped him to make important decisions regarding the banking crises.

Kaizen: The decision to divest from banking and financial sector was huge. Then the company focused in petrochemicals and ranching?

Zorraquin: Yes, and other industrial activities like the one we still have today—the manufacturing of appliances: water heaters, and until recently, refrigerators. When I came home from business school, I was working with my dad in some of these strategic issues. My full-time work was the company I still run today.

Kaizen: The name of that firm is Rheem?

Zorraquin: Yes. I was involved in that company until 1993, and then in 1993 Argentina was becoming a more open country for the first time in many decades. Companies like our petrochemical company, for the first time in many years, had to compete with a much more open market.

Kaizen: Who is president of Argentina at this point?

Zorraquin: Carlos Menem. He passed a lot of interesting reforms. Argentina became a more competitive environment, and in that competitive environment, our petrochemical company started to look bad. Part of the reason was the culture of being a successful company in a closed economy with a lot of protection like most companies at the time. The company started, for the first time in 15 years, to lose money in ’93.

Kaizen: This is an adjustment to an open economy?

Zorraquin: The world petrochemical prices had come down, so margins were squeezed. We had made investment decisions that were significant, like starting a new poly property in Buenos Aires. All of those things combined. I was appointed as CEO of the petrochemical company. At the time, I was 34 or 35 years old.

Kaizen: How many people are working in the company at this point?

Zorraquin: 1000 people at the petrochemical company.

Kaizen: What is the name of the company?

Zorraquin: IPAKO. The company was initially started a U.S. chemical conglomerate.

Kaizen: In going from a closed economy with protections to a more open economy, what were the biggest challenges?

Zorraquin: Adjusting and changing the culture towards the market and the customers, because the customers now had more options to buy product from than just us. We had to get rid of the monopoly type of culture that we had. That was very important. At the same time, we needed to become a much more lean organization in all aspects. I conducted a major restructuring of the company that very rapidly provided a relief in overhead costs. In maybe a year or so, the company started to make money again. We were lucky because world prices stopped declining and started to come up. After having losses in ’93, by the end of ’94 the company was already very profitable.

Kaizen: Your peer companies in Argentina during this time—what was their overall track record of making the adjustment or going out of business?

Zorraquin: Most of the petrochemical companies at the time did very badly, and a lot went into bankruptcy. We were able to survive those two years of crisis, and in 1995 we sold the company to Dow Chemical for a very large amount of money.

Kaizen: IPAKO?

Zorraquin: Yes. At the time, it was considered the deal of the year in Argentina. It was a major success for the group.

Kaizen: And for you, as the new CEO.

Zorraquin: For me, as the CEO.

Kaizen: We’re now in the middle 90s?

Zorraquin: 95-96. We were left with all this cash, totally out of the chemicals business. We still have the appliance business, the ranching business, and a few other small operations. Those are our companies—very small and with a very healthy cash position.

Kaizen: The structure of the overall company at this point: is there one holding company for all of them?

Zorraquin: One holding company. Garovaglio. That’s still the name today.

Kaizen: You have CEOs for each major division?

Zorraquin: Yes, and I was the CEO of the holding company, overseeing everything.

Kaizen: What is your father’s position at this point?

Zorraquin: He was chairman of the board. It has been a successful partnership between him and I. Together with the board of the holding company, we started to look at investment opportunities.

Kaizen: Right, and from the sale you’ve got lots of cash?

Zorraquin: Yes. We didn’t want to liquidate the company and take the cash. We hired a consultancy firm, Bruce, Allen, and Hamilton, and we analyzed businesses in which we could be successful. There were some criteria. For example, we felt that we were not very able in the dealing with internal governments, so we would not get into very regulated industries because we felt that was not part of our culture. Also, we wanted to be in businesses in which an Argentine group could thrive locally. That’s when this very large meatpacking company came up. It was owned by a family-owned, privately held company, the largest meatpacking group in the country. In a matter of maybe six months, we negotiated a deal, and we bought 30% of that.

Kaizen: A natural fit with your ranching activities.

Zorraquin: Yes, we could fit the ranching activity with this large meat packer. The packing factories have a lot of industrial engineering and logistics, and that’s basically what we knew.

Kaizen: Right, so you had the human capital?

Zorraquin: Human capital. We took over the company in August ’97. Argentina was, for the first time in 60 years, having access to the U.S. market for fresh beef. We set up a company in the U.S., and we started to export beef.

Three years after that, the company filed for bankruptcy because, in November 2000, Argentina had a foot-and-mouth crisis. In one day, we lost all the fresh beef markets in the world. Basically, the running of the company shrunk 70% in one day.

Kaizen: Wow.

Zorraquin: We filed for bankruptcy protection in the end of 2000, and we had started to accumulate losses, and losses, and losses. To make a long story short, at the beginning of 2002, my dad could not handle the situation anymore. He didn’t want to continue, so he passed the shares on to me. I remained the controlling shareholder in the middle of the chapter 11, the negotiation with the creditors, and shutting down factories. It was a very complicated time for me personally. In the middle of 2003 we came out of the bankruptcy, and in one year or two we sold the company for $1. In five years we lost all the investments in this company.

Kaizen: That’s terrible.

Zorraquin: We lost, let’s say, $150-200 million in five years.

Kaizen: Amazing.

Zorraquin: Our money was lost, and all the shareholders lost money. But, surviving the process was very complicated, because it coincided with the largest economic crisis of Argentina in 2001. In 2002, the GDP of Argentina dropped 15%.

Kaizen: Just terrible.

Zorraquin: A terrible time.

Kaizen: Were the borders still largely open?

Zorraquin: No. The border was open, but there was a big movement to fight market economics. They said the experiment of the 90s doesn’t work, and we had to close the economy again. We had been able to kill inflation in the 90s, and we were back again. We had 60% inflation in 2002.

Kaizen: There had been the hyperinflation of the late 80s, and it’s back again.

Zorraquin: We had killed inflation; we had almost zero inflation between ’93 and ’99. Menem had the constitution changed, and he was reelected. He did all the things that you would have to do to free ride the political system. In 2003, I was able to sell the company for $1.

Kaizen: This is just the meatpacking?

Zorraquin: Well, meatpacking was, at the beginning of 2000, 80% of the assets. We took the asset out of the balance sheet, and we kept the appliance business. With the farming business that was part of the group, we were able to sell them, and they were kept in the family estate. We sat on one farm because, in late 2000 when this crisis contributed money to the company, my father was buying assets at fair market value. That was one way of bringing money into the company, and keeping some value.

That was never challenged, because it wasn’t very well. There were some open bids, and it was very cleverly put together. The farms remained in the family estate. I was left alone running what was left of the company—the bankruptcy process. By 2004, I would say I was drained. The appliance company was doing okay, but all of these processes had done quite a lot of damage to my psyche.

Kaizen: I’m sure.

Zorraquin: I decided that for two years I was going to slow down my work, and that’s what I did.

Kaizen: You took a recovery period.

Zorraquin: I went into History, did a History guide degree at the University of La Plata. Then I went into Theology and started at the Catholic University of Buenos Aires. The appliance business was run by a CEO all that time. I was involved in the meatpacking business, and it was very well run. I didn’t have to worry much. I remained the chairman of the board of the holding company until 2006.

What was left from the crisis was a legal suit from some shareholders. It was a suit I was able to win, but it took me 10 years to win. They accused me of wrongdoing and of taking money out of the company. I proved that this was not true. They were taking of a blackmail type of approach. Basically what they wanted was for me to personally buy their shares because they had lost money in it. I was out of this crisis by 2008 or 2009, but in 2006 I decided to leave the board of the holding company. I think it was a very clever move because I was being attacked by shareholders just for being the chairman of the board. I said it doesn’t make sense, so I voted on a professional chairman that took over from there on.

Kaizen: Distancing?

Zorraquin: Yes. From there the shareholders started to come to the shareholder meetings, and they started to be more polite and say, let’s think about the future. It was something personal with me.

Kaizen: That takes the personal issue out of it.

Zorraquin: Yes.

Kaizen: Looking back for a moment, the crisis of the late 1980s was largely hyperinflation. The one in early 2000 sounds like it’s a combination of natural disaster, the foot-and-mouth disease with the hyperinflation, and a political environment as well.

Zorraquin: Yes. The microeconomic collapse of the late 2000, and political. Now, Fernando de la Rúa was elected president in ’98. He only lasted two years, because the Peronist party ousted him. They made his life miserable, and he had to resign. From there on, we had five presidents in one week. First came the Vice President, and then came the President of the Senate. He resigned, and then became the President. Then came the President of the Supreme Court, and finally …

Kaizen: You have political chaos.

Zorraquin: Chaos.

Kaizen: It just becomes impossible.

Zorraquin: Impossible.

Kaizen: I believe in the U.S. there was a collapse of the NASDAQ market in 2001, so there’s turmoil at the international level as well.

Zorraquin: Yes, but Argentina was so disconnected with the national turmoil. We had so many issues at hand here.

Kaizen: What are the lessons to take away from going through that? Is there a medical lesson for the veterinarians about foot-and-mouth disease? How do you insulate yourself from the political pressures, indexing your monies to the hyperinflation problems? What would you say are the major business lessons from going through that?

Zorraquin: There are probably things I would not do again if I had to go back. I was too much involved directly with the banks and the negotiations, and the banks wanted to go after me. They wanted to secure some of their loans with personal guarantees, and a lot of them I did. This probably cannot be written, because in Argentina it would be against the law to do that, particularly in the position I was in.

But, I had no choice. If I had not done it, the company would have probably gone bankrupt and liquidated. It would have sucked the rest of the assets on the appliance business. But it was risky, so I would not do that. The other thing that I learned is that I could attract and hire someone to run the business through crisis with me who was the perfect person for a policy situation.

Kaizen: Who was that?

Zorraquin: He had previously been a manager of a bank. He was a risk taker. We had to make a lot of risky decisions while surfing through bankruptcy. We had lost most of the capital and needed to make decisions of partnering with this and that one to bring cattle into factories and to be able to put the machine to work again.

Kaizen: Can you say his name, or is that a private thing?

Zorraquin: That’s a private thing.

Kaizen: Fair enough.

Zorraquin: That was very important for me, and it helped me also to stay a little away from the front of that in some instances, not with the banks but probably with the farming sector that were the suppliers of cattle to these factories. It was just very traumatic.

Kaizen: That crisis comes to an end, and you take some years off and study some history and theology. At what point did you reenter business?

Zorraquin: I never left completely.

Kaizen: You were chairman of the board you said?

Zorraquin: I was chairman of the board, but I didn’t have a good time when I came to the office. I didn’t feel at ease, and I was a very frustrated with the process, so I wanted to stay away. I knew that the appliance business was being run well, and so I took a lot of time off and spent a lot of time on the farm. For the first time in many years, I spent time at home because I had been out of home for such a long time with my kids that were young. I regained a lot of quality of life, you could say, that I had lost through the crisis. I had always been very active in sports. In the middle of the worst part of the crisis, I was probably running 35-40 miles a week, and I felt like I could sleep for hours. I was lucky not to have a heart attack.

Kaizen: You’re in your middle 40s at this point?

Zorraquin: I was in my middle 40s, and I started to have more of a passive life, studying and reading. I didn’t need to go out and run like a kid anymore. I started to enjoy other aspects of life—going to the farms, going to pick the kids up from school, going to my theology class, and reading. I would take my finals, and when I would come home from a final exam and open the door of my house, all the kids were waiting to ask, “How did you do dad?”

Kaizen: Nice.

Zorraquin: It was a very nice time, and my self-esteem was a little shit through all of this process. But, over time I started to regain some confidence, and I started to come to the office almost every day. I started to enjoy what the company was doing and started to work with the CEO, who is still the CEO of the company, more closely.

Kaizen: Your zest for business is returning as well.

Zorraquin: Regaining more with time. I became with ESEADE University, and I joined the board of the ski club. Then I became part of the nature conservancy. But I almost left all business-type environments. I was out of the business conferences, the business groups, and the chambers. I wanted to stay out of that for a while.

Kaizen: How would you characterize the structure of the business now? What are your major operations? You’re chairman of the board, you said?

Zorraquin: I’m chairman of the board of Rheem.

Kaizen: Of Rheem.

Zorraquin: Right, not of the holding company. Rheem is an operating company that has two factories. It’s the number one manufacturer of water heaters in the region, in the southern corner of South America. Rheem U.S. is a minority partner of this company since 1947, for 70 years.

My primary job is looking more into the future and working broad development. I have a relationship with the partners in the U.S. That’s what it is best for the business, and that’s the way I feel more at ease now with what I do.

Kaizen: During your standard workweek, what range of activities do you engage in? Reading, meetings, and so forth?

Zorraquin: Yes, and I also spend some time with my personal finances. I manage the finances of a farm I have in Uruguay, for example. I typically come to the office every day. I enjoy being in my office. I read, and I write. I took a trip to New Zealand and Australia to look at the solar business that Rheem has in Australia, which is probably one of the best solar businesses in the world for water heating. We are trying to put together a business plan to make an investment in solar business. I am probably in the office if I am in Buenos Aires for the day.

Kaizen: You mentioned you work with ESEADE University, and the ski organization, and the nature conservancy. Can you say a more about ESEADE University—what is your interest in working with that university?

Zorraquin: My primary interest is to keep alive the think tank to spread ideas. That is my primary interest.

Kaizen: You’re characterizing ESEADE as a think tank?

Zorraquin: Well, it started as a tiny think tank, but it became, over time, a traditionally run university. Small, but it is a university that is involved in different careers, and not necessarily with the purpose of teaching economics. But, I still believe that’s part of the essence of ESEADE, and they should have a flag. One of my ideas is that they should have a flagship graduate program that teaches politics and economics, to make people understand what is a free society and what is a free market.

Argentina needs that more than ever. It’s very relevant for the changes that Argentina needs. There’s a lot discussion about whether this has to be the size of the state, if we need to have a very regulatory, what should be the level of protection of industries. What is the economic model that will bring more jobs and opportunity for people? Discussions are everywhere in the world. The U.S. is the same.

Kaizen: Absolutely.

Zorraquin: That’s on one hand. On the other hand, it’s an institution that has to make money to survive, so how do we improve the operation and bring more students so we can have a financially stable institution that will allow us to dedicate some resources to spreading ideas?

Kaizen: The think tank element of it as well. The nature conservancy, how long have you been involved with that?

Zorraquin: I’ve been involved for four years. Nature conservancy started in Argentina eight years ago with a group of U.S. citizens interested in protecting the grasslands of Patagonia. There are few places in the world where you have such a big extension of grasslands. Mongolia is one; Patagonia is another. That was the reason why they wanted to come here, and these eight or nine American citizens were all involved in Argentina in some capacity. Either they have a ranch in Patagonia or they came to fish in Patagonia. I have always been very active fishing in Patagonia. My family has a property in Patagonia. Just by coincidence I got to know the Nature Conservancy, and I got involved.

For the last two years, I have been the chairman of the board of the Argentine chapter in which we still have 12 members of the board. Four are Argentines, and eight are Americans. The program has grown from the grasslands to other areas of Argentina where we are actively working. Shell oil and gas is one. We’re helping to protect the biodiversity in places where you dig or rig. The riggers of Patagonia is another one. Sustainable culture in the north is another one. Those are areas where we are working.

Kaizen: Looking back on your career in business, you have said a lot of things go into being successful in business—a willingness to work hard, to learn the business and the all the business’ aspects as you rise up in the ranks, strategic thinking abilities, and leadership abilities. Particularly with the ups and downs, you mentioned a lot of psychological issues—being able to deal with really extraordinarily difficult things. Are there things you would single out as most important for young people to work on that maybe they wouldn’t be thinking about when they’re 20-25?

Zorraquin: One thing that helped me out through the process of growing a big company through a crisis was separating, in my mind, the property or the ownership from the company. Let me try to explain. I knew that the net worth was at risk, but I could not take the decisions based on that consideration because I had to think more about the survival of the company whether the shareholders would recover part of the assets or not. If I had always thought about how to recover the assets, I would have missed the business opportunity or the business aspect of the transaction. To put it in a more crude way, I knew that I could lose everything, and I was ready for it.

Kaizen: Would you characterize that as a mental toughness, a clarity of priorities, or courage in the face of risky decisions?

Zorraquin: Maybe it was prioritizing. I had no fallback position, basically. Because, if everything went wrong, then all that I have at stake there would be lost. I knew that could happen, so it’s a matter of trusting that things will develop in some way. You have to be patient, you need to know that the process is long, and you have to rush into taking decisions.

You have to be able to do something between what your lawyer suggests and what your management team suggests. Sometimes you cannot go only through your legal advice in a bankruptcy; you have to keep your business advice as well. You have to move from one chair to the other one. This is legally risky, but this is something that’s worth doing because you have some business advantages. Don’t go against the law but know that there is a fine line.

Kaizen: Exercising judgment.

Zorraquin: Right.

Kaizen: With competing values, so to speak.

Zorraquin: I would say also, now that you mention judgment, it’s relying in my judgment. Many times my wife has said, “You don’t rely on other people’s judgment, and you have to be able to get more advice.” That’s a very good point. But, on the other hand, I thought a lot and I studied a lot about the situation. In the end, I relied on my judgment.

Kaizen: That’s what a leader has to do, right?

Zorraquin: Yes.

Kaizen: I want to raise some questions about Argentina. It sounds like a lot of the business troubles and successes you’ve had are tied to what’s going on in Argentine culture, the political culture, and so forth. How would you characterize Argentina, in the international perspective, in terms of its core entrepreneurial culture? Healthy? Struggling? What would you say?

Zorraquin: I think the Argentines are very entrepreneurial, but they are trapped in a very short-term horizon because the microeconomic system of Argentina has been very unstable.

Kaizen: Argentina has great human capital, right?

Zorraquin: Yes.

Kaizen: There are lots of natural resources, but it does under perform?

Zorraquin: It under performs because there is always a very short-term horizon.

Kaizen: That’s driven by macroeconomic instability?

Zorraquin: Economic and political. But, if there is little stability, immediately what an entrepreneur knows that she or he can have a longer-term horizon elsewhere if the business can be established outside of Argentina. The idea is born here, but they immediately flourish elsewhere.

Kaizen: Outside of Argentina?

Zorraquin: Yes, immediately.

Kaizen: This ties to my next question about brain drain issues. There’s, anecdotally, so many really smart Argentines that come to the United States or Canada or wherever for University. A lot of them don’t go back to Argentina. Is that a challenge, or a problem?

Zorraquin: No, I don’t think that brain drainage is a really big problem. You could find that scientists have left for decades, but they left because there was no money put into science and research, and they wanted to be physicists, for example.

Kaizen: Physicists?

Zorraquin: If you wanted to be a physicist you had to go somewhere else, because if you stayed here you would probably starve. That’s a brain drain, but professionals have gone in and out and have come back over time.

Kaizen: Because there are opportunities.

Zorraquin: But, what is true is that a lot of Argentines that leave for some time or forever do very well because they can adapt very rapidly to different environments.

Kaizen:  Maybe the macroeconomic uncertainty trains a mindset that enables them to be adaptable wherever.

Zorraquin: Yes, to the point that they find some environments to be too slow and not very challenging because things typically work well.

Kaizen: That’s something from the entrepreneurial side of the mission. On the ethics side, Argentina also has a reputation for a high level of corruption politically. How are those challenges for doing business?

Zorraquin: That creates a very big challenge for business. You can run a company without becoming involved in any corruption, small or big, zero. You can do it, provided that you have a certain position. At Rheem we conduct business 100% transparent, and we have very good standards, but it’s probably the best brand in the market. The result is we can conduct business because we have such a grand reputation, a reputation that has been made up after many decades of consistent business philosophy.

Having said that, if you want to start a business from scratch, you will be confronted from the very beginning with a lot of ways to bypass or shorten your way through the system, and you will be confronted with corruption. I would say this is becoming less and less, thank God, because the culture is changing. People understand that corruption only benefits the corruptee and the corrupt, but it has a detrimental effect in society, very detrimental. That is coming to light and is being discussed.

But, for example, I have a friend that started a business and wanted to build a particular sophisticated device in Argentina. This was three or four years ago, and he could not import stainless steel screws that were particular for that application. He had some friend that brought the stainless steel screws in the bucket, but as the business grew…

Kaizen: It’s not sustainable.

Zorraquin: It’s not sustainable. He wasn’t going to drive; gas wasn’t efficient. He went to Uruguay and set up the factory in Uruguay. Now, he can do it here because things are changing. You can remain non corrupt, but your road will be harder.

Kaizen: Yes, good. That’s encouraging. Especially, if you say the culture is changing, and more ordinary Argentinians are aware of the corruption issues and resisting, then that’s promising.

Zorraquin: But, I have read some polls in the past that say 40% of Argentines believe that breaking the law is not so bad. That’s how high it is in the mind of people. If the law doesn’t adjust to their way of doing things, their behavior, and their idiosyncrasies, they think it’s okay to break it. That’s important, very important. How do you change that over time? Through education and leadership.

Kaizen: But, also not having corrupt laws.

Zorraquin: Yes.

Kaizen: That force people into awkward situations.

Zorraquin: Laws that are so detrimental for the functioning of society, and there’s no way to bypass the law.

Kaizen: A couple more questions, just to wrap up. You’re in your 50s now?

Zorraquin: 57.

Kaizen: You’re financially successful, but you come into the office pretty much every day, as you said.

Zorraquin: Yes.

Kaizen: You could, if you want to, just retire, read, do family time, and so forth. What, in addition to financial issues, motivates you to come to the office every day?

Zorraquin: I think that I have to close the circle. I have now, one project that will take three to four years to materialize, and I think it’s going to be a milestone for my professional career. I’m very motivated for that project.

Kaizen: Looking back to your 20-year-old self when you were preparing yourself for your career, what advice would you give to other young people who are in their early 20s? What do you need to know to get the most out of yourself?

Zorraquin: I think that the advice would be to try to experience with as much as you can with the things that you feel you like most. Out of the box thinking. One thing I regret is I was so focused on structure in the things I had to do. Looking backwards I think, what if I had considered this and that? What if I had traveled abroad after high school and spent a year? I think all of those things enrich your life, and if you can do that at an earlier stage, it’s a lot of human capital that you can then deploy over time.

Kaizen: Alright.

Zorraquin: My recommendation would be to try to come out of high school with a very open mind, and utilize trial and error. Try this, and if it doesn’t work let’s go to the other one.

Kaizen: Be aware of the structure that you need to follow, but look for ways to get outside that structure and experience as much as you can.

Zorraquin: Yes.

Kaizen: Be flexible and open, especially when you’re young.

Zorraquin: I think traveling is a phenomenal. Today, it’s so easy to travel. My children have traveled since they were very young, but today I have two who live outside of Argentina, and my daughter is getting married in three months. She has decided that she will go to Australia for two or three years.

Kaizen: Wonderful.

Zorraquin: Melbourne to work and study. Because, they have been so much immersed in this world culture, no? Travel, and see, and learn, and language. They are very open. That, not only enriches their lives, but I think it increases their potential for success, no matter where they live.


This interview was conducted for Kaizen by Stephen Hicks.

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

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.

Only in Argentina?

Saturday, July 12th, 2014

map-argentinaA fun and informative post about 20 things that only happen in Argentina.

Related:

* Two of our Kaizen interviews on entrepreneurship and ethics:
Enrique Duhau and Eduardo Marty.

* Business in Argentina — interview with Federico Fernández and Martin Sarano.

* A comparison of how resource-poor Hong Kong’s relatively laissez-faire free market has taken it from poverty to riches while resource-rich Argentina’s experiments in statism have taken it from prosperity to decline and semi-functionality.

* Stephen Hicks’s keynote lecture at the 2010 Austrian Economics conference in Rosario, Argentina, sponsored by the Bases Foundation, the Faculty of Economics of the Pontifical Catholic University of Argentina, and the Instituto Hayek.

Interview with entrepreneur Enrique Duhau

Monday, November 11th, 2013

Entrepreneurial Agriculture

k27-coverEnrique Duhau is President of Administración E. Duhau S.A., one of the largest producers of grains and beef in Argentina. Educated in Buenos Aires, London, and New York, he was also co-founder of Apple Argentina and Maxim Software, which produced software for Apple products to be sold internationally. In 1990, he co-founded Junior Achievement Argentina, to teach young kids entrepreneurial abilities and philosophy.

Education and early career

Kaizen: Argentina is noted for its agriculture, and your company is a big part of that. Your story starts here in Buenos Aires?

Duhau: Yes, I was born here. My mother was born in England, but her parents were born in Argentina. And I have a long list of entrepreneurs on both sides.

Kaizen: Is entrepreneurship in your genes or is it family culture?

Duhau: Argentina was very, very entrepreneurial a century ago when my ancestors came here and it still maintains the culture. London Business School, where I studied, does an annual survey of many countries. Argentina is not at the top, but it is quite high on the list.

Kaizen: Is this in terms of young people’s entrepreneurial aspirations?

Duhau: Not just aspirations—doing lots of new business. Part of it is because people for some reason are catapulted into entrepreneurship.

Kaizen: Entrepreneurship by necessity.

Duhau: Yes. But I think it is a mixture. Some people by necessity become entrepreneurial, but for others it is not a necessity, it is a vocation. I think it is part of the country and culture.

Kaizen: What was your schooling like?

Duhau: I went to an English-Spanish bilingual school here in Buenos Aires through elementary school and high school. Then I went to university here in Argentina. There were two types of universities then: government and private. Most of my friends went to the private universities, but I decided to go to the state university. I had always been very interested in getting into contact with everyone across society.

Kaizen: A wider mix of people?

Duhau: Yes. It was very, very interesting.

Kaizen: When you were young, did you plan to go into business?

Duhau: Since I can recall, I’ve always dreamed about business and I discussed with my father different types of business and how I could make money.

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Junior Achievement Under Attack by the Argentine Government

Thursday, September 13th, 2012

Kazien interviewee and Junior Achievement Argentina (JAA) founder Eduardo Mary (left) alerted us to this story from La Nacion. The Argentine government is attempting to shut down JAA because it teaches young Argentinians the basics of business creation and entrepreneurship, and consequently promotes free market capitalism and individual liberty.

Read the article (in Spanish) here.

Read our interview with Eduardo Marty here.

CEE Interview with Federico Fernandez and Martin Sarano

Friday, October 14th, 2011

Dr. Stephen Hicks, CEE’s Executive Director, talks with Federico Fernández and Martin Sarano, co-founders of Bases Foundation, on the political and economic climate in Argentina.

Part I:

Part II:

Fall 2011 Guest Speakers Federico Fernandez and Martin Sarano

Monday, October 10th, 2011

The Center for Ethics and Entrepreneurship welcomes Federico Fernández and Martin Sarano to Rockford University this Thursday, October 13, from 11 am to 12:15 pm, in Scarborough 208. Fernández and Sarano will give a joint lecture entitled “Doing Business in Argentina: The current business climate and the ethical dilemmas it presents to entrepreneurs and corporations.”

Federico N. Fernández and Martin Sarano are the co-founders of Bases Foundation, a non-for-profit organization devoted to foster awareness and promote the benefits that individual freedoms bring to society. Mr. Fernández (President of Bases Foundation) is currently editing a book on Karl R. Popper which will be published in 2012. Mr. Sarano (Vice President of Bases Foundation) is a Chicago Booth MBA student and has worked in different corporate and consulting roles in various industries.

All members of the campus community are welcome to attend.

View a PDF of the flyer for Fernández and Sarano’s talk here.

Interview with Eduardo Marty

Monday, February 21st, 2011

Eduardo Marty is the Founder of Junior Achievement Argentina, an educational outreach program. Students in JA are taught how to prepare a business plan and raise funds. Approximately 50,000 students per year across Argentina participate. Marty has also held academic posts as professor at the University Francisco Marroquín, Guatemala, and the University of Buenos Aires. He was the host of Buenos Aires’s major television talk show Boom—Politics and Economics. We met with Mr. Marty in Buenos Aires to talk about his business education programs for young people and the state of entrepreneurship in South America.

.
Kaizen: Where did you grow up in Argentina?

Marty: In Buenos Aires. I went to elementary and high school here and the University too.

Kaizen: Before university, what was your education like?

Marty: Well, I went to school called National Buenos Aires. That’s the oldest high school in Buenos Aires, created in 1770. It’s a public school, but it’s a very prestigious one. It was the first school in Buenos Aires. To enter, you need to pass a very tough test once you finish elementary school. From five students submitting and applying—they accept just one. Our education is divided into elementary school and then secondary school. When I was in sixth grade I tried to pass the exam and I did it, so I was one year younger than the rest.

The Jewish community attends that school a lot. It is a very intellectual community here in Buenos Aires. By the way, you know that after New York Buenos Aires has the second largest Jewish community in the hemisphere.

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January 2011 Issue of Kaizen

Thursday, January 20th, 2011

In our latest issue of Kaizen we feature an interview with Eduardo Marty, Founder of Junior Achievement Argentina and former host of Buenos Aires’s major television talk show Boom—Politics and Economics.

Also featured in Kaizen are student essay contest winners Kathleen Simmert, Nathaniel Branch, and Amelia Franceso, and guest speaker Nimish Adhia.

A PDF version of Kaizen is available here. We will soon post separately the full interview with Mr. Marty.

If you would like to receive a complimentary issue of the print version of Kaizen, please email your name and postal address to CEE [at] Rockford.edu.

“Start-ups Bloom in Argentina”

Wednesday, September 15th, 2010

Via the Policy Forum on Entrepreneurship, here is a good New York Times article on entrepreneurship in Argentina. With the government in debt, and with little access to credit, “slowly, Argentines are beginning to trust and invest in each other.” The article profiles the founders of a software startup as examples of how the response of individuals to the stormy economic climate of Argentina is changing.

Read the article here.