Oscar Espinosa Bedoya, President of Ferreycorp, Caterpillar's distributor in Peru since 1942 and a leading force in the country's construction, mining, agricultural and transportation equipment, vehicles and machinery sector, talks to United World about the company’s strategy and how it has adapted itself to changing times.
Peru’s growth in the last decade has been an example for Latin America and it made the country be selected to host the summit of the IMF and the World Bank, which hadn’t taken place in Latin America for 50 years. Ferreycorp operates, works and provides services to two sectors that have been key for the economic growth of the country: Mining and Infrastructure. What has been the contribution of these sectors to the dynamic growth of Peru?
What is new and unprecedented in Peru is that the economic policy has remained the same for 20 years. Before that, usually, when a government took office, the policy was changed. They even adopted some destructive polices that stopped the country. But in the last two decades, because of the continuity of this effort, the cumulative rates of growth have been impressive. Even though the 2015 rate is lower than in other years, this shouldn’t be a reason to panic. Growing 2.5% or 3% is not the end of the world. There are some countries that would give anything in their power to grow at these rates. This will be overcome. The country's future is very promising, the amount of natural resources we have is extraordinary. The marketing potential is huge. The income level of the population is growing; statistics show strong growth of the middle class. This is a country in which everything is yet to be done. In other words, we have the resources and the demand. In this company, we are very optimistic, maybe because we are linked to products that are related to the country's development. Our company is in the base providing equipment and capital goods for the development and growth of the mining, construction, fishing and energy sectors. Though there is disappointment in certain sectors of the population and in the private sector, we have to highlight that we are not in recession: there are stable indicators such as the rate of inflation, the level of net international reserves, the growth of critical sectors or the domestic market. Although there will be elections next year, the political projection is that the country will continue along this path.
Given the current situation, it is necessary to analyze external factors such as the fall of the value of minerals, the levels of economic growth in China; and the internal factors such as proximity of an electoral process, etc. to understand the current growth rates of the Peruvian economy. How have these factors affected the Peruvian economy?
Obviously, the above-mentioned factors affect the economy. The falling of the value of the minerals may have impacted on the new projects in mining, which is one of our markets. However, the customers who are in operation are still demanding our machines, equipment and service even more intensely. Regarding the exchange rate, for example, many companies must be concerned because they sell their products in the local currency, and they are indebted in dollars. If the exchange rate grows, the liabilities grow without matching the corresponding assets. These companies are in trouble. It is not our case. We are a company that borrows, buys, and sells in dollars. Then, the devaluation of our currency creates momentary distortions which affect our balance, but, after a few months we restore the balance by selling the goods that were purchased with a certain dollar at a certain exchange rate. It’s like a more valuable dollar. We are protected. In the first half, Ferreycorp had significant exchange loss, since this year the devaluation has been greater. But we are recovering by generating higher gross margins month by month. We should not worry over the key elements of the economy. It requires sensible continuous management to make the Central Bank keep a moderate devaluation, with moderate inflation and this also guarantees the stability of the following years.
Where does most of your core business come from? The mining sector?
We have quite a diversified structure. Mining constitutes 50% of our sales, but we are present in construction, energy, agriculture, fisheries, almost in all the dynamic sectors. In mining, although prices and social problems have stopped certain investments, the large companies that are operating are reinvesting and maintaining and increasing production levels, as mentioned before. For example, Southern Copper is still active, and it is expanding Toquepala. Cerro Verde project is still a huge investment. The expansion that started in 2014 may lead it to become one of the largest copper mines of the world. These and other projects, despite the price crisis, are booming and they are still demanding products, parts and services, allowing us to maintain a leading share in this market.
After three-quarters of a century operating, how has Ferreycorp managed to adapt to the economy and how has it diversified to maintain a line of growth for so many years? What is the key?
We were in the consumer goods business until the late 80s, with high market share. We left this business to concentrate on capital goods, which requires many resources. We made decisions that allowed us to grow to where we are now. There are many companies with whom we have competed that have disappeared now because they were not able to adapt themselves and implement corrective measures in time.
What is the expansion strategy of the company in other countries like?
The strategy to continue growing has several elements. One being diversification in the economic sectors we serve, in our outreach efforts - through differentiated companies and businesses and the products and services we offer. In our core portfolio of Caterpillar, other lines are added such as cranes, asphalt plants and crushing equipment from prestigious brands.
Another great way to expand is going abroad. Our foreign growth has been possible, to a great extent, because the same brands we market invite us to represent them in other countries. They are happy with the way we handle the business. We are a customer-focused company and that creates a series of processes and attitudes which are some of the reasons for our growth. This happened with Caterpillar, Central America, and also with Mobil lubricants.
We are in six countries and the most recent is Chile, with Terex cranes. In Caterpillar business, we respect the territories held by other dealers radically, and we maintain a relationship with them which we really appreciate.
What does Ferreycorp represent for Caterpillar World?
In April, Caterpillar made a celebration and invited the 20 best dealers in the world; three of them were from Latin America. One of those three was us. We are one of the dealers with the largest share in their market. We are proud, and it encourages us to continue growing. We have complete support from Caterpillar.
You were one of the first companies to enter the Lima Stock Exchange and, currently, 37.21% of your company’s shareholders are foreigners. How important is corporate governance given the nature of your shareholders?
We entered the stock market in 1962. That leads us to the subject of corporate governance. Although this concept began to spread after the crisis caused by Lehman Brothers, we were already into this because we had been issuing stocks and bonds; in 1997 we issued ADR shares internationally. At that time, 50% of shareholders were foreigners. That led us to improve our corporate governance policies. We have gained the Exchange recognition like the "Key to the BVL" for the best corporate governance on several occasions. Our actions are part of the Corporate Governance Index of the Stock Exchange since its inception. Moreover, we are members of a distinguished group of companies, The Latin American Companies Circle, which is an institution supported by the OECD and the International Finance Corporation. It is a group that seeks to influence other companies positively, using models like ours to enhance production levels, their practices and corporate levels. It is thought that the market will benefit in the end as more companies adopt this model.
We are delighted to be very active in this field, trying to incorporate good practices constantly. We have an office of investor relations, focused on them and on the financial analysts, providing them with ongoing information. We are renowned for our criterion of equality when making decisions. We have more than 3,000 shareholders who believe that they are well represented because the company is open and transparent. We are keen to keep our good corporate governance practices.
How close is your relationship with the US market?
Our business activity is not oriented to market products in the US. But we are in the same line of most American products and we do it with great dedication, because it defines us well in the market in which we operate. Apart from our main represented brand, Caterpillar, we sell several other American brands. Although we have also products from other origins, we are more linked to US capital goods.
At the same time, we must highlight the strength of our relationship with American clients that are linked to mining, which we have accompanied for many years in Peru. Similarly, most foreign investors are from the US.
We were talking about creating virtuous circles in relation to what each one of the sectors of the economy needs. How can Peru continue growing and creating virtuous circles today?
The gap that we have in infrastructure as well as in mining is enormous. It is estimated that US $ 90 billion in infrastructure projects are needed. This represents, in turn, valuable opportunities for companies like ours, a leader in construction such as Caterpillar. An expanding market should generate investments, which leads to the revitalization of the virtuous circle of growth: private investment, product growth, job creation, rise in consumption, and, again, investment expansion. We believe that, although the country’s growth is slowing down, the future is promising.
From your point of view, what is the key to unlock all this?
There are two approaches: one of them being macro national, and the other, entrepreneurial. As regards to the macro national approach, I think we should continue doing what we have been doing. 20 years ago, the country took a route based on a free market economy and economic stability and predictability. We must continue it. This, among other things, creates a major attraction for foreign investors, who, by the way, get the same treatment as domestic investors regarding tax and profit repatriation issues. In addition, along with significant poverty reduction, not only social equity is obtained, but also the middle class is expanded and consumption is increased; all these factors also generate investment. Even though Peru’s is still a small economy, it has elements that make it interesting.
Regarding the business sector, not only do they have to adopt and maintain good practices, but they must constantly adapt to new realities, including the use of advanced technologies and new concepts in business. In our company, we are strengthening the strategy to emphasize the focus on the customer and to continue to transform our machine sales to "sell" productivity. We want the success of our customers to whom we offer machinery, equipment, services and technology.
Warren Buffet said "Someone sits today in the shadow of a tree planted long ago." Where should we plant trees today in Peru to provide the shadows of tomorrow?
We "plant" a careful attention to our customers with machines, service and technology that give us "the shadow" of their future loyalty. It's what Caterpillar called sow, grow and harvest. In a business process such as the exploration of a mine or the construction of a road, the first thing needed is machinery. We support growth sectors, we sell productivity and technology so that the client, who has the machinery, has a profit and, therefore, he will want to make it better and more efficient. The level of economic efficiency and productivity are very important to grow.
Given the situation that we are experiencing at a global level, for example in China, where the several devaluations of their currency have taken place, people are much more careful when deciding where to invest, especially in long-term investments such as in the mining or infrastructure sectors. Facing the political transition Peru will go through, what message would you like to send to the international investor who wants to come and invest here?
What we, Peruvians, have to do is to attract foreign investment and to welcome foreign capital to supplement domestic capital stock. We have conditions that have allowed a high level of investment so far, and this should continue. There is economic stability, we are in the Pacific Alliance and there is a growing effort to improve our competitiveness. As some Latin American countries are in crisis or are, in my opinion, on the wrong track, it is pretty easy to stand out. The message to potential foreign investors is showing a growing market which allows them to develop investment projects and to take advantage of both the local and the foreign market.
One mechanism to continue growing and to open the market could be the signing of the Trans-Pacific Partnership. What is your opinion on the signing of a deal like this?
Although there are some opponents to this initiative, we are in favor of this agreement as we were for the free trade agreements (FTAs). It is a kind of effective expansion of the FTAs. Comex Peru, of which we are a member, is an institution that promotes international trade and attributes of an open market economy and has an important position to disseminate and make the country move forward in this direction, as it did it with the negotiation of the FTA with the United States. I believe that experience shows that free trade agreements, with appropriate support from national interests, are beneficial for the country.
You have the gift of speech, what title would you like to give this interview?
More than the gift of speech, I have many ideas and experience accumulated over the years. The title that I would give to this interview is "Ferreycorp bets on the future of the country with great optimism."