BW: Companies' Love-Hate Relationship with Chavez

JUNE 25, 2007

GLOBAL BUSINESS
By Geri Smith

A Love-Hate Relationship With Chávez
Companies are chafing under the fiery socialist. But in some respects, business has never been better


Just how hard is it to do business in Venezuela? As President Hugo Chávez leads his country toward "21st century socialism," hardly a day passes without another change in the rules restricting companies. Want to export? First get government certification that there's no domestic shortage of your product. Want to import? Prove that the goods aren't available locally. Chávez has already forced global oil giants, phone carriers, and power companies to hand over control of key assets. Now he says he might nationalize banks, hospitals, and steel companies. No wonder foreign direct investment, which averaged $3.2 billion annually during Chávez's first three years in office, plunged to a net outflow of $2.6 billion last year. "It's a bit like the...French Revolution," says Edmond J. Saade, president of the Venezuelan American Chamber of Commerce (VenAmCham). "Power to the people, death to the nobility.'"

No doubt, Venezuela is a pretty scary place to invest these days. But in some respects business is better than ever. Thanks to soaring oil revenues, Chávez is spending heavily--some $13.3 billion last year alone--to win support for his "Bolivarian Revolution." For the past three years the economy has grown at an 11%-to-12% clip, while consumption has expanded by 18% annually. The poor, 58% of all Venezuelans, have seen their meager household incomes more than double since 2004 thanks to cash stipends, subsidized food, and scholarships from the government's social-development programs. The result: Sales of everything from basics such as Coca-Cola (KO ) and Crest toothpaste to big-ticket items like Ford (F )SUVs and Mercedes-Benz (DCX ) sedans have taken off.

You might call it business' love-hate relationship with Chávez. Local and foreign companies alike are raking in more money than ever in Venezuela. Two-way trade between the U.S. and Venezuela has never been higher. Venezuela exported more than $42 billion to the U.S. last year, including 1 million barrels of oil daily, and imported $9 billion worth of American goods, up 41% from 2005. But since Chávez declared President George W. Bush Public Enemy No. 1, Americans prefer to keep a low profile, even though VenAmCham's 1,100 member companies account for more than 650,000 jobs. "Consumption has been going through the roof, and commercial relations between the U.S. and Venezuela are still workable, but on the political front there is confrontation," says Saade. "American business is caught in the middle."

UNDENIABLE POTENTIAL
Even global oil companies-- Chavez's chief targets so far--are likely to stay put. Although they have been forced to turn over control of their projects to the state-owned Petróleos de Venezuela (PDVSA), Chávez can't afford to alienate them. Ventures involving foreign companies account for 40% of Venezuela's output of 2.4 million barrels a day. For the multinational oil giants, the country is too important to ignore, even if it means they no longer call the shots. "Venezuela's oil potential is so great," says a foreign oil executive who declined to be identified. "We're not making huge returns, but it's not a financial black hole, either."

Other industries are not only putting up with Chávez but also benefiting directly from his programs. Take Intel Corp.: Sales of its microprocessors in Venezuela jumped by 15% in 2006 and look set to grow at the same pace this year as the government equips schools and public offices with new computers. In December, Caracas started a joint venture with China's Lanchao Group to manufacture low-cost machines called "Bolivarian PCs." The venture, 60% owned by Lanchao, will produce 80,000 computers in Venezuela the first year and 150,000 in 2008, including a stripped-down desktop model that will cost $450. Intel says the government alone could buy as many as 300,000 computers. "There's a lot of money in the Venezuelan market now, and it's important to take advantage of that," says Guillermo Deffit, Intel's business-development manager in Venezuela.

Sales of cars and cola are booming, too. Ford and General Motors Corp. (GM ) have manufactured cars in Venezuela for nearly a half-century, but with the strength of the bolivar, imports of pricier models such as the Ford Expedition sport-utility vehicle and GM's Silverado pickup are on the rise. Last year, Ford's sales increased 52%, to nearly 62,000 cars and trucks, as its imports more than tripled, to 28,000. GM's sales jumped 21% last year, to 71,000 vehicles, and so far this year are on track to climb by 50%. And sales of Coke and other beverages made by bottler Coca-Cola Femsa (KOF ) in Venezuela jumped 25% in the first quarter of 2007, in spite of a two-day shutdown of the company's distribution center in March for a surprise audit by tax authorities.

AN UNCERTAIN FUTURE
For local companies that have managed to survive Chávez's ever-changing business rules, the fast-growing economy offers some small solace--but few guarantees for the future. "We have fewer competitors every year because people throw in the towel," says the owner of a family company that provides raw materials for a variety of industries. He declined to give his name, fearing government retaliation, but he says his profit margins are getting fatter as he faces less competition. Still, his company has shrunk to just 100 employees from 300 since Chávez came to power in 1999, and sales have fallen by half. Dozens of his friends have left the country in recent years, and one of his top managers is decamping soon for Florida, where many middle-class Venezuelans have made their homes. But he's determined to stick it out.

As Chávez continues his socialist crusade, there are signs of rising discontent: A recent decision to revoke a popular TV network's license sparked outrage among university students, who took to the streets in early June. And the consumption boom is fueling inflation, now running at 18% annually. In any event, the fiery President can hardly do without business. Private companies account for half the government's nonoil tax receipts and 83% of jobs, says Ruth de Krivoy, a former Central Bank president who runs Síntesis Financiera, a Caracas think tank. "The government believes that state-run companies...will take the place of the exploiting' business class," she notes. "But if you erase the private sector from the map, what do you have left? Not much."




Geri L. Smith is BusinessWeek’s Mexico City bureau manager.