Fully aware of the challenges they face, Chilean SMEs are opening up new spaces in the US market. This is generating the emergence of new niches, such as in the service sector, in which both public and private development action is prevalent, and which are increasingly attuned to the demands of the export value chain.
By Fabiola Venegas
The segment of Chilean small and medium-sized enterprises (SMEs) that exports goods and services to the United States is undergoing a significant change. In 2007, there were 917 such companies with sales of approximately US$215 million. By 2015, the number of SMEs had decreased to 898 but sales had risen to US$320 million. This change demonstrates the ongoing growth of the average amounts being invested by the firms operating in the area.
In addition to the overall numbers, the composition of the sectors in which these SMEs operate has changed considerably. The traditional positioning of higher value-added products such as those pertaining to manufacturing, agroindustry and mining, has provided a boost to Chilean export SMEs in recent years. Raúl Ciudad, President of the Asociación Chilena de Empresas de Tecnologías de Información (Chilean Association of Information Technology Companies), or ACTI, views this trend in a global context marked by the leadership of the service sector. This is in contrast to the flat growth of the goods industry over the last decade.
“The United States is one of the largest purchases of services. Therefore, we have to understand and recognize what Americans are consuming while learning how to improve the Chilean export economy” he states. Ciudad also stresses the advantages of strengthening ties with trade associations in the United States, in order to “build the bridges that help Chilean companies establish themselves in that country and form connections with their clients”.
Consequently, public and private development agencies have placed the service industry at the heart of their strategies in the US market, as well as sectors such as health food and biotechnology. The road ahead is long since the overall value of Chilean SME exports in 2016 was US$1.468 billion, which is just 2.5% of all Chilean exports during this period, according to the Servicio Nacional de Aduanas (National Customs Service) and the Servicio de Impuestos Internos (Internal Revenue Service). Of this amount, sales to the United States accounted for 19%, with a value of US$276 million for that year.
In light of the improved growth expectations, strengthening the foothold of Chilean SMEs in the United States requires confronting a broad range of issues: from new strategies to maximize opportunities in relation to emerging products with sound prospects though trade missions or fairs; to the formation of partnerships with public and private US entities, and even state governments, as well as advisory bodies with specialized knowledge and sound positioning in the market. Nicolás Leal, CEO and founder of LAP Import, a company which has imported health food products from Chilean and other Latin American SMEs to the United States since 2014, provides a brief explanation of American tastes: “in the US you have to offer an innovative, indigenous product, but one that is not completely unknown”.
A further challenge includes raising capital, especially for support provided to companies beyond the early stages of development and internationalization. “It is necessary to bear in mind the business plan, logistics chain and production capacity, among other factors. Later, each company must decide whether it is prepared to export”, says the Director of ProChile, Alejandro Buvinic. ProChile is significant in this regard because it is implementing distinct initiatives across each stage of SME development in order to integrate these enterprises into trade missions and enable them to negotiate directly with importers.
“Depending on the particular vocation of the company (in question), it is able to improve its professionalism and adapt its offerings to distinct requirements, taking advantage of the trade links that Chile has with the rest of the world”, explains the Head of Competitive Development at the Chilean Economic Development Agency (Corfo), Claudio Maggi. He adds that the key is to clearly understand the competitive advantages that must be transferred to the external market, prior to working on the internal aspects of the product or service that needs “adapting or standardizing”.
The small share of SMEs in Chile’s overall export value provides a growth opportunity in terms of securing positioning in markets such as the United States, although this requires financing during the maturity stages. This is a requirement that is being addressed by the Chilean American Chamber of Commerce (AmCham Chile), which runs distinct support programs aimed at entrepreneurs. One such program is Look North in which tools are provided via workshops on the different types of investor options and available financing, in addition to affording participants access to networking spaces and contacts with institutions and organizations that operate on a global scale.
The Chilean Government, by means of Corfo, also implements financing programs that focus on early stages of development, including Scale, which was created in 2006 to support dynamic start-ups. Following three calls for applications to date, this scheme has supported a total of 50 projects, two of which are already trading in the United States: MyHotel, a platform that manages feedback information from guests; and TEART, which sells leaf tea with a disposable 100% biodegradable infuser.
Nevertheless, market actors recognize that available funds are still insufficient to provide support to SMEs in the more advanced stages of development and export. A further challenge is to address the lack of knowledge about international markets among SMEs. This reality is accentuated in the case of the United States because of the language barrier, says Gonzalo Brahm, Executive Director of Asela, the Latin American network of the Asociación de Emprendedores de Chile (Chilean Association of Entrepreneurs), or Asech. Accordingly, Asela has recently launched a program to support 25 entrepreneurs in the area of food who are looking to establish their businesses in the United States, having received financing from Corfo’s Nodos para la Competitividad (Nodes for Competitiveness) scheme and in conjunction with ProChile.
As well as emphasizing the importance of capital for growth, Brahm notes that once SMEs move abroad they have to double their productive capacity. He warns of the need for such SMEs to operate with integrated bank accounts that do not yet exist in the region, to avoid a situation in which the transfer of money from a foreign to a local bank results in the SME losing up to 6% of the invoice value. “In the Pacific Alliance, we are pushing for the creation of an integrated checking account”, he affirms.
Interruption of services
The Chilean service industry is becoming an increasingly important sector in global exports, with annual growth of 6% over the last decade, totaling US$9.777 billion to 2015, according to the Dirección General de Relaciones Económicas Internacionales (Directorate General of International Economic Relations), or Direcon. In this context, the United States has positioned itself as the primary trade actor with market growth of 28% between 2012 and 2016. This expansion was led by the large consumption of digital products and in which the software segment alone grew to US$122 billion, as highlighted by the study “Analysis of trade links between Chile and the United States in the context of the Free Trade Agreement”, compiled by Direcon and ProChile.
This has been confirmed during 2017, with the United States remaining the primary target for Chilean service exports, accounting for sales of US$136.4 million in the first quarter of the year. Overall, the share of the US market grew by 7% in relation to the same period in 2016 and now represents 26% of the total export market. On a more granular level, the largest growing subsectors in this regard were advertising (1,866%), animation including comics (560%) and call centers (236%).
The Director of ProChile is careful to emphasize the strategic importance being acquired by the service sector in terms of developmental policy. He also stresses that the overall growth of the service segments in which local actors have gained international recognition, such as engineering and architecture, is opening up new opportunities for additional subsectors, including video game development, music and other cultural areas. Accordingly, Buvinic adds that ProChile “has been working to foster video game companies, including the five businesses that made up the humble Chilean pavilion (the only one from Ibero-America) at one of the most important video gaming fairs held in the United States in 2012. Today, we participate in the fair with 25 companies”.
With double-digit growth rates, Tadashi Takaoka, Entrepreneur Manager at Corfo, states that technology services should be a priority and must be pushed to take advantage of the highly skilled engineering professionals in their midst; a reality demonstrated by the recruitment of numerous Chilean developers by US companies. Similarly, he underscores that Chile should take steps to maximize its potential in the development of large export services, including logistics, the Internet of Things, and the analysis and optimization of complex data.
ProChile also emphasizes the importance of strengthening leadership in mining and the promotion of engineering services, to make the most of a market which is projected to achieve average growth of 3.3% between 2012 and 2017.
Health food: a billion-dollar business
Thanks to its solid track record in exporting fresh fruit, salmon and wine, Chile plays a significant role in the US food market. This is leading to a new generation of SME producers who are pursuing the sustained expansion of the niche of organic food products, which is set to grow at an average annual rate of 14% between 2013 and 2018, according to Direcon.
Indeed, the US gourmet and organic food sector is growing rapidly and trading more than US$200 billion, with the segment of snacks or ‘ready-to-go’ products alone reaching US$50 billion. With this in mind, Nicolás Leal contends that “the export range of Chile and other Latin American countries is really powerful, and so there was (originally) a match between adding supply to the market and increasing international demand for Chilean producers”.
Leal adopts a twin approach in this regard: he provides advice to SMEs through the consultant LAP Consultores and also conducts business dealings via Whole Foods Market, the organic food chain that distributes a significant portion of its products across 1,000 supermarkets in the United States and which represents a key part of a wider trend that “is becoming increasingly popular”.
Regarding lessons learned by SMEs in the United States, Leal says that success does not solely depend on the product itself, but also on designing top quality packaging, clearly identifying the benefits of the product, and managing value added certification and marketing.
“When we began (the business), it was not too difficult to enter the supermarkets, but when we lacked the capacity to deal with the sales point and the issue of marketing, a lot of companies ultimately ended up failing”, he warns. Following this learning experience, Leal stresses the need for SMEs to establish an initial marketing plan over a period of at least a year. This, he says, “will go a long way towards defining the success of a product, or increase its chances of a positive outcome”.
In this context, the public sector has played a significant role by promoting distinct sectoral campaigns, such as Fruits from Chile and Foods from Chile, in addition to staging trade missions, encouraging SME participation in large fairs for distinct subsectors, and providing support to such enterprises that are deemed to have export potential in fruit, vegetables and seafood products.
Biotechnology on the up
The biotechnology industry is experiencing a revolution, with one of the epicenters of this seismic change lying in the United States. In fact, the US sector is set to grow to US$142.5 billion by 2018 at an average annual rate of 8.9%.
Locally, Chile has approximately 200 entities dedicated to research and development in this field, according to the Asociación Chilena de Empresas de Biotecnología (Chilean Association of Biotechnology Companies), or Asembio. These entities now are in the crosshairs of numerous US firms in terms of the formation of strategic alliances, as well as outsourcing and investment opportunities in Chile, according to Asembio.
In addition to promotional efforts by public agencies via trade missions, market research and coaching programs, one of the most prominent initiatives developed in the private sector to generate trade links with investors in the United States is Biotech Challenge, from AmCham Chile’s Look North program. This scheme consists of a competition to which entrepreneurial projects with a scientific basis and from the life-sciences can apply. Winners of the contest are invited to join trade missions to the United States in order to further their understanding of the American ecosystem, adopt good practices and expand their contact networks.
“We expect Chilean entrepreneurs to be able to secure a significant number of meetings with venture capitalists from the Cambridge-Boston area and hope that they subsequently succeed, at some point, in raising capital for their next milestones”, says Lorena Palomo, Chief Operating Officer and Head of the Look North program at AmCham Chile. Palomo explains that the projects participating in the Biotech Challenge are in the early stages of development, since these entities require a more extensive period of maturity than initiatives in other areas.
As a measure of success in raising finance, Palomo highlights the case of Novacold, a firm which obtained funding from a local investor and now participates in the scale-up program, Ganesha Lab. This year, the scheme will focus its support on three highly innovative projects, including a system that helps to detect diabetic retinopathy from a photo taken with a cellular phone and the subsequent provision of an accurate diagnosis. This technology will be particularly useful for patients who live in geographical areas from which it is difficult to access medical attention.
Beyond the major pending challenges, SMEs are managing to open increasingly prominent spaces in US markets. In conjunction with the sectors that have already been consolidated, this is bringing about a growing number of emerging niches. In turn, this trend is affording these enterprises a range of highly significant development opportunities and is giving rise to an increasing number of public and private initiatives that aim to meet their needs across the entire export value chain.