Argentinian Agribusiness, Smuggling, and Protectionism

November 29, 2014 • ART OF LIVING, COMMERCE, POLITICS

 
Libertarian Enrique Duhau (ED) 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. He was recently interviewed by Savvy Street’s Stephen Hicks (SH).

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

ED: 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.

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

ED: 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.

SH: So after you finished at the University of Buenos Aires with a bachelor’s degree you worked but simultaneously went to business school?

ED: I waited a few years to go back to school, got my share of successes and failures, and learned from experience.

SH: After undergrad, what was your first job?

ED: The first thing I did was start a grain-trading business with a friend from college.

SH: Actual commodities?

ED: Yes. We built a grain processing plant out in the country. I detected places where production was increasing and there were not enough traders. We set up the business and started buying grain from farmers, selling them seeds, and herbicides, and reselling to exporters.

SH: So, import-export?

ED: Yes.

SH: What was your partner’s name?

ED: Carlos Scaffino. He was also the partner in my second venture at Apple Computer.

SH: Did you start small with a little bit of capital?

ED: Yes. We started small. We got our capital from our personal savings and raised more from friends and family and added debt. The first couple of years were quite difficult; then we started doing well. When the best was coming, we were hit by a big tornado and the silo plant got destroyed. That was about four years after we started. So we decided to close down and start something new.

SH: No insurance?

ED: We didn’t have insurance; it was too expensive in Argentina at the time.

SH: Wiped out by a tornado? Ouch!

ED: Yes. [Laughs]

SH: What year did you decide to get out of the grain-trading business?

ED: We started in 1976 and the tornado hit in 1980. Some people even saw cows flying! [Laughs]

SH: You can laugh about it now, but that must have been difficult to go through.

ED: Yes it was.

SH: Did you then shift into software?

ED: Before that—we started in 1983—I had learned that Apple was trying to find a new distributor for Argentina, so we went to Cupertino, California, and spoke with those in charge.

SH: You and your partners?

ED: I had two partners: Scaffino, who came from my grain venture, and Antoine Thibaud, a French-Argentine with an engineering degree. It was a wonderful company. Apple was very small at that time, and you got to know everyone there, including Steve Jobs. It was very, very interesting. A wonderful experience.

Apple sent a team of managers to check us out. They interviewed four or five companies and listened to their presentations, and we won. For the next ten years we were their distributors and representatives.

SH: What were you distributing?

ED: The computers and their software. Apart from their operating system they didn’t have much, but they had some software, accessories, printers, and monitors.

SH: What made your proposal stand out to Apple?

ED: I think we understood better what Apple and the personal computer were. I had been using personal computers for three or four years; I was always fascinated by computers, even at an early age when you could only see a computer in a photo—you couldn’t even touch it. Computers were in labs, behind glass, and in air-conditioned rooms, and I couldn’t even get in.

SH: Very much at the beginning of the personal computer revolution.

ED: Yes. Apple started in 1977. Microsoft and IBM were released in August of 1981. We started a couple of years after that.

SH: Very cutting-edge. Was distribution in Argentina challenging? Or was there a business plan and you just followed the plan?

ED: Argentina has had problems for about 60 or 70 years now. It was a rich country—one of the richest in the world—and now we’ve had quite a few decades of decadence.

We signed the contract with Apple in August or September, and it was to begin October 1, 1983. On that same date, the government published that we could not import computers for about 90 days. There was a new government and they wanted to protect industry, so they thought they would develop a local computer industry by putting restrictions on imports.

SH: Their protectionist policy specifically prohibited foreign computers?

ED: Yes. They thought that they could manufacture computers, yet they didn’t understand what a computer was. The view was that if you inserted a few chips and put everything together with a screwdriver, then you were making computers. But the value was not there; it was in the Operating System, design and marketing.

SH: How did you overcome that political challenge?

ED: We talked with the government and explained that we could also manufacture Apple computers. In the short-term we got some import licenses. Then they opened up imports, but set a 108½ percent import duty.

SH: 108½ percent tax?

ED: Yes, it sounds unbelievable now.

SH: So a computer cost Argentines over twice as much.

ED: Then an enormous contraband started. So our competition was smugglers. We didn’t do that. As official representatives we couldn’t smuggle; we couldn’t run the risk of being in the newspaper.

SH: Who were your customers? Were you direct-to-business or store fronts?

ED: We had storefronts. That is how Apple worked everywhere. They were all independent retailers. We had to develop the distribution network and convince people. That was not hard, though. Apple was a star. Everyone was reading about Apple, so many people wanted to be a distributor. So we set distributors in the main cities of Argentina. A couple of years later they gave us also Uruguay. We did that quite well for quite a few years.

Then we saw that there was a substantial business in software and that software would become much more important than hardware. Hardware, in the end, would become a commodity business with low margins. So we set up Maxim Software in 1985.

SH: To make software for the Apple system?

ED: Yes, for the Apple Macintosh.

SH: What kind of programs, for example?

ED: We developed programs for banks and financial companies for their trading desks. They would have the trading desk of currencies and bonds, and they would put maybe 10 or 15 MacIntoshes there, collect them in a network, and trade through the computers. It worked very well.

SH: Do you have a partner at this time or more than one partner?

ED: I had two partners in the hardware business, Scaffino and Thibaud, and an additional partner for software, Hector Goldin. They were all very smart and hardworking.

SH: What was the division of labor among the four of you?

ED: Thibaud and Goldin were writing code, and Scaffino was in sales. I took care of the finances and marketing. It was a small market, but very profitable. We had one main client who paid for all of the development, and we had two or three other banks.

SH: In the late 80s, Apple had some difficulties.

ED: Yes. In 1985 Apple fired Steve Jobs; that was a big mistake. The company started to lose profitability and market share. A decade later the company was nearly broke.

SH: Yet you were successful, and in the late 1980s you received an award from Apple?

ED: Yes. We got a marketing award because of rapid growth. We sold thousands of computers even though they were more expensive than overseas. Part of that was profited by smugglers.

SH: How did the smugglers bring the computers in?

ED: Through customs: they just bribed the agents. And as a libertarian, I can’t fault them. Smuggling shouldn’t exist: there should be just open markets.

SH: The import controls made it hard for people to make a legitimate living.

ED: Yes.

SH: On the other side, what was especially challenging? You’ve mentioned political obstacles and competition from smugglers. Were there things that you found difficult personally?

ED: Yes. The relationship with the government was difficult to deal with; it was always a challenge. We had to learn about that.

SH: Was it just protectionism or were other aspects of the government business?

ED: Especially protectionism, and a bit of corruption when the government would buy computers. At the end, we decided not to sell to the government because it was hard work and no return—we would lose to competitors who offered a bribe. We decided to go double our efforts in the private market, which was the largest: individuals, professionals, and businesses.

SH: You next went into agriculture. How did that big shift of focus happen?

ED: Agriculture is the main industry in Argentina; it has always been quite an exciting business. Even when Argentina wasn’t doing very well, that was the business to be in. It is my family’s business also. My father was retiring, so he wanted a new generation in the family to take over the business. I saw that there were many opportunities to grow. At the same moment my brother went in; so we took over the company.

SH: How old were you at this point?

ED: I was about 42 years old. We did very well: we grew a lot and went into new businesses.

SH: When the transition occurred, what kinds of things did the family company do at that point?

ED: Agriculture and beef production.

SH: The crops you grew—were they for human or cattle consumption?

ED: Mostly for cattle consumption, but also human. We used to do wheat and soybeans for oil, which are for human consumption. And corn for human and cattle consumption.

SH: You also have cows?

ED: Yes, in the poorest lands. It also is the lowest return business, so we are getting out. But we grew in grain production, milk, and feedlot. We operate the largest feedlot in the country now.

SH: Feed-lot for steers? And milk cows?

ED: Yes, both.

SH: Do you do your own distribution?

ED: No. We sell to meat-packing houses and to supermarkets.

SH: What were the areas of biggest opportunity?

ED: One was feed-lot, which practically did not exist in Argentina. We traveled extensively. We went to the United States and visited many, many feed-lots and learned how to do it well. And we became the largest, especially by integrating grain production with the feed-lot.

SH: Vertical integration to keep your costs down?

ED: Yes.

SH: Argentina’s beef is world famous. What makes it distinctive?

ED: Part of it is the way it is cut and cooked. It’s very different from the way Americans do it. Another reason is that much of it is grass-fed. Even though we have feed-lots, more than half of what we give is grass—we don’t give just grains.

SH: And that’s different from the North Americans?

ED: Yes. Americans use more grains, and that produces a difference in taste. In nature cows used to eat grass, not corn.

SH: Is there a cost difference?

ED: As we have it integrated with production, the grass is right there.

SH: Feed-lot has been the big growth area?

ED: Crops also.

SH: How about dairy?

ED: For dairy, we have about 2,000 cows; but we haven’t grown that business because there is a tremendous government interference. Government restricts exports and caps prices, so it is never a good business. Argentina has a fantastic opportunity in milk production, but we need free markets and less government interference. We are waiting for policies to change, and ready for a tenfold growth in the business.

SH: And that’s not likely to happen because it is a politically sensitive product?

ED: Yes. But I think at some moment we’ll get a new government with new ideas and they’ll realize the way Chile, Peru, Columbia, Panama—that half of Latin America is going in the right way and that controls and restrictions are bad and cause poverty.

SH: Your feed-lot section is the largest in Argentina. How many steers do you have?

ED: We fatten about 70,000 per year. It is a new industry. In the USA, I think the largest is 100,000. So we are getting there, we still have room to grow.

SH: You’ve also invested in internet businesses?

ED: At the same time, I started an internet business. It was small and still surviving. We couldn’t sell it for millions, but it is a satisfaction that ten years later it is still working.

SH: What part of the internet?

ED: Greeting cards. It’s very interesting because it is easy to launch in different countries; it doesn’t require logistics: cards are sent through the internet. It has worked in Spain; it’s relatively small in the United States; and it is more or less large in South America.

SH: What is that company called?

ED: Correo Mágico, which is Spanish for Magic Mail.

SH: To go back to agriculture for a minute: my understanding is that the best cropland is in the central part of Argentina?

ED: Yes.

SH: In how many Argentine provinces does your company operate?

ED: In six provinces: two in the north and four in the center.

SH: The center is the Pampas?

ED: Yes, the fertile Pampas.

SH: What do the provinces in the north do?

ED: In the north, we produce crops: corn, soybean, sunflower, and cotton.

SH: Steers and dairy are in the central provinces?

ED: Yes. And now we are going to build an ethanol plant. We’ve haven’t started producing yet, but we’ve been working for a year with suppliers, advisors and banks. It’s been quite a good business in the USA, and we think it is going to be very good here also.

SH: How many employees overall in all of your operations?

ED: 220.

SH: And when you started?

ED: When we took over there were about 45 people.

SH: So you’ve grown about four or five times the size.

ED: Yes. In dollar sales we’ve gone up about eleven times.

SH: How do you decide each year which crops to grow and in what quantities? Is it driven by what you think your cattle will need, or by commodity prices in Argentina and the rest of the world?

ED: Well, both. But first there are agronomical reasons. It’s important to rotate crops; it’s not good for the land to produce the same crop year after year, so we have to rotate. We also look at the markets—especially the futures markets in Chicago and Buenos Aires. Agriculture is a very volatile business. We have market and climatic risks. We cope with them by planting in different parts of the country and in different planting seasons, to lessen the drought risk, and producing different crops and using the future markets to cope with the price risks.

Following our tradition from our first company …

SH: The tornado?

ED: [Laughs] No tornadoes. We don’t insure because we are in six different provinces, six different areas, and we hedge prices and different crops. Different crops mature at different months of the year. So practically every year we have some tornado, hail, flood or drought, but it’s all part of the business. But I can tell you, the worst risk is government interference!

SH: Agriculture is a traditional business, but it is also very high-tech, particularly in the last century—agricultural equipment, hybrid crops, pesticides, and so on. So keeping innovative is an important part of agriculture. How do you do that at your company? Do you spend significant time reading about what is going on? Do you have a research development team?

ED: In agriculture, an important fact is that every farm is different and every region is different. Industry technology has globalized; it is very similar in different parts of the world. Agriculture is very different, because each plot of land is different, and the weather also differs regionally. So new technology is implemented locally because there are local differences, even on different plots, and especially on different farms and in different regions.

So we have to do some local R&D. We are affiliated with an organization called CREA, a group of about 2,000 farmers, with which we do some field R&D. That works very well. And every year we have some plots with experiments in our farms. Our agronomists mostly manage them; but some are done in conjunction with the seeds and herbicides manufacturers.

SH: Your work week or month: what typically is that like? How much time do you spend reading reports, doing email, or having meetings?

ED: I spend more than two or three hours a day reading. I also email a lot; I think email is magic because it has increased our productivity so, so much.

SH: Do you use a smartphone?

ED: Yes. As I told you, I love computers. I also have an iPad and iPhone.

SH: So are you then in fairly constant communication?

ED: With people in our organization, communications is constant: weekdays and weekends. Agriculture is a business that goes on day and night.

SH: Have you segmented your time by area—how much is finance, how much is marketing, how much is reading technical stuff, how much is travel? Or is it just all mixed together?

ED: It is all mixed together. But maybe twenty percent of my time I read. I answer emails for about an hour and a half. I talk on the phone with our managers. And I look at the markets maybe ten percent of the day. The rest is finance and the basics—the boring part: accounting, and that sort of thing. [Laughs] But it has to be done.

SH: Argentina is very rich in natural resources, with an entrepreneurial culture and immigrants from all over the world. But it also has high levels of poverty. Why is Argentina struggling?

ED: Because about 70 years ago Argentina closed its economy, abandoned free markets, and started over-regulating. The government at that moment thought that you could develop industry by restricting imports, which I think was a big mistake. Instead what you develop is protected industries that are inefficient and can never compete. With open markets you develop much stronger industries. The truth is that over the last few years the countries that have grown are countries that have open markets with very low import duties and low taxes.

SH: Can you give some examples?

ED: One close example is Chile. Thirty years ago, Chile decreased import taxes for all products to a flat ten percent. Since they have lowered them to a two percent average. Before that they had duties of up to 200%. Then the Chileans had—from 1990 to 2009— leftist governments, and those leftist governments kept the free-market policies and even reduced import duties to four percent. They also signed free-trade agreements with more than 60 or 70 countries: United States, Canada, Mexico, with all of America, Europe and Asian countries.

SH: So if Chile is a clear success example, why has that not come to Argentina? Economic ignorance? Vested interests?

ED: I think it is a bit of both. But economic ignorance is the bigger part of it.

SH: They don’t see that protected industries become lazy and inefficient?

ED: But after you do protectionism for a few years, you have many workers who are working in those protected industries, so they become a factor also.

SH: The protected workers don’t want to lose those perqs and that support?

ED: Right.

SH: Would you say, then, that to turn things around in Argentina, the biggest single step would be eliminating the import-export regulations?

ED: Yes. Then you would also have to reduce all regulation—the entire economy is currently regulated. You also have to reduce taxes. Taxes are way too high. In agriculture, we pay about 80 percent of the value we create to the different branches of government.

SH: Eighty percent?

ED: Yes. It is a ridiculous amount.

SH: Outside of your business career, you were a professor at ESEADE, the graduate school of business here in Buenos Aires?

ED: Yes. That was for a few years many years ago, but I’ve always been involved. I’ve always believed in free minds and free markets—I believe in freedom. Argentina would have a tremendous opportunity to reduce poverty and to grow if we adopted free-market policies and a better political system. So I’ve always been working for that. One of the things we did with a friend, Eduardo Marty, is we set up a Junior Achievement in Argentina in 1990. It’s been very successful.

SH: When you were the professor at the business school, what did you teach?

ED: Epistemology. It was interesting.

SH: Good enthusiasm. Where does that come from? From really believing in your product?

ED: Yes. From passion. It’s having the traits of a salesperson selling your project, your product, the business you are in.

SH: About developing people’s abilities and character. Is formal business school education a good preparation for the realities of business?

ED: One thing that business schools are doing much better now is being entrepreneurial. About 20 or 30 years ago, they didn’t even talk about entrepreneurship at business schools. It was believed that every student wanted to get into Exxon or Citibank—the big corporations—and stay there.

SH: The traditional track?

ED: Yes. Nowadays most students want to be their own bosses and have their own businesses. The skills required are quite different.

SH: So business schools are adapting?

ED: Yes. Some people who have been tremendously successful, like Bill Gates and Steve Jobs, were dropouts. But I think they are geniuses, so for the rest of us, we need business school.

SH: As you look back, has something consistently been the most satisfying part of being an entrepreneur? Being your own boss? Seeing your business grow?

ED: For me, interfacing with people is always fascinating: talking to customers, talking to employees. And seeing them and the business grow. It never is the end result of making a lot of money that is the satisfaction; it’s always the ride.

When you look back, the best years are when you were three or four people in an office working all day and all night to get the shipment out—that brings you the most satisfaction.

SH: What advice would you give to young people at the beginning of their careers about how to make their careers the most successful and enjoyable?

ED: Well, as I said, to follow your passion. I think passion is a much more important mover than just money. Steve Jobs’s objective was to change the world one person at a time and to put a computer in front of every person in the world. I think if you want to change the world, you do it with objectives like that; you can’t change the world by just wanting to make millions. No one would follow you. But many people will follow if you want to change the world.

In the case of Eduardo Marty, he’s exactly like that. He’s an entrepreneur in a non-profit. But he wants to change Argentina and change the minds and souls of millions of kids. That’s what moves him. He couldn’t have grown and brought in all of the business people who have helped him and kept his organization moving with the salaries he pays if people weren’t motivated.

Also, talk with industry movers and shakers. Some people are a bit intimidated, but it is incredible how many of these people—if you just knock on the door or give them a call—they will receive you and talk to you. It’s a very good way to learn what the opportunities are and where the industry is moving.

Then, try to get a good mentor. Mentors are very helpful. They can help you prevent a lot of mistakes.

For more information about Enrique Duhau, please email him at eud [at] admin.com.ar.

This is an excerpt of an interview that first appeared on the Kaizen Newsletter of the Center for Ethics and Entrepreneurship at Rockford University in Illinois.

 

Argentina|Chile|Smuggling

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