Environmental Concerns
The huge expansion of projects that Chile is now experiencing doesn’t come without consequences to both the environment and the local population. Chile has moved from combined-cycle plants, which can be built in a number of locations because the fuel is imported, to coal and hydro plants, which need to be located either near the sea or near the natural resource. This has resulted in greater resistance toward new projects. Local populations argue that these plants threaten water supply for human and agricultural consumption, change the priorities of the local government, and adversely affect the local environment together with the tourism economy, which many of these local communities are built on.
Under the current legal framework, once a company has the water rights to a project, it can force local residents to sell their property (subject to reasonable compensation) in order to begin developing a property. Certain exceptions are made for indigenous populations. Though there are certainly environmentalists who are adamantly opposed to all developments, and there have been suggestions that local pressure groups are being organized by international nongovernmental organizations, there can be no doubt that many local indigenous people are being asked to sacrifice a lot for little in return. Chilean companies and environmentalists remain far apart.
SN Power’s Huseby believes that the biggest challenge upon entering Chile is persuading the locals who are affected by a project that the investment is good for the country and good for them. He claims: "If you do it right, projects can become an important catalyst for development locally. You can implement training programs to engage the local population in the projects you are leading, you can have plantations of forests, develop forest management, and develop greenhouses. There are many ways to involve communities in the projects. Another measure is to manage the local provision of food. All of the foods consumed at our constructions are locally produced. There are lots of things you can do if you start thinking about it. The way to do it is to start consultation early on and find out what is important to the residents of a local community. It is a long process and it takes time, and in many cases you need to win trust, so you may need to do some preliminary work to build trust with people."
Manufacturing for the Power Industry
Chile is not known for its manufacturing industry. Its small population and relatively high labor costs have made it less attractive as an outsourcing location compared to Asian countries or Brazil, and local efforts have been focused on the mining and processing sectors. Felipe Andrews, General Manager of HBSE, which provides solutions to the electricity sector, argues: "We have noticed that most companies which have the experience of manufacturing complicated, sophisticated products will base their operations in Brazil."
Chile does, however, have some well-established and technologically advanced manufacturers in the energy sector. The same principles of economic liberalism that define energy legislation apply to the wider economy, and there are few trade barriers to protect Chilean manufacturers. Chile is probably the most pro-market economy in South America, and numerous trade agreements have forced energy components manufacturers to sink or swim.
Pablo Neuweiler, commercial manager of Chile’s largest transformer manufacturer, Rhona, notes that: "We have no import barriers like Brazil or Argentina, which forces us to be competitive. We are used to it." Carlos Rojas of engineering company Proingesa, says, "This type of market forces us to be more competitive, to improve our management and strategic running of the company."
Though transmission and generation companies tend to view cheap components as a false economy in light of the significant financial implications of shutdowns, Chilean companies are still reviewing their businesses in order to meet emerging competition from Asia. Augusto Wiegand, general manager of the transformer manufacturer TUSAN noted: "We need to start manufacturing highly technological items because the cheaper ones will be produced in China, and we will be left unable to compete in the global... economy." The major Chilean transformer manufacturers are increasingly focused on differentiating themselves from the international competition through after-sales services and their ability to adapt rapidly to the needs of local clients. Wiegand predicts: "We shall evolve into a services company."
Domestic components manufacturers are forced to offer high-tech products as their local clients normally procure supplies using international tenders and, according to the local head of Tyco Electronics’ Energy Division, Juan Darritchon, the energy distributors cooperate on many parts tenders in order to ensure conformity across the country’s grids.
Perhaps the area where Chile needs to invest the most, but seems to be focusing the least, is the area of innovation. In order to effectively compete in the global economy, Chile needs to move forward and do things better rather than doing them cheaper. Chilean companies are dynamic and aggressive in moving to larger markets, but they need to find their competitive advantage. EDYCE, the domestic leader in steel structures, is an example of how when a Chilean company invests in improving processes and in research and development, it can become not only a domestic leader but also a regional leader.
Multinationalism and Chilean Exports
A notable feature of Chile is its growing intra – South American trade and investment model. As well as having representation from the full range of multinationals present in most countries around the world, Chile also hosts various South American multinationals. An example of a foreign company that has aggressively and dynamically moved into Chile is SANTOS CMI. The Ecuadorian EPC offers a different solution than most companies in the market. Unlike its competitors, it comes from a construction background rather than an engineering background. Gaston Fontaine, country head, said, "Our engineers are practiced and experienced in the field, and that gives us a relative advantage in the market."
Another South American multinational is WEG, the Brazilian service company. Fernando Cardozo, WEG’s country head, told us why WEG decided to enter the Chilean market: "Financially, Chile is absolutely secure. It is an extremely competitive market in spite of its size. I could say that in terms of the way it operates it is very similar to bigger countries, like the United States, for example."
Some Chilean companies have built, or are in the process of building, substantial overseas operations. The open market culture in Chile, something lacking in many other Latin American business communities, has aided this process as Chilean businessmen throughout the power value chain are use to dealing with foreign clients and meeting their tendering processes and standards. Pablo Bosch, general manager of BBosch, explained that through consistent annual growth of 13% to 16%, his company has grown from a simple erector and maintainer of transmission lines into the tower fabrication sector. BBosch is now a Latin American leader in the fabrication business and has galvanizing plants (serving sectors beyond power) in Chile and Brazil. For Bosch, a keen free trade and globalization advocate, building his export business is essential: "I know I can not depend only on my Chilean customers." Therefore BBosch is "developing the network and engineering capacity to sell structures all over the world." The company, which had a turnover of approximately $100 million last year, sells to Peru, Brazil, and Costa Rica and is even bidding on a project in the Arctic.
Chilean companies are gaining market penetration in other Latin American markets because they have built strong relationships with European and North American EPCs, and their clients are confident that they will meet their requirements regardless of the location of the project. BBosch was a key subcontractor on the SIEPA project to build an international Central American grid because of this reality.
Fernando Zuñiga, energy head of SalfaCorp, explained his strategy for expansion: "Presently, we are the biggest construction company in Chile. Two years ago we acquired a company in Peru. We have been present two years now in the Argentinean market and we have recently opened an office in Colombia. To be able to reach those countries you need investments or to buy domestic companies."
Although many Chilean service companies are moving into foreign markets, there is considerable confidence in the domestic market. This is due to the rising demand for energy and the fact that the many of the new plants coming online are typically located far from the load and therefore require more transmission infrastructure than the gas-fired plants built in the early part of this decade. Local operators are building relationships with foreign manufacturers in order to service the Chilean market. Sergio Palacios, general manager of transformer engineering and service company Jorpa, said, "We have a strategic alliance with an Argentine company called Los Conce S.A., which is starting to produce transformers, and we have a contract to distribute and represent their products here in Chile."
Alfredo Zamorano, CEO of Chilean EPC Proyersa Energy insisted: "We do not discard the international market.... right at this moment the domestic market is the most important [for us]."
Human Resources
Industry chiefs are keen to emphasize that the Chilean service sector is a sophisticated market with a labor force as skilled as in any Western market. For example, Kipreos — a low-, medium- and high-voltage transmission line erector — has developed a substantial helicopter operation in order to undertake complex operations in some of the world’s most adverse terrain (Figure 11). Chilean companies are focused on developing the knowledge base of their employees and adding value through transferring their expertise to their clients. Oscar Jimenez, general manager of the precision instruments distributor Intronica, believes that "What we have to do is add value by training the users."
11. High-level teamwork. Kipreos is a low-, medium-, and high-voltage transmission line erector that has developed sophisticated helicopter operations for erecting transmission lines in challenging terrain. Courtesy: Kipreos
Due to its topography and well-established hydro sector, Chile has strong, established expertise in this field. Though the ill-conceived regulatory changes of 1999 effectively stifled new hydro developments and triggered a brain drain as engineers emigrated to more promising markets, it also forced Chilean engineering companies to enter new foreign markets. The 2004 revision of the law reopened the gates to new hydro developments and has put Chilean EPCs in a strong position.
Ricardo Quezada, DESSAU INGENTRA
Executive Vice-President of Chilean/Canadian EPC DESSAU INGENTRA Ricardo Quezada claims: "DESSAU INGENTRA is set to expand through all of Latin America. We currently have projects in Central America, in the Dominican Republic to be more specific, and also in Peru." DESSAU INGENTRA is one of the huge beneficiaries of this growth within the hydro sector, which advanced company growth at a rate of 300% over the past three years. Quezada reckons that the level of experience within his company is the driving force behind this growth.
Fernando Vivanco is commercial manager of Mas Errázuriz, a specialized EPC company working in Chile as well as expanding overseas. It is another shrewd operator that has been quick to take advantage of this growth in projects: "These projects need companies with expertise in subterranean construction, and we have it," he said.
Chile at a Crossroads
Chile faces a great challenge to diversify its power generation sector, maintain its environment, and achieve energy independence. Chile suffered greatly from energy supply security in the last few years; its key mining sector was handicapped, and its reputation as an entry point for South America was damaged. The main actors in Chile are aware of the seriousness of this situation and have shown increased interest in the energy sector as a result. The removal of natural gas from Chile’s energy mix leaves a gaping hole, and it is important that Chile doesn’t repeat its mistake and attempt to fill this round hole with a square peg.
Chile certainly offers great opportunities for investors, but there is still uncertainty as to how its generation sector will develop. A great volume of new projects are planned or under construction, but the lack of governmental control over the wholly privatized sector makes it difficult for any specific solution to be pushed.
Chile likely will look to hydro projects and coal-fired plants for the next generation of power plants. Hydro, most prominently HidroAysén in the south, will service the SIC. In the north, the SING will rely on coal-fired plants. The two LNG terminals being built will diversify Chile’s portfolio, but it remains unclear whether LNG plants can financially compete in the Chilean market. The lack of subsidies for renewables means that it is unlikely Chile will become a regional leader in this area.
Should Chile manage to reconcile with one of its neighbors and begin importing natural gas again, doing so could change all of this once again. The world will be looking at Chile with great interest to see which path it takes.
—Ramona Tarta (ramona@gbreports.com), Mark Storry (mark@gbreports.com), and Oliver Cushing (oliver@gbreports.com) are reporters for Global Business Reports (info@gbreports.com).
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