Peru: Gateway to Latin American Business

by Evan Jaqua and Timm Tuttle

Note: A shorter version of this article by Paccess appeared as Inside Out: Peru in J@pan Inc, the premiere English-language magazine covering business in Japan.

While focusing on Peru's business and cultural ties to Japan, the article portrays the ample opportunities in Peru awaiting businesspersons from any region. Contact Paccess for more information.

A "Hidden Commercial Gem"

Peru isn't on the radar of many businesspersons around the world, including in faraway Japan. That's unfortunate, as after centuries of difficulties stretching from the Conquistador era through the troubled 1980s, the Peru of today is undergoing a true renaissance, with startling economic growth, low inflation, growing integration with the world economy, and the firm establishment of a stable democratic government. Not surprisingly, the U.S. Commercial Service describes the country as "...the hidden commercial gem of Latin America - a diverse, export-driven economy characterized by open markets and fiscal prudence."

From Paccess's offices in the US, Tokyo, and my present location in Peru's capitol city of Lima, for almost 14 years my colleagues and I have dedicated ourselves to helping firms expand overseas. While I have an interest in promoting the region, the facts speak for themselves: Peru's recent growth and untapped potential make it a source of new trade and investment opportunities, as well as a "gateway to Latin America."

Data on Peru (2006)

Area: 1.28 million sq. km (about 3x Japan's)
Population: 29 million (about 1/4 Japan's)
Government: Constitutional republic (1993 constitution)
GDP: $93.3 billion (about 1/50 Japan's)
Economy: Services (45%), manufacturing (17%, food, textiles, metals, refining, paper, chemicals, fish meal); agriculture (9%, coffee, asparagus, others), mining (7%), others.

On the fast track

Ex-President Alberto Fujimori (1990-2000) initiated a pro-business stance that continues today. Thanks to market-oriented reforms, privatizations, and measures to promote trade and attract investment, Peru's economy is on the fast-track: 7% GDP growth in 2007, 8% in 2006, and similarly impressive figures stretching back for many of the years since sustained growth began in 1993. Industry, construction, and real estate are booming. The Garcia administration (2006-) is impressing outsiders with efficient economic management, increased revenue collection, ratings upgrades on government bonds, and decentralization initiatives. The hyperinflation of the late 1980s has been quashed, falling short of 2% in 2007. Peru's stock market has taken notice: Peru's Lima General index rose 36% last year, the sixth consecutive annual gain and one of the best returns in the world. The index's performance in the first quarter of 2008 has been strong as well. (Sources include the US State Department, CIA, and Peru's most influential daily newspaper, El Comercio.)

Since late 2007, Peru has concluded FTAs with the U.S., Canada, and Singapore, adding to those already in place with other Latin American countries. Peru expects to conclude new FTAs with China (2008), the EU (under negotiation), Japan (targeted for 2010), and many other countries in the near future. Support within Peru is strong for FTAs as a way to strengthen international trade and investment; for example, a recent poll revealed 72% of Peruvians approve of signing an FTA with the European Union.

Japan is Peru's 5th largest export market, though trade between the two nations is not high; Japan accounts for only about 5% of exports from and imports into Peru, according to the Japanese Embassy in Peru. Imports from Japan are primarily vehicle-related; exports to Japan, mostly mining products and fish meal. The Japan-Peruvian FTA, which officials of both countries say is on target for adoption, will eliminate tariffs for Japanese exporters, such as the 9% tariff currently applied to Japanese autos.

MOFA reports that investments from Japan to Peru reached 112 cases in 2004, totaling US$785 million in value. (China, meanwhile, with an eye on Peru's natural resources, is expected to invest over a cumulative $10 billion by 2015.)

Natural wealth

Early peoples were drawn to what is now Peru by its immense natural bounty, including mineral wealth, the Andes, the Amazon rain forest, and bountiful seas. Today, Peru is one of the globe's largest producers of precious metals, ranking 1st, 2nd, and 5th in production of silver, copper and gold, respectively. Peruvian seas support the world's largest fish meal industry.

Peru is active in energy exploration. The under-development Camisea natural gas project will tap into the equivalent of 2.4 billion barrels of oil - 40 years' worth of oil at Peru's current consumption rate of 60 million barrels per year. Additional natural gas and petroleum supplies will soon make Peru a net energy exporter, the US State Department predicts. (An everyday example of how natural gas reserves are transforming Peru can been seen simply by grabbing a taxi in Lima: almost all taxis now run on natural gas.)

Tourism opportunities abound. Peru is most famous in Japan, as elsewhere, for the ancient Incan ruins of Machu Picchu, the mysterious Nazca lines, and countless cultural wonders created by a long series of civilizations. Even now, Peru often rewrites the history books as cultural artifacts from millenniums past turn up in remote areas.

Less well known is Peru's incredibly diverse and beautiful terrain. Whether you want to relax on gorgeous uncrowded beaches, hike in some of the world's tallest and most majestic mountains, or explore the amazing biodiversity of the Amazon jungle, you can do it all in Peru. Travelers are increasingly taking note: according to the Peru Japan Association, Japanese tourists to Peru have been increasing by over 15% annually during the last 5 years, exceeding 40,000 in 2007.

Japan connections

Japan established diplomatic relations with Peru in 1873. Immigration to Peru began in 1899 when 790 Japanese took their increasingly-superfluous traditional farming skills to Peru under a government-sponsored emigration program. By 1923, over one hundred groups of Japanese had arrived to Peru, almost all under temporary labor contracts to work in such places as the sugar fields.

There are now over 90,000 Peruvians of Japanese descent, the largest group in South America after Brazil. The community has for the most part prospered and is well regarded; a prominent electronics store bearing the name of its founder, Carlos Hiraoka, is one example of Peru's many flourishing Nikkei-founded businesses. (There have been rough periods as well, particularly during WWII when Nikkei were subject to discriminatory laws and even had properties seized; many were forced into hiding or fled the country.)

In 1990, Alberto Fujimori took the presidency as a dark horse candidate and became the nation's most famous representative of the Nikkei community. (Some observers claim that Peruvians of native descent trusted Fujimori more than the long-dominant political elites of Spanish descent, aiding his presidential bid.) For most of his 10 years in power, Fujimori enjoyed wide popularity, but by 2000, scandals forced his defection to Japan. Last year he was extradited to Peru after being detained during a visit to Chile in 2005. Fujimori is currently on trial in Peru on corruption and human rights charges, yet is considered by many Peruvians as a hero who defeated the Shining Path terrorists and placed the country on its current road to prosperity.

Japan and Peru have continued to deepen their mutual ties to the present day, a relationship underscored by President Alan Garcia's trip to Japan earlier this year.

Risk and concerns

South American countries have long suffered from the image - not always unfounded - of political instability, internal rebellions, high inflation, and corruption. Peru has been paring down this list of woes. Democracy has taken firm root, as seen in this decade's open elections. The country's infamous battle with the Maoist Shining Path rebels effectively ended in 1992 with the capture of the group's leader. On the corruption front, organizations like World Audit place Peru on a level with Brazil, China, and India - considerably worse than Japan or the US, notably better than Russia.

Concerns remain. Inflation has been tamed, though the combination of fast economic growth and high oil prices will exert upward pressure whose effects will need to be watched. (It also must be noted that President Garcia's previous term in the latter half of the 1980s was seen as a cause of that era's hyperinflation.) Despite noteworthy improvements, underemployment and poverty remain problems as well.

Most Peruvians believe that the country is on the right track, as evidenced by support for FTAs. But if rising prosperity doesn't start helping the large percentage of population living below the poverty line, political observers see the risk of a Venezuelan-type populist movement. A Hugo Chavez-style government would almost certainly have negative consequences for international firms seeking to expand into Peru.

Outlook and opportunities

Peru is becoming a major economic power in an increasingly important region of the world. With the fifth-largest population in Latin America and strong, stable growth, there are good reasons to consider Peru as a gateway to Latin American markets, or as a key market on its own. Opportunities that are worth serious consideration include:

1) Exporting to Peru, and then to other Latin American countries.
2) Importing unique products from Peru
3) Setting up manufacturing facilities to take advantage of Peru's FTAs, numerous incentives for investors, and geographic location, for sale to markets in the Americas and elsewhere.

As an example of an "export and expand" strategy, Paccess is helping a Japanese client sell its flameless heating products to the Special Forces Unit of the Peruvian military. The firm hopes to eventually manufacture its products in Peru, taking advantage of the lower labor costs and of Peru's FTAs to export from Peru to the US and beyond. Thanks to the Peru-US FTA, the firm can also sell Peru-manufactured product directly to the US military.

On the import side, a Tokyo-based distributor was very impressed by the Peruvian wine Paccess introduced, and will begin importing it to Japan shortly. As the first to sell Peruvian wine in Japan, this distributor expects to establish a lucrative niche market in a high-quality, novel product that will appeal to younger wine drinkers and connoisseurs alike.

Be aware that business culture in Peru is not the same as that in Japan or North America. It's been aptly described as "southern European" in style, but of course bears differences from that region as well. As with any country anywhere, local laws and regulations can further hold surprises. The best advice for taking advantage of opportunities in Peru is simply this: find and work with a trusted local partner.

Now is a good time to get in on the ground floor of business in Peru, before the "hidden gem" becomes household knowledge around the world!

About Paccess

For over 10 years, Paccess Inc has assisted companies with market entry, strategic partner search, and trade development, in the US, Japan, and Latin America. With a presence in Lima, Paccess is ideally positioned to assist you in taking your business to Peru and beyond.