IMPLEMENTING GLOBAL STRATEGIES IN SPAIN; HOW TO GET INTERNATIONAL • INTRODUCTION Spain is a Western European country, situated in the Iberian Peninsula with a population of nearly 40 million. For centuries, Spain has been considered a second rate country, lacking the natural, human and monetary resources of their rich northern neighbors. Every time Spain tried to catch up with those powerful countries the lack of capital, entrepreneurial tradition or able politicians have keep this nation in the second international row. During the past century a civil war followed by international isolation due to the dictatorship established in Spain kept this country far away from the western prosperity. During the years of dictatorship the country started an industrialization process that brought some prosperity to the country but protectionism and no international perspective slower its growth. During the last decade several factors helped to change the situation. A young, well−educated generation of managers with international background helped companies to became more competitive and aggressive against foreign competitors. A new right−liberal government freed Spain from its traditional protectionist policies towards a more freed economy. Privatization of government owned companies, former monopolies, created private, well managed, outstanding giants able to compete in a free market economy. All these factors made the Spanish economy one of the strongest and with the highest growth rate of Europe. After securing its national market, national companies attempted to go international focusing primarily on the South American market, closer to the Spanish in language and corporate culture. The implementation of the European currency, the Euro, provided those companies with the capital resources of a whole continent making possible for them to expand their business therefore acquiring the size they needed to compete in a one−to−one basis with the European corporate giants. • THE YEARS OF DICTATORSHIP The Spanish Civil War (1936−1939) marks a sharp stop to the industrialization process which begun in the last decades of the XIX century. After the war the country was entirely devastated with a much lower industrial and agricultural output than in 1935. Gold reserves were used during the war by the republican government to pay for war expenses. There was no way of financing the reconstruction of the country in the current international environment, World War Two (1939−1945). There was a shortage in food and raw materials and an enormous inflation rate due to the great amount of money in circulation. The sympathy of Spain towards the axis powers during the war led to animosity between the Allies and Spain, keeping the country away from any international relationship until 1951. The government tried to rebuild the industrial might focusing on what they called National Interest Industries taking into consideration only political considerations to decide which industry was subject to help. It wasn't until 1951 when the U.S. signed treaties with Spain and gave credit to the Iberian nation that changed the situation of isolationism and poverty that the country was summed in. In 1959 the government conducted the so−called Stabilization Plan with the basic objective of increasing the production. GDP grew at a 7% rate from 1961 and 1974. Productivity and competitiveness were highly enhanced during that period. In 1974 the Oil Crisis reached Spain. In 1975 Franco, Spain's dictator, died. While Spain was summed into political turmoil that eventually led to democracy, the world crisis provoked a cut in inversion, high inflation rates, growth stagnation and high unemployment rates. (Geografia e Historia de Espana) • FROM TRANSITION TO DEMOCRACY The period between 1975 and 1979 is called The Transition. During this time King Juan Carlos led the country into democracy in a quite smooth way. Economically Spain was, as well as the rest of the western world, in the middle of the Oil Crisis. The private owned companies faced tough times because of inflation, high−energy prices and foreign competition. The stated owned companies, grouped in a holding called INI, enjoyed a virtual monopoly and therefore did not have 1

to face competition. Despite the high level of unemployment (8 million) the labor market was very tight because of the protectionist laws of the dictatorship. Unable to solve the economic crisis, the government quitted and the new socialist government takes office. Huge governmental expenses used for social security and other social expenses took money out of the market, making impossible for Spanish companies to get money at low interest rates for inversion. The national currency, the Peseta, was too volatile to seek for foreign credits. It wasn't until 1986 with the admission of Spain into the European Common market when the crisis finally started to be over. • FROM 1986 to 1995 This period is marked as the break−even point for success or failure for the Spanish companies. The European Common Market gave Spain commercial partners and a series of financial and economical aids that helped the government to stabilize the economy. State owned companies knew that they should soon face privatization and later on competition. A long period of 8−10 years set for the end of monopolies gave them time to strengthen competitive advantages, secure national markets and be prepared for privatization. Private owned companies were already used to face competition but they found themselves too small in size to compete one to one in the Common European Market. Small, medium and big corporations, which failed to compete, went either bankrupt (Plastimetal), faced foreign take−over (Seat, Spanish car−maker was purchased by the Volkswagen group), or had to be absorbed by the government (RUMASA, whose revenues in 1984 accounted as much as the government's budget.) Other companies, especially banks, started a process of takeovers and mergers that is not yet complete (Banco Bilbao merged with Banco Vizcaya and later with Argentaria corp. creating BBVA). • FROM 1995 TO 2000. Despite some structural problems in these five years we assist to a spectacular growth in corporate culture, making Spain one of the leading countries of the European Union (EU) both financially and in new technologies. Despite this growth Spain still have to face some problems. Whole areas of Spanish industry have languished in a tightly protected environment and until recently many companies failed to take the initiative. Some key industrial sectors are in foreign hands, such as the powerful automotive industry. Spain is the 6th car producer of the world but just because foreign owned companies merely assemble vehicles there. (Spain Isn't California) But the fact is that the economic boom happened. There are several reasons to explain it. First of all; education. In Spain, a new generation of managers started to take control. Those managers want to leave their mark not only in Spain but around the globe (Spanish Surge). It is called the executives competitive spirit. Those managers share a common background. Most of the have Business School Degrees from America's top universities do speak several languages and have spent a good portion of their careers abroad. For example, Juan Villalonga, Telefonica's ex'CEO has an MBA in Princeton, worked 9 years at Mckinsey & Co. in the U.S. and Europe and worked as investment banker at Credit Suisse First Boston. These managers know the country, but are also aware of the markets outside it and have a very open mind related with international business. So, Spain has the managers that would lead the companies towards success. But what about the government? Prime Minister Jose Maria Aznar prepared the scenario cutting off the role of the state in the economy, embracing free market and sold most of the government stakes at former monopolies. (Spanish Surge) Thanks to the government the labor market is now much more flexible. In a country of 40 million it created as many jobs as all the other EU countries combined. (Making Inroads into Spain) The new generation of managers found their companies in a nice environment helped by the international growth but their size was yet too small to get involved in other saturated, competitive markets without being beaten or purchased by the big French, German or British rivals. They had to get bigger. The Spanish market was already saturated and was relatively small. Spanish companies turn their heads onto their natural expansion zone: South America. It is true that some medium size companies found their own way of getting international and compete. Zara, for example, is considered Europe's hottest retailer. With 415 stores worldwide (Paris, London, Tokyo) Zara based its success in fast merchandise turnover (new designs every two weeks in the stores) at good prices. But how can a small bank compete among giants such as Deustche Bank or BNP−Paribas? How can a small telecommunications company face competition against BT−MCI or 2

AT&T? How can a small oil company compete against BP, Shell or Esso? The natural way to go multinational in Spain is the South America and Hispanic markets. Antonio J. Zodio, president of the Madrid Stock Exchange, consider Spain as the natural bridge between America and Europe)(qtd. Spanish Urge). Spain Share with South America not only a common language but also a similar corporate culture, same ways to look into business, old entrepreneurial families linkages and government sympathy. In conclusion all these companies decide to get bigger by going international and they do so expanding in South America first so they acquire size and then they compete worldwide as global players. But where do these companies found the money to invest and purchase assets in South America? First of all, there is a strong equity culture in Spain. There is a capitalization of $280 Billion. 8 million out of 40 million are stockholders. (The Gain In Spain). But even tough the capitalization is high in Spain; it was almost impossible to raise money internationally with the Peseta as the national currency because of its volatility. But with Spain in the Euro zone, CEO's can tap the financial resources of an entire continent to finance their big foreign acquisitions. • RESULTS What has happened? Spain has invested more than $64 billion in South America. For example, it is the 2nd major investor in Brazil ($16.5 billion) surpassed only by the U.S. The two largest banks in the region are the BBVA and the BSCH, both Spanish. For example, BSCH controls majority stakes at Banco Rio (Argentina), Banco de Venezuela, Banco de Caracas, and the 3rd and 5th banks of Mexico among others. They also own Patagon.com and Musimundo.com, two financial portals (Argentina) (Swinging)(European). Electricity giant ENDESA is Latin America's biggest electric utility provider. MAPFRE is the area's largest insurer. But that is only the peak of the iceberg. Let's take a look to the two biggest companies in Spain. Repsol and Telefonica, which were two former monopolies in oil and telecommunications. Both lost their privileges as monopolies and went private in the mid 90's and both expanded rapidly in South America and turned later into global companies. Telefonica owns majority stakes at Protel (cellular phone carrier in Mexico), Peru's Telefonica, Chilean CTC, Argentina's TASA, Colombia's COCELCO, Brazil's CTR and Telefonica Larga Distancia of Puerto Rico. It owns the argentine broadcaster Telefe, the cable operator's cablevision (Argentina), Metropolis (Chile), Cablemagico (Peru) Telco/MSO/CanTV (Venezuela). After this enormous growth base in South America, Telefonica expanded in both telephones and Internet trough the rest of the world. It has joint ventures with WorldCom in Italy, Western Europe, Central and Eastern Europe and Italy. It has a calling center and a cellular phone carrier at Morocco and a cellular Phone carrier in Israel, Pelophone. It has acquired licenses to operate third generation GSM phones in Germany, Italy and France. It developed its own Internet portal, Terra Networks, rated second in Europe and first in South America and purchased Lycos to give more international expansion to its Internet assets. We can say the Telefonica is one of the top 5 telecom companies (dialing in on Latin America) (Telefonica's bid to be a cyberstar)(Spanish Prisoner)(Telefonica to break into Showbiz)(www.Telefonica.es) The other big Spanish company, Repsol, acquired Argentinean YPF in 1997 and is actually ranked as the 7th oil company in the world. It has either exploration or production in Argentina, Venezuela, Indonesia, Russia, Bolivia, Trinidad & Tobago, Vietnam, Algeria, Libya, Egypt, Ghana, Vietnam, Dubai, Peru, Colombia, Spain, United Kingdom and Ireland. (www.repsol.es) (Repsol−YPF) • CONCLUSION We have seen how Spanish companies can compete in other markets. We have seen that with good political 3

conditions and a good management Spain can compete in the international markets. We must notice that this expansion happened during a worldwide expansion of the economy but Spanish managers were audacious enough to see into the future and forget old traditions. Spanish managers took the risk of going abroad, and most of the succeeded. Those companies, which were not big enough to compete or failed in its international expansion, are no longer in the game, and no records are left of their failures. Maybe it is a risky business, but it was the only way to face competition in the European Union. What will happen in the future? The government in Spain is increasing measures to continue with this growth. It plans to increase expenses in R&D from 0.8% of GDP to 2% before 2003. It has already developed a third generation GPS net, being the first country in doing it, which will assure Spanish telecommunications to be on the edge for another 5 years. And companies they have already faced competition, they have gone through mergers, acquisitions, negotiations, monetary crisis in Europe and South America and they have prevail. Those companies have a capable management used to negotiate and deal with international situations that will be crutial in the years to come in the still culturally different European Union. Spanish managers who wish to go international must look for synergies with South American companies and learn how to deal and merge or take over companies there. Once your management makes them profitable, the size that the company has acquired will permit a bigger capitalization and the chances to compete in the always−saturated European Market. Spanish Roquefort in France? Why not?

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