SALFACORP: A Chilean Company with Worldwide Focus

Introduction:

With over 75 years of experience in the construction industry, SALFACORP, a mid-sized company from Chile has shifted its focus from being a local market dominator to becoming a world-wide player in a dramatically growing capital projects industry. It merits a thorough marketing profile analysis, as Chile itself  “has achieved a strong insertion in the globalized world, signing free trade agreements with the United States, the European Union, China, Japan, Korea, Canada, Mexico, Mercosur, P4 (New Zealand, Singapore, Brunei), EFTA and other nations in Central and South America.” (Chile United States Free Trade Agreement, 1). Companies such as SALFA, which already have a strong footing in the home market, wish to take advantage of its existing competencies in order to gain significant shares of external markets where direct competition between nations, in many industrial sectors is only commencing.

As most people outside of Latin America, or even Chile, have yet to have heard the name of this company mentioned, a more detailed description of its history and operations is in order before any in-depth analysis is to be presented. This is in spite of the fact, that even though its beginnings are quite humble, the company at present is reporting billion dollar annual revenues.  SALFACORP began as a fledging family owned construction company with its activities primarily based in the sprawling, capital city of Santiago.

Nevertheless, within ten years the company was winning major bids for projects such as the construction of the national stadium, a massive 62 acre sporting complex and stadium with a capacity for 48,000 people. (Estadio Nacional de Chile, 1) This was an enormous feat, especially for a poor country with a population in the capital of approximately 1 million.  (Republica de Chile, Breve resena de la Epoca, 5). At the same time the company also expanded its scope, involving itself in motor vehicle imports, which were spun off into a distinct organization by the 1950s.

Over the years, the company has continued to expand both geographically and industry-wise, and has positioned itself in many fields that complement its construction component. Worth mentioning is SALFACORP’s involvement in real estate, industrial installations, as well as its opening of regional offices throughout Chile, Peru, Argentina, and even China. Yet, we can consider the company to be in many ways quite new, as for example it has only recently (2004) been listed on the stock market. And, its major international expansions have only occurred within the last 5 years. Accordingly “2007 proved to be the year in which SalfaCorp became one of the leading companies in the construction market, supported by the strength of its management, the efforts made by each worker and team of professionals, as well as its innovative ability in an ever increasingly competitive field.” (SalfaCorp, History, 2) These factors make the company one that investors should keep a good eye on, especially since there are many contingencies that are coming together that will give it an excellent opportunity to make significant growth.

Company Background

SALFA is very direct regarding what it does. Regardless of all the different areas that the company has expanded into, it has decided to state quite simply that “SalfaCorp is a Chilean construction company.” (Salfa, Executive Review, 1). This is the backbone of all its operations. Nearly 80% of its revenue depends on the building and implementation of “shopping centres, power stations, paper and cellulose plants, hotels, mining works, a variety of industrial plants, aircraft platforms, oil platforms, hypermarkets, churches, sports and education centres, roadway works, hospitals, jails, office and apartment buildings, urbanizations and housing projects.” (Salfa, Executive Review, 1) Next after this, nearly all the remaining revenue comes from its real estate operations. Above all other considerations, SALFA’s main objective is to maintain and expand itself as a market leader in the area of construction.

In parallel with its main business structures, through a series of acquisitions and expansions, SALFA has been able to move into many new areas. Some notable mentions are Aconcagua S.A., SalfaAustral Immobiliaria in real estate; SalfaMantenciones, Revesol, in industrial maintenance; Maqsa in machinery and equipmental rental; Novatec in third party urbanization; SalfaConstruccion, ConstructoraSalfa, SalfaOOCC y Arquitectura in Construction; and finally Salfa Montajes and Salfa Industrial in capital projects.

A major source of competitive advantage that the company has is the fact that it has been in business for nearly 80 years. While in many industries simply existing is of little value, in construction it is a huge asset. Because, many of the projects that SALFA is involved in are very large and in many instances public works, the company wins them in great part due to its long positive track record. This factor weighs in heavily when selecting a company for things like road paving, hydroelectric plant construction, etc. If a company that is initially cheaper, but soon goes bankrupt, wins a bid for one of these projects, it would be a major blunder for the government’s effort to maintain a positive opinion in the public’s eye.

Another source of competitive advantage obtained by SALFA is the fact that it is one of the few construction companies worldwide that has made a strong commitment to improving standards at all levels including the handling of the environmental impact of its operations. The company has proven itself to be at the forefront of private sector environmental affairs, as Patricio Mora a SALFA manager stated in 2003 “the public agencies are quite behind in environmental issues. The state has not prepared itself to protect the environment. One example: we do not know where to send our wastes so that they be properly disposed” (Sustainable Supply Chains, 52) Accordingly, since this time local governments and the citizenry have pressured for stronger environmental controls, controls that modern ISO rated companies like SALFA are more than willing and able to accept.

Currently, and in great part due to its expansion into a more diverse mix of geographic and product markets, SALFA has many strong competitors. In the industrial construction industry alone, the company must compete with 49 other companies only in its home market. In the house construction market, it similarly must vie with 43 others. (Research Centre, 1)  Identifying all of its competitor’s world-wide in every single segment is quite another story and is a daunting task even for those who are in the industry.

Organization

In order to achieve its primary goals, SALFA has developed a unique organizational structure that includes the separation of the company into various division level components that focus on specific areas of competence. These strategic business units (SBU’s) are SALFA Ingenieria & Construccion S.A. (Engineering and Construction, Note: S.A. is an acronym for “Sociedad Anonima” which designates a company with corporate organization in Chile), SALFA Inmobiliaria (Real Estate), and finally Salfa Gestion (Logistics and Technology Infrastructure).  Although each one is quite different in the area that it must concentrate its efforts on, and as such merits its own SBU, the divisions between themselves are highly interdependent. This is especially so, with SALFA Gestion and the other SBU’s.

Salfa Ingenieria & Construccion S.A. is the large scale project manager of SALFA. It profiles itself as “one of the main companies in the national industry and is our most developed and experienced Business Unit. It carries out construction projects varying from 500 UF (2 million USD approx.) Housing projects to larger works such as thermal power stations.” (Business Structure, 1) Many of these types of projects, especially power stations and low-cost housing projects, are public works projects and require extensive contact with government entities. These are the kinds of works that involve public biddings and extensive oversight before, during, and after a particular job has been completed.

Salfa Immobiliaria is the parent organization for all the different business units that fall under its real estate avenue of operations. The SBU states that it “considers everything from the Real Estate market study and the choice of land- including its financing and acquisition- to the architecture and development design, the construction contract management, and marketing and payment matters.” (Business Structure, 1) Currently, the primary business focus of this part of the corporation is on housing for middle and lower middle class segments of the economy. Although, nearly twenty years ago, this part of the company was only a marginal contributor to overall revenue, at present through its myriad of names that attack as many market segments as possible, Salfa Immobiliaria contributes to nearly one-fifth of the total budget.

Salfa Gestion, is the operational, logistics, and technological arm of the company. It defines itself as a “first rate logistics and technology infrastructure which guarantees the timely supply of the best technical and commercial quality goods and services.” (Business Structure, 1) This includes the major buying centre for the company, for all kinds of heavy machinery and building components that are needed for the major projects that are undertaken by all the members of the SALFA Corporation. This includes the management of a vast and complex array of heavy equipment, machinery, human capital, and other resources that must be effectively and efficiently deployed in ever decreasing time-frames for customers that have become extremely stringent in order to meet highly competitive construction and production schedules.

More than any other considerations, the greatest strengths possessed by SALFA are its human inputs. As the company is located in Chile, it can readily access a constant stream of young, highly talented engineers coming out of two of Latin America’s top 10 schools, the University of Chile and Catholic University of Chile (Webometrics, 1).  With the University of Chile’s engineers recently winning an international award for its robotics team, outpacing rivals from engineering powerhouses such as Germany and Japan, there is obviously no shortage of talent, even in a country of 16 million.

Also, the Chilean government has recently announced a “$6 billion fund to send 6,500 Chilean students a year abroad to pursue post-graduate studies in the United States, European and Australian universities.” (Brain Exports, 1) The bulk of these students will advance themselves in “engineering, science and technology studies” (Brain Exports, 2). This will obviously be a boon for construction firms such as SALFA as national policy is making a shift from the raw materials export sector, to more advanced products. And, as Wharton Business School’s admissions director mentioned in a trip to Chile last year, more than 90% of Chileans that study abroad are back in their home country within a few years. SALFA will be in perfect position to capture this stream of highly qualified graduates.

The primary weakness, that SALFA as of late is taking great lengths to overcome, is the fact that the company has a multi-national “feel” to its operations, without the respective multi-national scope. It is severely in debt with its own growth potential in this regard. While SALFA currently has opened offices and commenced operations in Argentina, Peru, and China, these have been recent developments. They are lacking the major investment and commitment that the company has with its home-country activities. The corporation is still heavily dependent on the construction and real estate market back home, as its foreign activities still remain as marketing question marks. It has not made the greater expansion that many shareholders are probably hoping for. Taking advantage of the numerous trade agreements made by the Chilean government, SALFA has yet to make significant moves in Europe, North America, and Oceania.

Nevertheless, these weaknesses in turn compose the greatest opportunities that the company possesses.  Its foothold in China, may turn out to be the new mainstay of the company. For example in the year 2006, “China’s investments in construction, factory equipment and other fixed assets rose 27.7 per cent in the first quarter compared to the same period in 2005.” (Daily Commercial News, 1) Here the company has the opportunity to make up for not entering other emerging and developed markets that have hammered out favourable trade agreements with Chile. China is an opportunity to make strong growth in a country with over 1 billion inhabitants and a 10% annual growth rate.

Another major opportunity the company has is in light of the “Credit Crunch” occurring in the US. Coupled with the experience of its real estate division, SALFA has the opportunity to make a major move in the American housing market. As the value of the U.S. dollar has lost over 37% of its value against the Chilean peso in the last five years (U.S. dollar to Chilean Peso Exchange Rate, 1), combined with the fact that massive housing loan defaults are bringing housing prices to all-time lows, SALFA is in a perfect position to make large acquisitions of existing real estate in order to strengthen its world-wide real estate portfolio.

Decline of U.S. Dollar vs. Chilean Peso

Also, as the US economy is in decline, and the construction industry is lagging, SALFA can take advantage of these conditions in order to develop self-owned projects. At present many small-time investors have taken “advantage of collapsing prices in the US to buy property for cash that could increase in value over the long term”.

(Currency Exchange, 1)

With an elite group of engineers and technicians, the company can begin to work in a niche market in order to gain a good name for itself as a top-notch builder.

A big threat the company will encounter, especially in its newfound China operations, is the potential for a massive amount of employee defections in its overseas operations, both from employees in the parent organization, and from the local workforce. The new generation of Chinese workers, as their parent’s only children, are individuals that want to see quick results, and have little if any loyalty for their companies. This is a stark change from decades past. Eli Lilly, although in a radically different industry, encountered these problems as it found “retaining high-quality workers in a country where employee turnover was high and corporate loyalty low” was a much more difficult task than originally thought. (Stanford GSB, 1)

Also, as the demand for highly qualified foreign managers is still quite high in this market, incoming managers from Chile will be tempted by extravagant offers from larger, more powerful multinationals. Even though this risk is less than the previous one mentioned, human resource considerations, overall, are many times underestimated when coming to the Asian giant.

Another significant threat on the company’s horizon is the fact that “The weak US construction market, in particular the residential sector and the associated credit crisis, will cool the world construction market in 2008, say international construction economists.” (Daily Commercial News and Construction Record, 1) This is particularly relevant for SALFA, as the Chilean, and the Latin American, economy is particularly sensitive to fluctuations in the U.S. economy. The local saying states (translation) “When the United States sneezes, Chile catches a cold,” (Chile Maintains Growth, 1)

Marketing Strategy

SALFA’s marketing strategies are as diverse as the different SBU’s and functional units that the corporation unites under its vast umbrella. Nevertheless, there are many distinct ideas that define how SALFA in recent years has decided to sell itself to its customers in an effort to gain greater shares of new and existing markets. SALFA has defined itself as a construction company, and as such its major products are buildings of all kinds, industrial installations, and large scale vehicles and equipment (as recalled earlier, its commercial car and truck division have been separated into another organization, although many people still confuse the two companies).

The Chilean government is a major customer of SALFA, and must be treated in a special manner, in relation to traditional commercial contacts. The open bidding system is used to “demonstrate transparency and to facilitate participative competition” (Informacion Corporativa, 1). Instead of maximizing profits, SALFA in this area must be able to maintain mandated levels of quality at the lowest possible price in relation to competitors. Until now, it seems to have worked as the company is a major bid winner in the construction of “hospitals, jails, and universities…as well as housing and pavement projects.” (SalfaCorp Group Construction Companies, 1)

Individual consumers can buy homes and other properties for personal use, quite conveniently through Aconcagua. Recently acquired, this has served as a distribution channel for unit sales of large-scale housing projects such as apartment buildings, gated communities, and condominiums. Pricing and promotion strategies that SALFA has can be viewed through the window of this subsidiary of the company. This is so, as product positions for its large scale private projects and heavy machinery are generally not disclosed to the public and are the subject of direct negotiation between the company and the organizational customer.

Aconcagua targets its housing products to all the different segments of the middle class, but especially reaches families with its slogan “We grow together” (Aconcagua, Quienes Somos, 1). This is illustrated by the fact that new home offerings from 40,000 – 400,000 USD are prominently displayed on its promotional web site, with clearly displayed information regarding quick financing with local banks or other institutions. Plus, the company differentiates itself by making an extra effort to accompany the new family in the entire purchasing process, including extensive after-sales service. It attempts to give a one-on-one service that covers the entire process of buying a home, from the initial search, to financing and making the final purchase.

From this we can see, that SALFA makes the most earnest effort to personalize its sales and marketing efforts in every segment. This is important in order to develop long term relationships with high-level executives in both government and private sector organizational clients as well as with individual home owners, where a well treated customer can become a loyal customer for decades. This does not mean that price and product quality considerations are not taken, but it implicates that empathy with the customer and the projection of a positive corporate image also are given significant weight.

Conclusions

Although, SALFA is taking greater risks through its international expansion, it can still be considered a traditional industry with consistent gains over the long term. It is part of an industry that is continuously growing, even within economic fluctuations. It is a reference for the Chilean economy, as the construction industry itself is an index of a country’s economic health. All stakeholders involved with the company can rest assured that the future looks bright for SALFA, as increased Latin American and Asian expansion will continuously add equity to the company. Recent news has also augured a bright future for the corporation.

Many recent developments in the company have only occurred within the last few years. Even though Aconcagua was mentioned quite often as the real estate stronghold of SALFA, Aconcagua was only acquired in 2007. Nevertheless, it fits in perfectly with the firms overall business as a high-quality sales channel for building projects.

Plus, SALFACORP’s performance in the stock market has been spectacular. It has been able to triple the amount of payments per share while still being able to reinvest 70% of earnings in the last four dividend periods. The company’s value went up 146% last year. Yet, SALFA is not for investors that are faint of heart, as it has experienced extremely high volatility and a 27% retreat in the first six months of this year. Nevertheless, just today the share price jumped a whopping 3% in 4 hours of trading; proving the resilience of the company will shine through external economic factors.  (Bolsa Comercio Santiago, 1)

This year the company completed a share buy back program to put more of the company in the hands of its employees. This is a strong indication that top management is confident that shares will continue to grow, and can be used as motivational tools for the SALFA executive workforce. Furthermore, Chile’s major pension funds have also made significant investments in the company, with hopes for continued long-term growth.

In all, SALFA has followed the marketing principle of “It’s best to do one thing really, really well.” (Our Philosophy, 2) Over the next few years, the corporation will surely impress into people’s minds that SALFA stands for the perfect balance of engineers and technicians whose final product is world-class constructions ranging from your family’s home to the next generation of power plants that will heat it.

References
“Chilean Business Round Table: Fruits and Vegetables – FRUITTRADE 2008” Chile United States Free Trade Agreement  July 22, 2008. July 22, 2008 http://www.chileusafta.com/
“Estadio Nacional de Chile” Wikipedia: The Free Encyclopedia July 20, 2008. July 22, 2008 http://es.wikipedia.org/wiki/Estadio_Nacional_de_Chile
“Republica de Chile, Breve Resena de la Epoca” Exordio La Segunda Guerra Mundial (1939-1945) July 25, 2004. July 22, 2008 http://www.exordio.com/1939-1945/paises/Latinoamerica/chile.html
“History” SalfaCorp: Constuyendo Pais 2008. July 22, 2008 http://www.salfacorp.com/resena.php
“Business Structure” SalfaCorp: Construyendo Pais 2008. July 22, 2008. http://www.salfacorp.com/estructura.php
“Sustainable Supply Chains” The Global Compact: Case Studies Series 2005. July 24, 2008. http://www.unido.org/fileadmin/media/documents/pdf/Services_Modules/csr_sustainable_supply_chain.pdf
“Research Centre – Construction Companies” Mercantil.com: Portal de Negocios July 23, 2008. July 24, 2008. http://www.mercantil.com/rc/port_select_activities.asp?area_code=1116&lang=eng&onlyweb=
“Top Latin America” Webometrics Ranking of World Universities 2008. July 23, 2008. http://www.webometrics.info/top100_continent.asp?cont=latin_america
“Brain Exports are Chile’s bet for the Future” The Oppenheimer Report June 5, 2008. July 23, 2008. http://www.miamiherald.com/421/story/558723.html
“Currency exchange – credit crunch motivates overseas homeowners” FC Exchange 2007. July 23, 2008. http://www.foreign-currency-uk.com/articles/currency-exchange-734.aspx
“World construction market will cool in 2008, Davis Langdon report says” Daily Construction News and Construction Record January 31, 2008. July 23, 2008.  http://www.dcnonl.com/article/id26221
“U.S. Dollar to Chilean Peso Exchange Rate” Yahoo! Finance July 23, 2008. July 23, 2008. http://finance.yahoo.com/currency/convert?from=USD&to=CLP&amt=1&t=5y
“Global Firms Must Understand Local Practices” Stanford Graduate School of Business January 2008. July 23, 2008. http://www.gsb.stanford.edu/news/headlines/vfttlilly-08.html
“Chile Maintains Growth Despite Crisis in U.S.” News: Xinhuanet December 16, 2007. July 23, 2008. http://www.spanish.xinhuanet.com/spanish/2007-12/16/content_544522.htm
“China Construction Growth Rises 28%” Daily Commercial News April 21, 2006. July 23, 2008. http://www.dailycommercialnews.com/article/20060421500
“Informacion Corporativa” Direccion Chile Compra 2008. July 23, 2008. http://www.chilecompra.cl/institucional.html
“Aconcagua – Quienes Somos” Aconcagua: Juntos Crecemos 2008. July 24, 2008. http://www.iaconcagua.com/?seccion_id=c3909e9fce20664bdb44efb19b798c1f&unidad=0
“SalfaCorp Group Construction Companies” SALFACORP: Construyendo Pais. 2008. July 23, 2008. http://www.salfacorp.com/obrasciviles.php
“Bolsa Comercio de Santiago” Bolsa de Santiago July 24, 2008. July 24, 2008. http://www.bolsadesantiago.com
“Our Philosophy” Google: Corporate Information 2008. July 24, 2008. http://www.google.com/corporate/tenthings.html

Appendix: From Google Finance

http://finance.google.com/finance?q=SCL:SALFACORP

Key Stats & Ratios

Quarterly
(Mar ’08)
Annual
(2007)
Annual
(TTM)
Net Profit Margin 3.13% 6.08% 5.61%
Operating Margin 4.96% 8.13% 7.85%
EBITD Margin - 9.40% 9.35%
Return on Average Assets 2.73% 8.07% 7.45%
Return on Average Equity 6.86% 18.65% 17.99%

Financials

(In millions of CLP)

Income Statement Quarterly
(Mar ’08)
Annual
(2007)
Annual
(2006)
Total Revenue 98,214.36 379,639.63 281,219.68
Gross Profit 14,114.63 61,868.64 31,892.52
Operating Income 4,869.44 30,849.27 15,550.60
Net Income 3,045.01 21,825.27 11,643.17
Balance Sheet
Total Current Assets 301,569.04 270,402.97 96,505.92
Total Assets 471,004.86 430,377.02 141,540.48
Total Current Liabilities 228,668.59 204,923.44 57,978.85
Total Liabilities 290,849.82 254,672.62 83,220.57
Total Equity 180,155.04 175,704.40 58,319.90
Cash Flow
Net Income/Starting Line 3,045.01 21,825.27 11,643.17
Cash from Operating Activities -15,726.92 -53,405.45 15,241.67
Cash from Investing Activities -6,395.70 -24,881.37 -14,821.26
Cash from Financing Activities 21,469.91 86,431.73 -4,261.53
Net Change in Cash -608.51 7,601.55 -3,958.06


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