#121 – The Expat Files: Small Business, Cost of Living, and Cultural Nuances in Latin America

Automatically transcribed from the original recording; names and wording may contain errors.

[00:03] Hi everybody, I'm Johnny Mueller and you're listening to The Expat Files, living in Latin America. The show that tells you what it's really like to live, work, play and or retire in Latin America. I tell it just like it is, not the version they give you in those glossy travel magazines, or the picture they paint for you in those international traveler websites, where they're only trying to sell you something. What's it really like for expats living in Latin America? Well, it's time to take off those rose colored glasses and find out. So let's get started. You know, I'm always talking about how easy it is for an expat to come down here and start a business. And why those bleak first world calculations and statistics on just how difficult it is to get a business off the ground up there just don't apply down here in Latin America at all unless you're in a high volume tourist area.

[00:49] And when you're in a high volume tourist area, opening a business can be pretty rough. Then you have not only the local competition, but a bunch of first worlders doing the same thing. Then unless you've got some brand new first rate idea or something that's just become a fad, you might as well stay up there in Cleveland with your idea because you're likely to have a nine out of 10 chance of going bust in the first year or two. And I don't know how many of you first worlders up there know the statistics that they teach in management school and in business administration courses. Well they tell you up in the first world that you've got about a 90% chance of your business failing within the first or second year. Now I'm talking about opening a small business in the first world and I'm not talking about franchises. It turns out that franchises do a lot better than that because the franchise machine, the marketing department at Starbucks, Taco Bell, or Kentucky Fried Chicken, whatever franchise

[01:37] you want to buy into, well they're going to have done a lot of the legwork for you already, scout you out a decent location and all that, and crunch all the numbers and make sure you have a decent client base so you don't fall flat on your ass. Because that's the last thing a big franchise wants to do is have people buy in and go bust and that's why if you buy into one of the bigger franchises you have about a 50-50 chance of still being alive a year or two from when you're set up. But that's still just a flip of the coin and not much better than playing a hand of blackjack against the house. But a lot of people like 50-50 odds. That's why so many people play blackjack and why so many people dish out those big upfront costs and go with a franchise. But if you're trying to open just a regular old run of the mill small business up in the first world, a non-franchise outfit like a shoe store or a tailor shop or an ethnic

[02:22] grocery store or an antique store or a graphic comic book shop, well in those kind of businesses you're looking at a 90% fallout rate. You're likely to fail 90% of the time after the first year or two of business. And I'll be willing to bet that the vast majority of people in the first world who do actually opt to open a small business never did their homework enough to even realize that the odds of even being alive in two years just stink. And if you decide to open a bar or a restaurant or a hotel or get into the hospitality business at all, your odds are even crappier. And that's because so many people, ex-pat wannabes included, think they would be absolutely great at running a bar or restaurant. They think they can open a bar because they bartended in college and they watched every episode of Cheers and a restaurant because they've got some of grandma's old recipes and occasionally people compliment them on being a good cook.

[03:10] But believe me, it takes a hell of a lot more than that to make a successful bar or restaurant. But we all do have our fantasies. Now I have mentioned that your chances for succeeding with a small business down here in Latin America are astoundingly better than they are up in the first world. And I repeat, off the first world tourist trail that is. And people have emailed me trying to pin me down on numbers, asking me if they did open a bar or a restaurant or whatever down here. What exactly are the chances of success? Are they 10, 20, 50, 70, or even 80%? And that depends on a lot of things. But most of the time, when I see a business fail down here, whether it's a local or a first world person trying to set it up, it's that they don't have enough cash reserve to keep the thing going the first six months or a year, while that fresh new business is just starting out and trying to get on its feet.

[03:55] We always think we can outsmart the business experts when they talk about operating reserves. Nobody likes to hear that. But if you want to pin me down on the real numbers, I'll estimate that if you start a bar or a restaurant down here, instead of a 10% or less chance of surviving the first year or two, which are pretty solid statistics up in the first world, anyway down here, you've got so many advantages going for you right off the bat, and that doesn't even include that gringo advantage that I always talk about, that huge psychological advantage that you have because the Latins love everything first world and anything connected to it. Besides that gringo advantage, which is purely psychological and really the best pre-marketing anyone could ever have, is the fact that one, ransomed land, again off the tourist trail, are half to a quarter of what you'd pay for something comparable up in the first world. And if that isn't advantage enough, if your business is in one of the towns or cities

[04:44] in the Altiplano region, which is that eternal spring weather that I talk about, well then there's a good chance you won't have any heating or air conditioning bills either. Unless of course you're stuck in a big office tower or professional building where there's just no ventilation. But you don't have to set up shop there if you don't want. You can always move down the street or into another neighborhood and take advantage of that and cut your electric bill dramatically. And by the way, the cost of electricity down here, let's talk about that for a second. Well to tell you the truth, it's one of the only things down here in Latin America that you don't get a big savings on as compared to living in the first world. And it turns out all throughout Latin America, the cost per kilowatt hour is about the same or even a little bit higher than the average cost per kilowatt hour in the first world, which is reason enough to live in one of those Altiplano regions. Now to give you a good concrete example, I live in a 3500 square foot first world style

[05:33] house. And when I talk about first world living, I'm talking jacuzzi, trash compactor, electric garage door opener, garbage disposal, clothes dryer, dishwasher, conveniences all you listeners have and everything first worlders take for granted. And I don't have central heating or air conditioning, in fact I don't have air conditioning at all though I do have a fireplace which I've never used. Now my mother back in Chicago has a 1200 square foot house, about a third the square foot of my place and she has central heating and air conditioning of course. And she's paying about $60 a month on the budget plan, you know where they level it out every month so you have equal payments and can budget that. And she has a gas furnace for heating so that's not even included. And she pays about $40 for her gas on the budget plan. And she has a gas stove for cooking like almost everyone in Chicago does.

[06:20] Now down here in Latin America, the majority of people, middle class and higher, including expats have gas stoves and we all use gas propane for our gas, not piped in natural gas because nowhere in Latin America do they actually have a gas company that runs an underground network of pipes bringing the natural gas in to individual houses. In fact Mexico, which is one of the world's largest producers of natural gas, supplies the United States with most of its natural gas by the way. Well Mexico hasn't laid natural gas pipes for individual homes either. Instead they take their natural gas and compress it and turn it into propane gas and sell it in those familiar propane tanks all throughout Central and South America. Now I know some of you are probably thinking that that must be a big hassle, getting it delivered, storing it and it's got to be dangerous.

[07:06] Having a tank or two like that around the house, maybe even stuck in a corner in the garage next to your kids bikes or heaven forbid under the kitchen counter. Well not to worry because unless you've got tanks that are really rusted and rotted then there's no reason at all to worry. And by the way when the truck comes over to give you a new tank, you exchange your empty tank for a full one of his and if that tank's two rusteders got too many dings and dents in it, you can just refuse it and tell them to give you another. Because they've always got about 20 or 30 of them sitting on the truck. And the driver doesn't really care, he'll give you whatever you want, he's got a lot of stops to make and he'll give that dinged up rotted one to the next customer. Because Latin people are just not complainers by nature. In fact I've never heard a Latin American complain about the condition of a propane tank at all. Only gringos like me and expat Eddie do that.

[07:51] So it turns out the vast majority of the middle and upper class Latins, including expats, get routine deliveries of propane gas. And I usually get the 100 pound tank, which stands about as high as your chest. But the vast majority of middle class Latins get the 25 pound tank, which is the kind that most first world people see strapped to their barbeque grill in the backyard. Same thing. Now I might not have mentioned this before, but the average Latin American family, even the wealthier classes, have individual hot water heaters in each bathroom attached to the shower head. They're little metal or plastic jobs, about the size of a roll of toilet paper, with two or three thick electric wires coming out of the top of them that lead to a fuse box somewhere. The site of which scares a lot of first worlders when they first see these things.

[08:37] And though they may be ugly, they're absolutely safe if they're installed right. And in fact most of these point of use hot water heater jobs are manufactured in Europe and used extensively there because they're extremely efficient and big money savers. And though you might think they're a cheap and dirty solution to having hot water, they're big electricity and water savers compared to the way we plumb our hot water systems up in the first world, which are actually quite costly and wasteful. And here's a shocker, about 95% or more of the people in Latin America don't have hot running water in their houses. Even if they can afford it, they don't have their houses plumbed with separate hot and cold water lines like everybody does up in the first world. They just have one temperature of water, kind of room temperature bordering on cold. And that's why Latins who make it up to the first world are so stunned when they turn

[09:22] on the left hand faucet on the sink and the water comes out practically steaming. That just doesn't happen in Latin America, except in hotels and restaurants and first world style homes, in tourist areas, where there's so many first worlders that they've come to expect that. So here's what I'm saying, when you go to a Latin Americans house, even a wealthy Latin Americans house, and you turn on the left faucet in a sink or a bathtub, it's gonna come out cold. No matter how long you keep it running, it's still gonna come out cold. And if you look under one of those sinks and follow the feed pipe, you'll see there's just one, not two, there's just a cold pipe. And the common practice is to put a T in that pipe and run it to both the hot and cold water faucets. Which to me kind of seems ridiculous, since so many left hand faucets have a red dot for hot on them, or even say hot, but they never are.

[10:09] And here's the advantage of those point of views, electric hot water heater shower heads. What makes them ridiculously efficient, is that they heat up the water instantly. You don't have to wait three seconds and it's hot. Because it's being heated by electric heating elements, not two inches away from where that water comes out of the holes in the shower head. There's not that wasted energy that we have with our systems up in the first world, where there's a big water heater tank with 40 or 60 gallons in it, sitting in our basement or in a closet somewhere, with the gas or electricity turned on all the time, keeping that water at a constant temperature for whenever you need it. And then when you turn a hot water faucet on in the house somewhere, that water has to travel from that hot water tank in the basement, through a pipe, maybe 20 or 30 feet away or even more, which means in the first minute or two, you don't even have hot water

[10:56] at all. You just let it run down the drain, waste it, until water comes out warm enough to the touch so that you can use it. And then when you turn off that faucet in your bathtub, because you've had enough hot water, all the water from that faucet back to the hot water heater sitting in the basement or in their closet, is nice and hot, but it's not going anywhere. It's just going to sit there stagnant in that pipe until it cools down to room temperature. The gas or electric heat that was used to heat that water sitting in that pipe that's hot, but you're not going to use, was a complete waste of the energy that it took to heat it. And you might think, oh well, what's a minute of a little extra electricity or gas to heat that water in that pipe, even though you're not going to use it. But you see, if there's a family living in that house, that could happen 30 or 40 times a day. Every time you use the hot water, you're doing the same thing. You're heating water that you're going to use and water that sits in the pipes and never

[11:44] gets used. Not to mention when you turn on that hot water faucet, you let that first minute or two of cool water go right down the drain because you don't want to use that in your bath water. Now do you? And up in the United States, you have about 90 million single family homes with four people in each family doing that same thing every single day. But that doesn't happen down here in Latin America. Only a very tiny portion of the wealthy and expat population down here, maybe one half of one percent, like one family out of 200, has a whole house hot water heater. And though that might sound like the definition of third world, in this case, I think it's a pretty good idea to have those point of use water heaters. It seems they're one up on first worlders in that department anyway. Now if they only could make those things less ugly and hide the wires. Okay, but let's get back to that gas propane thing. Now in my house, I have that 100 pound tank of gas propane in its own little concrete

[12:33] block closet out in the garage, so it's no danger to anyone at all. And by the way, as far as the danger goes with these gas propane tanks, tanks aren't dangerous when they're in your house. Just like those natural gas pipes in your houses up in the first world aren't dangerous. Even though in a first world paper once in a while, there'll be a story of a gas explosion in someone's house, due to a leak or a faulty connection in a gas stove or something. But here's the story on that. Up north in the first world, where everyone's weatherproofed and double and triple sealed their doors and windows in their houses, well that just means if you do have a gas leak, the gas is not going to vent down, it's going to stay in your house, and if you flick a light switch or turn on the stove, well that's it. But in my 20 years down here in Latin America, I've never seen a news story or article on a gas explosion within somebody's house. Every time there is a story on a gas explosion, it's always related to a collision of a truck

[13:22] or a car or a motorcycle carrying gas propane tanks and smacking into some other idiot on the road. So ease your mind about having gas propane tanks in or around your house. They're no problem, believe me. And the vast majority of people down here choose gas propane to cook over electricity because it's much cheaper in the long run. And it's become kind of a custom for everyone to have gas propane, because until about 5 or 10 or years ago, power outages for a few hours at a time or more were so common that if you had an electric stove, you just couldn't count on being able to cook when you wanted to have a meal. But that was 10 or so years ago. I remember the first few years I was down in Costa Rica, living in a nice, 100% first world penthouse apartment. But still, 3 or 4 times a week, the power would go out for a couple hours at a time. And though the residential tower that I lived in was 100% first world all the way, in fact,

[14:11] built by a European group and owned by a very educated Dutchman, when the power did go off, it always took a minute or two for our generators to kick in. And yeah, and by the way, all the high-end residential complexes down here in Latin America, like hospitals and professional buildings, have their own diesel generators that kick in as soon as the power drops out. But to be honest with you, it's really rare to have a power outage down here in Latin America if you're in a middle-sized or big city anyway. It's not at all like it was 10 or 15 years ago, where you could count on two or three of them a week. That just doesn't happen anymore, and I'll tell you why. Before 10 or 15 years ago, all the power companies in individual Latin American countries down here were owned and operated by their governments. And if you could tell me of any government entity or program that they run that's halfway efficient or cost-conscious, that's not in fact a complete disaster.

[14:57] I want to know, please tell me. And that goes for the first world too, especially for the first world. Just think about the US military for a second. Need I say any more? Anyway, before 10 years ago, all the Latin American countries had electric companies that were owned and operated by their individual governments. And if there's one thing that investors demand, especially first-world investors, they demand a good solid infrastructure. And that's paramount in regards to the electric power grid, because everything's computerized these days. I mean, Volkswagen or Toyota are not going to come down here and build a plant in any Latin American country that has power outages four times a week. So Latin American countries responded to this by partnering up with first-world power generation and distribution companies. So now nearly every Latin American country has a first-world style electric grid and

[15:44] long-term contracts with power generation companies that are 100% first-world. And now the only time there are really major power outages is when a storm comes in and lightning or fallen trees take out a piece of a substation. And occasionally they do have their power outages out in the boonies, but not anything like it used to be some 10 or 15 years ago. But these days, the consequences of all those power outages that used to take place evidences itself by the fact that people still use propane gas in a big way down here. I do too. And to tell you the truth, I think it's a good thing. Most astute expats and expat wannabes know that first-world government debt and the derivative-based financial system is unsustainable. And sooner or later, probably sooner, we're going to be in for another big first-world blowout and this time it's unlikely that the patient will recover.

[16:31] Now imagine if your power went out 3 or 4 times a week for 4 or 5 hours at a time, or even more. Who are you going to call? But if you had a 100 pound tank of propane gas in your garage like I do, in fact I have two, well you could still do your cooking and stay warm because it'll run your gas furnace. And guess what? As funny as it sounds, you could buy a propane gas refrigerator freezer too. Every RV and when a bag-o-owner knows about those things. Those little refrigerators and freezers you see in those things run on propane gas, believe it or not. And what's even crazier than the idea of getting cold and ice from the flame off propane gas is the fact that Albert Einstein holds the patent for it. Yes he does. Oh he did. So anyway all you North Americans, if you really want to be prepared for the worst, it wouldn't hurt to have a tank of propane gas in your garage. But back to my case, when I buy a 100 pound tank of propane gas, the last time I got a

[17:21] refill it was about 60 bucks. Now in my house I have a gas stove, a gas clothes dryer, and a gas whole house hot water heater. Yes I'm one of those oddballs that has a whole house hot water heater. I'm first world through and through. Which makes me one of the one half of 1% who has hot and cold running water in his house down here. But I don't have one of those big standing tank water heaters. I have what they call a tankless water heater, which some of you might have heard of. They use them all throughout Europe because they're about twice as efficient as your standard water heater you see throughout the United States. That big old tank that sits in your closet or in your basement. These gas whole house tankless water heaters only light up and switch on when someone turns on the hot water in the house. The electronics in the unit sense the drop in pressure in the water line and instantly

[18:08] a spark plug ignites the flame and you've got hot water. And that saves a ton of money by not having that tank of water being heated up all day and all night waiting to be used. And that's why they call them tankless water heaters. In fact a whole house unit like that is only about as big as a boom box. So there is a big savings there, but you still have that problem of that wasted hot water heat in the pipes once you turn the unit off. And though they cost about 400 bucks twice what should pay for a tank water heater, they pay for themselves in about 2 or 3 years. So anyway I've got propane gas running my water heater, my clothes dryer and my stove. And a 100 pound tank of gas propane lasts me around 3 months. So that means right now I'm paying about $20 a month for gas. Along with my $50 a month electric bill, so I'm paying about $70 a month for all my basic

[18:55] utilities in a 3500 square foot home complete with a 4 person jacuzzi. And that's for 2 people in the household. That means for a standard family of 4 it would probably cost $100 to $120 a month for all utilities. Which when you compare that to first world utility rates, costs are just a little higher down here. Since the average utility cost for a house in the United States is about 100 bucks a month. And recognize right now I'm talking about using traditional energy sources for the household. But what you must understand that down here in Latin America, solar energy is the way to go. Starting with solar water heating, that's an absolute no brainer. But when talking about solar voltaic electric panels, well that's really the key to being self sufficient and for 10 grand or less you could get off the grid down here forever. But that's a topic for a different show. I was originally talking about the built in advantages of opening a small business down

[19:44] here and why those high predicted first world failure statistics for small businesses just don't apply down here at all. First I mentioned that equivalent land and rent costs are half to a third what they are in the first world. Then I went into energy and utility costs and though the rates down here are the same or even more than they are in the first world, if your business is located in one of the thousands of altiplano cities or towns, you'll be living in perpetual spring like weather where it never freezes and you never sweat unless you're at the gym. So even if your utility rates are equal to or a little higher than they are in the first world, you won't have any air conditioning or heating bills. Which should effectively cut your electric bill by a third or a quarter. Not to mention you won't have to buy or maintain a heating or air conditioning plant. And another instant advantage when you do business down here in Latin America is that personal corporate and payroll taxes are so low they're almost laughable.

[20:32] And in some Latin American countries like Belize, if you have a local lawyer and accountant do your books, you won't pay any taxes at all. And Belize isn't the only country down here that's like that. And we'll be talking about those other places in the future so stay tuned. And then of course down here you've got that tremendous labor savings. The average Latin American unskilled laborer makes between $300 and $400 a month. And the skilled laborer makes between $400 and $600 a month. And the professional guy or gal, engineer, lawyer, accountant, architect, the starting salary for a person like that right out of university is around $500 to $600 a month. And well established professionals can make between $1,000 and $1,500 a month. Which means that labor costs across the board down here in Latin America are about 20% or less of what you'd pay for equally qualified personnel up in the first world.

[21:20] Not to mention there's practically no such thing as pension plans or health care benefits for employees. And those kind of contributions and deductions take a huge chunk out of a first world small business owner's bottom line. So with all that said, when people email me asking me realistically, what are the chances a first world person can succeed down here when opening a small business, when I tell him what I think and I don't give him much explanation. When I say you can hardly fail, provided you're not in a high volume tourist area and are not a complete doofus and don't blatantly break too many of the golden rules of business that apply everywhere. Well the fact is you can hardly fail even if you're an amateur, because down here you have just so much wiggle room and up north so little margin of air that even if you had a business or two up in the first world failed or not, you'll be so far ahead of

[22:07] the local Latin business owners by just paying attention to details, they'll actually come a time when you'll sit down and say to yourself, hey, no one told me it would be that easy. And talking about attention to details which Latins are sorely lacking in, not only are the local businesses scruffy around the edges, generally dark, dank, poorly designed, lacking in customer service, and the products badly displayed. One of the biggest problems that almost every small Latin American business has is that the cashier often does not have change for your money. There's nothing worse than walking into a small grocery store, pulling out the equivalent of a five dollar bill in their money, and the cashier says, I'm sorry, we don't have any change. Do you have anything smaller? And when you say no, she sprints out the door with your money to a neighboring business while you sit around for five minutes waiting for her to break your bill.

[22:53] And I tell you, this happens to every single expat at least a couple of times a month. Now the only places that have changed all the time, of course, are banks and guess what? First World franchises that have come down here and set up just like a successful First World company, Walmart, Office Depot, Sears, and the like. They always have change for your 20. Now for all of you up in the First World who have a small business or worked intimately within a small business, you'll know one of the cardinal rules of doing businesses. Before you even open your doors, you make sure you have enough change so that you can go the whole day without having to worry about coming up short. But guess what? Down here in Latin America, since the time of Columbus, no one's ever taught that to the Latins. Or it just hasn't sunk in their heads yet that having change for common bills is an

[23:39] integral part of doing business. And rule number two, don't inconvenience the customer. And here's the real kicker. Let's take Guatemala for example. Did you know that the biggest bill in circulation right now is a 100 quetzal note, which is about $13. And if you walk into a beauty parlor, or a variety store, or a DVD shop, or if you just buy something from a vendor in a kiosk on the street, there's a very good chance he'll make a face when he sees that 100 quetzal bill, shrug his shoulders and say, that's too big, I don't have any change. Now I ask you, in the First World, is there any business owner that would ever say to you after you handed him a 20, I'm sorry, that bill's just too big to change, you'll have to give me something smaller. The fact is, little kids selling Girl Scout cookies, and the little girl in the corner lemonade stand is going to have change for that.

[24:25] I guarantee it. And you know what, I'm not just talking about that 100 quetzal bill, I've been in places where cashier didn't have change for a 20 quetzal bill, and now I'm talking the equivalent of about two and a half dollars. Can you imagine any cashier ever saying something like that to you in the United States? Details, details. And if you think that's funny, a lot of transnational businessmen have come down to Guatemala, and they've complained to the government that they don't like the idea that the biggest bill is only 100 quetzales, which is about 12 and a half bucks. That means if a business like Sears or Ace Hardware has until $20,000 by the end of the night, they've got close to 2,000 of these 100 quetzales bills laying around, and that's a pretty hefty stack. So under pressure from a lot of these businessmen and outside sources, about a year ago the

[25:11] Guatemalan government started issuing 200 quetzal notes, which are worth about $25 US each. And you think that would have made everybody happy, but it didn't. Here's what happened. As those things began circulating in the street, and banks started giving them out, the little businesses would not take them. I mean here you're asking people who don't even have change for half or a quarter of that amount, and you're asking them to start taking these things, well guess what, it was a big flop. And sometimes when you go to the bank, they'll try to stick you with some of these 200 quetzal notes, and you just know that 80% of the small businesses will just refuse to take them. And it's not that they don't think they're any good, it's just that small businesses and people who work in small businesses tend to deal with other small businesses in the area, and none of them have changed for extraordinarily large bills like that. Bills worth all of $25.

[25:57] But looking at it from the cash year's point of view is another thing. If down here the average cash year makes $2 to $250 a month, and the average cash year in the United States or Europe, with benefits and all makes $2,000 a month, nearly 10 times what the worker down here makes, Latin cash years for example, judge the value of the money that you're paying them at the checkout window based on what they earn. Just like us first-worlders, value denominations of money based on what we earn. So if a 200 quetzales note looks like a $25 bill to us, which isn't much, because we earn 8 or 10 times more than the average worker we just handed that bill to, well to them that bill looks like 8 or 10 times its value based on what they earn. In other words, to them it looks like $200 or $250, which of course is no excuse for

[26:44] them not having change on hand for any common currency that someone might hand them. And though it's more cultural than anything, it's all about the details and why expats coming down to start businesses more often than not succeed without even trying. Like my friend Expat Eddie always says, if you want to start a business down here, just pay attention the next time you're waiting in line or standing at the counter of your average Latin American small business and make a mental note of all the things they seem to be clueless about. Eddie said, any time he's in a Latin American business for more than 10 minutes, he feels like calling the owner over, grabbing him by the scruff of his neck, shaking him and saying, what the hell's wrong with you? But then again, Eddie admits, the problem is these guys just don't get it. As long as they're making money, they're not going to change a thing. And the sad thing for them and the great thing for expats is that they don't even realize

[27:30] they need to fix anything at all. You've been listening to The Expat Files, living in Latin America, coming to you each week from somewhere south of the border. And don't forget, you can email me on anything at all about Latin America, The Expat Files at gmail.com. Once again, The Expat Files at gmail.com. See you next time. Nos vemos. Nos vemos.