Wild article in WSJ. Vitech's PCs Establish Market Share in Brazil
September 16, 1998
By PETER FRITSCH
Staff Reporter of THE WALL STREET JOURNAL
ILHEUS, Brazil -- The sweet scent of chocolate spreads across the
steamy Brazilian jungle and into an old cacao-crushing shed where
hundreds of workers, mostly women, are busy building personal
computers. They earn as little as $163 a month -- a decent wage in a
region where unemployment shot to 45% after disease wiped out what
was once the world's largest cacao crop.
Presiding in Portuguese over this scene is the unlikely figure of Georges St.
Laurent III. The eccentric scion of the family that once owned Sterno
canned-heat, Mr. St. Laurent has worked at the U.S. Drug Enforcement
Administration, published a scholarly article in molecular biology as a Yale
undergraduate, made millions as an options trader and was "cured" of a
life-threatening illness by a Colombian healer who pulled 14 of his teeth
and stuck needles in his liver.
Today, the gaunt 37-year-old American lives on a
two-mile stretch of Brazilian beach, drinks coconut
milk from the shell and has two children by a
former girlfriend in Espirito Santo. He carries a
pendulum in his pocket to measure "auras," and his
office wall displays a chart explaining how to
assess someone's internal organs by looking at his
iris. Mr. St. Laurent's company also happens to
sell more personal computers in Brazil than anyone
but Compaq Computer Corp. And if recent trends
continue, the Miami company of which he is
chairman and chief executive officer --Vitech
America Inc. -- will be Brazil's leading PC seller
sometime next year.
Success in high-risk emerging markets never comes easy and can be
especially fleeting in the mercurial world of high technology. But as
Vitech's often wild Brazilian adventure illustrates, total immersion in a
market and the ability to adapt quickly to its fickle rules can reward a
company with the kind of market share it could never hope to win in the
developed world. And as Mr. St. Laurent will attest, it helps if you are a
bit crazy. "We're like the Viet Cong," he says. "We're so weird and alien,
the big guys never see us coming."
Big Local Brands
That turns out to be true in many of the world's largest emerging
economies. "Local heroes," as scrappy local PC makers are known, are
relegating the biggest names in personal computing to secondary positions
in places like China, Russia and Brazil. A Hong Kong company, Legend
Holdings Ltd., is the largest seller of PCs on mainland China, having
overcome years of International Business Machines Corp. and Compaq
hegemony. In Russia, local brand VIST Ltd. is the top seller of PCs,
according to International Data Corp. In Brazil, Vitech is followed by
Itautec SA, another strong local brand.
"Because of their agility and knowledge of the market, local computer
makers have the potential to be the real technology drivers" overseas, says
Craig Barrett, Intel Corp.'s president and chief executive officer. Indeed,
Mr. Barrett recently sat down for 90 minutes with Mr. St. Laurent at
Vitech's Sao Paulo office. His interest wasn't casual: While Intel dominates
the market for computer chips in the developed world, the giant faces stiff
competition elsewhere and needs companies like Vitech -- its largest
customer in Brazil -- to catch up.
Of course, the multinationals aren't about to throw in the towel. Though
Compaq and IBM have lost significant market share in Brazil's $2.7 billion
a year PC market, they still hold a strong share of the remaining $5.3
billion information-technology market, where Vitech is only beginning to
make inroads. Multinationals also have the muscle to weather downturns
such as those now gripping emerging markets world-wide. And aggressive
newcomers like Dell Computer Corp. are sure to give Vitech a run for its
money.
Weekly Installments
But the big boys will have a hard time competing with the likes of Gibson
Barreto. The independent Vitech sales agent is making cold calls one
afternoon in a poor neighborhood of Salvador, a colonial city on the
Atlantic coast. He talks Claudio Souza de Araujo, an upholsterer, into
buying a loaded PC with a fax/modem and CD-ROM drive. Mr. Souza
will make a down payment of $12.80 when his computer arrives and equal
weekly payments for three years. "It'll be tough, but I want my kids to
have a better life than this," says the barefoot worker, who gets a free
water filter for his purchase. "Helps avoid cholera," says Mr. Barreto, who
gets a 2% commission on the sale.
Selling computers on credit to people like Mr. Souza can be risky in a
country where a few years ago four-digit inflation destroyed the purchasing
power of such consumers. But given the unconventional path that brought
Mr. St. Laurent to Brazil, it isn't surprising that Vitech is willing to take
chances others would not.
Yale classmates most remember Mr. St. Laurent for the red Maserati he
used to drive around New Haven, a gift from a successful father. "I was
really the most arrogant, awful person you'd want to meet," he allows. He
was also one of the brightest. In 1983, at the age of 22, his work in
molecular biology landed him in the respected scientific journal Cell, with
the following page-turner: "Interferon Action-Two (2'5')(A)n Synthetases
Specified By Distinct mRNAs in Ehrlich Ascites Tumor Cells Treated with
Interferon." His father's stern reaction: "He wanted to know when I was
going to start making a real living," he says.
Bitter and depressed, Mr. St. Laurent made financial independence his top
priority. In 1984, he sold some stock and a coin collection he had kept
since age seven for $125,000 in seed capital and began trading futures on
the Chicago Mercantile Exchange. Things went badly until he discovered
currency options. "I took one look and saw it was just the Second Law of
Thermodynamics," he says. In nine months in 1985, he grossed $1.3
million.
Variously Diagnosed
Poised to make serious money, Mr. St. Laurent suddenly lost his voice.
Chronic dizziness and diarrhea set in. Doctors puzzled over his symptoms,
and his trading business slid. Even the intervention of his father, who sits on
the boards of Perkin-Elmer, the scientific-instruments company, and
Baxter International, a medical-devices company, did no good. Finally, a
close friend suggested his problems were psychological.
A parade of psychiatrists followed, along with lessons from a New York
Metropolitan Opera voice coach. A Harvard-trained doctor diagnosed
him as having a "toxic aura." He prescribed vitamin C and
electro-acupuncture in Baden-Baden, Germany. There, doctors diagnosed
a leaky appendix and recommended treatment at an alternative clinic in
South America. "It was weird," he says. "But I was dying."
Before long, Mr. St. Laurent was at the Clinica Kirpalamar in the middle
of jungle controlled by Colombia's ruthless M-19 guerrillas. There he
made friends with a cousin of drug lord Pablo Escobar -- a man he used
to investigate as an intern in the DEA's intelligence division. The treatment
was radical: Out came his appendix, as well as 14 teeth "contaminated"
with mercury amalgam fillings.
When the clinic phoned younger brother William to say that Georges was
in Colombia, William suspected a kidnapping. William, who is Vitech's
president, boarded a plane to Bogota with a disassembled, stainless-steel
9mm pistol scattered about in his luggage. But instead of trouble, he found
an actual clinic in Kirpalamar, staying only long enough to pass out when
Dr. German Duque stuck a long needle in Georges's liver. Says father
Georges St. Laurent Jr. of this episode in his elder son's life: "I would have
gone with a more conventional approach, and I may not have survived."
A Little Flat
Over the next four years, Mr. St. Laurent III lived at the clinic, learning the
tricks of natural medicine while recovering. His money running low, he
tried to buy and sell emeralds until the local mafia drove him off. He then
began trafficking in personal computers on trips back through Miami.
Going back to Chicago to trade options "just seemed too two-dimensional
at this point," he says.
By 1991, that business had evolved into TNT Systems Inc., a Miami
company that exported computer peripherals to Latin America. Soon
thereafter, William -- who had just sold a troubled business shipping beef
to Japan -- moved to Brazil to build computers under government
protection for local manufacturers.
The brothers spent the next several years in emerging-market survival
training. TNT found it tougher than it had imagined to collect from
customers in Colombia, Panama and Venezuela and couldn't pay
suppliers. By 1994, TNT went belly up, owing $2 million to a variety of
vendors. Some filed lawsuits and won. IBM has a $600,000 judgment
against TNT from this period. The companies are in settlement
negotiations.
Meanwhile, the brothers' father had lent them money to start Vitech
America in mid-1993. The company began exporting components to
William's Brazilian company, Vitoria Tecnologia SA, based in the coastal
state of Espirito Santo. Vitoria Tecnologia thrived under state incentives
that reduced the company's taxes to zero by tying them to Brazil's
then-rampant inflation. But when Brazil introduced a currency-stabilization
plan in 1994, inflation all but disappeared, ruining Vitoria Tecnologia's
profit margins. "We got burned," says William St. Laurent.
Chance Meeting
Things got even worse when the leftist Workers Party took office in
Espirito Santo that same year. Because the St. Laurent brothers had
publicly opposed the party, the incoming government refused to
renegotiate the incentives. Instead, according to William St. Laurent,
officials asked for a $600,000 bribe. A state spokesman denies that. In
any event, armed police ended up surrounding Vitoria Tecnologia's factory
with machine guns, seizing records and inventory Vitech is still trying to
retrieve.
On the verge of calling it quits, Georges St. Laurent III had a chance
meeting in early 1995 with the well-connected head of Bahia's cacao
institute. Vitech soon cut a deal to build computers in Ilheus under a
10-year tax holiday. The only catch: Vitech had to employ out-of-work
cacao workers -- even if machines could do certain jobs more efficiently.
Mr. St. Laurent III moved to Ilheus and began hiring field hands at a
fraction of the labor cost in southern states like Sao Paulo. To climb out of
their financial hole, the brothers assembled videocassette recorders and
TV sets for retail chain Casas Bahia SA. From Casas Bahia they learned
the importance of accepting postdated checks -- a common Brazilian
practice.
Because Vitech sells direct from the factory via commissioned agents, it
avoids the 2.65% tax charged every time a product changes hands in
Brazil. Between those savings and the cost benefits of manufacturing in
Bahia, Vitech is able to sell at prices 5% to 10% below the familiar U.S.
names. That's good news to Jose de Azevedo. A purchasing manager for
the Sao Paulo plant of Swedish truck giant Scania AB, Mr. Azevedo says
70% of the plant's PCs are now Vitech, despite a corporate directive to
buy Compaq whenever possible. "[Vitech's] prices are too competitive,"
he says, and a fluid supply chain means he can order a single computer by
fax and count on speedy delivery.
Cash Flow Headache
To be sure, the Vitech model isn't perfect. Because the company finances
its own customers, it has to administer 1.15 million financial transactions a
month and rely on painstaking in-house credit analysis. Also, Messrs. St.
Laurent would rather not be responsible for all that inventory floating
around Brazil; poor transportation infrastructure leaves them no choice.
With a third of sales made on credit to smaller consumers, cash flow is a
constant headache. And to stay afloat, the St. Laurent brothers have had
to rely on their father's deep pockets. The senior Mr. St. Laurent holds an
18% stake in Vitech.
Then there are the intangibles. Vitech's trucks must travel with armed
guards. Labor laws modeled on those of Mussolini's Italy make it nearly
impossible to fire inefficient workers. When Brazil's vigilant consumer
police recently busted a valued Vitech franchisee for failing to sell
Portuguese manuals with Microsoft Corp. golf programs, William St.
Laurent had to spring him with a $12,000 payoff.
But Vitech's obstinacy is bearing fruit. It held 8% of the PC market over
the first half of this year, second to Compaq's 9.5%, according to IDC.
The numbers are catching competitors' attention. IBM may be suing Mr.
St. Laurent III in Miami, but a top IBM executive traveled to Ilheus last
year to learn Vitech's model. A Compaq executive is due in Ilheus shortly.
The St. Laurents "have had their share of false starts, but that's the price
you pay for having the guts to be entrepreneurs in a crazy place like
Brazil," says Rui Campos, a former executive with PC maker Microtec
SA. "But they've finally got it right."
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