SMOKING SALMON.

Latin America's hottest growth company roils Chilean fish farming industry.

THREE METERS OF RAIN A YEAR. ISOLATED COLD water coves. Less sunshine than Seattle. The climatic conditions that make the bottom spur of Chile so inhospitable for humans are ideal for Atlantic Salmon. Never mind that this is the Pacific Ocean, the Atlantics thrive here. So do the companies that trade in what is arguably Latin America's chicest legal export: freshly farmed salmon fillets.

Sitting atop that pack is Mainstream Salmones y Alimentos. And that's no small distinction seeing that, if current growth continues, Chile will be the world's largest salmon producer by the end of the decade, surpassing Norway. Companies like Mainstream will be the reason why; it saw a 346% increase in revenues over three years and a whopping 1,730% boost in net income for the same period. But there's a dark side to Mainstream's stellar performance: Latin America's hottest growth company may be cutting too many corners, paying workers illegally low wages and overusing antibiotics in a quest for fast profits.

In 1985, Mainstream Salmones was among the first of companies to stake a claim to the coastal waters of Puerto Montt, Chiloe, Chaiten and the unnamed inlets and fjords where South America points toward Antarctica. That early lead, combined with a systematic acquisition of other concessions and smaller companies, made Mainstream the industry leader.

Mainstream's success is serendipitous in some respects, indirectly springing from charges by the U.S. Commerce Department that the company--along with eight other Chilean producers--was illegally dumping salmon on the U.S. market. Of the 59 companies that were cited by the United States, 50 were dropped from the investigation; Mainstream was not among them. The Commerce Department report "preliminarily determine[s] that sales have been made below normal value," but litigation in the mid-1990s brouhaha is expected to continue for at least five more years.

As the Chilean companies scrambled for ways to stay within the law, they stumbled upon a market niche. Instead of whole fish, they began exporting fresh boneless salmon fillets.

Capitalizing on labor costs far below those of the United States and Norway, the Chileans could process the fillets then take them to market at a fraction of the price charged by competitors. About 90% of the salmon that Chile sends to the United States is in the form of boneless fillets. Those exports, worth US$320 million, give Chile 70% of the $457 million worldwide market for boneless fillets.

But the shift to fillets also sparked a dramatic change within the salmon industry. The messy job of gutting and cleaning the salmon was transferred from consumers in U.S. kitchens to workers on Chilean assembly lines.

Labor and Iox. What's good for the consumer is not always good for the fish factory workers. Cheap labor seems to explain how Mainstream can consistently report profits above the industry average. Interviews with industry consultants, current and former company workers and government regulators reveal a company that talks publicly about cost cutting and efficiency but, government officials charge, pays less than the legal minimum wage and invests little in worker orientation and safety training.

"Mainstream is currently under investigation for breaking Chilean labor laws," says Hector Moyano, an investigator with the Inspection del Trabajo, the Chilean government body responsible for monitoring labor law compliance. "It is paying its workers less than minimum wage for overtime. Those hours have to be at least minimum wage. If we can't negotiate a settlement, we will have to fine them."

Moyano says Chilean privacy laws prevent him from releasing details of the workers' complaints filed against Mainstream. Mainstream CEO Francisco Ariztia declined to speak to LATIN TRADE. Mainstream's financial manager, Ivan Cerda, also rejected requests for information.

"We work 12-hour shifts and at the end of the month, instead of paying for all 40 extra hours, they say that you can be paid for 10 now and the other 30 when you retire from the company," says one worker, leaving Mainstream's processing plant in an industrial park outside Puerto Montt after a 12-hour shift. Asked if workers were interested in unionizing, she quickly answers: "If you even mention sindicato in there, you would be fired."

Safety--of both workers and consumers--has also become a hot topic at Mainstream. "There are companies that send workers to training classes and build them housing with double-paned glass and suitable working conditions, but Mainstream does not invest anything but the minimum for training or safety for its workers," says Mariela Romero, an industry veteran who monitors outbreaks of disease among salmon and trout species.

As representative of pharmaceutical company Schering-Plough's Animal Health Division, Romero is called in to analyze and squelch parasitic or bacterial outbreaks in the close confines of the salmon breeding pens. She says Chilean companies do not respond wisely to those outbreaks, over-using antibiotics to control them.

A report published in August 2000 by Chile's non-profit Terram Foundation, an ecological watchdog organization, concludes that the Chilean salmon industry introduces antibiotics directly into the lakes where salmon are cultivated. Thus, healthy fish are medicated along with the ill ones--and the entire ecosystem beyond the fish also gets a dose of antibiotics. Antibiotics saleswoman Romero confirms the practice.

Building resistance. The report finds that Chilean salmon industries use 75 times more antibiotics than their counterparts in Norway. The co-authors of the document, Marcel Claude and Jorge Oporto, warn that excessive and indiscriminate use of antibiotics "create a resistance to future medications that attack diseases." The report, which does not specifically single out individual companies, was slammed by the Chilean salmon industry. "These declarations are unjust and reveal a profound ignorance of salmon farming," the industry said in an official reply adding that the report used inadequate sources of information.

The report also recommends a moratorium on salmon farming concessions--a suggestion the salmon companies called unpatriotic. "This position is an attempt on the growth of the country, because in the coming years the expansion of salmon farming will create another pole of development," the industry said in its response.

Antibiotic saleswoman Romero says demand for her company's products remain on the rise, adding that sales went up "approximately 200-300%" from September to November.

"This comes from problems with resistance to other antibiotics on the market, which are no longer effective, or there was uncontrolled use of those antibiotics," Romero explains. "Not only does the Chilean industry use unproven antibiotics, but it doesn't respect the therapeutic dose. It gives a little more than necessary. And that is the principal problem of the resistance now occurring."

The Chilean salmon industry expects to break the $1 billion mark in 2001, and industry officials estimate it has reached just a third of its total potential. But some insiders say that without better industry standards and self-regulation, future growth could be threatened by both market and biological forces. As the most accessible fishing grounds have already been leased, future expansion will require road construction, adding to costs. Similarly, the supply of cheap fish meal, the key ingredient in salmon food, is declining.

Mainstream's tactics--criticized as they are--may be a good investment gambit in the short term for its owners, however. Chile's nimble salmon-farming enterprises start life as domestic companies then often are scooped up by multinationals. In August 2000, Norwegian firm Statkorn Holding purchased 77% of Mainstream Salmones y Alimentos for an estimated $115 million, a sale approved by the Norwegian Parliament.

Some industry leaders in Puerto Montt see the Norwegian purchase as a tactical move against the aggressive entry of Chilean salmon into the U.S. market. U.S. imports of Chilean salmon in 2000 rose 42% from a year earlier.

Still, Mainstream, focusing on fast growth today, may find it has traded away its chance at stability for tomorrow.

FEEL THE HEAT

THE LATIN TRADE HOT GROWTH COMPANIES posted Latin America's most stellar activity in terms of revenue and profit growth during the past three years ending June 2000.

While some of the region's hottest companies focus on exports, the vast majority of firms are geared on domestic sales in industries like retailing, which tend to outperform a country's economy. Given its steady growth in recent years, it's no surprise that Mexico is home to the largest number (29) of high performance companies. The rising Mexican tide is lifting all boats from US$17 million (sales) health-food retailer Grupo Nutrisa to $11 billion conglomerate Carso Global Telecom.

Further south, the rocky performance of Brazil's real in recent years has limited big sales-and-profits companies to only eight producers of exportable goods, such as chemicals and steel. Chile and Peru have five companies apiece on the hot growth list, with a mix of inward and outward looking firms.

At the top of the heap sits a Chilean salmon exporter that has wrangled its way to the No. 1 spot in a booming, yet competitive, industry. (It was No. 27 in our list last year.) The two runners-up are Mexico's Carso--controlling shareholder of Telefones de Mexico, which itself turns up at the No. 34 spot on this year's list--and Peru's Volcan, a small Peruvian mining operation catapulted into the big league. Neither appeared on our Hot Growth list in 2000.

Today's fast growth may not necessarily translate into tomorrow's security. Nor does it signal model management. At least one company in our top trio may be running on the "live fast, die young" plan--it's under investigation for labor law violations. The reigning telecom giant on the list, meanwhile, faces allegations of monopolistic practices.

Are Latin America's hottest pushing for too much, too soon? Only next year's hot growth list will tell...

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