Investing In Venezuela

Market Entry Strategy

• Venezuela is a relationship-based, rather than rules-based, society. Don’t expect a quick or satisfactory legal remedy in Venezuela if the relationship goes bad. Rather, U.S. companies are well-advised to invest considerable effort upfront in identifying the right partner, agent, distributor, or representative. Use all the resources available to you, e.g. counseling from your district office, the International Partner Search, Gold Key, Video Gold Key, and/or Customized Market Research services offered by the Commercial Service in Caracas, both to assess the market and to identify a partner.
• Anticipate the special conditions of doing business in this particular market, e.g., current political risk issues (which might legitimately look significantly more challenging to an investor than they would to an exporter), an overvalued local currency, and the cost and time added by the foreign exchange controls. Build these factors into your business plan.
• Decide whether your particular product/business will benefit from being identified with the U.S. or might be hurt by the identification. This plays out differently in different sectors, with different buyers, and with different products. Some are more popular because they are “American,” whereas in other situations a low profile identity will work better. In either event, be prepared to promote and support your product with professional quality Spanish language materials if at all possible, prepared either before or shortly after market entry.
• Look for relevant trade events in Venezuela to promote your products or to test the market interest. Our Commercial Service office in Caracas tries to keep U.S. companies apprised about events in Venezuela and the ways they can participate.
• Let the Commercial Service (CS) in Caracas know if you are participating in a trade show in the U.S. and you are interested in being visited by a Venezuelan company. CS Caracas promotes International Buyer Program trade events in the United States and will be glad to pass your company information on to Venezuelan companies in advance of an event.

Using an Agent or Distributor

A commissioned sales agent, or manufacturer's representative, finds customers, passes the order to the foreign company and receives a commission on the sale. The amount of commission will vary between 5 percent and 30 percent depending on the nature of the product and the amount of work or time required by the agent. Commissions are established by negotiation and not by legal stipulations. Where there are multiple levels of customers, employing an agent may be the most practical and efficient means of covering the market. Wholesalers or stocking distributors often have minimal outside sales forces, and rely instead on advertising and on walk-in customers or buyers. Having a distributor may be important where strong after-sale support is needed for the product.

Venezuelan companies at any step in the distribution chain tend to place repeated small orders. Foreign company requirements as to minimum orders, or even minimum annual sales, may meet with resistance from prospective distributors or agents. Venezuela has no particular laws or regulations to protect a local agent. There are no legally binding indemnification requirements. The written agreement in all principalagent, supplier-distributor arrangements is binding. It is common practice to have medium-term trial agreements with clear performance objectives when entering new business relationships.

Placing a Venezuelan citizen on a company's payroll can be costly in case of separation, since separated employees are entitled to benefits provided through the local labor laws. A minimum wage is set annually by government decree. Absent unusual circumstances, commissioned agents are not considered employees. There are numerous ways to find a business partner. The various Commercial Service services (such as the International Partner Search, Gold Key Service, Video Gold Key Service, Contact Lists, Trade Missions, Catalog Shows and USDOC-Certified trade shows) are commonly used. Check the Commercial Section’s website (http://www.buyusa.gov/venezuela/en/) for details on services designed to assist U.S. companies to assess the Venezuelan market and to identify a distributor, agent, and/or representative.

Establishing an Office

A business must first be registered, although no previous authorization is required, with the Venezuelan Municipal "Commercial Registry" to be legally established. Foreignowned businesses must be registered within 60 days of incorporation with the Superintendent of Foreign Investment (SIEX). Registration with the Social Security System and the National Institute of National Cooperation is also compulsory. The opening and operating of a coordinating or reporting office is not considered foreign investment or business as long as the office neither sells nor receives financing from the home office overseas. Under the Commercial Code, business enterprises can be registered as corporations, as limited liability companies, as partnerships, as sole proprietorships, or as cooperatives.

Registration itself is relatively fast and inexpensive, and U.S. companies should have a local attorney draft the registration documents. After registration documents are prepared, a municipal business license has to be obtained, and this requires the payment of a quarterly tax. The final step in registration is obtaining the income tax registration number (RIF) from the Ministry of Finance. The RIF must be shown on all fiscal documents and bills and serves generally as the identification for the business entity.

Office space is widely available for rental or purchase, although prices, especially in the capital city Caracas, can be expensive. Foreign companies are permitted without restriction to purchase real estate, except for a restriction on a foreign national’s purchase of real estate within 50 km of the national border or in other areas where there are security sensitivities. Standard lease contracts do not cover utilities. Some office buildings do lease office space with at least one phone line, and cellular telephone service is widely available from several competitive providers.

Franchising

Franchising is allowed under the existing foreign investment laws. Franchise payments, royalties, patent or technical assistance agreements must be registered with the Superintendent of Foreign Investment (SIEX). Certain payments for the use of franchised rights may be subject to withholding taxes. Decree 2095 guarantees the ability to remit funds for franchising rights, but dollar remittances are subject to the exchange controls now in effect.

Venezuela’s franchise market, the third largest in Latin America (after Mexico and Brazil), suffered significant fallout from Venezuela's economic crisis in 2003. However, a strong economic recovery in 2004 through 2006 has generated strong gross revenues for many types of franchises. Since the late 90's, the growth of the Venezuelan franchise sector has created an estimated 80,000 direct, and 160,000 indirect, employees. Although the traditional turnkey franchise operation boom has cooled, the Venezuelan Franchise Association - Profranquicias - sees good prospects worldwide for building on or expanding the 40+ Venezuelan franchises already operating overseas. This growth creates opportunities for U.S. providers of kitchen and bottling equipment, operational and management training, and many other ancillary products and services.

Direct Marketing

Direct marketing is a common feature of everyday life in Venezuela. Marketing, through TV commercials, newspaper inserts, house visits, or street vendors is widespread. Mail advertising has been slower to develop because of postal system issues. Placing orders by phone for delivery by messenger is becoming more popular, and companies that offer this type of delivery have turned to placing their catalogs in newspapers. As the telephone system expands, direct marketing by phone is expected to become more common. Almost all businesses now use fax machines in their day-to-day business and many utilize e-mail.

Joint Ventures & Licensing

Joint ventures are quite common in Venezuela. The principal requirement is registration of the venture with the Superintendent of Foreign Investment (SIEX). The law imposes no limit on the amount of dividends, reinvestment, or repatriation. However, the Venezuelan currency is not used in the States and repatriation through dollar purchases is subject to currency exchange controls now in effect. Similarly, manufacturing under license is permitted, but to collect license fees, royalties or trademark and patent fees the license must first be registered with SIEX, and conversion into dollars is subject to the currency exchange controls.

Joint ventures and wholly owned subsidiaries of foreign companies are generally treated, technically, the same as Venezuelan firms. However, some foreign firms do increasingly appear to be disadvantaged at various times in various ways when they do not fit the “endogenous development” priorities of the President Chavez administration. Foreign investment is limited to 19.9 percent of capital in such enterprises as security companies (guard services, armored cars, etc.), TV and radio broadcasting, and Spanish language newspapers. Banking, insurance and brokerage companies have been completely opened to foreign investment. Recent government actions have increased the minimum stakes the state must hold in the hydrocarbons sector, and the state has also recently bought out private sector interests in certain telecommunications and utilities businesses.

There are restrictions in professional services (attorneys, medical services, CPAs, architects, etc.), which fall under the Law of Professions. Typically, foreign professionals wishing to work in Venezuela must revalidate their professional credentials at a public Venezuelan university. This requirement, however, does not necessarily preclude providing consulting services under contract for a specific project.

Selling to the Government

Technically, the government’s purchase of goods and services is ruled by a system of laws, decrees and regulations. These include the November 13, 2001 Law of Procurement (Ley de Licitaciones), Decree 1.555, which applies to government purchases at any level of government.

Although Venezuelan procurement law and regulations encourage delivery of the best product or service for the lowest possible price to the Venezuelan taxpayer through a transparent and competitive process, many observers express concern that Venezuelan public procurement has become less transparent and/or openly competitive over the last few years.

Venezuelan government officials are not permitted to conduct official business in any language except Spanish. Correspondence in English is unlikely to get a response. There is no single Venezuelan agency in overall charge of government procurement which can provide guidance to foreign bidders or sellers. The purchasing agency within the Venezuelan government unit – and the Commercial Service in the U.S. Embassy – are sources of information to U.S. companies with no direct representation in Venezuela. Tenders may be opened in one of three ways:

1. only to domestic companies
2. to domestic and foreign companies, or
3. exclusively to foreign companies.

In the case of public tenders open to foreign bidders, it is sometimes stipulated that the foreign company, if it wins a tender, must form a consortium with a domestic firm or have a local representative.

Anyone wanting to sell to a Venezuelan governmental agency is required to register in the National Register of Contractors, maintained by the Central Office of Statistics and Informatics. This National Register has “sub-registers,” normally found in all ministries and governmental agencies that regularly purchase goods or services. A Labor Solvency certificate is also required to do business with the government or with a parastatal company.

If tenders are opened on an international level with only foreign companies expected to participate, these bidders might be exempt from registration requirements initially, but might have to register once pre-selected (short-listed). Selling goods or services to the state-owned oil company – Petroleos de Venezuela (PdVSA) – usually requires preregistration with PdVSA’s central supply office, Bariven. Companies that expect to sell goods or services costing less than Bs. 100,000 have been exempted from registration requirements.

Although it is an acceptable practice to pay commissions, these cannot be an additional item over the final sales price to the government. Government officials sometimes check the quoted price against the published export price list to make sure that commissions are not added in this way. The Venezuelan Controller General has maintained offices in the United States to assist in verifying pricing used in international bids. U.S. exporters are advised to proceed with caution if requested to make changes in a contract after it has been signed. Such an agency request, and the change in contract language or terms, must be in writing. Litigation against the government is difficult and enforceability of judgment precarious.

The Government of Venezuela is promoting social production firms (EPS’s). Consequently, some wholly or partially government-owned companies (national oil company PDVSA for example) are strongly encouraged to procure as much as possible from or through EPS’s. Purchases of up to Bs. 100,000 are not subject to tenders. Depending on monetary value and types of goods services purchased, all other procurements are supposed to fall into one three classifications: a) General Tender (Licitación General) b) Selective Tender (Licitación Selectiva), or c) Direct Purchase (Adjudicación Directa). Bid proposals usually must be separated into two parts:

1. legal documentation regarding the supplier, description of experience, list of prior clients, etc., and
2. information on the actual technical offer and price.

Traditionally, a commission established by the buyer has reviewed bids in the presence of a representative of the National Comptroller. The technical review may require outside opinions, such as from the College of Engineers, the National Council of Science and Technology, or a Congressional Committee established for this purpose. In the past, the National Comptroller has had the final word and could stop a bidding process at any time his office sensed that the procedures were flawed.

The tender publication usually contains a time schedule for pre-selection, submission of the final offer, and the date of the final selection. When several organizations are involved in the final selection, the deadline frequently slips and bidders are asked to provide a date up to which they will hold their prices. If that date passes, price increases may be accepted.

Distribution & Sales Channels

There are no existing laws or regulations that limit distribution. Possible channels include: manufacturer's representative or commissioned agent, wholesale importing distributor, importing retailer, or direct sale to end-user. It is quite common to find Venezuelan companies that play several of these roles. No specific business license is required for a local company or individual to be an importer. Many retailers handle their own imports, sometimes placing orders through commissioned agents and sometimes purchasing directly from foreign suppliers. Government agencies usually require that a supplier of specific types of equipment be an authorized seller for the foreign manufacturer. Multiple bids by the same manufacturer may result in disqualification. Authorization to sell is especially important where after-sale support might be needed.

It should be noted that freight handling in ports and airports is somewhat rudimentary and that damage might occur unless the products are well packed. Containers are handled efficiently, but will not pass customs as such unless their contents fall under one single tariff classification number. If they contain consolidated mixed cargo, customs will separate their contents to check each single item. In order to alleviate congestion at ports and airports, Customs will authorize this procedure to take place in a bonded warehouse or under special arrangements at extra cost at the recipient’s warehouse. Containers must be sealed during the transfer. Courier services such as UPS, Federal Express and DHL should not be used to transport merchandise if packages exceed two kilograms in weight. In those cases, the shipments are treated as airfreight and could be subject to delays in Customs. These facilities should be used primarily for the shipment of documents.

Likewise, parcel post shipment using the mail should be avoided. Venezuelan mail is typically subject to delays. If such a parcel arrives, customs will send a notification by mail to the recipient, who then has to reply by mail that he is willing to accept the package. The recipient then has to go, in person, to the central post office, where the package is to be opened in the presence of a customs official. This entire procedure can take several weeks, or even months. In short, the speediest procedure is airfreight, or in the case of very heavy shipments, sea freight. Major distribution centers include the ports of La Guaira and Puerto Cabello and the international airport of Maiquetia.

Selling Factors & Techniques

Sales at the retail level are not much different from those in the United States. Price haggling in established stores is not common. Special offers are frequent, but are seasonal in nature. There are numerous malls, but few department stores. It is highly advisable that U.S. companies provide sales literature in Spanish. While many Venezuelan business people speak English, many of their staff and customers do not. Consequently, failure to prepare materials in Spanish undermines a critical sales tool.

In many cases, U.S. companies should be prepared to train new agents or distributors, especially if a product is new or entails new technologies, because many Venezuelan businesses are smaller and consequently lack deep technical resources. New Venezuelan agent/representatives frequently request training at the U.S. company’s facilities for sales staff, maintenance or repair technicians. A U.S. company’s ability to ensure Venezuelan end users spare parts, repair service and all other types of after-sale support is another critical selling factor.

Electronic Commerce

By limiting annual dollar purchases over the Internet to $4,000 per person per year, provisions of the exchange control regime now in effect have had some negative impact on the initial burst of growth in E-commerce. However, Venezuela’s electronic commerce sector is forecast to keep growing due to increasing Internet penetration (31% growth from third quarter 2004 – third quarter 2005), development of the legal framework, improved capabilities of banks to provide secure transactions, and more widespread presence of public Internet access centers. Online users now total around 3.3 million and on-line spending reached USD $300 million in 2006.79% of Venezuelan e-transactions are B2B, and 21% of B2C transactions were with U.S. companies. Local e-commerce purchases are most often settled by non-electronic means (bank deposit, checks and cash). Barriers for e-commerce growth include relatively low credit card usage, exchange controls, and increasing, but still relatively, low Internet usage.

Trade Promotion & Advertising

While there are some specialized publications, daily newspapers are the most common forms of advertising. This holds true even with regard to machinery or industrial equipment. TV and radio commercials are heavily used to promote durable and nondurable consumer goods. Billboards are common, as are leaflets, newspaper inserts, and in-store promotions. There are numerous advertising agencies, some being subsidiaries of well-known U.S. companies. Premiums are not widely used to target the public at-large, but are often provided to existing customers or business associates. Business gifts are common around Christmas for steady customers, and can be expensive.

Shocks to the Venezuelan economy in 2003 and 2004 took their toll on the trade show calendar. However, some events – such as the annual Segur Show – weathered the storm. The economy’s bounce-back in 2004 through 2006 has restored other events to the calendar, and heavy government spending in targeted sectors has added others. Check the following links for more details: http://www.export.gov/tradeevents.html, http://www.buyusa.gov/venezuela/en/15.html.

Venezuelan trade shows typically are widely advertised and, even if specialized, widely visited by the public in general. These shows have proven to be an excellent vehicle to promote a new product, or to find an agent or distributor. Off-the-floor sales are not common, however, except for pre-Christmas gift shows and toy and furniture shows. Some shows are organized by local show organizers on behalf of trade or industrial associations. U.S. companies also have organized trade shows in Venezuela directly. The U.S. Commercial Service Embassy’s Commercial section has also staged several trade shows and trade promotions in the last two years – in Caracas and in other major cities, sector-specific and multi-sectoral, single company and multiple company. U.S. companies should check the Commercial Service’s website (http://www.buyusa.gov/venezuela/en/) for details on the Single Company Promotion and other specific trade promotion services offered to help U.S. companies enter, or expand their presence in, the Venezuelan market.

Pricing

Price controls and/or mark-up limits on certain products have existed in Venezuela for many years. Gasoline is price controlled. So are some pharmaceuticals and basic food products. Recently, the Chavez government has subjected an increasing number – hundreds -- of food products and consumer goods to price controls. In these cases, mark-ups for products already on shelves or storage were prohibited by heavy fines or even store closure. While most stores have been able to cope with these measures, many producers and packers have complained that the authorized retail prices were below production costs. As result products sometimes disappear, usually temporarily, from the market, and hoarding has become more common. Law prohibits price fixing among manufacturers. All promotions require registration and authorization by the consumer protection agency, INDECU.

Apart from the exceptions noted above, retail pricing has been largely left to the market, and mark-ups of 100% have been rather common. U.S. companies should directly contact the Commercial Service office in Caracas (caracas.office.box@mail.doc.gov) for more detailed pricing formula information.

Sales Service & Customer Support

It is not normally possible to sell equipment, whether industrial or durable consumer goods, without offering sales support, spare parts or service. It is therefore extremely important that prospective agents or distributors either provide this support or be able to contract for it. Maintaining an adequate stock of spare parts is often considered essential.

Due Diligence

U.S. exporters are well-advised to perform adequate due diligence before entering into new agreements with Venezuelan agents, distributors, or representatives. Local law, accounting, or investigative firms are available to perform these services. The International Company Profile (ICP) service offered by the U.S. Commercial Service Caracas is a tool frequently used by U.S. companies to address either initial or repeat due diligence needs. For more complete information on the ICP, please refer to the Our Services section of the Commercial Service Caracas’s website at: http://www.buyusa.gov/venezuela/en/.