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American Mining Company (AMC) in Colombia
AMC Moves to Colombia
By the end of 2000, the American Mining Company (AMC) had finished moving nearly all of its coal operations from the southern United States to its premier mine in Northeast Colombia. Despite telling its workers that the company would not transfer its operations abroad, AMC closed nine mines over a five-year period, firing over 5,000 United Mine Workers. Only one surface mine and one underground mine were left operational in the US, with plans to close both by 2003. AMC was one of the leading coal mining companies in the United States for the previous half century, with coal holdings of over 1.3 billion short tons and revenues of nearly US $1 billion. Worldwide, AMC enjoyed a reputation of providing high quality coal, reliable delivery, and excellent service. Before the shift to Colombia, AMC was one of the top 300 largest private companies in the United States. The company had also begun diversifying into real estate developments on both the US east and west coasts. Colombia provided numerous advantages for AMC. First, the country’s low wages provided a much cheaper labor force in comparison to the high hourly salaries of the US mine workers. Wages for Colombian mine workers, for example, ranged from $500 to $1,000 a month, while US mine workers received over $3,000 monthly plus benefits. Moreover, the company would also not have to contend with the burdensome labor restrictions of the US mine union, such as limited working hours and mandatory safety conditions. By the early 1990s, AMC’s CEO stated that the costly labor restrictions and high wages in the US severely impeded the company’s growth prospects. Colombian union membership, however, was minimal but rising. Workers were willing to endure much longer hours and more dangerous conditions. With unemployment levels of 20% in Colombia, there was no shortage of labor and little upward pressure on wages. Consistent devaluation of the Colombian peso further suggested that wages in US dollar terms would continue to make Colombia an attractive location for labor intensive industries such as mining. Second, Colombia held the world’s third largest coal reserves. Its natural resources generated some of the highest quality thermal coal anywhere in the world. The average composite of Colombia coal, for instance, had a heat value of 11,800 BTU per pound (6550 Kcal/kg), among the highest in the world. Its sulfur and ash content also exceeded global standards. Finally, the Colombian government, hit with enormous high public debt in the mid-1990s, was feeling pressured to privatize its national industries and attract foreign investment in order to meet International Monetary Fund (IMF) loan conditions. With high unemployment and rising inflation,
Copyright © 2001 Thunderbird, The American Graduate School of International Management. All rights reserved. This case was prepared by Dr. Dennis Guthery, Goodyear Professor of Industrial Marketing, Dorn Wenninger, MIM’92 and Andrew Dodenhoff, Graduate Assistant, for the purpose of classroom discussion only, and not to indicate either effective or ineffective management.

the government offered numerous attractive investment incentives to AMC, including tax-free operations for the first ten years, extremely cheap land holding Colombia’s best coal reserves, and subsidized infrastructure development. The construction of a modern seaport on the Caribbean coast, for example, would allow coal exports to be shipped to the United States within two days. The seaport with capacity to move 10 million tons of coal per year would be for the exclusive use of AMC. A new 200-kilometer rail link connecting the mine within the mainland to the coast would also be constructed. Over 500 soldiers from the Colombia army would be continually posted for the protection of the company’s operations and its workers. With these incentives, AMC began construction on its Colombian mine in 1994. By 1995, the company began initial production capacity of three million tons per year. AMC controlled every step of the production and shipment process. The coal was first mined underground and then transported by truck to a large loading facility ten miles away. It was then weighed, processed and crushed, before being loaded on trains for transportation to the port. AMC owned a portion of the rail link, with a state-owned company owning the majority of the link to the coast. The processing facility had capacity to store over 200,000 tons of coal. Approximately 1,700 tons of coals per hour could be efficiently loaded onto railcars with a 50-ton capacity. Planned expansion by the year 2004 would increase production to more than 10 million tons per year. The modern technology and efficient operational logistics could provide a reliable source of exports for the world coal markets. Reserves were proven to be plentiful and allowed AMC’s significant expansion plans. As the mine composed a growing percentage of the company’s profits, AMC began to close its US mines in Alabama, Georgia and Mississippi. Its last two US mines employed fewer than 500 workers. The CEO publicly stated that the company’s future lay in Colombia. With the Bush Administration’s energy policy increasingly focused on coal, AMC’s future prospects looked bright.

Colombian Business Environment
Few investment restrictions applied to foreign companies wishing to start business operations in Colombia. Both foreign and national investments, for instance, were obliged to follow the same legal and administrative policies. 100% foreign ownership was permitted for most sectors of the Colombian economy, with primary exceptions for national security, hazardous waste products, and some real estate developments. The privatization of state-owned industries had progressed significantly since the early 1990s. Power, telecommunications, and financial sectors were largely been privatized. Noteworthy changes to the country’s accounting and legal procedures had also taken place, making business transactions relatively more transparent. In addition, Colombian President Andres Pastrana was pro-US investment. Under Colombian law, 80% of a company’s employees were required to be Colombian nationals. AMC exceeded this percentage minimum, as the company rotated high- and mid-level executives between its US headquarters and its Colombian operations. The mine and seaport workers were exclusively locals. Coal was Colombia’s third largest export in terms of revenue, behind oil and coffee. The country’s coal exports were expected to double by the year 2005. Additionally, the government expected private investment within its coal industry to reach US $2 Billion by 2006. The majority of the country’s coal deposits lay within the Guajira Peninsula on the Caribbean coast. The state-owned coal company, Carbones de Colombia (Carbocol), was expected to be fully privatized by 2006. Carbocol had a 50% stake in the Cerrejón Norte Project, which was Latin America’s largest mining operation and one of the world’s largest pit mines. Extensive infrastructure developments, however, needed to take place before the full benefits of the Cerrejón Norte region could be realized. AMC expressed interest in acquiring Carbocol’s 50% equity in the project.

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Colombian Political Environment
For the thirty years previous to 2000, Colombia endured a bitter civil war between various rebel groups spread throughout the country. President Pastrana was elected in 1998 with the mandate to bring an end to the violent clashes between the Colombian Army, Marxist rebel groups and right wing paramilitary forces. Meetings in Europe between the Colombian government and the leaders of rebel groups failed to reach a sustained peace accord. Despite the intense efforts of the Pastrana Administration to negotiate with the rebels, kidnappings, assassinations, and other acts of terrorism showed no signs of letting up. Colombia maintained the highest kidnapping rates of any country in the world. Both foreign executives and local factory workers were frequently held for ransom, often up to years at a time. Violent and disruptive acts on companies’ operations were commonplace and a significant discouragement to foreign investors. Rebel guerilla groups dominated Colombia’s drug trafficking and kidnapping business. The two largest factions, the FARC and ELN, controlled more than 40% of the country’s territory, mostly in remote areas near the Venezuelan and Brazilian borders. Although the rebels primarily operated in sparsely populated areas outside the urban centers, kidnappings and other violent attacks were routine in city centers. One tactic employed by the rebels was to subcontract the kidnapping of foreigners and high-profile executives to local street gangs in Colombia’s major cities.

FARC
The Fuerzas Armadas Revolucionarias de Colombia (FARC) was Colombia’s largest and most dominant rebel group, with an estimated 15,000 troops. From the mid-1960s, FARC actively pursued its Marxist ideology through violent measures. It advocated the redistribution of wealth, land reform, and the expulsion of foreign multinational corporations. Profits from kidnapping and drug trafficking allowed FARC to be better armed, better equipped, and more motivated than the government soldiers. The Colombian Army principally consisted of young conscripts from the cities, unfamiliar with the jungle and often reluctant to fight against the professional rebel troops. In a controversial effort to initiate negotiations, President Pastrana carved out 42,000 square kilometers of largely remote jungle (roughly the size of Switzerland) to be declared a “demilitarized” zone. As government soldiers could no longer enter this zone, FARC essentially had a safe haven to freely train its soldiers and cultivate cocaine. It routinely harassed civilians living within the territory, often forcing villagers to contribute to the cocaine production. The unintentional result of the demilitarized zone was an estimated fourfold increase in cocaine production after its creation. The breakup of the Cali and Medellin cartels in the early 1990s pushed cocaine production to FARC strongholds in remote southern Colombia. Cocaine cultivation alone was believed to bring in more than $700 million annually. The majority of this cocaine supplied the US market. Several multinationals operated in this resource rich “no-man’s land,” including foreign oil, natural gas, and mining corporations. AMC’s principal Colombian mine lay within territory contested by the FARC, ELN and the Paramilitary.

ELN
The Ejercito de Liberacion Nacional (ELN) comprised Colombia’s second largest rebel group, with almost 5,000 armed members. Like FARC, ELN followed a Marxist ideology, but its primarily activities involved kidnappings and attacking the country’s energy and petroleum infrastructure. It relied on
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guerilla tactics to blow up oil pipelines and power lines, in addition to blackmailing multinationals. The government also gave ELN a safe haven of approximately 5,000 square kilometers in an effort to initiate peace talks. The rebel group achieved worldwide headlines in 1999 when it hijacked a domestic airliner, forcing the plane to land in remote northeastern Colombia. The last hostages from the plane were finally let go after over a year in jungle hideouts. One month after the plane incident, ELN kidnapped over 100 churchgoers from the central city of Cali. Negotiations in Geneva, Switzerland, throughout the summer of 2000, however, failed to secure the release of ELN hostages. It wasn’t until months later, after government antiterrorist troops closed in on the group, that the hostages were released. Several hostages died during the ordeal.

AUC
Colombia’s renegade paramilitary faction, Autodefensas Unidas de Colombia (AUC), was a highly controversial group determined to combat the Marxist rebel groups and any suspected sympathizers by brutal tactics. The AUC, known commonly in Colombia by the Spanish abbreviated term “Paras,” was believed to be one of the largest violators of human rights in the world. It was alleged to be responsible for three quarters of the politically motivated killings in Colombia. Anyone associated with the rebels was a target of the paramilitary groups. Villagers suspected of associating with the rebels were often killed. Union workers, believed by the AUC to be Marxist sympathizers, were also a primary target. Paras didn’t directly target foreign multinationals. In fact, opposition groups contended that US companies actually benefited from paramilitary actions. Para membership was estimated to range between 5,000 to 11,000 highly disciplined soldiers led by the charismatic but elusive leader, Carlos Castano. Although the AUC was officially illegal, the paramilitaries were believed to unofficially coordinate attacks with the Colombian army. President Pastrana cut all official government ties to the AUC, but the paramilitary group remained a primary source of intelligence for the Colombian Army. Castano publicly stated that the AUC depends on a 60% ‘tax’ imposed on cocaine producers to finance its war against the rebels. Like FARC and ELN, the paramilitaries were better equipped, better trained and motivated than their government army counterparts.

US “Plan Colombia”
In May 2000, the US Congress sent a $1.3 billion dollar aid package designed to help the Colombian government confront its security issues created by the rebels and the drug problem. FARC, highly agitated by the US aid, planned a series of coordinated attacks against US assets to protest the perceived interference. AMC was decidedly in favor of US aid, and heavily lobbied the US Congress to increase military shipments, including helicopters and training. AMC company officials personally escorted Colombian government representatives around Washington, DC, during their lobby efforts. Moreover, President Pastrana stressed to the US Congress that American corporations such as AMC that operated in Colombia’s volatile demilitarized zone would significantly benefit from such aid. The aid package passed with the objective of reducing cocaine production. US Congress members also acknowledged that American companies would directly benefit, as they had a strategic interest in a stable Colombia. AMC’s very public support of US military aid and that of Pastrana’s administration further aggravated the FARC rebels. The rebels viewed the US and foreign corporations as imperialists that sought to dominate the Colombian worker.

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Obstacles faced by AMC
Operating within one of the world’s most volatile regions, AMC’s operations were frequently in the crossfire between the warring Marxist rebels and the paramilitaries. AMC’s success in Colombia was not unimpeded. The company faced an increasing number of challenges, both from the rebel groups operating near AMC’s mines and from the paramilitary groups. FARC attacked AMC’s railroad a half dozen times within 1999 and 2000. The most recent attack destroyed an entire locomotive and its shipment. AMC’s mine pits were also subject to small raids by guerrillas. The company’s operations on its infrastructure were severely impeded by these attacks. The company was forced to operate only during the day as night operations were deemed to be too dangerous. FARC announced plans to impose a 10% ‘tax’ on companies operating within areas within its control. AMC flatly refused to make any payments to the rebels, calling it blackmail. In response, the rebels increased their attacks on AMC. Additionally, the leader of FARC said that it would take strategic actions against AMC in response to the company’s strong support for US military aid and “Plan Colombia.” Both FARC and ELN imposed similar ‘taxes’ on other multinationals. Oil pipelines, for instance, were favorite targets against oil companies that refused to pay. Kidnapping remained a major fear as well. Approximately 400 Colombian Army soldiers guarded AMC’s operations to increase protection. AMC also maintained private airports near its inland mine and on the coast. Nevertheless, kidnapping of foreign executives was a continual threat. AMC demanded increased protection from the Colombian government, but President Pastrana’s response was constrained by a lack of trained soldiers and the rough, isolated terrain. The paramilitaries were another threat to AMC. Although they didn’t attack the company directly, the paramilitaries targeted the company’s union workers in an effort to eradicate any potential Marxist sympathizers. With six union leaders killed by the AUC within three years, union leaders held one of the most dangerous occupations in Colombia. In the spring of 2001, the AUC stopped an AMC company bus transporting mine workers to their village. Two leaders of AMC’s mine union were taken off the bus and killed execution style. The assassinated leaders had previously requested that AMC allow employees to spend the night at the mine, due to the dangerous traveling conditions after dark. AMC refused to make this accommodation, stating that the mine was not equipped to house its workers. The day after the assassinations, over 1,200 of the company’s employees went on strike for three days in protest. All production ceased. The AUC said that union workers would remain a target as long as union leadership continued its Marxist ideologies. Two more union leaders were assassinated by the AUC in October of 2001. The company continued to refuse to house its workers and relations with its union employees were reaching a critical point. The United Mine Workers of America publicly condemned AMC for not taking the necessary precautions to protect its employees. It called for AMC to withdraw completely from Colombia, stressing that the company was putting its employees in danger by operating in such a volatile environment. Continuing operations in the country, the UMW stressed, would only add to Colombia’s human right violations. The United Mine Workers continued to put heavy pressure on AMC to withdraw. Recent developments in the neighboring country of Venezuela also troubled the company’s management. In November 2001, Venezuela’s President Hugo Chavez announced a new law that consolidated state-control of the country’s oil industry. The government would have authority to make strategic operational decisions and receive higher royalty payments. Private industry experts decried the acA02-01-0021 5

tion, stating that it would deter foreign investment. Business leaders called for a nationwide strike to protest the law, and most businesses closed for one day to honor the strike. Chavez, a former Army colonel elected to the presidency in 1998, enjoyed overwhelming popular support from the poor and brushed off the criticism. Chavez cited how millions lived in poverty, receiving little to no benefit from the oil industry’s rich profits. Part of Chavez’s goals to help the country’s poor included land distribution to the poor and the nationalization of more industries. Given that the goals of FARC and ELN also included land redistribution and opposition to multinationals, AMC would need to ponder whether it would be possible for Colombia to follow in its neighbor’s path.

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