Doing Business in Brazil

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Doing Business in Brazil
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Brazil Country Highlights

• Brazil has the largest economy in South America
• Brazil, along with India China has highest
  rates of growth
• Since 2000 Brazil accounts for 52 of FDI into
  South America, the 2nd largest FDI receiver
• In 2002 Brazil had the 12th largest economy
• Brazil is cofounder of Mercosur a key promoter
  of FTAA A champion of free trade

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Brazil Geographic Info

• Brazil is 5th Largest Country by Area
• A land area of 8.5 million square Kms
• A population of 172 Million
• Equatorial weather with largest rain forest
• Became a republic in 1889
• Divided into 5 regions and 26 states
• A country of immigrants Europeans, Africans,
  Asians pacific islanders

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Population Labor

• In 2002, 24 of labor force employed in
  Agriculture, 56 in service sector 20 in
  manufacturing
• Population is migrating towards costal urban
  centers, 81.7 of population live in cities
• Brazil has 31 major metropolitan centers with
  population of greater than 1 million

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Brazilian Economy

• Brazil is an emerging industrial-service economy,
  Agriculture accounts for less than 10 of GDP
• Brazil initiated Market reforms since 1990s
• Inflation has fallen to 9.3 (still high) in 2003
  from 2,708 in 1993 Real Plan
• Real Plan was initiated to stabilize economy in
  the aftermath of Contagion
• Real was devaluated in 2001 IMF extended 41
  Billion loan to bail Brazilian economy

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Real Stabilization Plan

• Real Stabilization Plan imposed a serious burden
  on Brazils growth
• During 1990 to 2001 Brazils economy grew by 8
  from US465 Billion in 1991 to 504 Billion in
  2001
• In Contrast Chinese economy grew from 387
  Billion in 1990 to 1.1 trillion in 2001
• Brazils GDP declined in second half of 90s
• High interest rates inflation is hurting growth

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Economic Crisis of 2001

• Real Stabilization plan imposed a high exchange
  rate against US Dollar to keep local prices under
  control
• In 1999 nominal interest rates reached 45, high
  debt level of 61 of GDP coupled with Asian
  Crisis Mexican Peso crisis pressurized Real
  to be devalued in 2001
• 41 Billion loan from IMF in 2001
• 15.7 Billion loan in 2002, additional 30
  Billion standby loan in 2002
• High debt levels makes Brazil dependent on FDI

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Comparison with
Brazil Mexico Chile
GDP in US Billion 502.5 617.8 63.5
GDP Growth 1.5 4.4 3.2
Real Interest Rate 11.8 3.5 2.9
Annual Inflation 7.4 5.5 3.8
Exports 61.7B 171.2B 16.1B
Exports of Goods Services/GDP 13.4 27.6 31.8
Imports of Goods Services/GDP 14.4 30.0 30.8
High Tech Exports in Billions of USD 18.6 22.4 3.4
PV of External Debt 223.8B 157B 34.9B
Total Debt Service ( of exports) 90.7 30.2 26
Source World Bank database 2002
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A fragile Economy

• High levels of debt (223.8 Billion) requires
  high debt servicing, 90.7 of exports
• Brazil trails Mexico in terms of high tech
  exports overall exports
• Brazil had a lower growth rate all through 1990s
• Higher interest rates and inflation when compared
  to Mexico Chile

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Brazils Competitiveness

• Brazil is ranked
• 46th in Growth Competitiveness Index (GCI)
• 35th in Technology Index (TI)
• 45th in Public Institutions Index
• 67th in Macroeconomic Environment Index
• Korea in Comparison is 21st in GCI, 18th in TI,
  10th in Macroeconomic Environment Index
• Brazil has upside potential to increase its
  competitiveness given its natural resources

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Brazils Factor Endowments

• Brazil is rich in natural resources
• Land, minerals, Water, Forests
• Brazil has an advanced technology
• telecom infrastructure
• Skilled labor
• Indigenous technology sector
• Booming Biotech Industry
• Brazil has established core sector
• Leading producer of Aluminum Steel
• Brazil has a young skilled population
• Over 250,000 are enrolled in Graduate program in
  2002

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Technology Focus

• Import Substitution program created a strong
  local industry
• Government encouragement of Aerospace,
  biotechnology sectors has built strong tech
  sector
• Brazil has built a strong engineering,
  Automobile, Aerospace industry

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Firm Strategy and Rivalry

• Liberalization in 90s and FTA agreements
  increased competitiveness of local firms
• Eg Number of Auto models has increased from 40
  to 400
• MNCs, Local firms compete for customers with
  more than 70,000 consumer products
• Intense Rivalry at home market has helped firms
  like Norberto, Embraer Odebrecht etc to compete
  globally

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Related Supporting Industry

• Brazils Auto Engineering industry is benefited
  by steel, rubber auto parts industry
• Brazil has a strong Agribusiness sector with
  chemicals, pesticides, seeds etc
• A strong higher education system supplies
  industry with talented employees

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Demand Conditions

• A strong home demand exists in Brazil
• A population of 172 Million
• A strong demand for consumer products, Autos etc
  at home supports expansion abroad by Brazilian
  companies
• Free Trade Area agreement with other South
  American countries creates a larger market

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FDI in Brazil

• Brazil attracts large amount of FDI
• 117 Billion in FDI from 1995-2000
• US is the largest investor Over 40 of FDI
• MNCs are the major source of FDI
• 80 of Fortune 500 firms have invested in Brazil
• Government policies favor FDI has abolished
  state monopolies
• Predictable transparent rules reduces red tape

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FDI Incentives

• Government incentives encourage FDI
• 70 of FDI are in services, 28 in manufacturing
• Low wages skilled labor availability
• 34 of banking is done by MNC banks
• Investments in Amazon region, Northeast region
  is tax exempt
• Export Processing Zones created to promote FDI
  and exports
• Investments in technology sector is exempt from
  income tax and has several other benefits

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Foreign Trade

• Since 1990, Brazil has enacted radical changes in
  foreign trade policies
• Computerized trade documentation
• Lowering of tariffs to 5-32
• Custom clearance is still cumbersome
• Restrictions on import of used cars, machinery
  consumers products exist
• Import of food drug products require government
  clearances
• Government purchases favors local production
• Import restrictions on services

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Free Trade Champion

• Founder Member of Mercosur (South American Free
  Trade area)
• Active in promotion creation of FTAA
• FTAA will boost exports from Brazil
• Brazil exports 60 billion worth goods to US in
  2002
• Steel, Chemicals, Soy, Paper pulp, coffee etc
• US accounts for 24 of Brazils exports,
  Argentina accounts for 10
• Brazil contributes just 0.9 of global trade

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Infrastructure - Transportation

• Infrastructure varies largely based in economic
  disparities
• Urban centers in South South east have good
  facilities
• Rural areas are quite undeveloped
• Road transportation accounts for 63 freight
• 1.7 million kms of roads, only 10 is paved
• Rail transport is very limited
• Only 28,000 Kms
• Air Waterways are still developing

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Infrastructure - Telecom

• Telephone services was privatized in 1990s
• High growth seen in cellular networks
• 29.2 million Cell phones
• Less than 3 of population have internet access.
• Digital divide is a major problem
• E-Commerce is developing slowly

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Infrastructure - Power

• Installed capacity of 65,000 MW Mostly
  Hydroelectric
• Power shortages exist
• Building new gas based power plants
• Experimenting with Ethanol A sugarcane
  byproduct as fuel
• Bolivia-Brazil Gas pipeline will help ease energy
  shortages by supplying 30 million cubic meters
  per day

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Consumer Markets

• Consumer expenditure in year 2002 was 300
  billion! Largest in S.America
• Sao Paulo region alone accounted for 96 billion
• Rio de Janeiro accounted for 35 billion
• Unequal income distribution is hampering consumer
  sales
• Only 17.4 of population have bank accounts
• About 30 million people
• Rural consumption is very low

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Consumption patterns

• Class A B Upper class Upper middle class
  accounts for 52 of consumption
• Class A B make 10 times or more of the minimum
  wages
• Class C consumers ( 4-10 times the minimal wages)
  account for 28 of consumption
• Class D E ( 1-3 times the minimum wages)
  account for the rest 20
• Local products, Local brands concentrate on Class
  C lower consumers (30 of market)

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Privatization

• Brazil had a huge state owned enterprises
• Privatization started in 1990s raised 105
  billion

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Culture

• Brazil is multi-cultural with Africans, Arabs,
  Europeans Native Americans
• As a whole Brazilians favor conciliation and
  tolerance
• Avoid direct confrontation and are good hosts
• Pay importance to relationships
• Value family ties but are individualistic
• Brazilians take time to trust foreigners
• Facial gazing touching is common

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Culture and Business
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Hot Sectors Oil Gas

• Investments is encouraged in hot sectors which
  offers excellent opportunities for investors
• Oil Gas Exploration drilling
• State owned enterprise Petrobras has 49 market
  share, Private sector controls the rest
• 15 growth rate, contributes 5.7 of GDP
• Opportunities in offshore drilling, offshore
  equipment, and services
• Rising energy demand promises good returns
• Oil Gas equipment market is estimated at 6
  billion

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Hot Sectors Banking

• Inadequate banking services offers excellent
  opportunity in retail banking
• About 60 million bank accounts currently exist
• 6 MNC banks have 33 of market share
• Banking sector accounts for 8.6 of GDP
• Increasing middle class will attract more retail
  banks
• Market for financial services is growing

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Hot Sector - Automobiles

• Brazils transportation sector depends on roads
• Brazil has about 15 car manufacturers
• Low cost labor and high quality is promoting auto
  parts industry primarily for exports
• 2002 revenues in auto parts exports was 11
  billion
• MNCs control 69 market share Auto parts

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Hot Sector Pharmaceuticals

• Brazil is the largest market for Pharmaceuticals
  2002 market was 5.2 Billion
• Imports 2.5 Billion worth of medicines and drugs
• Generic drugs are gaining popularity and accounts
  for 30 of the market
• MNC investments are for generic drugs

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Hot Sector Power Telecom

• Brazils expansion in gas based power plants has
  created a market for electric power equipment -
  2Billion a year
• Alternatives such as renewable sources such as
  solar power equipment is being encouraged
• Privatization is enabling a fast growth in
  telecom sector
• Currently, 40 million land lines, 29 million cell
  phones
• Total revenues of 8 Billion

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Hot Sector - Retailing

• Brazil has a sophisticated retail sector with
  self service type stores and giant retailers
  like Wal-Mart Carrefour etc.
• FDI in retail sector was 1.6 billion in 2001
• Brazils retailing sector is no par with US and
  Europe
• Opportunity exists in food retailing and
  targeting class C consumers
• A strong TV media helps advertisers and FDI in TV
  other media is encouraged

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IT Services Computers

• Brazil lags other countries in IT infrastructure,
  computer usage and Internet access
• Government encouragement will help grow IT sector
• Sales of computers and IT related goods and
  services is estimated to be 14 billion in 2003
• Digital divide (caused by wide disparity in
  income levels) is pulling down Brazils IT sector

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Closing Thoughts

• Brazil is a country of contrasts.
• A high tech industry in Aviation, deep sea oil
  exploration, machinery etc
• Yet 34 of population live below poverty line
• Income disparity is very high
• Economic liberalization is driving the economy
• Increasing the fiscal discipline, controlling
  inflation, lowering deficits is the key for
  economic stability
• Higher Social investments in education and health
  care is needed
• Government is also pursuing spending plans to
  increase wages, aid to farmers

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• Brazils current economic growth and stability
  can be upset by
• High spending plans which is ballooning domestic
  debt
• High real interest rates in hampering investments
• Pension fund tax reforms are urgently needed
• Globalization and exports are key for Brazils
  economy
• Brazil needs to address the medium term economic
  issues for future success