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Doing Business in Brazil

Doing Business in Brazil. 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 2 nd largest FDI receiver

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Doing Business in Brazil

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  1. Doing Business in Brazil

  2. 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

  3. 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

  4. 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

  5. Brazilian Economy • Brazil is an emerging industrial-service economy, Agriculture accounts for less than 10% of GDP • Brazil initiated Market reforms since 1990’s • 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

  6. Real Stabilization Plan • Real Stabilization Plan imposed a serious burden on Brazil’s growth • During 1990 to 2001 Brazil’s economy grew by 8% from US$465 Billion in 1991 to $504 Billion in 2001 • In Contrast Chinese economy grew from $387 Billion in 1990 to $1.1 trillion in 2001 • Brazil’s GDP declined in second half of 90’s • High interest rates & inflation is hurting growth

  7. 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

  8. Comparison with Source: World Bank database 2002

  9. 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 1990’s • Higher interest rates and inflation when compared to Mexico & Chile

  10. Brazil’s 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

  11. Brazil’s 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

  12. 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

  13. Firm Strategy and Rivalry • Liberalization in 90’s and FTA agreements increased competitiveness of local firms • Eg: Number of Auto models has increased from 40 to 400 • MNC’s, 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

  14. Related & Supporting Industry • Brazil’s 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

  15. 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

  16. 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 • MNC’s 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

  17. 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

  18. 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

  19. 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 Brazil’s exports, Argentina accounts for 10% • Brazil contributes just 0.9% of global trade

  20. 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

  21. Infrastructure - Telecom • Telephone services was privatized in 1990’s • 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

  22. 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

  23. 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

  24. 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)

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

  26. 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

  27. Culture and Business

  28. 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

  29. 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

  30. Hot Sector - Automobiles • Brazil’s 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 • MNC’s control 69% market share Auto parts

  31. 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

  32. Hot Sector – Power & Telecom • Brazil’s 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

  33. 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 • Brazil’s 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

  34. 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 Brazil’s IT sector

  35. 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

  36. Brazil’s 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 Brazil’s economy • Brazil needs to address the medium term economic issues for future success

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