Brazil: The
Basics

3 Make or
Break
Issues

2012 and
Beyond

EXPORTING OHIO TO
LATIN AMERICA: A
BRAZILIAN CASE STUDY
dwils...
Exporting Ohio to Latin America: A
Brazilian Case Study
Brazil: The Basics

P E S T

-Facts
-Opportunities
-Risks

3 Issue...
Brazil: The
Basics

3 Make or
Break
Issues

2012 and
Beyond
Brazil: The Basics

P E S T

What are the Political, Economic, Social and Technological
reasons to enter Brazil?
export, m...
Brazil: The Basics

P E S T

Political Risk
-The ability of government to respond to political risk
-The ability of govern...
Brazil: The Basics

P E S T

Political Risk
-The ability of government to respond to political risk
-The ability of govern...
Brazil: The Basics

P E S T
The unit of
measurement for
political risk is
STABILITY

Political Risk
-The ability of govern...
Brazil: The Basics

P E S T

Political Risk
-The ability of government to respond to political risk
-The ability of govern...
Brazil: The Basics

P E S T

Political Risk
-The ability of government to respond to political risk
-The ability of govern...
Brazil: The Basics


P E S T

Largest Latin American economy


7 largest in the World




Macro Trends

Developed fina...
Brazil: The Basics


P E S T

Currency


General


Weak exchange rate generally makes a country’s exports cheaper



...
Brazil: The Basics


P E S T

Currency Risk


Transaction exposure – commitment to make payment at future date


Soluti...
Brazil: The Basics

P E S T
How substantive is the
stakeholder?

Social Risk
-The ability of stakeholders to identify vuln...
Brazil: The Basics



Geert Hofstede’s Cultural
Dimensions








P E S T

Power Distance
Individualism
Masculinit...
Brazil: The Basics

P E S T
How substantive is the
stakeholder?

Social Risk
-The ability of stakeholders to identify vuln...
Brazil: The Basics

P E S T
How substantive is the
stakeholder?

Social Risk
-The ability of stakeholders to identify vuln...
Brazil: The Basics


P E S T

Technological


Infrastructure





Power
Public Health

IP Protection


Codified IP l...
3 Issues that can Make or Break
Your Brazilian Business Strategy
Entry Method & Organizational Structure

Labor

Regulatio...
Entry Method & Organizational
Structure
 Wholly

Owned Subsidiaries

 Non-Equity Alliance
 Licensing

agreements
 Supp...
Entry Method & Organizational
Structure


Wholly owned subsidiary




Foreign capital in Brazil treated quite liberall...
Entry Method & Organizational
Structure
Sociedade Limitada (LTDA)
 Sociedade Anônima (SA)
 Sociedade Simples
 Sociedade...
Entry Method & Organizational
Structure


Sociedade Limitada (LTDA)


Similar to US LLC
 Liability limited to partner’s...
Entry Method & Organizational
Structure


Distributorship & Agency Relationships



Brazilian agency relationships is g...
Entry Method & Organizational
Structure


Joint Venture


May be created with or without a joint company




Contract...
Entry Method & Organizational
Structure


Should you vertically integrate?




Transaction Costs





Is the exchang...
Labor – It’s more than just the 13th
salary
Labor rights are outlined in the Brazilian Constitution, as well
as laws, decr...
Labor – It’s more than just the 13th
salary


Basic Principals



Worker Protection: the worker is considered the weake...
Labor – It’s more than just the 13th
salary


Direct agreements between employees and employers to resolve
conflicts are ...
Labor – It’s more than just the 13th
salary


Not at will



30 days prior notice (some agreements may require longer p...
Labor – It’s more than just the 13th
salary


Brazilian v. Non-Brazilian


Staff of companies with three or more employe...
Regulation & Tax
 Import

Export Process
 Minimum Wage
 Privatization
 Recent Tax & Regulation Changes

“If you’re hon...
Regulation & Tax


Import Export Process


Register with the governmental registration system






Obtain importing ...
Regulation & Tax
 MERCOSUL



southern common market

Free from import duty with certificate of origin
However Exceptio...
Regulation & Tax


Recent Tax Changes


July, 2011




August, 2011




1% tax on foreign derivatives
Three prong pl...
Regulation & Tax


Minimum Wage
 January

2012 increases 14%

 Currently

R$ 545 per month x 13 (US$ 12,540)
 Likely t...
Regulation & Tax


Privatization




Infrastructure Need
Auction method
Airports





São Gonçalo do Amarante Airpo...
2012 & Beyond




Infrastructure
Currency Rally & Inflation
Regulation

Brazil: The
Basics

3 Make or
Break
Issues

201...
Infrastructure


Unlike the United States, Brazil is only beginning to develop
its infrastructure capabilities






...
Infrastructure


Logistics


Rail


ALL





ANTT road & rail regulator




Creating and paving many connecting ro...
Inflation, Currency, Macro
Trends


Inflation


Analyst’s views very on inflation: 2012-2013 Range: low 3% to
high 6%

...
Inflation, Currency, Macro
Trends


GDP Projections: mid to high single digit growth in 2013
 GDP Gap
Min wage increase ...
Inflation, Currency, Macro
Trends


Currency
 Largely

dependent on EU crisis

 If

no EU recession and developed banks...
Inflation, Currency, Macro
Trends


Macro Trends
 Min Wage
2012, 14% min wage increase – 54 million
receive min wage
 S...
Regulation


A Bigger Brazil:
 US$

16 Billion in tax breaks (over 2 years)

 Eliminate


 Buy

3 prong plan to conti...
Brazil: The
Basics

3 Make or
Break
Issues

2012 and
Beyond

EXPORTING OHIO TO
LATIN AMERICA: A
BRAZILIAN CASE STUDY
dwils...
Additional Sources


















UBS Investment Research: Emerging Economic Focus, UBS, August 29, 2011
A C...
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2011 Ohio Hispanic Business Summit

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Exporting Ohio to Latin America: A Brazilian Case Study

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  • Simply a framework to discus macro level factors, how you evaluate the factors will differ based on your organizations industry, strategy, competencies and goals; however, I try to pose a general question that you can ask yourself to begin the analysis and help identify what additional information and factors you should research
  • -First elections under the new constitution were not held until 1989-several parties (over a dozen) are represented in Congress
  • -Denmark is tied for 1st with New Zealand & Singapore-Scale is 10 – 1 , 10 is best-Somalia is worst
  • -Privatization for quite some time, significant amount began 1991 when government launched its “federal privatization program” reduced its 186 firms and -steady and as recent as 2010 $70B equity offering of Petrobras (ranked as largest security offering of any kind)-August of 2011 began privatizing Airports -Plan to privatize 3 more likely by end of the year and rights to oilfield
  • -Ask for story from audience -Share some ANVISA story-Time, communication, Tariff classifications, changes in Tariff rates, Changes in % required for taxation -End with its getting better, but stress there is still a long way to go
  • Brazil Nominal GDP 2.09 T, US apx 15T2010 7.5% growth2011 even with EU issues, projected to grow steadily at at least 3.5%Source BradescoGDP & Per Capita GDP source 2010 IMF numbers1/3rd global coffee, ½ of all global sugarcane exports, major world player in beef and poultry, soybeans and corn
  • What affects GDPPrice of aggregate goods and services (not just the price of a good, but the average of all goods in the economy)We use CPI (it’s a basket of goods)When price goes up, then inflation3 ways to measure (production approach-add the sums of value added through supply chain, expenditure approach-only look at sale of final goods & services, income approach-ignores imputed income)
  • Highlight this slide & mention it may be useful for them to come back to and analyze for their particular situation
  • -OECD, organization for economic co-operation & development (primarily wealthy countries, or the countries we traditionally think of as wealthy, with current EU crisis, as I’m sure Angela Merkel would argue, that is debatable.-in 2000 these countries decided to quantify what children were learning in school (Program for International Student Assessment-at the time of the initial study (as the most recent issue of the economist highlights) only ½ Brazilian children completed grade school and 3 out of 4 adults were functionally illiterate. -since enrolled in the study have shown solid gains-Brazil has set a goal to reach the OECD standard over the next decade -Dilma 75,000 scholarships-roughly 80 countries in current tests and Brazil ranks in the low 50s above the bottom 3rd (but not too far, 35 percentile)
  • Source: Industrial Property Law, Law No. 9279, as amended (May 15, 1996)(Braz).
  • -list of several available organizational structures
  • -Judicial treatment must be granted to foreign & domestic capital under the same terms-few areas are subject to restrictions (5) post office, real estate on international borders an certain countryside districts AND (3) with some limitations financial services, media -registration provides basis for expatratiaton and computation of any eventual capital gain tax
  • -list of several available organizational structures
  • -Judicial treatment must be granted to foreign & domestic capital under the same terms-few areas are subject to restrictions
  • Some non-automatic, Brazilian environmental agency, used materials, restricted & tax benefits, RadarSimplified 150,000 import / 300,000 export from brazil every 6 monthsOrdinary real location, employees, volume of operation depends on investment
  • -Venezuela signed membership agreement in 2006, not yet ratified
  • Sources:-Third quarter 2011 BBVA analyst report-August 29, 2011 UBS investment research report-September 6, 2011 Bradesco Corretora Weekly BBI Equity Research
  • Sources:-Third quarter 2011 BBVA analyst report-August 29, 2011 UBS investment research report-September 6, 2011 Bradesco Corretora Weekly BBI Equity Research
  • -payroll tax break may be extended-payroll tax breaks will be partially offset by additional 1.5% tax companies will pay on sales
  • -payroll tax break may be extended-payroll tax breaks will be partially offset by additional 1.5% tax companies will pay on sales
  • 2011 Ohio Hispanic Business Summit

    1. 1. Brazil: The Basics 3 Make or Break Issues 2012 and Beyond EXPORTING OHIO TO LATIN AMERICA: A BRAZILIAN CASE STUDY dwilsonjdmba dwilson@keglerbrown.com David M. Wilson, Kegler Brown
    2. 2. Exporting Ohio to Latin America: A Brazilian Case Study Brazil: The Basics P E S T -Facts -Opportunities -Risks 3 Issues that could Make or Break your Brazilian Business Strategy -Organizational Structure -Labor -Regulation & Tax 2012 & Beyond -Infrastructure -Inflation & Currency -Regulation Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    3. 3. Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    4. 4. Brazil: The Basics P E S T What are the Political, Economic, Social and Technological reasons to enter Brazil? export, manufacture, distribute, design . . .  Political   Economic   Macro trends, Currency risks Social   The ability of government to respond to and NOT create political risk The ability of stakeholders to identify vulnerabilities & apply pressure to the company to change its behavior Technological  Infrastructure, IP Protection, Government Incentives Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    5. 5. Brazil: The Basics P E S T Political Risk -The ability of government to respond to political risk -The ability of government to NOT cause political risk     The unit of measurement for political risk is STABILITY Government Structure Level of Corruption Appropriation Concerns Bureaucracy Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    6. 6. Brazil: The Basics P E S T Political Risk -The ability of government to respond to political risk -The ability of government to NOT cause political risk  The unit of measurement for political risk is STABILITY Government Stability  Stable Republic Since 1985  Multiple Peaceful Elections  Democratic Constitution  Functioning Executive, Legislative and Judicial Branches  Multiple Party System  Increasingly developed services: Fire, Police, EMS Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    7. 7. Brazil: The Basics P E S T The unit of measurement for political risk is STABILITY Political Risk -The ability of government to respond to political risk -The ability of government to NOT cause political risk  Level of Corruption  Transparency International 2010 CPI index    The abuse of entrusted power for private gain Perception of corruption in public sector 2010 (most current  USA: 22 of 180   Brazil: 69 of 180   Apx. 62nd percentile 1995 (year 1 of CPI)  USA: 15 of 41   Apx. 63rd percentile Denmark* 1st USA 22nd Brazil 69th China 78th India 87th Russia 154th Brazil: 36 of 41   Apx. 88th percentile Apx .13th percentile Rousseff Cleaning House  Jettisoned 5 cabinet members since June Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    8. 8. Brazil: The Basics P E S T Political Risk -The ability of government to respond to political risk -The ability of government to NOT cause political risk  The unit of measurement for political risk is STABILITY Appropriation concerns   Long history of privatization & recent commitments Talk of reviving old laws for a few categories   land restrictions on % of land in a district that foreigners may buy 1971 law found unconstitutional but is being revisited (no talk of taking land) Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    9. 9. Brazil: The Basics P E S T Political Risk -The ability of government to respond to political risk -The ability of government to NOT cause political risk  The unit of measurement for political risk is STABILITY Bureaucracy? Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    10. 10. Brazil: The Basics  P E S T Largest Latin American economy  7 largest in the World   Macro Trends Developed financial markets Young workforce  39.3%  United States 30.5%   Brazil China 29.4% Increasing domestic demand  Growing Middle Class  Over 35 million Brazilians entered the middle class from 2003 to 2009   estimates predict an additional 20 million will climb the ladder by 2014 Per Capita GDP larger than China or India  $10,816  China $4,382   Brazil India $1,371 Rich Commodities Base – Energy, Mining, Agribusiness  Vies with Australia as worlds largest exporter of iron ore  Fertile Land: 1/3rd global coffee, ½ of all global sugarcane exports, major world player in beef, poultry, soybeans and corn  Recent oil field discovery 15bn to 70-100bn barrels   NPV of this discovery is apx $500bn apx 20% of GDP Rainforest, Hydro Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    11. 11. Brazil: The Basics  P E S T Currency  General  Weak exchange rate generally makes a country’s exports cheaper    Central banks in Japan, South Korea and Taiwan have recently intervened to make their currencies cheaper China continues to suppress the value of its currency to strengthen exports Brazilian Real   1.59 end of August, crossed 1.9 (intraday) September Selling in September    Foreign investment attracted by high returns began to sell in September largely due to fear of Greek crisis  notably Japan Central bank lowered benchmark rate by .5% Many view the valuation as stabilizing after >45% increase since 2008 Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    12. 12. Brazil: The Basics  P E S T Currency Risk  Transaction exposure – commitment to make payment at future date  Solutions:     Translation exposure – accounting based changes in consolidated FS   Taking the value on 1 day and reporting on your statements Solutions:   Forward Contracts Risk Sharing Agreements Foreign Currency Options Swap (assets, debts, and/or liabilities with someone else, e.g., a bank or another company) Economic exposure – non zero changes in expected cash flows due to changes in currency (real not just nominal)  Solutions:  Diversification Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    13. 13. Brazil: The Basics P E S T How substantive is the stakeholder? Social Risk -The ability of stakeholders to identify vulnerabilities & apply pressure to the company to change its behavior  Stakeholders   How intense is the threat? Shareholders, NGOs, Interest Groups, Consumers, Local Communities. . . Factors  Cultural Norms, Languages     “Culture eats strategy for breakfast” – Oded Shenkar Demographics GINI index (inequality of income) Ethnic Conflict Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    14. 14. Brazil: The Basics  Geert Hofstede’s Cultural Dimensions       P E S T Power Distance Individualism Masculinity Uncertainty Avoidance Long-Term Orientation www.geert-hofstede.com Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    15. 15. Brazil: The Basics P E S T How substantive is the stakeholder? Social Risk -The ability of stakeholders to identify vulnerabilities & apply pressure to the company to change its behavior  How intense is the threat? Solutions  Decouple your brands / products   Partner with NGOs   Charge premium on specific brands for CSR projects, not all consumers Reputational benefit, they understand the industry and may help keep you up to date with shifts in pressure Admit Wrongs  People are more likely to believe your CSR reports when you tell them what you are doing wrong (and how you addressing it) Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    16. 16. Brazil: The Basics P E S T How substantive is the stakeholder? Social Risk -The ability of stakeholders to identify vulnerabilities & apply pressure to the company to change its behavior  How intense is the threat? Education  Past 2000 - ½ Brazilian students graduated grade school - 3 out of 4 adults were functionally illiterate  Present -Goal to reach OECD standard over next decade -75,000 scholarships to attend world’s top universities (only 9,000 a few months ago) Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    17. 17. Brazil: The Basics  P E S T Technological  Infrastructure    Power Public Health IP Protection  Codified IP law protected by the Brazilian Constitution      Rights are enforceable    Industrial Property Law, Law No. 9279, as amended (May 15, 1996)(Braz). Provides for contracts involving technology transfer, technical and scientific services, franchising and protection against unfair competition Instituto Nacional da Propriedade Industrial (INPI)  Federal agency in charge of regulating and registering patents, trademarks, industrial designs, approving licensing and other agreements Copyright Law, Law No. 9610, as amended (Feb 20, 1998)(Braz).  Regulates Brazilian Copyrights and some Software Law Patent holder is entitled to prevent others from using, producing, selling, offering, or importing a patented product or process Patent holder is entitled to be indemnified for improper use Government Incentives Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    18. 18. 3 Issues that can Make or Break Your Brazilian Business Strategy Entry Method & Organizational Structure Labor Regulation & Tax Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    19. 19. Entry Method & Organizational Structure  Wholly Owned Subsidiaries  Non-Equity Alliance  Licensing agreements  Supply agreements  Distribution agreements  Non-Equity joint venture  Stable Brazilian legal system leads to fairly predictable results – but you may not always like them Heads of Agreement (Similar to US Memo of Understanding)  Equity  Joint Alliance venture Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    20. 20. Entry Method & Organizational Structure  Wholly owned subsidiary    Foreign capital in Brazil treated quite liberally Current legislation does not distinguish between domestic & foreign owned companies Investments may be freely made & are not subject to any prior approval, license or authorization from authorities   No max or min limit on investment amount    Levels if wish to employee non-Brazilians No max or min term for the investment (repatriate anytime) Amounts paid by a Brazilian company to a foreign investor are NOT subject to any withholding tax   But must be registered with Central Bank’s online system Amounts over the initial registration are generally treated as capital gains and subject to 15% tax (25% if investor resides in a tax haven) Foreign investors are free to use any of the available company forms Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    21. 21. Entry Method & Organizational Structure Sociedade Limitada (LTDA)  Sociedade Anônima (SA)  Sociedade Simples  Sociedade em Nome Coletivo  Sociedade em Comandita Simples  Sociedade em Comandita por ações  Sociedade em Comum  Sociedade em conta de Participação  Associações  Fundações  Cooperativas  Consórcio  Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    22. 22. Entry Method & Organizational Structure  Sociedade Limitada (LTDA)  Similar to US LLC  Liability limited to partner’s quotas      Simplicity & Flexibility Reduced Maintenance Costs Less Formal Requirements  Must have at least 2 partners  Brazilian partners are not required  May be managed by one or more persons, partners or other entity    Quotas may be freely transferred according to the articles of association May not be traded publicly Manager must reside in Brazil  If foreign manager, must possess a permanent Brazilian Visa with authorization to act as manager of a specific company Generally preferred for wholly owned subsidiaries Sociedade Anônima (SA)      Similar to US Corporation May issue securities, debentures and may be publicly held Higher Maintenance Costs More formal requirements Generally preferred for ventures comprised of a large number of different shareholder groups Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    23. 23. Entry Method & Organizational Structure  Distributorship & Agency Relationships   Brazilian agency relationships is governed by the Brazilian Civil Code and by special legislation, Law n. 4.886/1965 Exclusivity is NOT presumed unless expressly established in an agency agreement    However exclusivity is common and will likely be required by potential agents Exclusivity entitles the agent to compensation related to direct sales made by the company without assistance of the agent Termination     There are specific enumerated “just” reasons for the termination of an agency agreement Termination is typically both difficult & costly Generally, an agent is entitled to no less that 1/12th of the total amount received during the time of agency or an amount equal to the monthly average compensation received multiplied by the remaining months left in the agency contract term. An agent is also generally entitled to reimbursement for investments, such as office rent and equipment expenses Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    24. 24. Entry Method & Organizational Structure  Joint Venture  May be created with or without a joint company    Contractual joint ventures between your LTDA/SA and a Brazilian company Low cost entry and exit to new markets, industries and industry segments Opportunity for learning Provides a contractual framework for operations without generating the problems associated with an agency relationship  Enables each party to take full responsibility for its contribution to the venture while minimizing the issues associated with exclusivity  Enables low cost entry and exit   May later evolve into equity alliance Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    25. 25. Entry Method & Organizational Structure  Should you vertically integrate?   Transaction Costs    Is the exchange subject to high threats of opportunism due to high transaction specific investments? Is the exchange subject to high threats of opportunism due to uncertainty and complexity? Capabilities   Some or all of the value chain, acquire rather than joint venture Do you have valuable, rare and costly to imitate resources? Real Options  To retain flexibility: exchanges characterized by high levels For additional information on of uncertainty should Jay B. Barney, this topic please reference: Gaining & Sustaining Competitive Advantage vertically integrated Third Edition, not be 2007 Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    26. 26. Labor – It’s more than just the 13th salary Labor rights are outlined in the Brazilian Constitution, as well as laws, decrees, provisional measures, ordinances and regulations, international conventions and treaties (ratified by the Brazilian government), company policies, Supreme Court decisions, Superior Labor Court decisions and customs Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    27. 27. Labor – It’s more than just the 13th salary  Basic Principals   Worker Protection: the worker is considered the weaker party in the relationship In labor-related conflicts, at any level or jurisdiction, whenever there is a doubt regarding evidence, the court’s decision will favor the worker        The law most favorable to the worker will be applied The conditions most favorable to the worker will be presumed Actual facts prevail over written documents Protected salary (generally cannot lower an employee’s salary) Defense of workers honor and ethical code Nondiscriminatory practices Continuity of employment relationship Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    28. 28. Labor – It’s more than just the 13th salary  Direct agreements between employees and employers to resolve conflicts are not valid   The Brazilian constitution provides the right to sue as an individual guarantee There are ways to settle    Every 12 months employees are entitled to 30 calendar days paid vacation   Arbitration, union conciliation commissions. . . but they do NOT prevent the right of individual claims In addition to the 13th salary (Christmas bonus equal to 1/12 the salary for each month of that year) Every month employer must deposit an amount = to 8% of employees salary into Unemployment Fund   If employee is dismissed without cause, the employee may withdraw the amount Employer must pay a penalty equal to 40% of the amount and an additional 10% to the government Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    29. 29. Labor – It’s more than just the 13th salary  Not at will   30 days prior notice (some agreements may require longer period of time) Notice shall specify whether the 30 days must be worked or not worked   If worked may be absent for 7 consecutive days or may leave 2 hours early every day For cause if:       A dishonest act Improper conduct Regularly doing business on behalf of himself or for a third party Criminal conviction Inadequate discharge of duty Habitual drunkenness       Currently debate on this cause; many courts consider it a social problem and not a just cause Violation of trade secrets Act of disobedience or insubordination Abandonment of employment Injurious act to the honor of any person during working hours (except in self defense) Persistent gambling Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    30. 30. Labor – It’s more than just the 13th salary  Brazilian v. Non-Brazilian  Staff of companies with three or more employees must be 2/3 Brazilian    And, at least 2/3rds of the payroll must be paid to Brazilians Salaries paid to employees in Brazil cannot be based on foreign currency Federal, State and Municipal Taxes  Contribution for Financing Social Security COFINS   7.6% calculated based on gross revenue from the sale of goods or services Contribution to the Social Integration Plan PIS Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    31. 31. Regulation & Tax  Import Export Process  Minimum Wage  Privatization  Recent Tax & Regulation Changes “If you’re honest and want to comply with the tax code, you need an accountant and a tax lawyer for life” -The Economist, September 24, 2011 quoting a São Paulo based economist Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    32. 32. Regulation & Tax  Import Export Process  Register with the governmental registration system    Obtain importing license if required    Automatic Non-Automatic (process may take several months)  ANVISA, IBAMA, MAPA, DECEX, CNEN, ANP, ANEEL, DPF, COMEX, MCT . .. Radar    Secretary of Foreign Trade SECEX, SISCOMEX system Subject to significant variability Simplified Ordinary Tax / Duty  Generally all imports are subject to import duty, IPI, ICMS, PIS and COFINS  Import duty is calculated on the total CIF (cost, insurance & freight)  Are charged based on the tariff classification of the product   Import Tariffs rage from 0 – 35% with an average applied tariff rate of 11.5% The import duty rate for machinery and equipment not produced local MAY be reduced to 2% upon request of the importer to the competent authorities Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    33. 33. Regulation & Tax  MERCOSUL   southern common market Free from import duty with certificate of origin However Exceptions to Common External Tariff (CET)  Brazil is permitted 93 exceptions to the CET  June, 2009 the trade minister raised several import duty rates:  August, 2009 MERCOSUL members approved tariff increases on hundreds of products within the CET  Primarily dairy, textiles, bags, backpacks, suitcases up to the bound level apx 31.4% Member Countries Brazil Argentina Uruguay Paraguay Applied Venezuela Not yet ratified by Paraguay Associate Member Bolivia Chile Columbia Ecuador Peru Observer of Agreement Mexico Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    34. 34. Regulation & Tax  Recent Tax Changes  July, 2011   August, 2011   1% tax on foreign derivatives Three prong plan to continue to spur economic growth September, 2011  30% Increase in industrial product tax on cars (37-55%)  Exempt if 65% domestic parts (Brazil, Mexico or Mercosul country)  Oct 6, 2011 Renault SA announced plans to increase its Brazilian production capacity by 100,000 vehicles  Brazil will be the companies 2nd largest market after France  Expects sales of 3 million vehicles annually by 2013 with 25% from Brazil  October 10, 2011 Chinese auto maker JAC announced it would build a factory in Brazil – output set to begin in 2014 Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    35. 35. Regulation & Tax  Minimum Wage  January 2012 increases 14%  Currently R$ 545 per month x 13 (US$ 12,540)  Likely to reach R$ 817 per month by 2015 (US$18,800)  54  million Brazilians at min wage level Increased domestic demand  Likely  increases consumption Risks  Some industries may see significant increases in 3 Make or Brazil: The 2012 and Break COGS Basics Beyond Issues
    36. 36. Regulation & Tax  Privatization    Infrastructure Need Auction method Airports    São Gonçalo do Amarante Airport – R$ 170 million (3x reserve) 3 more by end of 2011 Oilfield Rights The Brazilian President’s office emphasized, “[t]he government does not intend to get involved in these investments. These investments are going to be a long-term, private sector affair. The private sector must play a key role.” Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    37. 37. 2012 & Beyond    Infrastructure Currency Rally & Inflation Regulation Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    38. 38. Infrastructure  Unlike the United States, Brazil is only beginning to develop its infrastructure capabilities     Domestic Growth 2014 World Cup 2016 Olympics President Rousseff  Infrastructure background  Lula’s Program for Accelerated Growth Coordinator and is known for her technical analysis   History of funding with private capital Opportunities exist for   US companies with capabilities to assist in infrastructure development US companies that already possess the ability to design, develop, manufacture or deliver goods Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    39. 39. Infrastructure  Logistics  Rail  ALL    ANTT road & rail regulator   Creating and paving many connecting routes Air  Privatization   Recent concessions changes enables competitors to pay ALL an access fee Road   Monopoly on rail concessions it operates Excess capacity (profitable lines at near full capacity Operations, construction opportunities Telecom  30% of households have broadband Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    40. 40. Inflation, Currency, Macro Trends  Inflation  Analyst’s views very on inflation: 2012-2013 Range: low 3% to high 6%   Factors   Disagreements largely relate to labor productivity and fiscal accounts Significant FDI lured by high interest rates and growth Government Focus  Education    Increases in productivity Increases in the pool of educated labor decreases wage pressure which reduces inflation concerns Reduce Costs  Eliminated Payroll taxes for labor intensive industries like furniture and textiles in August Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    41. 41. Inflation, Currency, Macro Trends  GDP Projections: mid to high single digit growth in 2013  GDP Gap Min wage increase .6% + reduction in tax revenues from new industrial policies .4% = 1% GDP gap from expenditures & decrease of tax revenues  New Oil fields provide wealth to help fund infrastructure investment  Involvement of private sector capital in infrastructure development may reduce need for Government infrastructure expenditures (Increased privatization and licensing likely) Many analysts agree that the main risk for the Brazilian economy is not local, rather the potential deterioration of Impact of E.U. the E.U.  Greek debt default and general credit drop of the EU which triggers a regional recession will likely also reduce growth in the US and China     This reduction in global demand will likely lead to decreased commodity prices The impact of external noise would likely be smoothed by Brazilian fiscal and monetary counter cyclical policies; however, GDP growth would likely decrease to 2-3% in 2013 Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    42. 42. Inflation, Currency, Macro Trends  Currency  Largely dependent on EU crisis  If no EU recession and developed banks print more money this increased liquidity will likely keep rates low for several years. This will likely lead to increased Brazilian Real appreciation  Many analysts project as strong as BR$1.5 to US$1  If global distress then Brazilian Real could likely weaken to 1.7 or worse Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    43. 43. Inflation, Currency, Macro Trends  Macro Trends  Min Wage 2012, 14% min wage increase – 54 million receive min wage  Should support consumption and prevent downside demand pressures  January Even if EU recession, unlikely that Brazil will experience recession  Consumption is a high % of the Brazilian economy   May impact cost of labor and COGS in your industry Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    44. 44. Regulation  A Bigger Brazil:  US$ 16 Billion in tax breaks (over 2 years)  Eliminate   Buy 3 prong plan to continue to spur economic growth payroll taxes for labor intensive industries Software, Textiles, Shoes, Furniture Brazil Initiative  Allows government agencies to pay up to 25% more for locally produced products than similar foreign goods  Particularly when purchasing for defense, health, or high tech communications equipment  Subsidized Loan Programs Brazil: The Basics 3 Make or Break Issues 2012 and Beyond
    45. 45. Brazil: The Basics 3 Make or Break Issues 2012 and Beyond EXPORTING OHIO TO LATIN AMERICA: A BRAZILIAN CASE STUDY dwilsonjdmba dwilson@keglerbrown.com David M. Wilson, Kegler Brown
    46. 46. Additional Sources            UBS Investment Research: Emerging Economic Focus, UBS, August 29, 2011 A Closer Look at Brazil’s Credit Boom, Deutsche Bank EM Special Publication, July 22, 2011 Anchoring, De-Anchoring, Re-Anchoring, Bradesco Corretora Economics BBI Equity Research, September 6, 2011 Economic Outlook: Brazil, BBVA, Third Quarter 2011 Brazil Auctions Rights to Airport, WSJ, August 23, 2011 The Geopolitics of Brazil: An Emergent Power’s Struggle with Geography, STRATFOR, July 14, 2011 The Aging World, Ned Davis Research Inc, July 21, 2011 Japanese Dump Real Funds at Fastest Pace Since Earthquake: Brazil Credit, Bloomberg, September, 30, 2011 First they went for the currency, now for the land, The Economist, September 24, 2011 Gaining & Sustaining Competitive Advantage Third Edition, Jay B. Barney, 2007 Privatization and the Distribution of Assets and Income in Brazil, Economic Reform Project: Global Policy Program, July, 2000

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