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Selling to Brazil, Chile & Colombia- Toolkit for Success

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This joint presentation with Kegler Brown, JPMorgan Chase and the Ohio Department of Development educated attendees regarding the legal and financial considerations to be considered when doing …

This joint presentation with Kegler Brown, JPMorgan Chase and the Ohio Department of Development educated attendees regarding the legal and financial considerations to be considered when doing business in Brazil, Chile and Colombia. Topics addressed include Mercosur, labor, finance, trade, tax, culture, politics and the regulatory environment in South America.

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  • On this slide, explain that there are three key issues and that to best address the group (small to medium size enterprises, looking to export their products from the US to BCC) we have organized the content of our presentation into this format. First we will cover Methods of Entry . . . , 2nd we will address issues surrounding impor/export . . ., and 3rd we will discuss Agency distributorships and labor issues.
  • When you think of how to enter Brazil, Colombia or Chile, what do you think about? What questions jump into your mind. I generally begin with asking why? Is it because your competitor entered? Is it because an article in the WSJ said Brazil is not the 6th largest economy in the world, the largest in Latin America and the middle class is growing at an explosive rate? Is it because your organizations’ core competencies can be leveraged to do xyz? All of those could be great reasons, but the way that you approach the information we are about to discuss, and the decisions you make will vary greatly based on the answer to that question.
  • 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
  • -list of several available organizational structures, take a moment on this slide to discuss the importance of research, culture and selecting the right local partner. Mention that we will likely hear several stories related to this topic during the panel discussion later today. Provide a list of some research tools
  • -you may decide that you need an actual legal presence in Brazil, Colombia or Chile to execute your desired entry method. Although, each country offers several legal entities, these are the most common that are employed by foreigners when creating a subsidiary for the purpose of importation
  • -list of several available organizational structures
  • This is a very generic process, the way that you import will vary greatly based on your individual circumstances. If you decide it is best to register as an importer, then you will need to allocate time to navigate the that process. In Brazil: Siscomex registration, RADAR registration (ordinary or simple), licensing with various ministries (by product)Colombia: Chamber of Commerce registration, obtain tax registration, locate tariff sub-regime
  • There are several social contribution, pay roll taxes, health benefit and pension taxes also required to be paid in each country
  • Mention US Chile FTA, since 2004 (it is also referenced on the first free trade agreements “basics” slide noted as a YES under double tax treaty)
  • In Chile, managers may be terminated without cause in certain circumstances – source: PLC

Transcript

  • 1. Doing Business in Brazil, Chile & Colombia Presented by: Vania Zulatto, Director of TVZ International- Brazil Verónica Medina, COO of TradeChile S.A.- Chile & Colombia
  • 2. Brazil in the Americas
  • 3. Brazil in Brief • 8.5 mi square km • 193 million people (approx 85% urban) • Language: Portuguese • Labor force: 110 million people in 2010
  • 4. Political Environment • President Dilma Rousseff • Took office in 2011 • 30 years of political stability
  • 5. Why Brazil?• Strategic location• Approximately 50% of South America’s GDP• Political and economic stability• Favorable exchange rate: U$1.00 = R$ 1,75• Largest and most diversified industrial country in Latin America
  • 6. Economy• 6th largest economy in the world• Solid Banking System• Inflation under control: 4.4% estimated for 2012• GDP: US$ 2.3 trillion• GDP per capita: US$ 8,207.00• Growth Rate: 4% estimated for 2012• Brazil part of a world-wide phenomenon of a swelling middle class• In Brazil the economy is largely domestically oriented and consumer demand drives wage income.
  • 7. World Cup 2014 and Olympic Games 2016 Business Opportunities • Brazil - World Soccer Cup in 2014 • 12 cities do host the World Cup • Investments needed in airport infrastructure • Hotels • Public transportation • Stadium building / refurbishing • Communication • Rio de Janeiro - first-ever Olympic Games in South America in August-September 2016 • These events will generate numerous trade and investment opportunities in several areas
  • 8. Market Opportunities• State-of-the-art equipment and technologies• Agriculture Equipment• Aerospace and Aviation• Airports• Information Technologies• Telecommunications• Transportation• Electrical Power• Oil and Gas• Safety and Security• Environmental Technologies• Mining• Medical Equipment• Architecture/ Engineering/Construction
  • 9. Brazil Import and Export Statistics 2011 - (US$) Brazil Imports Statistics Brazil Exports Statistics Commodity: Total Commodity: TotalWorld 226,243,408,907 World 256,039,574,7681. United States 33,962,382,474 1. China 44,314,595,3362. China 32,788,424,507 2. United States 25,804,628,1563. Argentina 16,906,099,483 3. Argentina 22,709,344,4314. Germany 15,212,859,089 4. Netherlands 13,639,692,9085. Korea South 10,096,972,279 5. Japan 9,473,095,520
  • 10. Brazilian Imports – 2011Imports by Use Categories - % Share Source: Ministério do Desenvolvimento
  • 11. Market Challenges Advantages • Growing consumer market• High import tariffs (0-15%) • Diversified/sophisticated industry• Informal economy • Geographical proximity / US• Burdensome regulations • Brazilians receptive to US• Slow/bureaucratic customs culture/products system • Favorable exchange rate• European /Asian competition
  • 12. How to Enter the Market• Agents & Distributors• Licensing Agreements• Joint Ventures• Local Office• Government Sales
  • 13. Strategies for Success in Brazil• keep in touch and informed on the market, THE TIME IS NOW!• take advantage of the favorable exchange rate.• visit the market (Major Trade Shows/Trade Missions)• learn local business practices• reestablish contact with former clients• personal relationships are important• be flexible and innovative with your negotiations• Meet partners face to face• Be fast on your follow-up / give support to your rep• Provide after sales and technical assistance• Translate your catalogs into Portuguese• Be patient• Try to understand the complex tax regime
  • 14. Contact Us! Obrigada! Thank You! Ohio Department of Development Global Markets Division (614) 466-5017Vania ZulattoSão Paulo, SP - Brazil(55 11) 3384-9051vzulatto@tvzinternational.com.brwww.tvzinternational.com.br
  • 15. Chile and Colombia: the Places to Be! Copyright 2012© TradeChile
  • 16. Chile at a Glance  Area: 293,000 m2  Population – 17.2 M (Growth rate: 1.02%)  Language: Spanish  Capital: Santiago 6.5 M  Other Urban Centers:  Valparaiso 1M  Concepcion 1M  Workforce - 7.2 M (~38.7% women)  Life expectancy – 79.2 yrs Copyright 2012© TradeChile
  • 17. Why Chile?1. Highly competitive, dynamic and globally integrated economy: among the highest growth rate economies in the world2. Institutional and financial strength: low country risk3. Tax friendly economy: Chiles corporate income tax rate is 17%, one of the lowest corporate income tax rates worldwide4. High transparency: #1 in Latin America, 21st place among 174 countries worldwide5. Great business environment and economic freedom: #1 in Latin America, 10th place among 174 countries worldwide6. Highly skilled and competitive human resources: labor costs in Chile are competitive as compared to the USA and European countries.7. Excellent transport infrastructure and connectivity to the world Copyright 2012© TradeChile
  • 18. And what about Colombia?  Area: 1,147,748 m2  Population – 47.5 M (Growth rate: 1.377%)  Language: Spanish  Capital: Bogotá 6.8 M  Other Urban Centers:  Medellin 2.2 M  Cali 2.1 M  Workforce - 18.9 M  Life expectancy – 78.5 yrs Copyright 2012© TradeChile
  • 19. Why Colombia?1. Excellent economic supported perfomance: GDP per capita has doubled in the last six years (US$2,803.95 in 2004, US$6,273.37 in 2010)2. Attractive domestic market: 47.5 million inhabitants, fourth in Latin America and the second largest Spanish-speaking country in the world.3. Strategic location: international hub, center of 5 hourly zones4. Public commitment with investment: second in Latin America under terms of personal safety and suitable protection of private property.5. Qualified workforce: second most available qualified workforce in South America (IMD, Switzerland); most productive (PriceWaterHouseCoopers 2009)6. Good quality of life and flexible culture Copyright 2012© TradeChile
  • 20. Political background  Colombia, a presidential representative democratic republic, one of the oldest in Latin America Juan Manuel Santos, Colombia´s president since 7th August 2010  Colombia Primero (Colombia First), a liberal party leading the country Chile embraced a successful democratic systemin 1981, the most transparent in Latin AmericaSebastián Piñera, elected Chile´s president on17th January 2010Coalición por el Cambio (Coalition forChange), the right-wing alliance in power Copyright 2012© TradeChile
  • 21. Country Facts Chile Colombia GDP growth 2011 (est.) 5.9% 4.6% GDP growth 2012 (est.) 4.9% 4.5% GDP (PPP*) US$276.05 billion US$460.05 billion GDP per capita (PPP*) US$15,866 US$9,970.6 Population 17.2 million 47.5 million Inflation 2012 (est.) 3.2% 3.1% Unemployment rate 2011 7.1% 11.5% Total trade 2010 US$118.51 billion US$76.5 billion Trade balance 2010 +US$10.05 billion +US$3.98 billion United States, China, United States, China, Main trade partners Japan, Argentina, European Union, Brasil Mexico US$9.25 billion US$11.81 billion Imports from USA (25.5%) (21.77%)*PPP = Purchasing Power Parity Copyright 2012© TradeChile
  • 22. Country Ratings & Rankings Chile Colombia S&P 2011 A+ BBB- Fitch 2011 A+ BB+ Moodys 2011 Aa3 Ba1Global Competitiveness 31st Index 2011-2012 68th (#1 in Latin(out of 133 countries) America)World Economic Forum Doing Business 2012(out of 183 countries) 39th 42thWorld Bank (+2 from 2011) (+5 from 2011)Number of days 9 days 26 daysfor starting a businessCost to import (US$ per container) 795 2,830 67th 149thEnforcing contracts 480 days 1,346 days Copyright 2012© TradeChile
  • 23. Global Competitiveness Index* 2011-2012* World Economic Forum Copyright 2012© TradeChile
  • 24. Sustained Economic Growth (GDP rate) Copyright 2012© TradeChile
  • 25. Declining Poverty Rates (as percentage of population) Copyright 2012© TradeChile
  • 26. Inflation ComparisonChile and Colombia have had the lowest inflation rates among the major LA economiesSource: Business Monitor International 2012 Copyright 2012© TradeChile
  • 27. Chile and Colombia, open economies to the world Chile enjoys Free Trade Agreements with 58 countries and numerous Double Taxation Agreements including Canada and USA.  Duty-free access to 86% of the world’s GDP; 4.2B inhabitants 1st SA country to join OECD (2010)Colombia has recently ratifieda FTA with the United States,in addition to those already signed withother countries in the region.Access to 1.3B inhabitants Copyright 2012© TradeChile
  • 28. Agriculture machinery & Equipment HealthcareFranchising Construction Mining Business  Safety and security Opportunities  Consumer-Oriented products for the retail sector Food processing Energy & packaging Copyright 2012© TradeChile
  • 29. Oil & Gas Machinery & Svcs Automotive parts and accessories  Electrical power systemsSafety & PlasticSecurity Materials and Travel and Tourism Resins Building materials Business Food beverage processing Opportunities / Packaging equipment  Medical Equipment  Pollution control equipment Information Telecom Technology equipment & Svcs Copyright 2012© TradeChile
  • 30. Recommendations  Have a clear objective and projected vision  Visit and be committed to the market  Define what format of business activities would be viable for the Chilean/Colombian market; it differs by company and product type  Define type of product/service with value-added characteristics that could be of interest for Chilean/Colombian clients  In the case of Chile, it is a very price-sensitive market. Develop a thorough and aggressive marketing campaign and pricing strategy appropriate for the local market  Be proactive in communications and follow-up activities with interested companies  Provide strong support to the local counterpart (ie. after sales)Oxford Univ. study in 2009 showed that every US$1 spent oninternational travel, companies gain US$3.60 in profit Copyright 2012© TradeChile
  • 31. Verónica Medina COO TradeChile S.A. Tel.: +(56-2) 2442435 Fax.: +(56-2) 2442436E-mail: vmedina@tradechile.cl Copyright 2012© TradeChile
  • 32. Agency, Distributorships & Methods of Entry Import / Export Labor PREPARING FOR SUCCESS IN BRAZIL, COLOMBIA & CHILEwww.keglerbrownGlobal.com Luis Alcalde & David M. Wilson, Kegler @KeglerGlobal Brown
  • 33. 3 Issues that can Make or BreakYour Latin America BusinessStrategy 1. Entry Method & Methods of Entry Organizational -Strategic Considerations Structure -Available Organizational & Entity Structures -Features Import/Export 2. Regulation & Tax -Process -Taxes -Free Trade Zones & Treaties Agency, Distributorships & 3. Labor Labor -Creation -Termination Agency, Distributorships Methods of Entry Import / Export & Labor
  • 34. Entry Method & OrganizationalStructure  Strategic Considerations  Available Organizational & Entity Structures  Features Agency, Distributorships Methods of Entry Import / Export & Labor
  • 35. Entry Method & OrganizationalStructure P E S T What are the Political, Economic, Social and Technological reasons to enter Brazil, Colombia or Chile? export, manufacture, distribute, design . . . Political  The ability of government to respond to and NOT create political risk Economic  Macro trends, Currency risks Social  The ability of stakeholders to identify vulnerabilities & apply pressure to the company to change its behavior Technological  Infrastructure, IP Protection, Government Incentives Agency, Distributorships Methods of Entry Import / Export & Labor
  • 36. Entry Method & Organizational Structure P E S T Colombia Brazil90 8080 7070 6060 5050 4040 Colombia Brazil 3030 2020 1010 0 0 PDI IDV MAS UAI LTO PDI IDV MAS UAI LTO Chile100  Geert Hofstede’s Cultural 90 80 Dimensions 70 60  Power Distance 50  Individualism 40 Chile 30  Masculinity 20 10  Uncertainty Avoidance 0  Long-Term Orientation PDI IDV MAS UAI LTO  www.geert-hofstede.com Agency, Distributorships Methods of Entry Import / Export & Labor
  • 37. Entry Method & Organizational Structure P E S T Latin America Brazil90 8080 7070 6060 5050 4040 Latin America Brazil 3030 2020 1010 0 0 PDI IDV MAS UAI LTO PDI IDV MAS UAI LTO100 90  Geert Hofstede’s Cultural 80 70 US Dimensions 60 Brazil  Power Distance 50 40 Colombia  Individualism 30 Chile 20  Masculinity Latin America 10 0  Uncertainty Avoidance PDI IDV MAS UAI LTO  Long-Term Orientation  www.geert-hofstede.com Agency, Distributorships Methods of Entry Import / Export & Labor
  • 38. Entry Method & Organizational Structure  Direct sale from US using freight forwarder  Non-Equity AllianceMay also require  Distribution agreements a small wholly  Licensing agreementsowned subsidiary  Franchising agreementsholding company presence in  Supply agreements country  Joint venture  Equity Alliance  Joint venture  Joint company  Wholly Owned Subsidiaries  Greenfield operations Agency, Distributorships Methods of Entry Import / Export & Labor
  • 39. Entry Method & OrganizationalStructure  Joint Venture  May be created with or without a full joint company  Contractual joint ventures between subsidiary company and a partner company  Low cost entry and exit to new markets, industries and industry segments  Opportunity for learning  Provides a “contractual” framework for operations without generating many issues 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 full equity alliance Agency, Distributorships Methods of Entry Import / Export & Labor
  • 40. Entry Method & OrganizationalStructureSimilar to US Sociedade Limitada Sociedad por Acciones Sociedades de (LTDA) Simplificada Responsabilidad LLC (SAS) Limitada (SRL) Sociedade Anônima Sociedad Anónima SociedadesSimilar to US (SA) (SA) Anónima (SA)Corporation Agency, Distributorships Methods of Entry Import / Export & Labor
  • 41. Entry Method & OrganizationalStructure -No restrictions on foreign ownership* -No restrictions on foreign ownership* -No restrictions on foreign ownership* LTDA / SAS / SRL -No minimum or maximum capital -No minimum or maximum capital -No minimum or maximum capital & requirements* requirements* requirements*SA Common Features -Partner & parent company liability -Partner and parent company liability is -Partner and parent company liability is limited to capital contributions limited to capital contributions ** In limited to capital contributions insolvency PC is responsible for subsidiary liabilities if PC caused the subsidiary’s liquidation -Product Liability: Yes -Product Liability: Yes -Product Liability: Yes Agency, Distributorships Methods of Entry Import / Export & Labor
  • 42. Import / Export  Import Export Process  Associated Taxes & Duties  Free Trade Zones & Treaties Agency, Distributorships Methods of Entry Import / Export & Labor
  • 43. Import / Export * All US exports are also subject to US export controls *General Import Process & Timeline 17 Days 13 Days 20 Days -Document Preparation (8 -Document Preparation (6 -Document Preparation (12 days) days) days)Baseline: -Customs clearance and -Customs clearance and -Customs clearance and technical control (4 days) technical control (2 days) technical control (2 days)-medium size business -Ports and terminal handling (3 -Ports and terminal handling (2 -Ports and terminal handling (4-ship to economy’s days) days) days) -Inland transportation and -Inland transportation and -Inland transportation andlargest business city handling (2 days) handling (3 days) handling (2 days)-private, LLC-non hazardous goods Importing a container of Importing a container of Importing a container of goods goods to Brazil requires 8 goods to Colombia requires to Chile requires 6-dry cargo, 20-foot full documents, takes 17 days 6 documents, takes 13 days documents, takes 20 days and and costs $2,275 and costs $2,830 costs $795container Source: World Bank, Doing Business 2012 Agency, Distributorships Methods of Entry Import / Export & Labor
  • 44. Import / Export II-Import Duty 0-35% Import Duty 0-35% Import Duty 6% varies based on product & 0-5% raw materials, 12%Associated Taxes & Country of origin 20% finished consumer avg (CNM, HS) goods, 35% autos and Duties luxury items IPI-Industrial Product 20% VAT 16% VAT 19% Tax avg Varies based on product (CNM) PIS-Social Integration 1.65% Program Contribution COFINS-Social 7.6% Security Financing Contribution ICMS-State Tax 7– SP 18% 25% Agency, Distributorships Methods of Entry Import / Export & Labor
  • 45. Import / Export -Importer must register with -No license required for samples & -Under the terms of the US / Chile Brazilian Ministry of promotional products outside of FTASamples / Tradeshow Development, Industry and prior license list -Professional equipment Commerce -Maximum of 10 samples necessary for carrying out exceptions -No payment for the product may -Max value of US $50 per sample business may receive temporary be made by a Brazilian entity duty-free admission -If over 10 samples but less than -Exemption from II (Import Duty) US $1,000 value packing must -This is intended for display or state “merchandize with no demonstration of commercial commercial value" samples -Subject to applicable custom -Temporary admission of food duties samples require additional consideration Agency, Distributorships Methods of Entry Import / Export & Labor
  • 46. Import / Export Additional Tax Considerations Corporate Tax 15% Corporate Tax 33% Corporate Tax 17% Plus 10% on taxable income over R$240,000Baseline:-medium size business Transfer Price Yes Transfer Price Yes Transfer Price Yes-began operations 1/1/2009 Considerations Considerations Considerations-taxes & mandatorycontributions are measured On average, firms make 9 On average, firms make 9 On average, firms make 9at all levels of government tax payments per year and tax payments per year and tax payments per year and spend 193 hours per year-a range of standard spend 2600 hours per year spend 316 hours per year filing, preparing and paying filing, preparing and paying filing, preparing and payingdeductions & exemptions is taxes and pay total taxes taxes and pay total taxes taxes and pay total taxesalso factored amounting to 18.9% of amounting to 22.4% of profit amounting to 18% of profit profit Source: World Bank, Doing Business 2012 Agency, Distribut Methods of Entry Import / Export orships & Labor
  • 47. Import / ExportFree Trade Agreements and Memberships Double Tax Treaties Double Tax Treaties Double Tax Treaties US US US YES NO YES Colombia Brazil Brazil YES NO NO Chile Chile Colombia YES YES YES Membership Membership Membership Mercosur (Argentina, Mercosur Mercosur Uruguay, Paraguay, Bolivia, Chile, Colombia, Latin American Latin American Ecuador, Peru) Integration Association Integration Association LAIA LAIA Latin American Integration Association Andean Community of LAIA (Argentina, Brazil, Nations CAN (Ecuador, Mexico, Chile, Paraguay, Bolivia, Venezuela – Peru Uruguay, El Salvador, withdrew) Costa Rica, Guatemala, Nicaragua, G-3 (Mexico, Venezuela) Honduras, Cuba) Agency, Distributors Methods of Entry Import / Export hips & Labor
  • 48. Import / ExportFree Trade Zones: The basics -Manaus ZFM -Permanent Free -Inquique -Areas de livre Trade Zones (23) -Punta Arenas Comercio ALC (4) -Special Enterprise -Amazonia Ocidental Free Trade Zones (40) -Transitory Free Trade Zones Reduced/Exempte Reduced/Exempt Reduced/Exempt d ed ed II, PIS & COFINS II & VAT II & VAT Agency, Methods of Entry Import / Export Distributorships & Labor
  • 49. Import / Export  US / Colombia Free Trade Agreement  18 to 24 months to implement  Will Reduce tariffs on 80% of US imports  Other tariffs reduced over 10 years  Colombia to implement new domestic legislation in a number of areas:  sales agents, intellectual property, provide greater access to several sectors in financial services and telecommunications investments Agency, Distribut Methods of Entry Import / Export orships & Labor
  • 50. Agency, Distributorships &Labor  Agency, Distributorships & Labor  Creation  Termination Agency, Distributorships Methods of Entry Import / Export & Labor
  • 51. Agency, Distributorships &LaborGeneral LaborConsiderations -Labor law is rooted deeply -Written contract not required, employment relationship may be implied -Termination without cause will likely require provision of wages, holiday compensation and other benefits Agency, Distribut Methods of Entry Import / Export orships & Labor
  • 52. Agency, Distributorships & LaborSales Agent / DistributorCreation & Termination Creation: Creation: Creation: -If written contract does not exist, one may be implied -Written registered contract subject to Colombian law -In Chile, agency, distribution and franchise agreements are not -Contract should contain limitations, termination -Contract should contain limitations, termination events & specifically regulated. However, case law has provided some events, territory, products or goods, commission structure and territory useful guidance time of payment -Their validity, binding nature and enforceability has been -Exclusivity is not presumed recognized by the civil and anti-trust courts -Relationship is contractual Termination: Termination: Upon termination, without cause, agent entitled to: Termination: -Upon termination agent entitled to 1/12 of the average -1/12 of the total compensation during the time of agency commission of the last three years -Chilean civil and anti-trust courts provide precedents for termination and have established circumstances in which they -If a specific agency term , then the average monthly -Without cause termination agent entitled to damages for are null and void compensation for half of the months remaining in the contract. If opening market & promoting product $3,000 per month and 12 months into a 36 month contract, then -Relationship is contractual agent would receive $3,000 x 12 = $36,000 -Contract subject to anti-trust, consumer and general -Expenses related to promoting the brand and opening the commercial contract law principals market Agency, Distribut Methods of Entry Import / Export orships & Labor
  • 53. Agency, Distributorships & Methods of Entry Import / Export Labor PREPARING FOR SUCCESS IN BRAZIL, COLOMBIA & CHILEwww.keglerbrownGlobal.com Luis Alcalde & David M. Wilson, Kegler @KeglerGlobal Brown
  • 54. Additional Sources Doing Business 2012, Doing Business in a More Transparent World, World Bank Report, October 20, 2011 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
  • 55. Financing Your Future in Brazil, Colombia and ChileC O N F I D E N T I A LA N DP R I V A T EST R I C T L Y JPMorgan Chase Bank, N.A. Member FDIC © 2010 J.P.Morgan Chase and Co. All rights reserved.
  • 56. This presentation was prepared exclusively for the benefit and internal use of the J.P. Morgan client to whom it is directly addressed and delivered (including such client’s subsidiaries, the “Company”) in order to assist the Company in evaluating, on a preliminary basis, the feasibility of a possible transaction or transactions and does not carry any right of publication or disclosure, in whole or in part, to any other party. This presentation is for discussion purposes only and is incomplete without reference to, and should be viewed solely in conjunction with, the oral briefing provided by J.P. Morgan. Neither this presentation nor any of its contents may be disclosed or used for any other purpose without the prior written consent of J.P. Morgan. The information in this presentation is based upon any management forecasts supplied to us and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. J.P. Morgan’s opinions and estimates constitute J.P. Morgan’s judgment and should be regarded as indicative, preliminary and for illustrative purposes only. In preparing this presentation, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was provided to us by or on behalf of the Company or which was otherwise reviewed by us. In addition, our analyses are not and do not purport to be appraisals of the assets, stock, or business of the Company or any other entity. J.P. Morgan makes no representations as to the actual value which may be received in connection with a transaction nor the legal, tax or accounting effects of consummating aC O N F I D E N T I A L transaction. Unless expressly contemplated hereby, the information in this presentation does not take into account the effects of a possible transaction or transactions involving an actual or potential change of control, which may have significant valuation and other effects. Notwithstanding anything herein to the contrary, the Company and each of its employees, representatives or other agents may disclose to any and all persons, without limitation of any kind, the U.S. federal and state income tax treatment and the U.S. federal and state income tax structure of the transactions contemplated hereby and all materials of any kind (including opinions or other tax analyses) that are provided to the Company relating to such tax treatment and tax structure insofar as such treatment and/or structure relates to a U.S. federal or state income tax strategy provided to the Company by J.P. Morgan. J.P. Morgan’s policies prohibit employees from offering, directly or indirectly, a favorable research rating or specific price target, or offering to change a rating or price target, to a subject company as consideration or inducement for the receipt of business or for compensation. J.P. Morgan also prohibits its research analysts from being compensated for involvement in investment banking transactions except to the extent that such participation is intended to benefit investors.A N D IRS Circular 230 Disclosure: J.P. Morgan Chase & Co. and its affiliates do not provide tax advice. Accordingly, any discussion of U.S. tax matters included herein (including any attachments) is not intended or written to be used, and cannot be used, in connection with the promotion, marketing or recommendation by anyone not affiliated with J.P. Morgan Chase & Co. of any of the matters addressed herein or for the purpose of avoiding U.S. tax-relatedP R I V A T E penalties. J.P. Morgan is a marketing name for investment banking businesses of J.P. Morgan Chase & Co. and its subsidiaries worldwide. Securities, syndicated loan arranging, financial advisory and other investment banking activities are performed by a combination of J.P. Morgan Securities Inc., J.P. Morgan plc, J.P. Morgan Securities Ltd. and the appropriately licensed subsidiaries of J.P. Morgan Chase & Co. in Asia-Pacific, and lending, derivatives and other commercial banking activities are performed by J.P. Morgan Chase Bank, N.A. J.P. Morgan deal team members may be employees of any of the foregoing entities.ST R I C T L Y This presentation does not constitute a commitment by any J.P. Morgan entity to underwrite, subscribe for or place any securities or to extend or arrange credit or to provide any other services. © 2010 J.P.Morgan Chase and Co. All rights reserved. 58
  • 57. Trade Factoids and Notes November 2011 Trade Figures: Bureau of Economic Analysis of the United States Department of Commerce  Exports of goods and services over the last twelve months totaled $2.089 trillion, which is 32.64 percent above the level of exports in 2009. Over the last twelve months, exports have been growing at an annualized rate of 15.9 percent when compared to 2009, a pace greater than the 15 percent required to double exports by 2015.C O N F I D E N T I A L  Over the last twelve months, among the major export markets (i.e., markets with at least $6 billion in annual imports of U.S. goods), the countries with the largest annualized increase in U.S. goods purchases, when compared to 2009, occurred in Turkey (45.4 percent), Panama (40.6 percent), Honduras (37.0 percent), Argentina (33.4 percent), Hong Kong (32.9 percent), Peru (30.7 percent), Chile (29.2 percent), Brazil (29.1 percent), South Africa (28.7 percent), and Thailand (27.7 percent).A N DP R I V A T EST R I C T L Y © 2010 J.P.Morgan Chase and Co. All rights reserved. 59
  • 58. Economic Climate – It All Swirls Together Recent Trade Environment  Current credit environment has resulted in liquidity and balance sheet constraints  Market consolidation and reshaping in the current environment has limited the number of lending institutions willing to lend at attractive rates  Risk mitigation options such as distribution and insurance are reflecting the market volatility and uncertainty limiting the hedging availability  Due to market uncertainty and instability, we have seen an increase in demand for risk mitigation instruments such as guarantees and confirmations as well as for cost efficient transactionsC O N F I D E N T I A L What We’re Seeing  Issue – Capital goods buyers are struggling to raise capital in the debt market due to liquidity constraints and increase in cost of funds, which consequently impacts their ability to either source new goods or perform under their payment obligations.A N D  Solution – Buyers and Suppliers are working together with Export Credit Agencies and Lending Institutions to enhance the credit risk by shifting it to sovereign risk, in order to access cost efficient capital and longerP R I V A T E repayment terms.  By Product - Increased demand for US Ex-Im and Export Credit Agency financing in the marketST R I C T L Y © 2010 J.P.Morgan Chase and Co. All rights reserved. 60
  • 59. J.P. Morgan in Latin America  Full branch presence in Brazil and Mexico. Monterrey  More than 100 years of operation in Mexico and 60 years in Latin Brazil Mexico City America  Brazil in-country capabilities launched in 2009, including a at a glance local language Brazilian Internet banking platform Caracas Bogota  Over 1,000 employees currently in Latin America Lima  Global Credit - USD & local currency revolving credit, term Rio de Janeiro loans & overdrafts, as complying with in-country regulations Sao PauloA ND DS C C SO IN N I D TEE N I T LI SA L  Treasury services - foreign & local currency accounts, payments and receipts, Santiago R A Product  J.P. Morgan ACCESSSM - Web-based Global eBanking Suite Channel Buenos Aires U S O F MA  Foreign exchange – spot, forward, non-deliverable forward, swaps, options, electronic FX platforms Branch office  Trade finance – import & export letters of credit, Representative office structured trade, bank guarantee, supply chain finance I  Technology: A single global seamless system for improved product linkages and standardizations, new virtualP R I V A T E  #1 Latin America Research Team – Institutional Investor, accounts and state-of-the-art liquidity processing What makes 2010 How we are  New branches: 2012: Argentina and Chile ; 2013: Colombia us focusing our  Best Investment Bank – LatinFinance, 2010 different? investments  New capabilities: Upgrading our systems and expanding  Best Debt House in Latin America – Euromoney, 2010 our product offering in Brazil and Mexico. 2011 & 2012:ST R I C T L Y Network expansion into Peru, Uruguay, Costa Rica, El Salvador, Trinidad & Tobago, Jamaica, and Barbados. © 2010 J.P.Morgan Chase and Co. All rights reserved. 61
  • 60. Access to Capital and Borrowing Costs Brazil Chile Colombia USA Overnight Rate 10.5 5% 3.25% 0.25%  It’s important to note that the borrowing cost of an individual company depends on the nature of financing, tenor, collateral quality, etc. Hence there may be high variationC O N F I D E N T I A L among different companies - even in same country  When discussing the suppliers financing cost in general, financiers tend to address the medium tier  When financing their receivables, companies in these markets could pursue local ECA (Export Credit Agency) coverage when available, and the cost for that coverage is subjectA N D to the buyers credit rating, which is an additional cost (generally 50-100bps) on top of theP R I V A T E above illustrated borrowing costsST R I C T L Y © 2010 J.P.Morgan Chase and Co. All rights reserved. 62
  • 61. Global Trade Finance – What’s Top of Mind Global Trade Finance Should:  Integrate seamlessly with cash and liquidity processes to increase the efficiency of treasury operations C O N F I D E N T I A L Employ a broad range of settlement, risk mitigation and financing tools and solutions related to the commercial transaction and flow of goods  Recognize that individual requirements differ. Therefore in order to select the right mix of tools and solutions, demand a consultative approach from yourA N D provider(s)P R I V A T EST R I C T L Y © 2010 J.P.Morgan Chase and Co. All rights reserved. 63
  • 62. Global Trade Finance – Tools and Solutions Classic Trade Solutions Structured Trade Solutions  Imports  Receivable and payable financing  Letters of credit (LC)  Export Credit Agency (ECA) backed structured  Documentary collections trade: Ex-Im Bank in the USA  Exports  Pre-import/export financing structures  Letters of credit  Private credit insurance and political risk  Documentary collections insurance (PRI)C O N F I D E N T I A L  Standby letters of credit (SBLC)  Financing sales of capital equipment with  Bank guarantees terms greater than one year  Issuance of standby letters of credit to support bid, performance and payment bondsA N D  Financing of export-related accounts Specialized Trade Solutions receivable and inventoryP R I V A T E  Supply chain finance  Purchase order management (open account)ST R I C T L Y © 2010 J.P.Morgan Chase and Co. All rights reserved. 64
  • 63. Export Finance Life Cycle Trade Cycle Financing Pre- Shipment: Shipment: Post-Shipment: Negotiating the Sale Shipping Documents Transacting the Payment and Terms of Payment Title Transfer Financing the Receivable Arranging Working Capital Financing Financing the BuyerC O N F I D E N T I A L Working Capital Financing Foreign Buyer Financing Bid & Performance Standby L/Cs Letters of Credit and Bankers Acceptance Financing (generally, up to 180 days) Export Letters of Credit Non-LC SolutionsA N D Non-LC Solutions Documentary Collections and TA FinancingP R I V A T E Ex-Im Bank or SBA Working Capital Guaranteed Loan Program A/R Credit Insurance Discounting BAs and Foreign A/RST R I C T L Y Ex-Im Bank: Direct Buyer Financing © 2010 J.P.Morgan Chase and Co. All rights reserved. 65
  • 64. Classic Trade Solution - Documentary Letter of Credit Letter of Credit (LC) Characteristics  Offers the most protection to the SELLER  Three independent “agreements” underline a letter of credit  between BUYER and SELLER (their contract)  between Applicant and Issuing Bank (application and reimbursement agreement)C O N F I D E N T I A L  between Issuing Bank and Beneficiary (the LC)  Banks deal in documents only. BUYER’s recourse for problems with goods is to the contract with the SELLERA N D  Documents presented under an LC must comply with its terms and conditions, otherwise there is no obligation to honorT E C EL S T TR R C F C R E D I T RC IY V LA E T E I OT L Y P © 2010 J.P.Morgan Chase and Co. All rights reserved. 66
  • 65. Documentary Letter of Credit: a tool to provide short term finance to your Buyer – Overview  Buyer has requested extended payment terms of 90 days from date of shipment  Seller has countered that they will not offer such terms on Open Account basis, but would consider if Buyer provides acceptable LC and agrees to absorb the associated additional costs of financing  Seller talks with their bank, to obtain indicative pricing for 3 key credit/finance driven fees associated with this arrangement:C O N F I D E N T I A L  Confirmation fee  Acceptance commission  Discount charges  Buyer’s bank issues the LCA N D  Seller’s bank is the Advising and Confirming BankI V A T E  LC is payable via a Time Draft to be drawn at 90 days from date of OceanL S T TR R C F C R E D I T R P Bill of Lading E T E I OT L Y © 2010 J.P.Morgan Chase and Co. All rights reserved. 67
  • 66. Documentary Letter of Credit: a tool to provide short term finance to your Buyer – The Numbers  Seller ships and presents documents to their bank, requesting that the Accepted Draft be discounted.  Documents are examined and found to be in compliance with the LC  Time Draft is Accepted under the LC, creating a Bankers Acceptance  Seller’s bank discounts the Bankers Acceptance, depositing funds to the account of the Seller  Seller’s bank collects the full amount due under the Bankers AcceptanceC O N F I D E N T I A L from the Issuing Bank at maturity  Illustrative Fees: $300,000 sale to Chile at 90 days date of shipment  Confirmation fee 2.0% per annum. LC expires 90 days from date of issuance: $1500  Acceptance commission 2.5% per annum. Documents presented and Bankers Acceptance isA N D created10 days after shipment, leaving 80 days left until the payment due date: $1667  Discount charges 90 day LIBOR + 2%. Bankers Acceptance is discounted with 80 days left toI V A T E maturity: $1940L S T TR R C F C R E D I T R P  Total “financing” costs: $5107. 1.7% of the face value of the sale, or 6.8% if you multiply the E T E I OT L Y 90 day cost by 4, to express it as an annualized or 360 day cost © 2010 J.P.Morgan Chase and Co. All rights reserved. 68
  • 67. Access to Solutions – What is “Bankable”? ■ In a recent export finance seminar, Mike Howard, Regional Director of the Ex-Im Bank, made the very important statement: Ex-Im’s programs are not designed to make bad deals look good. ■ During this most recent financial recession, there has been much attention paid to credit quality as well as compliance (OFAC, Patriot Act and Know Your Customer, for example). ■ When you’re seeking to talk with a commercial bank regarding financing to support your global trade activity, you’ll need to present a solid case.C O N F I D E N T I A L ■ A business plan and 2 to 3 years of financial statements are a start. ■ Arrange a meeting with a commercial banker at your financial institution and explain your complete scenario – not just the single transaction, but how that transaction fits into your company’s overall business and business plan.A N D ■ Be prepared to tell your story a couple of times, because export finance will almost always involve not only your domestic banker but also the international specialist(s) atP R I V A T E that bank who will work with the banker.ST R I C T L Y © 2010 J.P.Morgan Chase and Co. All rights reserved. 69
  • 68. Structured Trade Solution - Export-Import Bank  The Export-Import Bank of the United States (Ex-Im Bank) is the official export credit agency of the United States. Ex-Im Banks mission is to assist in financing the export of U.S. goods and services to international markets.  The agency assists exporters by guaranteeing term financing to creditworthy international buyers, both private and public sector, for purchases of U.S. goods and services.  Ex-Im Bank does not compete with private sector lenders but provides export financing products that fill gaps in trade financing. They assume credit and country risks that the private sector is unable orC O N F I D E N T I A L unwilling to accept. They also help to level the playing field for U.S. exporters by matching the financing that other governments provide to their exporters.  Product suite includes working capital guarantees (pre-export financing); export credit insurance; and loan guarantees and direct loans (buyer financing). No transaction is too large or too small. On average, 85% of transactions directly benefit U.S. small businesses.A N D  Ex-Im Bank approved $32.7 billion in total authorizations in FY 2011 -- an all-time Ex-Im record. This total includes more than $6 billion directly supporting small-business export sales -- also an Ex-Im record. Ex-P R I V A T E Im Banks total authorizations are supporting an estimated $41 billion in U.S. export sales and approximately 290,000 American jobs in communities across the country.ST R I C T L Y © 2010 J.P.Morgan Chase and Co. All rights reserved. 70
  • 69. Ex-Im Bank EWCG Program Benefits – Expansion Of Borrowing Base Asset Based Facility WCGP Advanc Collateral Amount Advance Collateral Collateral e Exportable Inventory Raw Materials $ 200,000 20% $ 40,000 75% $ 150,000 WIP $ 200,000 0% $ 0.00 75% $ 150,000 Finished Goods $ 600,000 50% $300,000 75% $ 450,000C O N F I D E N T I A L Subtotal $1,000,000 $340,000 $ 750,000 Foreign Accounts Receivable (A/R) Open Account $ 400,000 0% $ 0.00 90% $ 360,000A N D L/C Backed A/R $ 600,000 75% $420,000 90% $ 540,000P R I V A T E Subtotal $1,000,000 $420,000 $ 900,000 Total Borrowing Base $760,000 $1,650,000ST R I C T L Y © 2010 J.P.Morgan Chase and Co. All rights reserved. 71
  • 70. Structured Trade Finance – Protecting Your Accounts Receivable THE ONLY UNINSURED ASSET  One of the most vulnerable to a loss  More likely to be affected by business cycles  Provides the cash flow (lifeblood) of a business  Represents permanent investment  High cost to maintain (funded through bank borrowings and cost of delinquencies)C O N F I D E N T I A L Senior Cash Executives Land &A N D Accounts Buildings ReceivableP R I V A T E Mach & Inventories EquipST R I C T L Y © 2010 J.P.Morgan Chase and Co. All rights reserved. 72
  • 71. Short-Term Export Credit Insurance WHAT: Commercial Risk of Default: Insolvency and Protracted Default Country/Political Risk: Debt Moratorium, Trade Embargo, License Cancellations etc. WHY: Provides coverage against the unforeseen and unexpected Export receivables are usually the riskiest portion of the current asset portfolio yet it is the only one that is unprotectedC O N F I D E N T I A L WHERE: The US Government’s Official Export Credit Agency: Ex-Im Bank The Private Sector: Filling the “niches” and shortfalls in the programs of the ECA’s. Commercially oriented insurance programsA N D WHEN:P R I V A T E When you want to mitigate the risk of loss and/or cap it When you want to meet or beat the competition When you want to tap new sources of financing for your company and your buyersST R I C T L Y © 2010 J.P.Morgan Chase and Co. All rights reserved. 73
  • 72. Summary – Global Trade Finance Key Challenges ■ Arranging financing: for you, your suppliers, your customers ■ Navigating regulations: U.S. and foreign ■ Managing counterparty risk: suppliers and customers ■ Controlling and optimizing cash: reducing DSO and extending DPOC O N F I D E N T I A L ■ Accessing expertise: local market knowledge, best practices ContactA N D Martha I Gabrielse, Vice PresidentP R I V A T E JP Morgan Chase Bank, NA 616-771-7410ST R I C T L Y martha.i.gabrielse@jpmchase.com © 2010 J.P.Morgan Chase and Co. All rights reserved. 74