Brazil                       unbound                       How investors see Brazil                       and Brazil sees ...
ContentsForeword                                                                         4Executive Summary               ...
ForewordBrazil’s economic resilience over recent years has captured theworld’s attention. All eyes have been on its growth...
Executive summaryBrazil has never been so popular among investors as it is now. Interest has risen steadily over the past ...
IntroductionBrazil is in fashion. Hosting the football World Cup in 2014     world, respondents to the Economist Intellige...
In some respects, this new prominence should come as no          much lower than it should be because of a failure tosurpr...
The Brazilian National Congress     Designed by the world famous architect Oscar Niemeyer8
Part one:  ornerstones of          C                                                       global financial crisis vindica...
more promising BRIC economy, Brazil responded to the                Moreover, high public spending imposes a huge burden o...
Natural advantages: Land and energy                               Likewise, Brazil’s energy profile, in many respects, lea...
obstacle, far more than selected corruption, poor                                                                  The fra...
shops, Brazil’s tantalising market of 192 million, youthful             With appetites for consumer goods now thoroughlyco...
TheFederalUniversityofParana,Curitiba.     The	oldest	university	in	Brazil,	founded	in	1912.14
Part	two:		 ocial	and	          S                                                        them	for	example.	“They	can	talk	...
Every bit helps, it seems. “You cannot lose the opportunity       Getting foreigners to fill the gap can also be frustrati...
How would you rate, relative to management in                                                                             ...
Business education – not just for the boardroom     The size of Brazil’s market for business education is around $1bn, acc...
II. nnovation in thinking and action    I                                                           Which of the following...
What proportion of the products and services sold by                         models are currently available, from General ...
Brazil unbound: How investors see Brazil and Brazil sees the world
Brazil unbound: How investors see Brazil and Brazil sees the world
Brazil unbound: How investors see Brazil and Brazil sees the world
Brazil unbound: How investors see Brazil and Brazil sees the world
Brazil unbound: How investors see Brazil and Brazil sees the world
Brazil unbound: How investors see Brazil and Brazil sees the world
Brazil unbound: How investors see Brazil and Brazil sees the world
Brazil unbound: How investors see Brazil and Brazil sees the world
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Brazil unbound: How investors see Brazil and Brazil sees the world


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Brazil unbound: How investors see Brazil and Brazil sees the world is an HSBC report produced in co-operation with the Economist Intelligence Unit. The report draws on in-depth interviews with country experts and analysts, Economist Intelligence Unit forecasts, and a survey of executives in 536 companies across 18 industries, during April-May 2010. Around one third of survey respondents were based in Brazil and a further 11% in Latin America; 20% were based in Asia-Pacific, 15% in North America, and 12% in Western Europe.

Over two-fifths (41%) of companies had annual global revenues of $500m or less, and 22% had annual revenues above $10bn. In terms of seniority, 58% of respondents were C-suite or board members.

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Brazil unbound: How investors see Brazil and Brazil sees the world

  1. 1. Brazil unbound How investors see Brazil and Brazil sees the worldin co-operation with
  2. 2. 2
  3. 3. ContentsForeword 4Executive Summary 5Introduction 6Part one: ornerstones of success C 9Part two: Social and intellectual capital 15 I. Talent and education 15 II. Innovation in thinking and action 19 III. Brazilians abroad 22Conclusion: The beginning of the future 26 About this report Brazil unbound: How investors see Brazil and Brazil sees the world is an HSBC report produced in co-operation with the Economist Intelligence Unit. The report draws on in-depth interviews with country experts and analysts, Economist Intelligence Unit forecasts, and a survey of executives in 536 companies across 18 industries, during April-May 2010. Around one third of survey respondents were based in Brazil and a further 11% in Latin America; 20% were based in Asia-Pacific, 15% in North America, and 12% in Western Europe. Over two-fifths (41%) of companies had annual global revenues of $500m or less, and 22% had annual revenues above $10bn. In terms of seniority, 58% of respondents were C-suite or board members. 3
  4. 4. ForewordBrazil’s economic resilience over recent years has captured theworld’s attention. All eyes have been on its growth, as it distanceditself from the political and economic uncertainty of the 1980s.With growth set to continue, it has been forecast that by 2025 Brazil will become the world’s fifth largest economy,overtaking Britain and France, while São Paulo will rank higher than Paris and Shanghai as the world’s sixth wealthiest city.In 2010, HSBC celebrates the vibrancy and excitement of modern Brazil with a series of international events and activitiesacross ten markets from the UK and Brazil to North America, South Africa, the Middle East and China. This programmeof activity is centred around our sponsorship of Festival Brazil, a four-month summer celebration of the country’s culturalofferings at London’s Southbank Centre.Working in 88 countries, we see the understanding of different cultures as an essential part of building internationalrelationships and business expertise. As part of our global Cultural Exchange programme, Festival Brazil provides insight into one of the world’s most prominent economies.Bringing together the views and opinions of the global business community, this Economist Intelligence Unit reportidentifies and explores the challenges that now face this dynamic country. I hope that, whether you are already experienced in working with Brazil or are just starting to explore its opportunities, this report will prove valuable to your business.Zarir J CamaGroup Manager, Group Management Office, HSBC Holdings plc4
  5. 5. Executive summaryBrazil has never been so popular among investors as it is now. Interest has risen steadily over the past 15 years as thecountry has managed to overcome one political, macroeconomic and business challenge after another. Privatisation,liberalisation, a new stable currency, the smooth handover of political power, to name but a few achievements, coupledwith a boom in global demand for Brazil’s copious supplies of commodities, have boosted foreign currency earnings andfired up consumer spending. Brazil has been transformed from “country of tomorrow” to “once-in-a-lifetime opportunity”.The transition is, of course, far from over: education, bureaucracy, corruption, infrastructure and fractious politics, to list justa few deep-seated problems, will take years to address. But its new-found economic and political stability – which helpedthe economy withstand recent global financial shocks – allows policymakers to make a serious start on addressing theseissues. Moreover, the country’s natural riches in agriculture and mining – and potentially offshore oil too – will, if used wisely,provide the cash needed for vital investments for years to come.This report, based on interviews and a survey of 536 senior executives produce better results. Some 57% of surveyed executives do not haveworldwide, largely endorses the general optimism about Brazil’s a dedicated RD facility, or even plan to have one in the short term inprospects. Part one of the report sets Brazil’s recent transition into its Brazil. Over one half of respondents (51%) say that, at present, less thanpolitical, macroeconomic and industry context. Part two focuses on 10% of products and services sold by their companies have actuallythree essential areas of the business operating environment: the market been developed there, and at least one quarter of respondents expectfor talent; the state of innovation; and the dilemmas facing Brazilian no progress on that score over the next three years. Yet almost halfcompanies as they expand abroad. Some of the key conclusions of this (49%) of survey respondents describe the capacity of Brazilian-basedreport and the main challenges facing Brazil include the following: businesses to integrate the latest international technology into their operations as either “very good” or “excellent”, and only 6% say it isPoor infrastructure takes a heavy toll on business. “poor”. This indicates that better education, improved infrastructure,Although something of a truism, the parlous state of the infrastructure greater investment in RD and closer relations between companiestops the list of obstacles faced by investors in Brazil. In our survey, and universities would have a disproportionately positive impact onnearly one half of respondents (49%) point to “low standard or costly innovation. That said, business has broken new ground in environmentalinfrastructure” as the main operating obstacle. In spite of some and agricultural technologies, which are being exported worldwide.improvement in logistics, freight depends on costly road haulage; thereare few railroads; the potential for waterways remains largely unexplored; Co-operation with universities works well.and ports and airports are congested. These conditions can add one One way to promote innovation is through business co-operation withquarter or more to the cost of getting goods to market, say investors. academic institutions. Experience seems relatively limited, but positive.Logistics experts call for better co-ordination between different layers of Of survey respondents whose Brazil-based operations already work withgovernment and the private sector. local universities, 60% say the relationship has been “positive” and 12% “very positive”, compared with less than one quarter (23%) who sayWeaknesses in the education system impair the supply of that such co-operation “failed to live up to expectations” or was “veryrelevant workplace skills. unsuccessful” (5%). Brazilian-based companies would appear to getWhile many of the graduates of Brazil’s universities are viewed as the rough end of such deals (or perhaps are too optimistic about theirtop class, there are too few of them. Poor teaching and resourcing in potential), as almost one third (32%) report that such co-operation secondary education means that school leavers are among the world’s “failed to live up to expectations”.least educated. Companies find they must fill the skills gaps themselveswith their own training. At least one third of investors surveyed say Brazil focuses on “South-South” trade relations, especially skills shortages represent one of the biggest operating problems, with with China.almost one half (47%) of US-based companies reporting this as their As part of a general policy of trade diversification, one of the biggestgreatest challenge. Educationalists call for a more relevant curriculum, changes in Brazilian trade policy under President Lula has been thebetter teacher training, and a shift in state funding from tertiary to expansion of trade and investment with China. China has become Brazil’ssecondary education. largest export and import partner, and provides investment and finance to secure supplies of key minerals. Brazil has also expanded its share ofInvestors praise the abilities of their Brazilian managers. trade with the rest of Latin America, other Asian countries, the MiddleEducation standards may be higher in most parts of Asia, but, say East and Africa, especially in agriculture.investors, the quality of management is “probably worse in China andIndia”. Indeed, Brazilian managers are deemed to be on a par with their Brazilian firms still suffer from poor brand recognition abroad.peers in developed markets, and superior to those from other emerging Beyond the charmed circle of a few high-profile companies, Brazilianmarkets, according to 42% of survey respondents. In particular, investors brands still lack the global draw of their Western counterparts. This islaud the flexibility and maturity of their Brazilian staff, a facet that may reflected in our survey, in which 84% of respondents say that Brazilianderive from learning to cope with economic upheaval. However, this brand names are not well recognised or not highly regarded abroad. flexibility does not translate adequately into innovation. Only 3% of US-based respondents believe that Brazilian brands are both recognised and highly regarded. However, the perception of BrazilianBrazil lags in innovation; investors could help more. brands changes somewhat among China-based executives, with almostBrazil scores poorly on most innovation rankings, and deeper analysis one quarter of those respondents (24%) giving a warm reception tosuggests that even the meagre investments into innovation could Brazilian products. 5
  6. 6. IntroductionBrazil is in fashion. Hosting the football World Cup in 2014 world, respondents to the Economist Intelligence Unit’sand the Summer Olympics in 2016 would seem a fitting survey prefer to point to the “B” in BRICs (the oddballcap to the momentous economic changes witnessed over category of fast-growing emerging giants comprisingthe previous two decades. While such mega events can Brazil, Russia, India and China) rather than to thestrain a country’s budget and test its infrastructure, sending country’s long-standing structural deficiencies. Morelesser hosts into a spiral of debt, Brazil’s leaders will see executives see Brazil primarily as “a young, fast-growingit as global recognition of the country’s importance in the market opportunity on a par with China, India or Russia”world; a powerful signal that Brazil’s domestic concerns (49%) – although Chinese companies were far lessmatter beyond its borders; that its companies are a force favourably disposed to such a comparison – and as “anto reckon with abroad; and that its talents are the envy of emerging player on the international stage” (40%), thanthe world. as “a market with high potential but held back its poor business environment” (31%) or even “a supplier ofSuch sentiments, if not new, are certainly more realistic key commodities” (20%). Despite the fact that incometoday than at any point in the country’s recent history. distribution remains among the most skewed in the worldOnce known for its severe stop-go economic cycles, the – recent improvements aside – social inequalities andmemory of hyperinflation in the late 1980s and the 2002 traditional stereotypes linked to culture and sport were IMF bail-out is receding fast. Investor queasiness over cited respectively by only 13% and 9% of respondents.the election in 2002 of the left-wing President Luiz InácioLula da Silva (“Lula”), whose two terms end this year, has Overall, what do you consider to be the main imageproven misplaced. Brazil’s economy rode the global financial today of Brazil in the world?crisis, suffering only a brief and shallow dip. The economy (% of respondents)is poised to expand by nearly 8% this year. And today’s A young, fast-growing market opportunity onpolicymakers angst less about financial turmoil and more a par with China, India or Russia. 49%about who and how to access newly discovered deepwater An emerging player on the international stage. 40%oil reserves, developing a foreign policy doctrine that A market with high potential but held back its 31% poor business environment.reflects global ambitions, and turning domestic enterprises A supplier of key commodities 20%into world beaters. to the world. Principally known for extremes of wealth and 13% poverty.For investors, Brazil’s glass is now “half full”. With 192 Retains its stereotypical image associated 9%million consumers, it is Latin America’s largest market, the with culture and’s fifth-most populous country and the eighth-largest 0 10 20 30 40 50 60 70 80 90 100economy. When asked about Brazil’s image in the Source: Economist Intelligence Unit.6
  7. 7. In some respects, this new prominence should come as no much lower than it should be because of a failure tosurprise. Along with South Africa and India, Brazil has been address structural reform. Swathes of its workforce area leading light in the G20 (group of 20 leading economies). poorly educated; innovation is stunted; infrastructure unfitDuring the global economic crisis, the G20 superseded the for purpose; and its companies’ brands, having focussed G8 as the main platform for global governance, according on home advantage are, with notable exceptions, littlelarge developing nations such as Brazil a greater voice known a time when the setting of global rules is dominating This report is divided into two parts. Part one looks atheadlines. And it hasn’t escaped investors that emerging the political, macroeconomic, industry and infrastructuremarkets have generally come through the financial crisis foundations that have enabled the country to soar better shape than have developed markets. There Part two draws on the views of business executives bothis also plenty of commercial substance behind Brazil’s in the country and worldwide and identifies three keynew popularity among investors. The consolidation of aspects of business on which Brazil’s future depends:macroeconomic stability in the past decade has meant its development of skills, its capacity to innovate, andthat the country’s large internal market potential is finally the country’s role in the world – and evaluates why thebeing realised. Brazil’s young and sizeable population and optimism is justified.its burgeoning middle class are both by far the mostattractive features of the country, according to 58% ofexecutives surveyed. By contrast, such factors as itsabundant natural resources, political stability and cheaplabour force – often features of primarily export-driveneconomies – were far less regarded.Judged by its history, therefore, Brazil has done well; judgedby today’s competition, however, the country still has muchground to make up. Although GDP growth this year isexpected to approach Asian rates, such rates are far fromsustainable given infrastructure deficiencies. Since GDP perhead is significantly higher than in China – and especiallyIndia – comparisons to Asian rates of growth are not entirelyappropriate; even so, Brazil’s potential sustainable growth is 7
  8. 8. The Brazilian National Congress Designed by the world famous architect Oscar Niemeyer8
  9. 9. Part one: ornerstones of C global financial crisis vindicated several of Brazil’s statist policies. The state development bank, Banco Nacional de success Desenvolvimento Econômico e Social (BNDES), played a major role in supporting credit at a time when private banks around the world were retrenching sharply.Maintaining political consensus The difference seems to be that a decade of responsibleBrazil’s new-found political stability has provided a sturdy debt management, floating exchange rates and inflationbase for expansion. National elections no longer pose targeting – introduced at the behest of the IMF in the wakeany threat of a radical shift in macroeconomic policy of the upheavals caused by the 1997-98 Asian and Russianorientation. The country’s voters will elect a new president crisis – remain sacrosanct. These policy anchors were vitalin October 2010, after the two-term limit of Luiz Inácio Lula in enabling Brazil in 2008 to withstand (to the surprise ofda Silva (known as “Lula”) expires, as well as voting in many) a series of external economic shocks that in thestate governors and a new Congress. Few commentators past would have triggered major instability. Although someharbour serious worries about the main candidates and large companies, such as Aracruz, a pulp and paper group,their policies. Power has alternated since 1995 between suffered from poor derivatives deals, the country’s con-two main parties: Lula’s Partido dos Trabalhadores (PT, servatively-managed banks were not exposed to the riskyor Workers’ Party); and the centrist Partido da Social assets that felled counterparts in the US and Europe. ADemocracia Brasileira (PSDB – or social democrats). Both $30bn swap deal with the Federal Reserve Board (the USbroadly agree to continue or defend the successful policies central bank) increased trust in the Brazilian banking sectorof the past fifteen years. and underpinned strong growth of deposits in recent years.Lula’s shift to the economic policy centre ground ahead of Indeed, during the global financial crisis, many Braziliansthe 2002 elections has broadened cross-party consensus in overseas switched their assets out of US banks to Brazilianfavour of disciplined monetary and fiscal policies. This has banks, as they were perceived to be safer.underpinned a more stable macroeconomic environment, Notwithstanding all these positive political developments,enabling domestic and foreign investors to lengthen their Brazil’s political environment remains a drag onplanning horizons. The consolidation of greater political implementing reforms needed to sustain more dynamicstability also comes as a welcome relief for a population GDP growth. Although four parties typically account forwhich following the end of military rule in 1985 has seen around 70% of seats in the chamber of deputies andwild political swings and a host of ill-fated economic plans over half those in the senate, a total of 18 political partiesaimed at promoting growth and quashing hyperinflation. are represented in Congress and governing coalitionsFor all the corruption in Brazil’s political system, especially are typically unwieldy affairs. On account of the lax rulesin the parliament, the country has demonstrated its political governing party allegiances, congressional representativesmaturity. The outgoing President Lula took over the tend to be extremely provincial, showing greater loyaltyreins from Fernando Henrique Cardoso in 2003 relatively to interest groups than to either party or policy. Moreover,smoothly, despite being in the midst of a full-blown the president is critically dependent on the support ofeconomic crisis of confidence. He ends his second term state governors, who typically have considerable influencewith unprecedented popularity ratings above 80% (thanks over their states’ delegations in Congress. Switching partyin large part to successive increases in the minimum wage allegiances in pursuit of career advancement is commonand social policies that has lifted some 12 million families among politicians and contributes to the fractious nature ofout of poverty). Yet he has resisted the temptation to the political system.change a constitution that forbids him a third term. Instead,he has promoted a relatively uncharismatic former civil chief A new economic eraof staff and energy and mines minister, Dilma Rousseff, to Brazil’s is a diversified economy with strong corporate anddefend his legacy. financial sectors, a low external debt burden and highly diversified export industries and markets. These factorsThis legacy is not simply one of implementing free-market put Brazil in a position to emerge relatively quickly from theideas. The state remains firmly entrenched in the running global downturn. The country’s recession was brief andof the economy, despite many unhappy experiences shallow: the economy contracted by a mere 0.2% in 2009 –of “economic miracles” gone sour from hyperinflation with the help of some credit expansion, and some supportand foreign debt default. Ms Rousseff, and the PSDB from the government’s flagship infrastructure developmentchallenger, José Serra, also advocate a state-led programme, the Programa de Aceleração do Crescimentodevelopment strategy to a greater or lesser degree. (PAC), growth acceleration programme launched inThe failures of free market models exposed by the early 2007. In contrast to Russia, seen by many as the 9
  10. 10. more promising BRIC economy, Brazil responded to the Moreover, high public spending imposes a huge burden ondownturn by letting its currency depreciate, conserving its monetary policy to keep inflation tamed. The benchmarkforex reserves. Moreover, Brazil has, since 2008, become a Selic interest rate at over 10% is one of the highest innet foreign creditor as foreign debt shrank and international the world, and market rates are far higher. By Brazilianreserves soared, prompting all three main credit rating standards, interest rates are historically low, but given theagencies to give the country an investment grade rating. still-large public-debt financing requirements, the latter is also crowding out private borrowing.The Economist Intelligence Unit expects Brazil’s economyto shoot ahead, by 7.8%, in 2010 – a fitting end to The current account could also deteriorate rapidly. SixPresident Lula’s second four-year term that has seen annual consecutive years of surplus ended in 2008. Last year,average economic growth of 4.7% (compared to average the deficit amounted to 1.5% of GDP, and the Economistannual growth of 2.5% in the previous 25 years). Yet, the Intelligence Unit forecasts a deficit of 2.7% in 2010.macroeconomic outlook is far from risk-free. A double-dip Officials hope that the local currency, the Real, will devalueglobal downturn may yet hit Brazil on the rebound, and accordingly, but this readjustment may not be smooth,fiscal and current-account deficits could all too easily especially in a difficult external financing Although the budget deficit is relatively smallfor a G20 country, at 3.3% of GDP in the 12 months toend-May 2010, this may not last. Indeed, arguably, creative accounting has played a part in keeping the primary budgeton target, and opacity in itself can jeopardise confidence ifthe positive mood ever shifts.Forecast summary(% unless otherwise indicated) 2008a 2009a 2010b 2011bReal GDP growth 5.1 -0.2a 7.8 4.5Consumer price inflation (av) 5.7 4.9 5.4 4.6Money market interest rate (av) d 12.4 10.1c 10.3 11.5Exports of goods fob (US$ bn) 197.9 153.0 178.2 194.3Imports of goods fob (US$ bn) -173.1 -127.7 -171.7 -200.9Current-account balance (% of GDP) -1.7 -1.5a -2.7 -3.3External debt (year-end; US$ bn) 253.4c 279.8c 307.0 318.5Exchange rate R:US$ (av) 1.83 2.00 1.80 1.86a – Actual. b – Economist Intelligence Unit forecasts. c – Economist Intelligence Unit estimates. d – Selic overnight rate.Source: Economist Intelligence Unit.10
  11. 11. Natural advantages: Land and energy Likewise, Brazil’s energy profile, in many respects, leads theImprovements in the policy mix have allowed public and world. Around 80% of the country’s electricity comes fromprivate investors to focus on developing the country’s hydro-electric plants, accounting for some 45% of energyindustrial and natural resource base. Brazil boasts the most consumption in 2009, and continues to attract investors indiversified economy in Latin America with export industries new dams in the Amazon. Petroleum derivatives accountedranging from petrochemicals to aeronautics. Manufactured for 39% of total energy consumption, natural gas for 8%,exports have, in fact, declined from almost 60% of total coal for 5%, and nuclear for 1%.export earnings in 2000 to 40% in 2010, but overall While green energy sources have helped to weanearnings virtually tripled in this period thanks to extensive the economy off imported oil, and improved Brazil’sand efficient exploitation of bountiful natural assets and high environmental credentials (the adverse impact ofcommodity prices. dam-building aside), the country’s recent discovery of hugeBrazil is finally being recognised as an agriculture oil reserves below the deep waters off its southern coastsuperpower. The commodities boom that peaked in 2008, will eventually shift the energy balance, making Brazil acoupled with seemingly insatiable demand from China, has major oil exporter over the longer term. The country alsopowered Brazil’s commodities exports, which account for produces industrial quantities of biofuels such as sugarcanesome 43% of total foreign sales. It is the world’s largest ethanol used in cars. In 2008, domestic sales of ethanolexporter of orange juice, coffee, sugar, beef and poultry exceeded, for the first time, the sale of petrol. Petrobras,meat. Agronomists have developed new species to boost the state oil giant, is also investing in biofuels (biodieselproductivity in less fertile areas, including almost 100 new and sugarcane ethanol via a joint venture with Tereosspecies of soya beans per year. Its grain and leguminous International, a subsidiary of the French co-operative.harvest increased from 100m tonnes in 2003 to 134m The introduction in 2003 of flex-fuel car engines hastonnes in 2009. encouraged a partial renewal of the passenger-car fleet; inThe explosion of demand enabled powerful local 2009, 88% of new sales were flex-fuel vehicles. Flex-fuelmultinationals to emerge, although smaller family-owned cars can run both on petrol and sugarcane ethanol, allowingfarms have found it hard to integrate into this booming drivers to choose the cheapest option. These developmentsmarket economy. Meanwhile, global commodity trading have gone hand in hand with a local car industry that hasgroups such as Cargill and Bunge, long present in held up well in the global crisis, thanks in large part toBrazil, have linked a productive agricultural base into a tax breaks and a good supply of credit, helping to makesophisticated food and drinks industry. Unilever and Coca Brazil the world’s the sixth-largest manufacturer andCola, for example, have seen solid growth in Brazil and fourth-largest and fastest-growing market for light vehicles.driven much of the sector’s consolidation. Local groups inprocessed meat products, such as JBS S.A and Marfrig, Shaky infrastructurehave also prospered, while others, such as Sadia and Car makers may rejoice, but it is the millions of driversPerdigão, have merged after the former got burnt by that have to negotiate the dangerously unpaved roads thatderivatives contracts. prevail everywhere except the main routes – and even many of these are potholed or need resurfacing. PoorDeeper underground lie other sources of rich foreign infrastructure is one major reason that Brazil scores low incurrency earnings, including huge reserves of iron ore in the the Economist Intelligence Unit’s business environmentmining province of Carajás in the northern Amazon region rankings (based on 12 key business operating criteria),and the south-eastern state of Minas Gerais. Although which places Brazil 40th out of 82 countries despitethe sector was opened up to foreign competition in 1995, the expectation of some mild improvements in comingBrazil’s privatised mining group, Vale, the world’s largest years. The World Bank Doing Business report and otheriron ore exporter, continues to dominate. It expects to boost international rankings tell a similar story. High and complexits iron ore output by 50% to 450m tonnes by 2014. The taxation, excessive bureaucracy, complex customs rules,company also acquired Inco of Canada in 2006 – with its corruption, a sluggish judiciary, and rigid labour markets arelarge reserves of nickel – diversified into copper, expanded further legitimate investor Africa, and is now operating in five continents. But ask local businessmen with international ambitionsThe list of Brazil’s other mineral riches is also notable: about their greatest concern, and the parlous state of the world’s number three bauxite producer; the world’s the infrastructure will almost certainly top the list. In our sixth-largest reserves of uranium; the largest producer of survey, nearly one half of respondents (49%) point to niobium; and significant resources of manganese, copper, “low standard or costly infrastructure including telephones,tin and gold. transport networks and utilities” as the main operational 11
  12. 12. obstacle, far more than selected corruption, poor The fragmented nature of transportation is even moregovernance (34%) or skills shortages (32%), the state of apparent in rail transport. The country’s 30,000-km railtransport infrastructure is particularly dire. In spite of some network has grown by 20% since it was privatised andimprovement in logistics, freight depends on costly road upgraded in the late 1990s. But despite government haulage; there are few railroads; the potential for waterways efforts to get more freight on trains, it remains remains largely unexplored; and ports and airports are underused (with rare exceptions such as lines operated congested. This can add one quarter or more to the cost of by iron ore exporters) accounting for only 25% of totalgetting goods to market, say investors. freight movement.Which of the following operational obstacles Meanwhile, Brazil’s great potential for river transportpresent the greatest challenges to your business remains largely unexploited. Waterways currently accountoperations in Brazil? for only 13% of haulage, even though Brazil has a 48,000 km network of navigable rivers.(% of respondents) The logistical nightmare does not end when goodsLow standard or costly infrastructure including, 49% telephones, transport networks, utilities. finally get to ports for export. Although ports such as atFailure to honour contracts, bribery, corruption, weak corporate governance. 34% Santos near São Paulo, which handles around one quarter Lack of key skills including management. 32% of the country’s foreign trade, have undergone some Poor quality control. 24% modernisation over the past 15 years, they are congested and expensive, especially at harvest times when trucks Rising wages/low productivity. 21% laden with grain arrive for loading. It is a similar story withUnderdeveloped retail and distribution systems. 20% the country’s main airports, the result of soaring demand, Credit risk. 17% and will surely become an important issue to be resolved before the flood of visitors pours in for the football World Availability of credit. 15% Cup and Olympics. Difficult relations with organised labour. 14% 9% Aside from the need for continuing investment, Mr Saturated markets. Morgan sees problems in the lack of a big picture. Freight 0 10 20 30 40 50 60 70 80 90 100 operators all along the supply chain tend to see “lowSource: Economist Intelligence Unit. cost” as the key performance indicator. No-one takes a strategic view of transport which would end up savingInvesting in infrastructure has been at the heart of President money. He believes that if logistics operators focused atLula’s growth programme (the so-called PAC, launched in each stage on time rather than cost, this would produce2007), but progress has been limited. Fewer than half of the the greatest efficiencies. The problem is that no-one takestargets for 2010 have been met (with much of the proposed “end-to-end” responsibility for the whole logistics journey.financing going to first-time home owners, rather than into And this extends to the final export destination. He citesphysical infrastructure). High public spending commitments an example of one company’s grain exports to Russia thatare crowding out the paltry 1% of GDP that is proposed ran into trouble because the Brazilian logistics manager wasfor investment in infrastructure, while limited private sector unaware of the different rail container sizes used in Russia.investment in transport will not make up the shortfall. Ultimately, the solution lies in better collaborationLittle more than 10% of Brazil’s road network is paved, between private sector operators and the state at variousand even these are poorly maintained. The exceptions levels. Where there is a big player, like Vale, it is possibleare the main toll roads managed by private operators to negotiate with the state over transport needs andsince the late 1990s, such as the main São Paulo-Rio de investment. In a fragmented market, such as the foodJaneiro motorway. As well as growing car usage (with industry, substantial effort is required to get the right 25m vehicles now on the roads) more than 60% of cargo people around the table to discuss priorities, investmenttransportation is by truck, even though this method is slow and responsibilities.and costly. Many fleets comprise owner drivers with ageingvehicles, and this makes it hard for a company to develop Consume now, pay lateran overarching view of its logistics needs. According to Once seen as ‘Americans without credit’, Brazilians areAndrew Morgan, founding chairman of Supply Chain starting to enjoy the rush of debt-induced purchasingEurope, which is involved with freight logistics in Brazil’s power. As access to credit has improved, and shops havefood industry, drivers are more worried about “fiscal facilitated even relatively small purchases such as shoescompliance” – that is, filling out the right tax invoice – than with installment-payments, household consumptionwhether the goods arrive on time. has boomed. Despite difficulties of getting goods to12
  13. 13. shops, Brazil’s tantalising market of 192 million, youthful With appetites for consumer goods now thoroughlyconsumers is simply too mouth-watering a prospect to whetted, households are setting their sights on the biggerbypass. The eventual control of inflation in the mid-1990s prize of home ownership. The mortgage market, whichand the success of the new stable currency, the Real, set was almost non-existent in the 1990s, has started showingthe stage for a consumer boom. Falling unemployment, signs of life, although it remains in its infancy. Equivalent tonow at 7.5% in major urban centres, real income gains and only 1.3% of GDP at end-2005, it increased to 2.1% of GDPcredit expansion have pushed up disposable incomes and at end-2008, and with public financing for social housing,made ordinary Brazilians feel a little richer. and a government pledge to finance at least 1 million homes for the poor and the middle class, the mortgageSome 20 million Brazilians over the past six years have been stock has risen in absolute terms, though is still only aroundreclassified out of poverty, according to Marcelo Neri, a 3% of GDP, indicating huge scope for researcher from the Fundação Getúlio Vargas (FGV),a Rio de Janeiro think tank and business school. Over one Time and demographics are on Brazil’s side, at least overhalf of all households in large urban centres are middle the medium term. The share of the population aged 14 orclass, up from 42% in 2004, according to the FGV. Never under is around 28%, and this age group will still comprisegreat savers (given the legacy of hyperinflation), Brazilians at least one in five Brazilians for another 20 years. Butare now able to borrow to finance the good life, with credit ageing will set in thereafter: the country’s birth rate hasrising from 25% of GDP in 2005 to 45% of GDP today, declined from 2.39 per woman in 2000 to an expected 1.76pouring further fuel on consumer fires. in 2010, according to Instituto Brasileiro de Geografia e Estatística (IBGE). It forecasts that the rate will stabilise atThis has generated rapacious demand for cars, personal around 1.5 by the 2020s. But for the next decade, at least,computers, TV sets and mobile phones. Following the 1998 the country can count on a robust working-age populationprivatisation of the telecoms industry the sale of mobile to pay taxes and pension contributions (assuming growth inphones rose spectacularly, overtaking the number of fixed the formal sector), in marked contrast to many developedlines in 2003, and reaching 184 million in mid-2010. economies. It is the nurturing of this younger generation,Large retailing groups have also thrived. Foreign chains such its education, training, jobs and skills, that holds the key toas Carrefour (France), and Wal-Mart (US) have diversified Brazil’s long-term growth and prosperity, as Part Two of thisinto non-food and wholesale activities. Pão de Açucar report explores.(controlled by Casino, a French retailer) recently agreedto buy two local non-food outlets, Ponto Frio and CasasBahia, in order to increase its exposure to electronic goodsdemand and the lower-income market segment.Brazil: Population, income and market size 2005a 2006a 2007a 2008a 2009b 2010c 2011c 2012c 2013c 2014cPopulation (m) 184.2 186.8 189.3 191.9 194.4 196.8 199.3 201.6 204.0 206.6GDP (US$ bn at 881.8 1,088.9 1,366.3 1,637.9 1,573.4 1,927.6 2,021.7 2,088.9 2,198.2 2,317.9 market exchange rates) Private consumption 531.5 656.6 818.4 988.0 987.4 1,194.0 1,253.1 1,299.8 1,370.5 1,442.3 (US$ bn) Private consumption 2,890 3,520 4,320 5,150 5,080 6,070 6,290 6,450 6,720 6,980 per head (US$) GDP per head 8,610 9,110b 9,800b 10,390b 10,360 11,150 11,660 12,260 12,990 13,760(US$ at PPP) Personal disposable 543.3 674.2b 841.7b 1,016.3b 1,127.6 1,270.8 1,252.8 1,240.3 1,240.5 1,256.9income (US$ bn) Growth of real 2.5b 5.7b 6.2b 7.1b 15.5 -0.7 -1.8 0.2 -0.5 0.7disposable income (%)Source: Economist Intelligence Unit. 13
  14. 14. TheFederalUniversityofParana,Curitiba. The oldest university in Brazil, founded in 1912.14
  15. 15. Part two: ocial and S them for example. “They can talk about [child development psychologist] Piaget but they cannot organise a classroom. intellectual capital They just don’t know the practice,” says Mr Rodriguez. He estimates the annual cost to the education system and the wider economy of such educational shortcomings at around I. alentandeducation T $600m. As Paulo Renato Souza, a former education minister, notes: “We need pupils actually to learn something.” Thelearningcurve Averageyearsofformaleducationbygender,ageThirty years ago, Brazil and South Korea had similar levels groups,2008 (in years)of GDP per capita – today the Asian tiger is over three times richer (in PPP terms). One major reason for this 20-24 25-29 30-39 40-49 50-59 60divergence has been a lack of investment in education. In Men 9.1 8.8 7.7 7.3 6.2 4.3Brazil, the system’s failings are having direct consequences for the quality of the workforce. In 2008, some 20% Women 9.8 9.5 8.5 7.7 6.3 3.9of the working-age population could not read, write or Total 9.4 9.2 8.1 7.5 6.3 4.1understand basic text, a slight improvement on the 25% Source: IBGE.level of functional illiteracy recorded five years earlier. The quality of education for the majority of the country’s children Educationallevelachievedinworking-agepopulationand teenagers – that is, those who cannot afford a private (25-64agegroup):education – remains particularly inadequate, held back by poor teacher training, shortcomings in physical infrastructure Basic education: 63%including a lack of nurseries, and still-high truancy rates. Secondary education: 27% Only one half of the country’s children complete secondary education, the second worst drop-out rate in the world, Higher education: 10%ahead only of Mozambique, according to Alberto Rodriguez, Source: IBGE.a World Bank education specialist. CompaniesstepinThe system can boast a few successes. Almost all children aged between 7 and 14 attended school in 2008, according Companies in Brazil often find that if they want the skills to official figures. The average number of years of formal they need, they have to fill the yawning gap left by the education in the working-age population has also risen over country’s scrappy education system themselves. Much of the past 20 years from 5.2 years to 7.1 years in 2008. But this the training takes place after recruits are hired, but some level is still short of the 10 years recommended by Unesco initiatives try to get in earlier. Following his retirement as and achieved by neighbouring Chile, Peru and Argentina. president of Philips Latin America, Marcos Magalhães, for There are also big regional disparities. The more developed example, launched the Instituto de Co-Responsabilidade pela south and south-east have 7.5 and 7.7 years, respectively; Educação, an initiative to raise education standards in his the poorer north-east averages 5.9 years. Although younger home state of Pernambuco, in the north-east. Such private people tend to have had more years in school than their efforts are spreading, and carry the simple objective: to make parents, they are still ill prepared for the modern job market. the classroom work, and try to catch up with competitors, In OECD-run tests across 57 countries in 2006, Brazilian especially in Asia. 15-year-olds ranked 53rd in mathematics, 52nd in sciences The idea follows similar, successful initiatives in South Korea and 48th in reading. and Europe. But in Brazil, they merely scratch the surface. Part of the problem is the structure of the education system. Meanwhile, government education bodies A highly decentralised mish-mash, responsibilities are spread insist, rightly in many instances, that money for education be over numerous tiers of government. The federal government spent on teacher training and partnerships with spends some 3% of its budget on education, but it is state-run schools. the public sector schools run by states and municipalities These dilemmas exist at post-secondary education too. that manage much of it. The system involves 200,000 An Economist Intelligence Unit report on post-secondary educational units, 50 million pupils, and 3 million, often education in Brazil concluded: “Rather than operating underperforming, civil servants and managers, according to educational institutions, the private sector should work in João Batista Araújo e Oliveira, a former World Bank official. public-private partnerships related to education, share best Teachers are also often part of the problem rather than the practices of change management, provide financial support solution. Reports of waste in schools are rife – computers for programmes to enhance teacher qualification, and share left in their boxes because teachers don’t know how to use new technology solutions.” 15
  16. 16. Every bit helps, it seems. “You cannot lose the opportunity Getting foreigners to fill the gap can also be set up a link between the corporate world and the Alistair Cox, CEO of Hay Group, a consultancy, says thatuniversity,” says Mr Gutierrez, CEO of Intrabase, a local India provides a valuable example to follow: Brazil needsmarketing company. He adds that companies can spur to invest in information technology and attract the talentpost-secondary institutions to explore real-world situations currently working outside encouraging employee participation in educational All these issues become starkly apparent from theprogrammes and offering students hands-on experience Economist Intelligence Unit’s own survey. The lack of keythrough internships and work-study programmes. skills is the biggest operating challenge faced by nearly one third of survey respondents – and as much as 47% ofCreaming off US-based companies – on a par with corruption and notWhile the mass of under-educated Brazilians languish, the far behind the problems of poor infrastructure. Notablestory at the top of the pyramid is of intensifying competition deficiencies among staff include language skills (43%for managerial skills. Much of the quality talent that report shortfalls there) and science knowledge (34%).enters the workforce comes from several well-respecteduniversities and business schools in Brazil, many of which Still, over one half of respondents also say that theare ranked as the best in Latin America, according to a 2009 Brazilian workforce matches their needs, with engineeringcomparative survey by Heidrick Struggles, a recruitment companies being among the more satisfied (although it isfirm. Students from leading (usually state-run) universities worth noting too that the US Chamber of Commerce inin Brazil are rated highly by foreign multinationals. São Paulo recently found that 41% of its members were unhappy with the quality of engineers, describing theirIn addition, business schools are catering for a new crop training as “totally inadequate”).of professional managers. Some of the more promisingstudents attend leading foreign business schools, but In which of the following areas of education or skillsincreasingly home-grown institutions such as the highly relevant to your business do you believe the Brazilianregarded Insper and IBMEC have emerged and been labour market satisfies your needs or falls short?successful. Others though have attracted criticisms for (% of respondents)lacking relevant “people-related” training that is increasinglyrequired by international management. Basic literacy or numeracy 13% 70% 17%Although deemed highly creative, Brazilian staff are often Secondary education 11% 68% 21%seen as lacking initiative. According to Sergio Averbach, Tertiary education 11% 54% 35%president of the South America division of Korn Ferry,an executive search company, the success of Brazilian Languages 9% 48% 43%managers internationally is more “due to their outstanding IT 16% 62% 23%influence and leadership skills, than to the ability to createthe new and the different.” Science 10% 56% 34%With rapid economic expansion and rising foreign Engineering 18% 61% 20%investment, demand for the right skills has simply Mobility 20% 59% 21%intensified. “Board members often tell me they are havingtrouble hiring people from CEO to factory staff,” says Mr Work ethic 16% 61% 23%Averbach. “I recently received 10 presidents of construction Soft skills (ie, problem solving, 23% 58% 19%companies. There is simply not enough labour force to cultural sensitivity, etc)meet the needs at all levels in Brazil.” 0 10 20 30 40 50 60 70 80 90 100Companies have few problems with those who are Exceeds needs Matched needs Falls shortqualified – there just aren’t enough of them. AES, a USelectricity company that has invested some $6bn in Brazil Source: Economist Intelligence Unit.since 1997 and plans to double in size within five years,typically suffers a shortage of electricians and mechanics. Brazilian managers also appear to lack international“Quality is not a constraining factor, but the volumes are experience and multicultural awareness, when comparednot there,” notes Andrew Vesey, AES president for Latin with their peers in developed markets. But local managersAmerica and Africa. The company has to invest in training do excel in creativity and innovation. Managementits own workforce to meet its needs. experience, finance and marketing are also highly rated.16
  17. 17. How would you rate, relative to management in b) developed markets?developed markets, the skills and knowledge of (% of respondents)Brazilian managers in the following areas?(% of respondents) 19% Generally superior. Management experience. 12% 35% 39% 13% 1% International experience 5% 24% 40% 26% 5% About the same. 51% People management. 9% 32% 42% 14% 3% 7% 36% 41% 13% 2% Generally inferior. 31% Relevant technical skillsMulticultural awareness (languages, 10% 28% 34% 23% 5%knowledge of foreign cultures, etc). Strategic thinking. 8% 30% 43% 16% 3% 0 10 20 30 40 50 60 70 80 90 100 Finance. 16% 30% 38% 14% 2% Source: Economist Intelligence Unit. Marketing. 10% 36% 38% 13% 3% Creativity/Innovation. 21% 32% 31% 13% 3% The sky’s the limit 0 10 20 30 40 50 60 70 80 90 100 Very high 1 2 3 4 Very low 5 At the very top, there seems to be no shortage of role models to inspire the most ambitious Brazilian executives. Several Brazilian-born business leaders have risen toSource: Economist Intelligence Unit. global prominence in recent years. Carlos Brito, the CEOOverall, Brazilian managers are deemed to be on a par of ABInbev, started his career with the Brazilian brewerwith developed market peers, and superior to those from Ambev (which later merged with Interbrew and Anheuserother emerging markets, according to 42% of respondents. Busch). Alain Belda and Brazilian-born Carlos Ghosn haveEducation standards may be higher in most parts of Asia enjoyed high-flying careers at Alcoa and Renault-Nissan,than in Brazil, but the quality of management is “probably respectively. André Esteves now heads BTG, an aggressiveworse in China and India”, says Eduardo Wanick, president emerging market investment bank. What, some argue, mayof DuPont Latin America. be holding back the next generation of business leaders is the ability to think innovatively.How would you rate the quality of Brazilian managerscompared with those in:a) other emerging markets?(% of respondents)Generally superior. 42% About the same. 50% Generally inferior. 8% 0 10 20 30 40 50 60 70 80 90 100Source: Economist Intelligence Unit. 17
  18. 18. Business education – not just for the boardroom The size of Brazil’s market for business education is around $1bn, according to VanDyck Silveira, director of business development at Duke Corporate Education. Petrobras, the state oil group, for example, is spending an estimated $150m per year on training. Companies are increasingly taking on the burden of improving employee skills that should have been covered within the education system. Mr Silveira, one of several executives who took over and restructured the business school IBMEC in 1998, sees a particular need for the soft skills of management – communication, giving feedback, “co-creating” and so on. But he also believes that the highly flexible approach of his Brazilian students makes them well placed to benefit. Unlike many other nationalities, “they don’t freeze when their mistakes are pointed out”. Feedback is taken constructively and at face value, he says. Duke CE’s courses are rare in a country where MBAs are focused on academic research rather than the needs of companies. But while dealing with some of the most motivated and employable talent he sees much deeper problems in Brazil’s education system - namely the failure of secondary schools to prepare students for the world of work. The elite are already well catered for, he believes, having attended expensive secondary schools where teaching is rigorous and includes a strong dose of science and mathematics. These students are at a big advantage when getting into the highly competitive and high-quality state universities. The rest have a poor grounding in science, mathematics and computer science. They may have had classes in 15th century Portuguese literature, but they have not been trained to think rigorously or analyse data, remarks Mr Silveira. This deprives potential employers of a corps of competent middle management and technical staff. “There is a big disconnect between high school and university,” he notes. Many of the private colleges they go on to are merely “diploma mills”. Mr Silveira has seen the problem first hand, and has even had to alter the syllabus at IBMEC to get weaker state school candidates up to scratch. Positive discrimination can help, but it tends to lower the overall quality of graduates, and requires higher education institutes to teach basic, grade 1 skills or else see students fall behind. The problem stems from the quality of teaching in what amounts to “a pact of mediocrity”. To paraphrase an old Soviet-era joke about bosses and workers: “they pretend to teach us, and we pretend to learn.” Secondary school teachers do not have to be accredited with a formal qualification. They may be able to run a classroom, but they barely know the subjects they are supposed to be teaching. A question of class Mr Silveira argues for reform in three areas to meet Brazil’s future business needs. First, address the mismatch between what business needs from school leavers and what the bureaucrats in the education ministries put on the syllabuses. He wants officials to “create a learning architecture” that educates for life, from top management to the shop floor. Second, shift funding away from the top universities towards primary and secondary education. This means ensuring proper training and qualifications for teachers, and greater transparency about which are the high- and low-performing schools. While around 7% of the government budget goes to education generally, the vast majority of this is spent on higher education. Related to this is a third issue – the need to be more equitable, so that those who are most able to pay, and who dominate higher education (and who will earn most in their future careers), are not funded by poorer taxpayers who benefit least from the education system. With only around 1 in 5 school leavers going to college, this seems not only unfair but also grossly inefficient. Business should be less worried about the quality coming out of the top of the education system and focus on the mid-ranking school leavers, who are needed to provide the nation’s middle management, technicians and engineers, but find themselves struggling through, and too often dropping out of, secondary education.18
  19. 19. II. nnovation in thinking and action I Which of the following technological factors most impact your firm’s ability to innovate in Brazil?A certain mindset (% of respondents)While Brazilian industry can boast several centres of Technical skills of the workforce. 46%excellence—notably energy, aerospace and agribusiness—education deficiencies hold back innovation in the wider Availability of scientists and engineers. 41%economy. David Neeleman, the São Paulo-born CEO of Total spending on RD in the country. 33%Azul airlines (and founder of the low-cost JetBlue airline Availability of university graduates. 30%in the US), observes a culture of deference among his Spending on RD by the private sector. 28%Brazilian staff. Flight attendants are happy to read the Quality of IT and communications infrastructure. 28%company manual, but few actually raise issues duringmeetings or try to improve processes. “Innovation starts Spending on RD by the public sector (government). 23%when people are able to speak their mind,” he says. He is Broadband penetration. 13%not the only investor to draw such conclusions. 0 10 20 30 40 50 60 70 80 90 100But others would disagree with this assessment. Many Source: Economist Intelligence Unit.investors regard their Brazilian staff to be “flexible and Whether this is the result of a lack of inventiveness oradaptable”, quite probably because they have had to deal systemic failures in the business environment is hard towith a succession of economic crises that taught them how gauge, but Brazil’s weedy performance comes throughto succeed in the midst of instability, say investors. “There in the views and experiences of companies a tolerance for ambiguity that is much stronger in Brazil “Innovations that are developed locally are not frequent,”than in other countries,” says KornFerry’s Mr Averbach. The laments Mr Wanick. Some 57% of surveyed executivesBrazilian executive “has in his DNA the ability to change say that they do not have a dedicated RD facility, or evendirection with greater ease than in any other region in the plan to have one in the short term in Brazil, although theworld”. But research conducted with Insead business likes of IBM and General Electric have recently announcedschool suggests that Brazilian managers are less able when decisions to establish their own research centres in comes to “creating the new and the different”. Over one half of respondents (51%) say that, at present,Whichever view one takes, Brazil cannot deny its poor less than 10% of products and services sold by theirrecord of innovation. “Everybody agrees that innovation is companies have actually been developed in Brazil, and atimportant but people do not necessarily behave that way,” least one quarter of respondents expect no progress oversays Mr Wanick from DuPont. Brazil accounts for some the three years. Moreover, only 29% expect to develop half3.5% of world GDP at purchasing power parity (PPP), but of their products and services in Brazil, and that figure risesonly 0.2% of world patents originate from this market. By to 38% in three years’ time.contrast, 28% of patents are registered in the US. Yet conditions for innovation on the shop-floor are moreAn Economist Intelligence Unit innovation model that promising; when focusing more on the human factors,measures countries according to both their readiness and Brazilian-based companies are seen as well able to integratesuccess in innovation ranks Brazil 52nd out of 82 countries, the latest international technology into their operations, withand notes that the country is likely to slip further down the almost one half (49%) of survey respondents describingrankings in coming years. More interestingly, the model this capacity as “very good” or “excellent”, and only 6%shows that its ranking of the factors that contribute to saying it is “poor”.innovation (for example, the number of science graduates,education levels, the business environment, RD spending,broadband penetration, etc), although in itself low, isstill higher than the measure for innovation successes(measured by the number of patents filed globally). Thissuggests that not only is Brazil insufficiently innovativecompared with its peers, but that it is also inefficientwith its resources, by failing to translate investments intopractical innovation. 19
  20. 20. What proportion of the products and services sold by models are currently available, from General Motors,your company in Brazil was developed Toyota, Mitsubishi, Honda and Hyundai. “The potential isin Brazil? huge,” says Mr Wanick, although he declines to providea) in the past three years hard numbers. Brazil is the largest market in the region for armoured vehicles; but there is plenty more demand for(% of respondents) Armura in the rest of Latin America and further afield. 0-10% 51% Greenfield thinking One vital area of innovation where Brazil excels is in the 11-50% 21% development of green technologies. Despite international criticism over Amazon deforestation (and worries over 51-90% 13% potential new oil wealth), Brazil boasts some impressive green credentials. Electricity needs are largely met91-100% 16% through hydro power, and the country has experimented successfully in biofuels such as sugarcane ethanol. Local 0 10 20 30 40 50 60 70 80 90 100 manufacturers and suppliers such as Magneti MarelliSource: Economist Intelligence Unit. developed a “flex-fuel” engine in the 1990s, allowing cars to run on either petrol or ethanol, or a combination of theb) in the next three years? two. Such models now account for more than 90% of new(% of respondents) vehicles in the fast-growing automotive market (see Part one). Brazil-based companies are also involved in research on a second generation of biofuels (such as cellulose), 0-10% 26% although the performance of biodiesel has proved less convincing. Local firms, such as Braskem, are also breaking 11-50% 36% new ground in green plastics (see case study below). 51-90% 23% C ase study Braskem: A future in green plastics91-100% 15% Braskem, the petrochemical unit of Odebrecht, a major 0 10 20 30 40 50 60 70 80 90 100 industrial conglomerate, hit headlines when it announced the development of so-called “green plastics”. Brazil’sSource: Economist Intelligence Unit. President Lula promoted the company’s technology on a visit to Europe, unveiling a prototype of the “green car ofC ase study the future” which included Braskem’s innovative material.DuPont: Middle class armyDuPont has recently launched its version of ‘the people’s’ The new sugarcane-derived polyethylene, which avoids bullet-proof vehicle in Brazil based on a light and affordable the use of naphta, will be produced on an industrial scalearmouring concept. The new product, named Armura, by the beginning of 2011. The product will cost aroundoffers protection against 97% of firearms in circulation 20% more than an equivalent non-green product, says thein Brazil, according to DuPont, at a much reduced cost company, but the innovation is viewed as a breakthrough in($10,000 instead of $30,000 or more). The armour is also the search for renewable alternatives to oil-derived plastics.much lighter (less than 100 kg against more than 200 kg for The plastic was developed from sugarcane ethanol byregular armour). Braskem’s research and development centre in southernThe project was developed entirely in Latin America, Brazil in partnership with Japan-based Toyota Tsusho.mostly in Brazil, says Eduardo Wanick, president of DuPont In addition, Braskem is working with Novozymes, aLatin America. The concept is appealing to a growing Danish-based biotechnology company, in a research middle-class population that lives in a state of constant project to produce a sugarcane-derived polypropylene.insecurity, especially in urban centres (“40,000 murders a The company has capitalised on Brazil’s experience in ethanol,year is like a small war,” says Mr Wanick – not to mention which is already widely used as biofuel in the car industry.carjackings and other forms of attack). Braskem’s ethanol is supplied by ETH Bio-Energia, also a unitIn order to put its product on the market, DuPont of Odebrecht. The new R500m green plastics plant, whichprovides complete prefab kits (its own products are called is being set up in Triunfo, southern Brazil, will have an annualSentryGlas and Devlar) to authorised car dealers. Five capacity of 200,000 tonnes, according to Braskem.20