Strategies for Success: Doing Business in Brazil Today

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Strategies for Success: Doing Business in Brazil Today by Gabrielle Trebat, Director, Brazil and Global Practicies, McLarty Associates. Presentation featured at the 2nd International Conference: Brazil: A pathway into the future from the Emerging Markets Institute at Cornell University's Samuel Curtis Johnson Graduate School of Management and Better Brazil

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  • Oct 2012 elections will be indicator of PT party trajectory. Lula is getting back into the political game in a big way after his recovery from cancer and remains a wild card. Dilma doing great job of balancing traditional Workers Party – PT party - ideology with preference for big government/state-run enterprises with pragmatic need to succeed – wave of privatizations and concessionsin critical infrastructurePresident Rousseff inherited a mandate to implement the vision that was laid out during the Lula years which meant much needed infrastructure investments to bring the Cup and the Games to fruition, realize the social development goals afforded by the pre-salt findings, and fully realize Brazil’s entrance on the global stage and emergence as global player.
  • Lula vision + Dilma’s pragmatism is creating WORLD OF OPPORTUNITES for foreign investors – if they can successfully navigate them which I will talk about later. 113m more people wanting access to everything from financial savings instruments and insurance, to cars and refrigerators. More investment needed to keep up with domestic demand. 11th round – pending royalties vote in CongressAGRIBUSINESS: As the interior of Brazil prospers, a number of US firms are starting to expand here (after opening offices in SP or RJ). Brasilia is 3rd richest city and highest GDP per person of any Brazilian city. There are growing opportunities in construction, hotels, hospitals and the booming agribusiness “green belt”. IT Maior: Announced in August, the program plans to develop the software industry as part of the broader BrasilMaior development strategy. The government will spend R$500 million to train software programmers and engineers. Part of the money will also be used as tax incentives for software companies as well as manufacturers of semiconductors and tablet computersCONCESSIONS –details and timetable still fuzzy but many oppys for diverse industries Number of states have announced their own programs to expand or upgrade infrastructure – helped by the RousseffAdmin’s decision to raise limits on states indebtedness to the federal government as well as access to special line of credit for states established by BNDES to finance state infrastructure projects.
  • For foreign companies to successfully navigate Brazil, it is critical to understand not just structural limitations, tax challenges, regulatory environment, etc but Brazilian political reality and mindset in Brasilia. Because now, more than ever, it is in Brasilia where decisions are made that create market opportunities, impact investment trends, or otherwise alter the business environment.INTRO Dilma took office she inherited a global economic environment that was different from her predecessor – resulting fear of deindustrialization…..desire to enter club of developed nationsAs such, what we have seen is a HEAVY FOCUS on industrial policy to address these challenges– which follows a long Brazilian tradition of centrally planned industrial policies aimed at spurring economic development. Increasing number of special procurement regimes to protect domestic industries….“Buy Brazil” Law passed in 2010 offers up to 25% price preference in government procurement tenders for manufactured products and services that fit technical guidelines as well as a 60% local content requirement. Special focus on auto, defense, healthcare and ICT industriesBrasilMaior aimed at stimulating development of local industry and encouraging diversification of exports by offering blend of tax cuts, low-cost BNDES financing and trade-related policy measures including:Tax credits for exporters and fiscal incentives for local industryImposition of local content requirements Tariff and non-tariff barriers on imports across all industrial sectorsAdditional trade-related measures: Government to increase border controls against contraband and increase number of personnel investigating unfair trade practicesGreater efforts to confirm the origin of goods, aimed largely at Chinese exporters suspected of circumventing existing anti-dumping tariffs by shipping from third countriesGovernment warned it will cancel import licenses if products are not labeled with the correct country of originMore recently ….New Tariffs on 100 Products: In early September, Brazil's government raised tariffs on 100 products in a move designed to protect local industry (while remaining WTO-consistent). The target list includes steel and petrochemicals products, certain construction materials and food imports such as potatoes. The average tariff on the products will now run at approximately 25%. Criticism is, as withBrasilMaior, while all measures are WTO-consistent, raising tariffs on imports isn’t a long-term competitiveness strategy for strengthening domestic industry. IT Maior Announced in August, the program plans to develop the software industry as part of the broader BrasilMaior development strategy. The government will spend R$500 million to train software programmers and engineers. Part of the money will also be used as tax incentives for software companies as well as manufacturers of semiconductors and tablet computersThe Rousseff Administration has made local content a core component of BrasilMaior which reflects a pro-producer point of view vs. industrial consumers POV and thus shifts the focus away from improving the weak supply chain in the high-tech industry.
  • LABOR: Weak primary and secondary public education system as well as higher education…Shortage of skilled labor - Visa process is an item on the CEO Forum agenda so it continues to be raised at high levels btw our two governments….TAX:Rousseff administration has focused tax policy more on tax reductions – such as this week’s cut in electricity costs - than on the much needed simplification and consolidation of the tax system. Most importantly payroll tax cuts, reduction of taxes on fixed investments and recent announcement on reduction of high energy costs including reductions for the power sector. There has been talks on consolidation but no tangible progress to report. Perhaps in a 2nd administration.
  • Expansion of trade with Brazil has greatly overburdened the country’s airports, ports, rails, and roads – which weren’t operating optimally to being with. There have been a number of recent improvements in overall speed of customs processing in some venues in Brazil – an important achievement was the 2010 launch of a new, automated system for express delivery customs processing called SistemaRemessa – allows for paperless electronic clearance for express delivery goods. And the “green lane” pilot project to allow expedited clearance for pre-authorized shipments between the two airports. Visits of Brazilian customs officials to US logistics hubs share best practices here in US.But the inefficiencies has made movement of goods costly and time-consuming, resulting in interruptions in supply chains and contributing to an unpredictable business environment BUSBC has worked to support modernization of the customs regime in Brazil to bring “best practices” from the US and other countries by advocating a number of changes to the GOB. Here are just a few that, if implemented, could go long way to helping realize Brazil’s ability to serve as a logistics hub for the region:One rec is to institute universal risk mgmt procedures that currently exist in many countries including the US, to ensure a holistic and integrated approach to security concerns, as well as more consistent enforcement of taxes, duties. OEQ: Brazilian IRS is studying a pilot project for implementing a trusted shipper program which would enable RF to institute fully automated systems for both normal and express customs processing – minimizing human handling of payments which slows down process and can introduce element of uncertainty/unpredictability w/r/t to errors. AIRPORT CARGO: Many firms are hopeful that the wave of airport privatizations will help ameliorate cargo bottlenecks at the overburdened principal airports in SP, RJ and Campinas. Urgent need to: Increase personnel processing intake and upgrading and expanding physical infrastructure to include additional appropriate storage for special merchandise (pharmaceuticals, high value shipments, etc.). Express Delivery Reform - reduction of high flat tax on express imports and increase in stringent value limits on express shipments as well as lifting of prohibitions on commercial shipments.
  • Companies that do well are those that have made efforts to adapt to political realities I mentioned at the outset To better gain traction in the Brazilian market, many firms consider first entering into JVs….some publicly available examples chosen at random….For those with more aggressive plans or simply accelerate growth in the market, acquisitions…..
  • INDUSTRY ASSNS – carry clout due to history of working to represent interests. Culture of lobbying - while growing quickly – is still in developing. SECOND TIER: Especially to move into top 10! Partnering with smaller scale firms may be an easier initial point of entryConsider building a relationship elsewhere first, or being helpful in a 3rd market to facilitate entry into Brazilian market
  • Strategies for Success: Doing Business in Brazil Today

    1. 1. STRATEGIES FOR SUCCESS:DOING BUSINESS IN BRAZIL TODAY Cornell Club, NYC September 20, 2012 Gabrielle Trebat, McLarty Associates
    2. 2. Brazil Political Scenario2  Nearly 30 political parties, govern in fragile coalition  Weak and unwieldy Congress, heavy use of Presidential Decrees  Dilma with nearly 80% approval  October 2012 midterms  Lula looms – 2014  Corruption still a factor  Mensalão impact  Active, but not overly sophisticated, media  Practical populism = Dilma  Desire to be global stakeholder  Must succeed with social development goals, Games,
    3. 3. Market Opportunities3Rise of the Middle Class - class C expected to reach 113 million in 2014Opportunities in renewable energy, Oil & Gas - Pre-salt exploration 11th ANP round approved by President Rousseff and announced –May 2013 Pre-salt bid round – November 2013Agribusiness Belt boomIT and Digital InclusionRio 2016 Olympics: RJ State estimates 2011-2016 investments to reach US$50 bn throughPPPs Rail/Road/Port concessions - $66 billion package announced in August BNDES to provide funding for 80% of concessions Next round of airport privatizations – 3Q 2012 State/Municipal level projects Recife, Curitiba and Maringa (Parana) success stories
    4. 4. Assessing the Business Environment: Focus on Industrial Policy 4 Concerns with deindustrialization, competitiveness  Strengthening of Brazilian Real  China competition  Rising labor costs  Global slowdown  Desire to bolster industrial and human capacity Buy Brazil  2010 “Buy Brazil” policy - 25% price benefit in government procurement  2011 Plano Brasil Maior “Greater Brazil Plan” aimed at supporting local industry, trade- related measures  2012 New Tariffs on 100 products, IT Maior Local content requirements  65% local content requirements in oil & gas  Brazil seeks the best technology that is “Made in Brasil”  Job creation the goal, but want tech transfer  Need for partnerships/joint ventures with local companies
    5. 5. Brazil’s relationship with foreign investment today….5
    6. 6. Assessing the Business Environment: Talent, Tax6II. Opportunities for Technical Partnerships Urgent need to improve STEM higher education levels  Science Without Borders program to fund 100k Brazilian students seeking advanced degrees in STEM fields at U.S. universities. Early commitment to fund students and/or provide internships received from Boeing, Ch2MHill, Praxair, GE, Varian and Amgen among others “Hire Brazilian” quota requirements - and lengthy visa process for bringing in highly skilled foreign talent - exacerbates talent shortage and introduces element of unpredictability in project planningIII. Onerous Tax Regime Highly complex and burdensome; highest amongst Latin American nations for income, corporate and VATs While corporate tax rate at 34% is comparable to developed countries, the lack of tax consolidation gives rise to differing – and competing – levels of tax requirements at federal, state, and municipal levels. Foments “fiscal wars” among states vying for investment (i.e. ICMS and “guerras fiscais”) Receita Federal (Brazilian IRS) resistant to simplifying tax code for fear of losing much- needed revenue to fund pension system, social programs, infrastructure projects Note: the U.S. has no bilateral tax treaty (BTT) with Brazil
    7. 7. Assessing the Business Environment: Infrastructure7IV. InfrastructureInfrastructure bottlenecks, inefficiencies hamper growth…. And contribute to logistics costs reaching 12-15% of GDP in Brazil, compared to 5% average in countries like USA and Germany Only 6% of Brazil’s roadways are paved, compared to 54% in China and 80% in Russia ….while demand builds Rise of class C has increased demand for cars and household products, overwhelming capacity of roads to deliver the goods and warehouses to supply them Rising number of commodity exports snarling traffic in booming agribusiness belt Number of passengers using Brazilian airports rose 75% since 2007 But every challenge presents an opportunity…. In August, President Rousseff announced a $66bn concession package for rails, roads, and ports to be financed by BNDES. Additional package for airports and additional ports expected in September. While good news, be aware that…. Delays can be expected due to environmental licensing process, internal auditing procedures State bureaucracies could slow execution of project
    8. 8. Assessing the Business Environment: Trade Facilitation8V. Trade FacilitationProgress in recent years…. Remessa Expressa Green Lane Pilot Project Viracopos-Miami US-Brazil Commercial DialogueBrazil-US Business Council Customs Modernization Working Group: Adoption of universal risk management procedures, more consistent enforcement of taxes and duties Trusted Shipper Program – Authorized Economic Operator Upgrade Airport Cargo Infrastructure – insufficient personnel, poor physical infrastructure Reduction of 60% flat import tariff on express imports, raise stringent value limits on express shipments. No duties or taxes or formal documentation for shipments valued at less than $200. Facilitated customs treatment of critical industrial imports through automatic
    9. 9. Key to Success in Brazil9  Consider partnerships/joint ventures with Brazilian firms  Merck forged a partnership in 2012 with Brazilian drugmaker Supera Farma Laboratorios to jointly market 30 products.  Ch2M Hill and Metodo Engenharia form a partnership in 2010 to develop projects in the oil & gas sector  Consider acquisition of a Brazilian companies  China’s Lenovo purchased last week Brazilian electronics manufacturer CCE for R$300 million as part of its strategy to become Brazils top manufacturer of personal computers and unseat Brazilian-owned Positivo  Offer technology transfer, technical training, and/or local R&D activity to win procurement bid  France and Brazil signed a tech transfer accord in 2009 to build four conventional subs and one nuclear sub with DCNS SA and Odebrecht
    10. 10. Key to Success in Brazil10  Image matters - have an active government relations presence  Increasingly, Brasilia is where decisions are made that create market opportunities, impact investment trajectories, or otherwise alter the business environment  President Rousseff has prioritized a closer working relationship between Brasilia and the business community (e.g. CEO competitiveness “kitchen cabinet”)  Leverage industry associations  They carry clout/have access with government officials and offer cover for conveying key messages without appearing to cater to parochial interests  Focus on the second tier firms  The top 5-10 Brazilian firms in your sector don’t necessarily need US Partners; the next tier do  Top Brazilian firms are interested in partnering in the U.S. and elsewhere beyond Brazil  Remember the states  States and municipalities have money and greater flexibility for doing deals than the federal government
    11. 11. THANK YOU!gtrebat@maglobal.com

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