FDI in B2B Travel in Brazil


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Using a fictitious B2B Online Travel Organization, this research paper explains why doing a foreign direct investment in Brazil, in the Travel industry, is a judicious decision. All the facts presented in the paper are true and validated. However, organizations used for explaining the FDI process are fictitious and any resemblance to an existing organization is a co-incidence. Please email me at ankurdineshsharma@gmail.com for any further information and/or details on this.

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FDI in B2B Travel in Brazil

  1. 1. International Business FDI of TripOn in Brazil *Prepared for an International Business Project of Indian Institute of Management, Calcutta (IIM-C) For more information, please contact: Ankur Sharma ankurdineshsharma@gmail.com +91 9886403253 Follow me @ankurdinesh http://ankursharma.co.in/
  2. 2. About TripOn  We are a white-label B2B travel solutions company that provides easy to customize travel products and services to our partners  We have been a leader in privately branded Internet travel programs for over 5 years  Largest B2B that provides travel white-label services in India  Few of our partners in India include - cleartrip.com, jetairways.com, takemytrip.com etc. whom we provide our hotel services  “We build your brand, not ours”, as we have no competing website
  3. 3. Product Overview Sales Service UI Feeds Phone Comments Hotel Our biggest product! Air Air + Hotel 5/13/2010
  4. 4. Transaction Type Flow Search Engine Customer PropertyInformation Customer PropertyAvailability Customer PropertySearch RateRules BookReservation Customer ViewReservation CancelReservation Customer 5/13/2010
  5. 5. The Online Travel Agency (OTA) Industry  OTA’s provide consumers with online availability and reservation capabilities for a wide range of travel products, including airline tickets, hotel and resort rooms, car rentals, cruises, vacation packages, and various other leisure and business travel services.  Data and research shows that, 83% use the internet to research and purchase travel. That is a lot. So basically, between 8 and 9 people out 10 use technology for their travel research. (US data)  The travel industry is divided into 2 segments:  Managed business travel (also referred to as corporate travel)  Leisure/unmanaged business travel.
  6. 6. The Online Travel Agency (OTA) Industry  Online travel revenues in Asia-Pacific, Europe and the US, 2006-2010 (% of total travel):
  7. 7. TripOn Plans to enter Brazil  TripOn will be entering Brazil through a JV with the local Brazilian OTA viagemfeliz.com  The Brazilian company is a pure online air travel company. We will be partnering with them to provide technology platform and know-how on hotel bookings online  viagemfeliz.com is specialized online flight booking agent with 20% market share in Brazil.
  8. 8. TripOn Plans to enter Brazil  The other major market players are submarino and Decolar (Despegar). Submarino has a 63.5% market share in the OTA segment covering the following:  International and Domestic:  Hotel  Air  Packages (Air + Hotel)  Domestic  Bus Tickets  Rail Tickets  MICE (Meetings, Incentives, Conferences & Exhibitions)  The strategic JV will leverage viagemfeliz.com’s brand in the Brazilian market to compete with submarino in the areas viagemfeliz.com is not a player currently.
  9. 9. Why Brazil  The primary considerationsfor investing in brazil are:  Travel and tourism market is growing  Investment environment is positive
  10. 10. Travel & Tourism Industry in Brazil  Travel is very important for a country that’s the size of Brazil. It has 3,581 airports, 3,024 of which are usable.  More than 3 million Brazilian and foreign visitors boosted hotel occupancy in the North-eastern states from 43% in 2008 to 67% in 2009.  In 2009 some 8,235,000 passengers flew to Brazil, an increase of 14.5% from 2006, and about the same number flew out of Brazil.  Brazilis replete with tourism attractions like the Amazon; the wildlife- packed Pantanal wetlands; 8,850 kilometers of superb Atlantic coastline, white sand beaches ,the waterfalls at Foz do Iguaçu. Brazil has one of the world's most spectacularly located cities, Rio de Janeiro, which hosts the annual Mardi Gras Carnaval (Carnival); one of the largest cities.
  11. 11. Travel & Tourism Industry in Brazil  The Brazilian Tourism Agency (Empresa Brasileira de Turismo--Embratur) found that 82.6% of those who came to Brazil in 2008 came for tourism; the rest came for business, conferences, and conventions, including Eco-92.  In 2009 about 5.6 million foreign visitors traveled to Brazil.  Since the United Nations-sponsored Rio Earth Summit (Eco-92) in 1992, the Brazilian government has targeted ecotourism as a priority.  Brazil’s tourism industry has benefited greatly from the announcement of several high profile events to be held in the country.  The 2014 FIFA World Cup is set to be a huge draw for visitors  The addition of the 2016 Olympics in Rio de Janeiro will further boost the sector.
  12. 12. Online Hotel Market in Brazil  Online hotel booking market in Brazil is $65 million in 2009  Expected to grow to $135 million by 2013  Plan to achieve about 20% of this market by 2013  CAGR in hotel online industry is 24% in next 3 years
  13. 13. Conducive Economic Situation  Among the last in and first out countries from the major economy downturn.  Likely to become the worlds 5th largest economy, overtaking Britain and France. *Goldman Sachs  The economy has been open to Foreign trade and investment and many state industries are privatized.  Foreign investment is pouring in, attracted by a market boosted by falling poverty and a swelling lower-middle class.  FDI in brazil was 30% up in 2009 even as FDI inflows into the rest of the world fell by 14%  After 25 years of weak and unstable growth, Brazil faced the world crisis with increasing levels of production, income and investment.
  14. 14. Conducive Economic Situation Real GDP Growth (% py) From 2003 to 2008, Brazilian economy grew 27.4%, at an average of 4.1% per year.
  15. 15. Factors affecting a business entering Brazilian Market Political  Politicians have begun to see travel and tourism as a major industry.  Government is encouraging foreign investment in tourist facilities in Amazônia. The Ministry of Commerce, Industry, and Tourism includes a cabinet-level official in charge of tourism policies.  In January 2010, the government said it would invest BRL 1 Billion to improve facilities throughout the country ahead of the World Cup.
  16. 16. Factors affecting a business entering Brazilian Market Economic  The actual investment figures - recently released by Brazil's Statistical Agency (IBGE) - read as follows: 6.6% increase in investment in Brazil, 2% GDP growth and 7.7% rise in household consumption expenditure.  In 2009, favorable exchange rates, a rapidly growing middle class and non-stop investment in promotional activity and infrastructure were key to boosting sales of domestic as well as international package holidays. It is worth noting, however, that travel and tourism businesses which capitalized on foreign destinations benefited the most over the year, mainly as a result of favorable exchange rates.  The 2% growth in Brazil's GDP during Q4 2009 is, according to Bloomberg, the fastest economic expansion in two years
  17. 17. Factors affecting a business entering Brazilian Market Economic Contd.  Brazil's GDP grew from April to December last year - confirms that Brazil's economy is back on track for high growth.  Many economic analysts are expecting four strong quarters - the Brazilian government is predicting over 5.7% this year with most other forecasts hovering between 5.5% and 6%.  Forthose companies that plan to venture abroad, more travel will be done in places where the dollar is strongest.  Brazil has a double taxation treaty with India.
  18. 18. Factors affecting a business entering Brazilian Market Social  In the early 1990s, about 6 million jobs were linked to Brazil's travel and tourism industry.  The industry isone of the country's biggest employers, involving one in every eleven workers.  It contributes an estimated 8% to the country's GDP.  Nearly 50% of the population is under twenty years of age ready to adapt new changes in technology and with increased levels of income
  19. 19. Factors affecting a business entering Brazilian Market Technology  In year 2009, Brazilhad an internet penetration of 38% - higher than any other than developing nation  Internet sales are projected to grow significantly as new purchasers increasingly come online for the first time. The travel industry will begin to accommodate Latin America’s emerging middle class tourists and business travelers.  Above 80% of Brazil’s population has mobiles and the impact of the mobile phone would be as follows:  Increasing numbers of travelers in the future will book accommodation only on arrival because of the growing use of mobile phones.  Consumer behavior will change so people are comfortable getting on a plane without a hotel, knowing they can book one on their mobile device when they get there.
  20. 20. FDI rules in Brazil  Foreign capital may freely enter Brazil and is treated like local capital.  Legally registered companies, foreign or domestic, enjoy the same rights and privileges, and they compete on an equal footing when bidding on contracts or seeking government financing.  Expatriating profits out of the country is not an issue in Brazil.  The present Company Law 6404 was passed in 1976, the same year the Securities Commission (Comissão de Valores Mobiliários.CVM) was created.  Both the laws were designed to protect minority shareholders, strengthen stock markets and facilitate the formation of conglomerates. The law introduced new corporate concepts to Brazil, including those of a controlling shareholder and the mandatory distribution of dividends.  According to the central bank, FDI flows climbed to US$21.52bn during 2005, up from US$20.27bn in 2004 and just US$12.90bn in 2003.  The sectors receiving the highest inflows during 2005 were services (US$2.98bn), retail (US$2.10bn), and food and beverages (US$2.07bn).
  21. 21. Incentives to invest in Brazil  FDI in Brazil is normally accompanied by multiple incentives offered by the state and local governments.  For example: Brazil is famous for its “guerra fiscal” (or “tax reduction wars”) in which the states compete with each other to offer the largest tax-incentives to foreign companies.  Law 11,196, published on November 22nd 2005, gives special tax breaks and other incentives to export firms and to investments geared to technology. Research-and-development projects and information technology also qualify for some direct assistance and tax relief
  22. 22. Establishing a local company in Brazil  Foreign firmsmay engage in business in Brazil by acquiring an existing company or by forming a local subsidiary.  FDI inflows into Brazil were attracted mostly by the size of the vast domestic market and also by favorable government policies  It has been observed that the FDI inflows into Brazil favored the capital intensive or technology intensive industrial production sectors of the economy.  Majority ofthe Brazilian politicians view FDI as an employment generating avenue and also as a modernizing vehicle for the Brazilian
  23. 23. Positive Sentiments for FDI in Brazil
  24. 24. How TripOn plans to operate  Use available platform technical know-how with knowledge capital in India  Leverage viagemfeliz.com brand and online reach with no or little spend in marketing  Competitive pricing & local language support for customer support  Employ domestic employees for Business development as the aim is to reach out to hotels of both tier-1 and tier-2 destinations.
  25. 25. Risks  High Labour Market Rigidity - Brazil has some of the highest hiring costs in the world, forcing employers to commit large sums to pension funds and to pay enormous penalties for firing workers.  TripOns expenditure in hiring will be primarily in business development and marketing. Expenditure in technology necessary only in adoption to portugese.  Existing Major players  TripOn plans to promote the tier-2 locations focusing primarily in the high margin hotel market
  26. 26. Conclusion TripOn wants to establish itself as an international B2B hotel services provider and the JV with viagemfeliz.com will provide them an ideal platform to start this journey with minimal risk and maximum leverage
  27. 27. Thank You!