Doing Businessin Brazil

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Doing Businessin Brazil

  1. 1. Doing Business in Brazil
  2. 2. Brazil: Country Highlights <ul><li>Brazil has the largest economy in South America </li></ul><ul><li>Brazil, along with India & China has highest rates of growth </li></ul><ul><li>Since 2000 Brazil accounts for 52% of FDI into South America, the 2 nd largest FDI receiver </li></ul><ul><li>In 2002 Brazil had the 12 th largest economy </li></ul><ul><li>Brazil is cofounder of Mercosur & a key promoter of FTAA – A champion of free trade </li></ul>
  3. 3. Brazil – Geographic Info <ul><li>Brazil is 5 th Largest Country by Area </li></ul><ul><li>A land area of 8.5 million square Kms </li></ul><ul><li>A population of 172 Million </li></ul><ul><li>Equatorial weather with largest rain forest </li></ul><ul><li>Became a republic in 1889 </li></ul><ul><li>Divided into 5 regions and 26 states </li></ul><ul><li>A country of immigrants – Europeans, Africans, Asians & pacific islanders </li></ul>
  4. 4. Population & Labor <ul><li>In 2002, 24% of labor force employed in Agriculture, 56% in service sector & 20% in manufacturing </li></ul><ul><li>Population is migrating towards costal & urban centers, 81.7% of population live in cities </li></ul><ul><li>Brazil has 31 major metropolitan centers with population of greater than 1 million </li></ul>
  5. 5. Brazilian Economy <ul><li>Brazil is an emerging industrial-service economy, Agriculture accounts for less than 10% of GDP </li></ul><ul><li>Brazil initiated Market reforms since 1990’s </li></ul><ul><li>Inflation has fallen to 9.3% (still high) in 2003 from 2,708% in 1993 – “Real Plan” </li></ul><ul><li>Real Plan was initiated to stabilize economy in the aftermath of Contagion </li></ul><ul><li>Real was devaluated in 2001 & IMF extended $41 Billion loan to bail Brazilian economy </li></ul>
  6. 6. Real Stabilization Plan <ul><li>Real Stabilization Plan imposed a serious burden on Brazil’s growth </li></ul><ul><ul><li>During 1990 to 2001 Brazil’s economy grew by 8% from US$465 Billion in 1991 to $504 Billion in 2001 </li></ul></ul><ul><ul><li>In Contrast Chinese economy grew from $387 Billion in 1990 to $1.1 trillion in 2001 </li></ul></ul><ul><li>Brazil’s GDP declined in second half of 90’s </li></ul><ul><li>High interest rates & inflation is hurting growth </li></ul>
  7. 7. Economic Crisis of 2001 <ul><li>Real Stabilization plan imposed a high exchange rate against US Dollar to keep local prices under control </li></ul><ul><li>In 1999 nominal interest rates reached 45%, high debt level of 61% of GDP coupled with Asian Crisis & Mexican Peso crisis pressurized ‘Real’ to be devalued in 2001 </li></ul><ul><ul><li>$41 Billion loan from IMF in 2001 </li></ul></ul><ul><ul><li>$15.7 Billion loan in 2002, additional $30 Billion standby loan in 2002 </li></ul></ul><ul><li>High debt levels makes Brazil dependent on FDI </li></ul>
  8. 8. Comparison with Source: World Bank database 2002 26 30.2 90.7 Total Debt Service (% of exports) $34.9B $157B $223.8B PV of External Debt 3.4 22.4 18.6 High Tech Exports in Billions of USD 30.8 30.0 14.4 Imports of Goods & Services/GDP 31.8 27.6 13.4 Exports of Goods & Services/GDP $16.1B $171.2B $61.7B Exports 3.8% 5.5% 7.4% Annual Inflation 2.9% 3.5% 11.8% Real Interest Rate 3.2 4.4 1.5 GDP % Growth 63.5 617.8 502.5 GDP in US$ Billion Chile Mexico Brazil
  9. 9. A fragile Economy <ul><li>High levels of debt ($223.8 Billion) requires high debt servicing, 90.7% of exports </li></ul><ul><li>Brazil trails Mexico in terms of high tech exports & overall exports </li></ul><ul><li>Brazil had a lower growth rate all through 1990’s </li></ul><ul><li>Higher interest rates and inflation when compared to Mexico & Chile </li></ul>
  10. 10. Brazil’s Competitiveness <ul><li>Brazil is ranked: </li></ul><ul><ul><li>46 th in Growth Competitiveness Index (GCI) </li></ul></ul><ul><ul><li>35 th in Technology Index (TI) </li></ul></ul><ul><ul><li>45 th in Public Institutions Index </li></ul></ul><ul><ul><li>67 th in Macroeconomic Environment Index </li></ul></ul><ul><li>Korea in Comparison is 21 st in GCI, 18 th in TI, 10 th in Macroeconomic Environment Index </li></ul><ul><li>Brazil has upside potential to increase its competitiveness given its natural resources </li></ul>
  11. 11. Brazil’s Factor Endowments <ul><li>Brazil is rich in natural resources </li></ul><ul><ul><li>Land, minerals, Water, Forests </li></ul></ul><ul><li>Brazil has an advanced technology </li></ul><ul><ul><li>telecom infrastructure </li></ul></ul><ul><ul><li>Skilled labor </li></ul></ul><ul><ul><li>Indigenous technology sector </li></ul></ul><ul><ul><li>Booming Biotech Industry </li></ul></ul><ul><li>Brazil has established core sector </li></ul><ul><ul><li>Leading producer of Aluminum & Steel </li></ul></ul><ul><li>Brazil has a young & skilled population </li></ul><ul><ul><li>Over 250,000 are enrolled in Graduate program in 2002 </li></ul></ul>
  12. 12. Technology Focus <ul><li>Import Substitution program created a strong local industry </li></ul><ul><li>Government encouragement of Aerospace, biotechnology sectors has built strong tech sector </li></ul><ul><li>Brazil has built a strong engineering, Automobile, Aerospace industry </li></ul>
  13. 13. Firm Strategy and Rivalry <ul><li>Liberalization in 90’s and FTA agreements increased competitiveness of local firms </li></ul><ul><ul><li>Eg: Number of Auto models has increased from 40 to 400 </li></ul></ul><ul><ul><li>MNC’s, Local firms compete for customers with more than 70,000 consumer products </li></ul></ul><ul><li>Intense Rivalry at home market has helped firms like Norberto, Embraer Odebrecht etc to compete globally </li></ul>
  14. 14. Related & Supporting Industry <ul><li>Brazil’s Auto & Engineering industry is benefited by steel, rubber & auto parts industry </li></ul><ul><li>Brazil has a strong Agribusiness sector with chemicals, pesticides, seeds etc </li></ul><ul><li>A strong higher education system supplies industry with talented employees </li></ul>
  15. 15. Demand Conditions <ul><li>A strong home demand exists in Brazil </li></ul><ul><li>A population of 172 Million </li></ul><ul><li>A strong demand for consumer products, Autos etc at home supports expansion abroad by Brazilian companies </li></ul><ul><li>Free Trade Area agreement with other South American countries creates a larger market </li></ul>
  16. 16. FDI in Brazil <ul><li>Brazil attracts large amount of FDI </li></ul><ul><ul><li>$117 Billion in FDI from 1995-2000 </li></ul></ul><ul><li>US is the largest investor – Over 40% of FDI </li></ul><ul><li>MNC’s are the major source of FDI </li></ul><ul><li>80% of Fortune 500 firms have invested in Brazil </li></ul><ul><li>Government policies favor FDI & has abolished state monopolies </li></ul><ul><ul><li>Predictable & transparent rules reduces red tape </li></ul></ul>
  17. 17. FDI Incentives <ul><li>Government incentives encourage FDI </li></ul><ul><ul><li>70% of FDI are in services, 28% in manufacturing </li></ul></ul><ul><ul><li>Low wages & skilled labor availability </li></ul></ul><ul><ul><li>34% of banking is done by MNC banks </li></ul></ul><ul><li>Investments in Amazon region, Northeast region is tax exempt </li></ul><ul><li>Export Processing Zones created to promote FDI and exports </li></ul><ul><li>Investments in technology sector is exempt from income tax and has several other benefits </li></ul>
  18. 18. Foreign Trade <ul><li>Since 1990, Brazil has enacted radical changes in foreign trade policies </li></ul><ul><ul><li>Computerized trade documentation </li></ul></ul><ul><ul><li>Lowering of tariffs to 5-32% </li></ul></ul><ul><li>Custom clearance is still cumbersome </li></ul><ul><li>Restrictions on import of used cars, machinery & consumers products exist </li></ul><ul><li>Import of food & drug products require government clearances </li></ul><ul><li>Government purchases favors local production </li></ul><ul><li>Import restrictions on services </li></ul>
  19. 19. Free Trade Champion <ul><li>Founder Member of Mercosur (South American Free Trade area) </li></ul><ul><li>Active in promotion & creation of FTAA </li></ul><ul><li>FTAA will boost exports from Brazil </li></ul><ul><li>Brazil exports $60 billion worth goods to US in 2002 </li></ul><ul><ul><li>Steel, Chemicals, Soy, Paper & pulp, coffee etc </li></ul></ul><ul><li>US accounts for 24% of Brazil’s exports, Argentina accounts for 10% </li></ul><ul><li>Brazil contributes just 0.9% of global trade </li></ul>
  20. 20. Infrastructure - Transportation <ul><li>Infrastructure varies largely based in economic disparities </li></ul><ul><ul><li>Urban centers in South & South east have good facilities </li></ul></ul><ul><ul><li>Rural areas are quite undeveloped </li></ul></ul><ul><li>Road transportation accounts for 63% freight </li></ul><ul><ul><li>1.7 million kms of roads, only 10% is paved </li></ul></ul><ul><li>Rail transport is very limited </li></ul><ul><ul><li>Only 28,000 Kms </li></ul></ul><ul><li>Air & Waterways are still developing </li></ul>
  21. 21. Infrastructure - Telecom <ul><li>Telephone services was privatized in 1990’s </li></ul><ul><li>High growth seen in cellular networks </li></ul><ul><ul><li>29.2 million Cell phones </li></ul></ul><ul><li>Less than 3% of population have internet access. </li></ul><ul><ul><li>Digital divide is a major problem </li></ul></ul><ul><ul><li>E-Commerce is developing slowly </li></ul></ul>
  22. 22. Infrastructure - Power <ul><li>Installed capacity of 65,000 MW – Mostly Hydroelectric </li></ul><ul><li>Power shortages exist </li></ul><ul><li>Building new gas based power plants </li></ul><ul><li>Experimenting with Ethanol – A sugarcane byproduct as fuel </li></ul><ul><li>Bolivia-Brazil Gas pipeline will help ease energy shortages by supplying 30 million cubic meters per day </li></ul>
  23. 23. Consumer Markets <ul><li>Consumer expenditure in year 2002 was $300 billion! – Largest in S.America </li></ul><ul><li>Sao Paulo region alone accounted for $96 billion </li></ul><ul><li>Rio de Janeiro accounted for $35 billion </li></ul><ul><li>Unequal income distribution is hampering consumer sales </li></ul><ul><li>Only 17.4% of population have bank accounts </li></ul><ul><ul><li>About 30 million people </li></ul></ul><ul><li>Rural consumption is very low </li></ul>
  24. 24. Consumption patterns <ul><li>Class A & B – Upper class & Upper middle class accounts for 52% of consumption </li></ul><ul><ul><li>Class A & B make 10 times or more of the minimum wages </li></ul></ul><ul><li>Class C consumers ( 4-10 times the minimal wages) account for 28% of consumption </li></ul><ul><li>Class D & E ( 1-3 times the minimum wages) account for the rest 20% </li></ul><ul><li>Local products, Local brands concentrate on Class C & lower consumers (30% of market) </li></ul>
  25. 25. Privatization <ul><li>Brazil had a huge state owned enterprises </li></ul><ul><li>Privatization started in 1990’s raised $105 billion </li></ul>
  26. 26. Culture <ul><li>Brazil is multi-cultural with Africans, Arabs, Europeans & Native Americans </li></ul><ul><li>As a whole Brazilians favor conciliation and tolerance </li></ul><ul><li>Avoid direct confrontation and are good hosts </li></ul><ul><li>Pay importance to relationships </li></ul><ul><li>Value family ties but are individualistic </li></ul><ul><li>Brazilians take time to trust foreigners </li></ul><ul><li>Facial gazing & touching is common </li></ul>
  27. 27. Culture and Business
  28. 28. Hot Sectors – Oil & Gas <ul><li>Investments is encouraged in hot sectors which offers excellent opportunities for investors </li></ul><ul><li>Oil & Gas Exploration & drilling </li></ul><ul><ul><li>State owned enterprise Petrobras has 49% market share, Private sector controls the rest </li></ul></ul><ul><ul><li>15% growth rate, contributes 5.7% of GDP </li></ul></ul><ul><ul><li>Opportunities in offshore drilling, offshore equipment, and services </li></ul></ul><ul><ul><li>Rising energy demand promises good returns </li></ul></ul><ul><ul><li>Oil & Gas equipment market is estimated at $6 billion </li></ul></ul>
  29. 29. Hot Sectors – Banking <ul><li>Inadequate banking services offers excellent opportunity in retail banking </li></ul><ul><ul><li>About 60 million bank accounts currently exist </li></ul></ul><ul><ul><li>6 MNC banks have 33% of market share </li></ul></ul><ul><li>Banking sector accounts for 8.6% of GDP </li></ul><ul><li>Increasing middle class will attract more retail banks </li></ul><ul><li>Market for financial services is growing </li></ul>
  30. 30. Hot Sector - Automobiles <ul><li>Brazil’s transportation sector depends on roads </li></ul><ul><li>Brazil has about 15 car manufacturers </li></ul><ul><li>Low cost labor and high quality is promoting auto parts industry primarily for exports </li></ul><ul><li>2002 revenues in auto parts exports was $11 billion </li></ul><ul><li>MNC’s control 69% market share Auto parts </li></ul>
  31. 31. Hot Sector – Pharmaceuticals <ul><li>Brazil is the largest market for Pharmaceuticals – 2002 market was $5.2 Billion </li></ul><ul><li>Imports $2.5 Billion worth of medicines and drugs </li></ul><ul><li>Generic drugs are gaining popularity and accounts for 30% of the market </li></ul><ul><li>MNC investments are for generic drugs </li></ul>
  32. 32. Hot Sector – Power & Telecom <ul><li>Brazil’s expansion in gas based power plants has created a market for electric power equipment - $2Billion a year </li></ul><ul><li>Alternatives such as renewable sources such as solar power equipment is being encouraged </li></ul><ul><li>Privatization is enabling a fast growth in telecom sector </li></ul><ul><ul><li>Currently, 40 million land lines, 29 million cell phones </li></ul></ul><ul><ul><li>Total revenues of $8 Billion </li></ul></ul>
  33. 33. Hot Sector - Retailing <ul><li>Brazil has a sophisticated retail sector with self service type stores and giant retailers like Wal-Mart & Carrefour etc. </li></ul><ul><li>FDI in retail sector was $1.6 billion in 2001 </li></ul><ul><li>Brazil’s retailing sector is no par with US and Europe </li></ul><ul><li>Opportunity exists in food retailing and targeting class C consumers </li></ul><ul><li>A strong TV media helps advertisers and FDI in TV & other media is encouraged </li></ul>
  34. 34. IT Services & Computers <ul><li>Brazil lags other countries in IT infrastructure, computer usage and Internet access </li></ul><ul><li>Government encouragement will help grow IT sector </li></ul><ul><li>Sales of computers and IT related goods and services is estimated to be $14 billion in 2003 </li></ul><ul><li>Digital divide (caused by wide disparity in income levels) is pulling down Brazil’s IT sector </li></ul>
  35. 35. Closing Thoughts <ul><li>Brazil is a country of contrasts. </li></ul><ul><ul><li>A high tech industry in Aviation, deep sea oil exploration, machinery etc </li></ul></ul><ul><ul><li>Yet 34% of population live below poverty line </li></ul></ul><ul><ul><li>Income disparity is very high </li></ul></ul><ul><li>Economic liberalization is driving the economy </li></ul><ul><ul><li>Increasing the fiscal discipline, controlling inflation, & lowering deficits is the key for economic stability </li></ul></ul><ul><ul><li>Higher Social investments in education and health care is needed </li></ul></ul><ul><ul><li>Government is also pursuing spending plans to increase wages, aid to farmers </li></ul></ul>
  36. 36. <ul><li>Brazil’s current economic growth and stability can be upset by: </li></ul><ul><ul><li>High spending plans which is ballooning domestic debt </li></ul></ul><ul><ul><li>High real interest rates in hampering investments </li></ul></ul><ul><ul><li>Pension fund & tax reforms are urgently needed </li></ul></ul><ul><li>Globalization and exports are key for Brazil’s economy </li></ul><ul><li>Brazil needs to address the medium term economic issues for future success </li></ul>

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