Brazil: Opportunities abound, plus high labor costs, taxes and other challenges

Here’s how fast Brazil’s economy has been growing in recent years: So many people have joined the middle class and now buy private health insurance that there’s not enough private hospitals or doctors to treat them all.

Unemployment is so low and professionals so needed nationwide that skilled personnel are now being imported from Portugal, Spain and other nations to fill posts in health and other technical fields.

Those were among highlights of a panel discussion on “Brazil: The World is Watching,” at WorldCity’s Global Connections held Sept. 27 and attended by more than 80 people.

Today, Brazil ranks as the world’s seventh largest economy. It is Florida’s top trade partner. And it’s poised for world attention, when it hosts the soccer World Cup in 2014 and Summer Olympics in 2016.

The economy has been sprinting so fast in recent years – with infrastructure and public services failing to keep pace – that growth now is slowing to levels that seem more sustainable, panelists said.

Paula Arnaldo, executive director for researcher IBOPE Inteligencia International, responsible for market research for Latin America. Photos by Carlos Miller

“It’s hard to stay at that [speedy] rhythm all the time,” panelist Paula Arnaldo, executive director for researcher IBOPE Inteligencia International, responsible for market research for Latin America.

Brazil’s surging middle class now is demanding more accountability from government, even taking to the streets earlier this year in mass protests. Taxpayers are asking: “Where is the money is going?, Why should I pay for this corruption and overbidding [on contracts such as World Cup soccer stadiums]?”, said Arnaldo.

High salaries and fringe benefits

For multinationals, the talent crunch means paying higher salaries – on top of hefty fringe benefits long required by Brazil’s generous labor laws and also, on top of Brazil’s legendary tax burden, panelists said.

It’s typical in Brazil today for employers to pay 21 percent payroll tax for public health and social security, another 37 percent in other taxes, as well as 10 percent for private health insurance, plus cash for private pensions, said panelist and human resources specialist Walter Zucca.

Walter Zucca, a senior consultant at Aon Hewitt, said Brazil forces employers to pay high taxes.

“Some clients ask: “How does that work?” And I like to say, “It doesn’t work,”’ joked Zucca, a senior consultant at Aon Hewitt, who works on benefits packages with multinational companies.

For motorcycle maker Harley-Davidson, costs for fringe benefits run “about four times as much in Brazil as we see in the United States and elsewhere,” said panelist Mark Van Genderen, Harley’s vice president and managing director for Latin America.

High labor costs mean that Harley, like many multinationals, is cautious not to over-hire in Brazil. And the company also adds new stores in Brazil conservatively – trying to keep its dealership count at levels that can weather lower economic growth rates, said Van Genderen.

Helping stoke Brazil’s economy is China’s appetite for its metals and foodstuffs and Washington’s policy to keep interest rate low. But what happens when U.S. interest rates rise?, asked audience member Pete Fernandez, a principal with Bernstein Global Wealth Management.

For Harley, a more immediate concern is foreign exchange rates, which have swung 35 percent or more in recent years, said Van Genderen. They matter, because Harley’s accessories pay high import duties. The mix of an expensive dollar and taxes can push the retail price of a Harley jacket that sells in the United States for $300 up to $1,000 in Brazil – out of reach for most customers, said Van Genderen.

With such steep costs in Brazil, how long will it take for multinationals now investing there to make their money back, so they can expand elsewhere in Latin America?, asked Marta Clark, vice president for Latin America and the Caribbean for software maker Adobe.

“I assume companies are making a lot of money in Brazil,” said Zucca.

“You’d like to think that,” quipped Van Ganderen.

Short term, labor costs will remain high in Brazil, Zucca said, partly because of a shortage of managers with strong English-language skills. Importing talent has limits too. To master Brazil takes Portuguese – a language not widely spoken in any other nation in the Americas.

It’s not just U.S. companies tapping the Brazilian market either. In recent years, China has overtaken the United States in annual investment into Brazil, Zucca said.

Adapt to the local culture

Still, not all multinationals succeed in the South American country. Brazilians want products adapted to their unique culture, Ibope’s Arnaldo said. Blue jeans with American-style cuts have flopped in a land known for form-fitting styles, though McDonald’s has caught on as a place where chatty, meat-loving Brazilians can socialize.

U.S. companies also face legal challenges in Brazil. Labor laws tend to favor workers and boost chances for employee lawsuits. Plus, U.S. companies must adhere to Washington’s Foreign Corrupt Practices Act, while rivals can engage in bribes that earn them Brazilian contracts, said audience member and international attorney Michael Liberatore.
Mark Van Genderen, vice president and managing director for Harley Davidson in Latin America, said foreign exchange rates and high import taxes cause merchandise to cost more in Brazil than in the U.S.
Despite hurdles, opportunities are so huge that Brazil can’t be overlooked. Consider that some 35 million Brazilians had private health insurance in 2006, and at least 46 million do now, said Zucca.

Little wonder then that Minnesota-based UnitedHealth Group last year agreed to buy Brazil’s largest health care company for nearly $5 billion, Zucca said, tapping what UnitedHealth called “the largest and fastest-growing health care market in the Americas” outside the United States.

Van Genderen’s advice for those doing business in Brazil: “Plan for success, but have in your hip pocket that it is still a volatile market.”

Global Connections is one of six event series organized by media company WorldCity to bring together executives on international business topics. The Global series is sponsored by real estate company Waterford at Blue Lagoon, Florida International University Business, public relations firm Edelman and air-conditioning maker Daikin McQuay.

The next Global session is WorldCity’s Latin America Energy Forum, set for Oct. 25.