Brazil’s future bright but “Brazil cost” remains knotty
Multinationals doing business in Brazil expect revenue growth to continue for at least the next five years, buoyed by GDP increases and an expanding middle class, as well as the 2014 soccer World Cup and the 2016 Olympics.
But, the country still faces challenges such as over-regulation of small businesses, a complicated tax structure, lagging infrastructure and a wide social gap, plus a potential trade war with the U.S., according to panelists at WorldCity’s March 26 Global Connections event.
“We expect as a company that Brazil is going to be growing in double digits at least until 2017,” said panelist Wilson Grava, vice president of sales, Latin America, for software company Symantec, and a Brazilian.
Symantec, the world’s third-largest software company behind Microsoft and SAP and which makes software including the popular Norton security suite, has been investing heavily in Brazil, its largest market in Latin America. Overall, the country accounts for half the IT industry in Latin America, according to market intelligence firm International Data Corp.
The country is an equally important market for appliance maker Electrolux, said panelist Joao Claudio Guetter, the Swedish company’s Major Appliances’ president for Latin America and the Caribbean.
“Brazil [represents] in the appliances business almost 50 percent of the demand in Latin America,” said Guetter, also a Brazilian. “Our company believes that we are going to have a very good run in Brazil.”
Electrolux’s factories in the country (it produces almost all of what it sells in Brazil in-country) are at capacity, with the local market buying everything. “If we could produce 10 percent more, we could sell 10 percent more,” Guetter said.
Companies not in Brazil are eyeing the country closely, looking for the best strategy to enter.
Panelist Milton Torres, managing director, Latin America for Office Depot, says his company estimates it could gain a $24 billion share of the office supplies market there.
“We really see it as a market with great potential, and our goal for the Olympics is to be the No. 1 office supplier by then,” said Torres, a Brazilian hired to help get the country into South America’s largest market. “The issue is … to find the right company to buy.”
With the office supplies market highly fragmented, Office Depot is looking for a local partner to help it with the nuances of the local industry, on-the-ground strategy and the right people. In fact, all the panelists agreed that partnering with or purchasing a local company is key to successfully entering the Brazilian economy.
*The ‘Brazil Cost’*
While they were universally optimistic about Brazil’s near-term future, all participants cautioned that government spending has been rising faster than GDP growth, yet at the same time, many Brazilians have remained untouched by economic advances. “The gap is still very high between the social classes, between regions,” Guetter said. “You have a lot of rich people, but you have a bunch of poor people.”
And then there is the “Brazil cost.” The country is still mired in expensive, multi-layered taxes and heavy regulation.
“You need to be a scientist to deal with the taxes in Brazil,” Torres said. Plus, he said, it takes on average 140 to 180 days to start a business, “and if you try to shut it down, it could take the rest of your life.” Guetter added that labor laws which date back to 1945 make it difficult to hire people, and almost impossible to fire them.
Those factors drive many small- to medium-sized companies into the informal economy, which is believed to represent as much as 40 percent of all Brazilian output — compared to 20 percent in a country like China. And, Torres said, estimates show that, along with more than 6 million registered small companies, there there may be as many as 12 million unregistered ones in Brazil. He said bringing those companies out of the shadows so they can better drive employment growth is key to the counry’s long-term health.
*A Possible Trade War*
Brazil is Florida’s (and Miami’s) top trade partner, but there are still barriers to imports.
Tariffs have been lowered — for instance, Guetter says, duties on appliances have dropped from 40 or 50 percent to around 20 percent. And pretty much anything can be imported into the country. Yet, getting Customs clearance, filling out paperwork, paying harbor and port fees and hiring an agent to shepherd imports through the system are all expensive and time-consuming.
Importing products into Brazil is not expected to get any easier or less costly. In fact, it is about to get more expensive for some companies, said trade attorney Jennifer Mulvaney of law firm Sandler Travis & Rosenberg, who is based in Washington but attended the event.
In a trade dispute that has been underway since 2002, the World Trade Organization recently authorized Brazil to raise tariffs on imports of 102 U.S. products, in retaliation for U.S. cotton subsidies. The tariffs were set to go into effect on April 7, and cover around $590 million of U.S. products.
While it’s possible that the U.S. Congress will introduce legislation to change cotton subsidies, the industry is exerting tremendous pressure against such changes. And, if the two countries do not reach an agreement on the cotton tariffs, Brazil could suspend intellectual property rights in areas such as pharmaceuticals and entertainment.
Beyond that, some U.S. legislators are talking about possibly excluding Brazil from the Generalized System of Preference program when it comes up for renewal later this year. The program allows that nation to export a large number of items into the United States duty free. It’s not a trade war yet, but one may be afoot, and “a trade war is never good,” Mulvaney said.
*No Dimming of Future Prospects*
Remarkably, the potential of a trade war with the U.S. is unlikely to dim Brazil’s prospects.
After all, Goldman Sachs, which coined the term “BRIC” nations to refer to Brazil, Russia, India and China as coming world powers, projects it will have the world’s fifth largest economy by 2014. It has the one of the largest supplies of fresh water in the world, is expected to be a major exporter of oil in 20 years and has the largest square footage of forest land in the world.
“That is going to be precious,” Grava said. “There is so much potential that we are basically probably in the infancy of what the country has.”
In fact, with Brazil’s GDP predicted to grow faster than the rest of Latin America’s and faster than the global average for at least the next five years, none of the participants see much risk in their companies’ investments in that country. “Finally, it is possible that we can think about the long-term in Brazil, because five or six years ago we could not do that,” Grava said.
Global Connections is sponsored by Florida International University’s Chapman Graduate School of Business and the Waterford. The next event, with the theme Social Media in Latin America and the Caribbean, is Oct. 30.