Doing Business in Brazil
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Transcript of Doing Business in Brazil
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Doing Business in Brazil
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Brazil: Country HighlightsBrazil has the largest economy in South
AmericaBrazil, along with India & China has highest
rates of growthSince 2000 Brazil accounts for 52% of FDI
into South America, the 2nd largest FDI receiver
In 2002 Brazil had the 12th largest economyBrazil is cofounder of Mercosur & a key
promoter of FTAA – A champion of free trade
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Brazil – Geographic InfoBrazil is 5th Largest Country by AreaA land area of 8.5 million square KmsA population of 172 MillionEquatorial weather with largest rain forestBecame a republic in 1889Divided into 5 regions and 26 statesA country of immigrants – Europeans,
Africans, Asians & pacific islanders
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Population & LaborIn 2002, 24% of labor force employed in
Agriculture, 56% in service sector & 20% in manufacturing
Population is migrating towards costal & urban centers, 81.7% of population live in cities
Brazil has 31 major metropolitan centers with population of greater than 1 million
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Brazilian EconomyBrazil is an emerging industrial-service
economy, Agriculture accounts for less than 10% of GDP
Brazil initiated Market reforms since 1990’sInflation has fallen to 9.3% (still high) in 2003
from 2,708% in 1993 – “Real Plan” Real Plan was initiated to stabilize economy in
the aftermath of ContagionReal was devaluated in 2001 & IMF extended
$41 Billion loan to bail Brazilian economy
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Real Stabilization PlanReal Stabilization Plan imposed a serious
burden on Brazil’s growth During 1990 to 2001 Brazil’s economy grew by
8% from US$465 Billion in 1991 to $504 Billion in 2001
In Contrast Chinese economy grew from $387 Billion in 1990 to $1.1 trillion in 2001
Brazil’s GDP declined in second half of 90’sHigh interest rates & inflation is hurting
growth
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Economic Crisis of 2001Real Stabilization plan imposed a high exchange rate
against US Dollar to keep local prices under controlIn 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 $41 Billion loan from IMF in 2001 $15.7 Billion loan in 2002, additional $30 Billion standby
loan in 2002High debt levels makes Brazil dependent on FDI
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Comparison with Brazil Mexico Chile
GDP in US$ Billion 502.5 617.8 63.5
GDP % Growth 1.5 4.4 3.2
Real Interest Rate 11.8% 3.5% 2.9%
Annual Inflation 7.4% 5.5% 3.8%
Exports $61.7B $171.2B $16.1B
Exports of Goods & Services/GDP
13.4 27.6 31.8
Imports of Goods & Services/GDP
14.4 30.0 30.8
High Tech Exports in Billions of USD
18.6 22.4 3.4
PV of External Debt $223.8B $157B $34.9B
Total Debt Service (% of exports)
90.7 30.2 26Source: World Bank database 2002
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A fragile EconomyHigh levels of debt ($223.8 Billion) requires
high debt servicing, 90.7% of exports Brazil trails Mexico in terms of high tech
exports & overall exports Brazil had a lower growth rate all through
1990’sHigher interest rates and inflation when
compared to Mexico & Chile
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Brazil’s CompetitivenessBrazil is ranked:
46th in Growth Competitiveness Index (GCI) 35th in Technology Index (TI) 45th in Public Institutions Index 67th in Macroeconomic Environment Index
Korea in Comparison is 21st in GCI, 18th in TI, 10th in Macroeconomic Environment Index
Brazil has upside potential to increase its competitiveness given its natural resources
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Brazil’s Factor EndowmentsBrazil is rich in natural resources
Land, minerals, Water, ForestsBrazil has an advanced technology
telecom infrastructure Skilled labor Indigenous technology sector Booming Biotech Industry
Brazil has established core sector Leading producer of Aluminum & Steel
Brazil has a young & skilled population Over 250,000 are enrolled in Graduate program in 2002
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Technology FocusImport Substitution program created a strong
local industryGovernment encouragement of Aerospace,
biotechnology sectors has built strong tech sector
Brazil has built a strong engineering, Automobile, Aerospace industry
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Firm Strategy and RivalryLiberalization in 90’s and FTA agreements
increased competitiveness of local firms Eg: Number of Auto models has increased from 40
to 400 MNC’s, Local firms compete for customers with
more than 70,000 consumer products Intense Rivalry at home market has helped
firms like Norberto, Embraer Odebrecht etc to compete globally
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Related & Supporting IndustryBrazil’s Auto & Engineering industry is
benefited by steel, rubber & auto parts industryBrazil has a strong Agribusiness sector with
chemicals, pesticides, seeds etcA strong higher education system supplies
industry with talented employees
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Demand ConditionsA strong home demand exists in BrazilA population of 172 MillionA strong demand for consumer products,
Autos etc at home supports expansion abroad by Brazilian companies
Free Trade Area agreement with other South American countries creates a larger market
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FDI in BrazilBrazil attracts large amount of FDI
$117 Billion in FDI from 1995-2000US is the largest investor – Over 40% of FDIMNC’s are the major source of FDI80% of Fortune 500 firms have invested in
Brazil Government policies favor FDI & has
abolished state monopolies Predictable & transparent rules reduces red tape
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FDI IncentivesGovernment incentives encourage FDI
70% of FDI are in services, 28% in manufacturing Low wages & skilled labor availability 34% of banking is done by MNC banks
Investments in Amazon region, Northeast region is tax exempt
Export Processing Zones created to promote FDI and exports
Investments in technology sector is exempt from income tax and has several other benefits
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Foreign TradeSince 1990, Brazil has enacted radical changes in
foreign trade policies Computerized trade documentation Lowering of tariffs to 5-32%
Custom clearance is still cumbersomeRestrictions on import of used cars, machinery &
consumers products existImport of food & drug products require government
clearancesGovernment purchases favors local productionImport restrictions on services
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Free Trade ChampionFounder Member of Mercosur (South
American Free Trade area)Active in promotion & creation of FTAAFTAA will boost exports from Brazil Brazil exports $60 billion worth goods to US
in 2002 Steel, Chemicals, Soy, Paper & pulp, coffee etc
US accounts for 24% of Brazil’s exports, Argentina accounts for 10%
Brazil contributes just 0.9% of global trade
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Infrastructure - TransportationInfrastructure varies largely based in economic
disparities Urban centers in South & South east have good
facilities Rural areas are quite undeveloped
Road transportation accounts for 63% freight 1.7 million kms of roads, only 10% is paved
Rail transport is very limited Only 28,000 Kms
Air & Waterways are still developing
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Infrastructure - TelecomTelephone services was privatized in 1990’sHigh growth seen in cellular networks
29.2 million Cell phonesLess than 3% of population have internet
access. Digital divide is a major problem E-Commerce is developing slowly
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Infrastructure - PowerInstalled capacity of 65,000 MW – Mostly
HydroelectricPower shortages existBuilding new gas based power plantsExperimenting with Ethanol – A sugarcane
byproduct as fuelBolivia-Brazil Gas pipeline will help ease
energy shortages by supplying 30 million cubic meters per day
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Consumer MarketsConsumer expenditure in year 2002 was $300
billion! – Largest in S.AmericaSao Paulo region alone accounted for $96
billionRio de Janeiro accounted for $35 billionUnequal income distribution is hampering
consumer salesOnly 17.4% of population have bank accounts
About 30 million peopleRural consumption is very low
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Consumption patternsClass A & B – Upper class & Upper middle
class accounts for 52% of consumption Class A & B make 10 times or more of the
minimum wages Class C consumers ( 4-10 times the minimal
wages) account for 28% of consumptionClass D & E ( 1-3 times the minimum wages)
account for the rest 20%Local products, Local brands concentrate on
Class C & lower consumers (30% of market)
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Privatization Brazil had a huge state owned enterprisesPrivatization started in 1990’s raised $105
billion
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CultureBrazil is multi-cultural with Africans, Arabs,
Europeans & Native AmericansAs a whole Brazilians favor conciliation and
tolerance Avoid direct confrontation and are good hostsPay importance to relationshipsValue family ties but are individualisticBrazilians take time to trust foreigners Facial gazing & touching is common
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Culture and Business
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Hot Sectors – Oil & GasInvestments is encouraged in hot sectors which
offers excellent opportunities for investorsOil & Gas Exploration & drilling
State owned enterprise Petrobras has 49% market share, Private sector controls the rest
15% growth rate, contributes 5.7% of GDP Opportunities in offshore drilling, offshore
equipment, and services Rising energy demand promises good returns Oil & Gas equipment market is estimated at $6
billion
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Hot Sectors – Banking Inadequate banking services offers excellent
opportunity in retail banking About 60 million bank accounts currently exist 6 MNC banks have 33% of market share
Banking sector accounts for 8.6% of GDPIncreasing middle class will attract more retail
banksMarket for financial services is growing
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Hot Sector - AutomobilesBrazil’s transportation sector depends on roadsBrazil has about 15 car manufacturersLow cost labor and high quality is promoting
auto parts industry primarily for exports2002 revenues in auto parts exports was $11
billionMNC’s control 69% market share Auto parts
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Hot Sector – Pharmaceuticals Brazil is the largest market for
Pharmaceuticals – 2002 market was $5.2 Billion
Imports $2.5 Billion worth of medicines and drugs
Generic drugs are gaining popularity and accounts for 30% of the market
MNC investments are for generic drugs
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Hot Sector – Power & TelecomBrazil’s expansion in gas based power plants
has created a market for electric power equipment - $2Billion a year
Alternatives such as renewable sources such as solar power equipment is being encouraged
Privatization is enabling a fast growth in telecom sector Currently, 40 million land lines, 29 million cell
phones Total revenues of $8 Billion
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Hot Sector - RetailingBrazil has a sophisticated retail sector with
self service type stores and giant retailers like Wal-Mart & Carrefour etc.
FDI in retail sector was $1.6 billion in 2001Brazil’s retailing sector is no par with US and
EuropeOpportunity exists in food retailing and
targeting class C consumersA strong TV media helps advertisers and FDI
in TV & other media is encouraged
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IT Services & ComputersBrazil lags other countries in IT infrastructure,
computer usage and Internet accessGovernment encouragement will help grow IT
sectorSales of computers and IT related goods and
services is estimated to be $14 billion in 2003Digital divide (caused by wide disparity in
income levels) is pulling down Brazil’s IT sector
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Closing ThoughtsBrazil is a country of contrasts.
A high tech industry in Aviation, deep sea oil exploration, machinery etc
Yet 34% of population live below poverty line Income disparity is very high
Economic liberalization is driving the economy Increasing the fiscal discipline, controlling inflation, &
lowering deficits is the key for economic stability Higher Social investments in education and health care is
needed Government is also pursuing spending plans to increase
wages, aid to farmers
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Brazil’s current economic growth and stability can be upset by: High spending plans which is ballooning domestic
debt High real interest rates in hampering investments Pension fund & tax reforms are urgently needed
Globalization and exports are key for Brazil’s economy
Brazil needs to address the medium term economic issues for future success