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Doing Business in Brazil

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Title: Doing Business in Brazil


1
Doing Business in Brazil
2
Brazil Country Highlights
  • Brazil has the largest economy in South America
  • Brazil, along with India China has highest
    rates of growth
  • Since 2000 Brazil accounts for 52 of FDI into
    South America, the 2nd largest FDI receiver
  • In 2002 Brazil had the 12th largest economy
  • Brazil is cofounder of Mercosur a key promoter
    of FTAA A champion of free trade

3
Brazil Geographic Info
  • Brazil is 5th Largest Country by Area
  • A land area of 8.5 million square Kms
  • A population of 172 Million
  • Equatorial weather with largest rain forest
  • Became a republic in 1889
  • Divided into 5 regions and 26 states
  • A country of immigrants Europeans, Africans,
    Asians pacific islanders

4
Population Labor
  • In 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

5
Brazilian Economy
  • Brazil is an emerging industrial-service economy,
    Agriculture accounts for less than 10 of GDP
  • Brazil initiated Market reforms since 1990s
  • Inflation 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 Contagion
  • Real was devaluated in 2001 IMF extended 41
    Billion loan to bail Brazilian economy

6
Real Stabilization Plan
  • Real Stabilization Plan imposed a serious burden
    on Brazils growth
  • During 1990 to 2001 Brazils economy grew by 8
    from US465 Billion in 1991 to 504 Billion in
    2001
  • In Contrast Chinese economy grew from 387
    Billion in 1990 to 1.1 trillion in 2001
  • Brazils GDP declined in second half of 90s
  • High interest rates inflation is hurting growth

7
Economic Crisis of 2001
  • Real Stabilization plan imposed a high exchange
    rate against US Dollar to keep local prices under
    control
  • 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
  • 41 Billion loan from IMF in 2001
  • 15.7 Billion loan in 2002, additional 30
    Billion standby loan in 2002
  • High debt levels makes Brazil dependent on FDI

8
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 26
Source World Bank database 2002
9
A fragile Economy
  • High 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 1990s
  • Higher interest rates and inflation when compared
    to Mexico Chile

10
Brazils Competitiveness
  • Brazil 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

11
Brazils Factor Endowments
  • Brazil is rich in natural resources
  • Land, minerals, Water, Forests
  • Brazil 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

12
Technology Focus
  • Import Substitution program created a strong
    local industry
  • Government encouragement of Aerospace,
    biotechnology sectors has built strong tech
    sector
  • Brazil has built a strong engineering,
    Automobile, Aerospace industry

13
Firm Strategy and Rivalry
  • Liberalization in 90s and FTA agreements
    increased competitiveness of local firms
  • Eg Number of Auto models has increased from 40
    to 400
  • MNCs, 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

14
Related Supporting Industry
  • Brazils Auto Engineering industry is benefited
    by steel, rubber auto parts industry
  • Brazil has a strong Agribusiness sector with
    chemicals, pesticides, seeds etc
  • A strong higher education system supplies
    industry with talented employees

15
Demand Conditions
  • A strong home demand exists in Brazil
  • A population of 172 Million
  • A 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

16
FDI in Brazil
  • Brazil attracts large amount of FDI
  • 117 Billion in FDI from 1995-2000
  • US is the largest investor Over 40 of FDI
  • MNCs are the major source of FDI
  • 80 of Fortune 500 firms have invested in Brazil
  • Government policies favor FDI has abolished
    state monopolies
  • Predictable transparent rules reduces red tape

17
FDI Incentives
  • Government 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

18
Foreign Trade
  • Since 1990, Brazil has enacted radical changes in
    foreign trade policies
  • Computerized trade documentation
  • Lowering of tariffs to 5-32
  • Custom clearance is still cumbersome
  • Restrictions on import of used cars, machinery
    consumers products exist
  • Import of food drug products require government
    clearances
  • Government purchases favors local production
  • Import restrictions on services

19
Free Trade Champion
  • Founder Member of Mercosur (South American Free
    Trade area)
  • Active in promotion creation of FTAA
  • FTAA 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 Brazils exports,
    Argentina accounts for 10
  • Brazil contributes just 0.9 of global trade

20
Infrastructure - Transportation
  • Infrastructure 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

21
Infrastructure - Telecom
  • Telephone services was privatized in 1990s
  • High growth seen in cellular networks
  • 29.2 million Cell phones
  • Less than 3 of population have internet access.
  • Digital divide is a major problem
  • E-Commerce is developing slowly

22
Infrastructure - Power
  • Installed capacity of 65,000 MW Mostly
    Hydroelectric
  • Power shortages exist
  • Building new gas based power plants
  • Experimenting with Ethanol A sugarcane
    byproduct as fuel
  • Bolivia-Brazil Gas pipeline will help ease energy
    shortages by supplying 30 million cubic meters
    per day

23
Consumer Markets
  • Consumer expenditure in year 2002 was 300
    billion! Largest in S.America
  • Sao Paulo region alone accounted for 96 billion
  • Rio de Janeiro accounted for 35 billion
  • Unequal income distribution is hampering consumer
    sales
  • Only 17.4 of population have bank accounts
  • About 30 million people
  • Rural consumption is very low

24
Consumption patterns
  • Class 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 consumption
  • Class 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)

25
Privatization
  • Brazil had a huge state owned enterprises
  • Privatization started in 1990s raised 105
    billion

26
Culture
  • Brazil is multi-cultural with Africans, Arabs,
    Europeans Native Americans
  • As a whole Brazilians favor conciliation and
    tolerance
  • Avoid direct confrontation and are good hosts
  • Pay importance to relationships
  • Value family ties but are individualistic
  • Brazilians take time to trust foreigners
  • Facial gazing touching is common

27
Culture and Business
28
Hot Sectors Oil Gas
  • Investments is encouraged in hot sectors which
    offers excellent opportunities for investors
  • Oil 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

29
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 GDP
  • Increasing middle class will attract more retail
    banks
  • Market for financial services is growing

30
Hot Sector - Automobiles
  • Brazils transportation sector depends on roads
  • Brazil has about 15 car manufacturers
  • Low cost labor and high quality is promoting auto
    parts industry primarily for exports
  • 2002 revenues in auto parts exports was 11
    billion
  • MNCs control 69 market share Auto parts

31
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

32
Hot Sector Power Telecom
  • Brazils 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

33
Hot Sector - Retailing
  • Brazil 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 2001
  • Brazils retailing sector is no par with US and
    Europe
  • Opportunity exists in food retailing and
    targeting class C consumers
  • A strong TV media helps advertisers and FDI in TV
    other media is encouraged

34
IT Services Computers
  • Brazil lags other countries in IT infrastructure,
    computer usage and Internet access
  • Government encouragement will help grow IT sector
  • Sales of computers and IT related goods and
    services is estimated to be 14 billion in 2003
  • Digital divide (caused by wide disparity in
    income levels) is pulling down Brazils IT sector

35
Closing Thoughts
  • Brazil 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

36
  • Brazils 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 Brazils
    economy
  • Brazil needs to address the medium term economic
    issues for future success
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