FT SPECIAL REPORT

New Trade Routes Brazilwww.ft.com/reports | @ftreportsWednesday December 3 2014

Inside

Mercosur failsto open doorsThe country’s approachto trade policy couldsee it left behindPage 2

Mining movesA $1.4bn port terminalin Malaysia improvesVale’s export efficiencyPage 2

FinanceFaced with a slowingeconomy at home,institutions areexpanding abroadPage 3

E arly in October, an event tookplace that showed that for-eign investor interest in Bra-zil remains resilient, even asthe economy has slowed in

recentyears.BMW, the German carmaker, opened

its factory in the southern state of SantaCatarina to begin producing its Series 3sedan in an investment that is projectedto cost R$600m ($240m) and generate1,300jobs.

“Whetherornottoexportwilldependon the economy and the speed withwhichwemanagetonationaliseproduc-tion of our cars,” Arturo Piñeiro, presi-dent of the carmaker in Brazil, said attheopeningceremony.

BMW is not the only company invest-ing in an economy that is undergoing adeep shift in trade flows with the end ofthe commodity supercycle and theslowdown in China. In the 10 months tothe end of October, Brazil attracted$52bn of foreign direct investmentinflows, putting it on track to reachabout$60bnbytheendof2014, roughlyin linewithpreviousyears.

“This will be another positive year,”says Alexandre Petry, executive man-ager of investments at Apex-Brasil, theexport promotion agency of Brazil.“Theprincipaldriver for investors isourmarket: 200m people with a lower mid-dleclass that is still growing.”

For a Brazil that grew accustomed toalmost automatic success by the end of

the first decade of the century, with theriseoutofpovertyofmuchof itspopula-tion and the emergence of sectors suchas agriculture and iron ore mining asnational champions, the past four yearshaverepresentedatransitionperiod.

In a year in which Brazil hosted the2014 soccer World Cup and staged aclosely foughtpresidentialelection,eco-nomic growth has slowed to a crawl. It isexpected to be a fraction of a percentagepoint this year, while inflation has

Struggling with the transitionThe end of thecommodity supercycleis bringing challenges,reports Joe Leahy

settled at the upper end of the centralbank’s target range of 4.5 per cent plusor minus 2 percentage points. Lowercommodity prices are taking their tollon trade. Iron ore prices have fallen 40per cent this year to a five-year low of$70 a tonne, while soyabean and othercrops are fetching lower prices. The cur-rent account deficit in October, at$8.1bn, was the widest for the monthsince the data series started in 1980,while over 12 months it remains at 3.7percentofgrossdomesticproduct.

The trade balance has turned nega-tive with $200bn of exports in the first10 months of this year, compared with$202.3m of imports. But foreign capitalmarket investment has taken up someof theslack,rising6.5percent.

“We depend a lot on foreign investors,not only for initial public offerings butdirectly and indirectly,” says EdemirPinto, chief executive of the companythat runs São Paulo’s stock exchange,the BM&FBovespa. He says there areabout 60 equity offerings that could belaunched if Brazil’s economy and cur-rencystabilisesafter theelections.

Much will ride on President DilmaRousseff’s new economic team. As theFT went to press, finance ministerGuido Mantega was replaced byJoaquim Levy, a capable former treas-ury secretary, whose main jobs are torebuild trust with the private sector andget the country’s finances back on track.

One of the problems with investorconfidence has been government inter-vention to try to counter the effects ofthe transition in the global economy fol-lowingfinancialcrisesabroad.

Government controls on fuel andenergy prices and unorthodox attemptsat providing a fiscal stimulus through

Continuedonpage3

An international hubfor R&DRio research anddevelopment centreattracts companiesfrom aroundthe globekeen toexploredeeperwatersPage 4

Ready for export: stacked containersat the Port of Santos — Paulo Fridman/Bloomberg

CommentMarcos Troyjo looksat ways to tacklethe ‘Brazil cost’ ofstifling bureaucracyPage 4

2 ★ FINANCIAL TIMES Wednesday 3 December 2014

New Trade Routes Brazil

W hen the EuropeanUnion and Mercosurbegandiscussingatradedeal in 1999 the logicseemed unavoidable

and unassailable. Here were two greatintegrating regional groupings castingan opportunistic eye on the 21st centuryand the march of globalisation. Whatcould possibly go wrong? Who wouldquibble?

It says something that, 15 years on,the EU-Mercosur trade negotiationshave outdone the World Trade Organi-sation’s long stalled Doha Round of talksin their record for stasis. And that Euro-pean officials see a greater chance ofsuccess in the difficult Doha negotia-tionsthanforanyMercosurpact.

Asked recently what the EU’s toptrade priorities for 2015 were, a seniorofficial in Brussels ran through a longlist of negotiations with the US, Japanand even Vietnam without once men-tioningMercosur.

For Brazil, that sort of response

presents a problem that it needs toaddress urgently, especially as it con-frontsslowingeconomicgrowth.

Brazil’s trade policy has had Mercosur– the “Common Market of the South” orMercosul as it is known in Brazil – at itscentre ever since the bloc was formed inthe 1990s. With what ought to be goodreason: member countries Brazil,Argentina, Paraquay, Uruguay and Ven-ezuela have a combined population ofmore than 260m and represent theworld’s fourthbiggest tradegrouping.

Brazil’s trade strategy has also longbeen to be an active participant in theWTO, at whose helm Roberto Azevêdo,aveteranBraziliandiplomatnowsits

Neither Mercosur nor the WTO hasbeen a particularly dynamic source oftrade liberalisation over the past decadeand, as a result, they have increasinglybecomealiability forBrazil.

In a July paper, Carl Meacham, thehead of the Americas program at theWashington-based Center for Strategicand International Studies, cited the

“constraints” presented by Brasília’sdedication to the WTO and Mercosur asone of the great limiting factors of Bra-ziliantradepolicy.

The problem for Brazil is that theworld has moved on. Frustrated with alack of progress at the WTO, the US, EUand other big economies have turned toambitious negotiations aimed at strik-ing “21st-century” regional trade agree-ments that venture into cutting-edgeareassuchasthedigitaleconomy.

Worried about being left behind,China has also been exploring new tradeavenues outside the WTO, which itjoinedtogreat fanfare in2001.

Closer to home, Chile, Colombia,Mexico and Peru have in recent yearssolidified their economic ties and com-mitment to trade liberalisation via theirPacific Alliance, which has become aprime example of the potential benefitsofanew“regionalism”intrade.

Therisk forBrazil is that it is sittingonthe sidelines and that in the coming

years it will find itself increasingly leftout of new trade blocs with all the eco-nomicconsequencesthatcouldentail.

That may be about to change. Thereare expectations following the Octoberre-election of Dilma Rousseff that, witha recession hanging over it, her govern-ment may shift to more trade- and mar-ket-friendly economic policies in thehopeofboostinggrowth.

President Rousseff’s own chief ofstaff, Aloizio Mercadante, fuelled someof those expectations when he told aNovember event in Brasília that Brazilneeded to pick up the pace of interna-tional trade negotiations and thatMercosur needed to “move forward” inits longstanding talks with the EU andothers.

But the government has played thatgame before and its commitment toMercosur remains at least part of theproblem. In August 2013, the then for-eign minister Antonio Patriota told theFinancial Times that Brazil was consid-ering going it alone in negotiations withthe EU if the talks with Mercosur did notprogress, a threat that appears to havegonenowheresince.

What can President Rousseff and hergovernmentdo?

The most obvious way forward maylie in the approach of one of her fellowleft-of-centre Latin American leaders,PresidentMichelleBacheletofChile.

Chilehas inrecentmonthsbeguncon-vening meetings of officials and minis-ters from both Mercosur and the PacificAlliance to discuss how to improve tiesbetween the two blocs. It has also beenmounting a diplomatic offensivedesigned to play down any sense ofregionalrivalries.

“The two blocs are neither contradic-tory nor competing,” Luis Felipe Ces-pedes, Chile’s economy minister, said inNovember.

The discussions are clearly at an earlystage. But, for Brazil, they may offer away out of its current trade impassewhile maintaining the political ties thatMsRousseffvalues inMercosur.

Mercosur failsto open doorsas others seekalternativesTrade policy Its approach puts the country at riskof being left behind, says ShawnDonnan

Total value of goods exports byMercosur members (2012): $340bn

Brazil’s share of Mercosur goodsexports to the world (2012): $243bn

Value of goods exports byMercosur members to othermembers (2012): $49bn

Brazil’s exports to other Mercosurmembers (2012): $23bn

Mercosur members:Argentina, Brazil, Paraguay,Uruguay and Venezuela

(Source: World Trade Organisation)

MercosurTime to trade up?

Impasse: President Dilma Rousseff at talks to resolve tensions — Georges Gobet/AFP

Some businesses have found waysto cope with the dreaded “Brazilcost” and one of the moresuccessful is the Melissa brand of“jelly shoes”.

Brazil used to be regarded as alow-cost manufacturing economy.But in the past decade, acombination of increased energyprices, high labour costs, lowproductivity and poorinfrastructure, have made thecountry one of the most expensiveplaces to produce things.

According to Boston ConsultingGroup, average manufacturingcosts in Brazil were 3 per cent lowerthan in the US in 2004, while thisyear they are estimated to be 23per cent higher.

José Augusto de Castro,president of the Brazilian ForeignTrade Association, says that 50 percent of exported Brazilianmanufactured products remain inSouth America.

Melissa has overcome theobstacles. Its colourful plastic shoesare identifiable from afar thanks totheir signature “tutti-fruttibubblegum” scent that alerts itsfans a store is nearby.

The innovative combination oftrendy designs with the use ofmono-material, which can bereused without costly separationfrom any other components, havecontributed to Melissa’s globalsuccess.

Melissa shoes began in 1979. Thebrand is part of Grendene, a largeBrazilian footwear group set up bytwo brothers in the 1970s. Melissa’ssuccess was due, in part, to its dailyappearance in a popular televisionshow in the 1980s called Dancin’Day, where the main characterswore Melissa shoes.

But when the programme ended,sales began to fall and in the 1990sGrendene executives were forcedinto a radical rethink. Therefollowed collaborations with high-end designers including KarlLagerfeld and Jean Paul Gaultier.

In 2004, Grendene listed on SãoPaulo’s stock exchange and Melissashoes strode on to the internationalstage and are now available in 80countries.

Melissa does not publish figures,but Grendene’s reported profit forthe third quarter of 2014 wasR$126m ($50m), with 55m pairs ofshoes sold, an increase of 1.4 percent on the same period of 2013.

Exports added up to 11.4m pairs,a rise of 4.3 per cent. Grendeneaccounted for 37.5 per cent ofshoes exported from Brazilin the final quarter of lastyear, and continues tolead the footwearindustry inexports.ThalitaCarrico

Case studyMelissa shoes

WillRobertoAzevêdobeable torescuetheWorldTradeOrganisationagain?

After theBrazilianheadof theWTOledits159tradeministers tothefirsttangibledeal in itshistory inBali inDecember2013,many, includingtheFT,sawthevictoryashis.

At thevery least, thearrivalofMrAzevêdo,acareerdiplomatanddealmaker, seemedtoofferadistinctchange intonefor theWTO,whichfor13yearsnowhas languishedunderthedarkshadowofthe long-stalledDohaRoundof tradenegotiations.

“TheWTOisback!”anexhaustedMrAzevêdoproclaimedtohugs,cheersandtears inBaliafterministersapprovedadeal tostreamlineproceduresatbordersaroundtheworldthatwastheresultof threemonthsofround-the-clocknegotiations

that theBrazilianshepherdedtirelessly.Butayearon,prospects for theWTO

lookalot lesshopeful thantheydidthen.AndthechallengefacingMrAzevêdoisarguablytwiceasdauntingas itwaswhenhetookover inSeptember2013fromtheeruditeFrenchmanPascalLamy.

TheproblemconfrontingMrAzevêdois that,what initiallyappearedtohavebeenasuccessfullydeliveredconfidence-buildingepisode inBali,descendedintoacrimonywithinmonths.

ApushinJulybythenewgovernmentinIndiatorenegotiatepartof theagreement ledtheUSandothers tocryfoul.Theresultwasthat,onceagain, formonthsparalysisdescendedontheWTO, justasMrAzevêdowasbeginningworkonthemorecomplicatedtaskofdeliveringsomethingthatmightbecalledtheDohaRound.

Thatstand-offwas finallyresolvedinNovember,whenIndiaandtheUSnegotiatedasolutionthathingedontherewritingofasinglesentenceandtheplacingofacomma.

Butthatwasnotuntil thedisputehadledtowhatMrAzevêdocalledthe“most

seriouscrisis” intheWTO’s20-yearhistory.MrAzevêdonowfaces thetaskof turningthatbitterepisode intosomethingconstructive inahurry.

That isbecausetheBalidealwasalwaysaboutsomethingbigger.Besidespassingthe“TradeFacilitationAgreement”toreduceredtapeatborders,ministersalsoagreedtheWTOshouldcomeupwithaplanbytheendofthisyeartorescuetheDohaRound,

whichcollapsedin2008andhasonlyshownfaintsignsof lifesince.

Until thenewgovernment inIndiaderailedhisplans,MrAzevêdoandhiskeyadvisershadbeenworkingassiduouslyatsoundingoutkeymembersontheiropeningpositionsandwhetheradealmightbepossible.

Theirplanwastocobblesomethingtogetherthatmightpassmusterwhenministersgatherat theendofnextyear.

ThentheworldandtheWTOcouldmoveon.

“Youcan’tkill [theDohaRound]unlessyoudeliver it,” ishowoneseniortradeofficial inGenevadescribedthestrategy.

Theuncomfortablenews is that thedebate inGenevaoverwheretogonextremainsstuckonsomebasic issues,startingwithwhatthegroundrulesshouldbe.

Somedevelopingcountrieswanttoresumenegotiationsonthebasisof thetext thatwasproducedin2008,asuggestionthatneither theEUnortheUSiskeentoaccept.

TheUShasalsomadeclear that itnolongerviewsChina,nowtheworld’slargest tradingnation,asadevelopingeconomyoraseligible for thespecialWTOtreatmentthatentails.China,meanwhile,has indicated itwillnotgiveupthatstatuswithouta fight.

ThebestbitofnewsmaybethatMrAzevêdois incharge.

HisstockremainshighwithintheWTOandhehasworkedhardtomakehis leadership inclusive. Inthe lead-uptoBali,hemadesurethateventhesmallestmemberscouldhavearole in

negotiations if theywantedoneandthatapproachhasendured. Ithelps toothathe isstill seenasthecandidateof thedevelopingworldandthathisascensiontotheheadof theWTOhasforcedBraziltobecomeamoreconstructiveplayer innegotiations.

But thetaskofrevivinganddeliveringsomethingresemblingtheDohaRoundisstill amammothoneandmaybebeyondwhatevercharmornegotiatingskillsMrAzevêdocandeploy.

ItalsoremainsthesurestwaytheWTOhastoassert its role intheglobaleconomy,evenas importantmemberssuchastheUSandEUturntonewregionalandsectoralagreementsoutoffrustrationwiththestasis inmulti-lateral tradenegotiations.

“Iwanttoput thehumandimensionat theheartofourworkandchangethetermsof thedebatetochangethisorganisation,”MrAzevêdotoldtheopeningsessionof theWTO’spublicforumthisyear.

Hemaystillbethebestcandidatetokeepthatpromise.ButwhetherRobertoAzevêdo–andtheWTO’smembers–candeliver thatchange isstill a frustratinglyopenone.

Dealmaker in charge at theWTO faces tough fightProfile

Roberto Azevêdo is aBrazilian who plays a globalrole in trade negotiations,writes Shawn Donnan

‘I want to putthe humandimension atthe heart of ourwork’Roberto Azevêdo

For Vale, the world’s largest producer ofiron ore, its location in Brazil has alwaysbeen both its greatest strength and itsbiggestchallenge.

On the one hand, its proximity tohigh-grade iron ore mines such as Cara-jás in the north of the country hasturned it into a world leader in theindustry and Brazil’s most internationalcompany.

Between January and October thisyear, iron ore ranked as Brazil’s second-biggest export just behind soyabeans,accounting for about 12 per cent of totalshipments invalueterms.

However, on the other hand, with itsbiggest mines more than 10,000 milesaway from the key Chinese market, itsgeographicalpositionhasbeen itsAchil-les heel in its battle with rivals BHP Bil-liton and the Rio Tinto Group, located inAustralia,muchcloser toAsia.

While demand from China is slowing,the country still accounts for 49.6 percent of Vale’s total iron ore sales and

Asia as a whole represents 65.4 percent, according to the company’s third-quarterresults.

As such, finding ways to reduce thelogistics costs of these vast deliveryroutes has always been one of Vale’s toppriorities. As the global commoditysupercycle ends, pushing down iron oreprices worldwide, these cuts havebecomeevenmore important.

So far this year, iron ore prices havefallenbymorethan40percent toa five-year low as new supply from Australiaand Brazil has hit the market just asdemand from Chinese steelmakers hasslowed.

Pedro Galdi, an analyst at SLW Corre-tora in São Paulo, says: “The three largeminers – Vale, Rio Tinto and BHP Bil-liton – sharply increased capacity,puttingmore ironore inthemarket,andcausing prices to fall. Many miners can’tcope with prices at this level – miners inChina are halting operations and in Aus-traliaandBrazil too.”

Given the vast scale of its operations,Vale is still able to make a profit withiron ore prices at the current $70 atonne. However, the company is undereven greater pressure to reduce costs toprotect itsmargins,hesays.

UnderVale’sbrashformerboss,RogerAgnelli, the company came up with itsmost ambitious solution to the problemyet. At the height of the commodity

boom in 2011, the company decidedthat the best way to tackle its high logis-tics costs was to build its own fleet ofvery large ore carriers (VLOCs) knownasValemaxvessels.

Capable of carrying 400,000 tonnesof iron each, the vessels were designedto reduce or at least control the com-pany’s shipping costs and help Valecompetebetterwith itsrivals.

“With Carajás iron ore taking close to40 days to reach China from Brazil,compared with 13 days for Australianproducers, Vale concluded that it was inthe interest of both the company and itsclients to come up with a competitivesolution,” the Rio de Janeiro-based com-panysaidat thetime.

However, in a significant blow to Vale,the ships were instantly barred fromentering Chinese ports following oppo-sition from the China Shipowners’ Asso-ciation. In January 2012, China’s minis-try of transport officially restrictedports’ rights to accept any large bulkcarriers, effectively refusing entry toany of the proposed fleet of Valemaxes

and forcing Vale to rely on nearbyunloadingbays inMalaysiaandthePhil-ippines. Chinese authorities have alsoexpressed concern over the safety of thevessels after one developed a crack in itshullduring loading in2011.

However, many analysts believe itwas just an excuse to ward off competi-tion from the Valemaxes, which threat-ened to reduce demand for China’s ownshippingservices.

In April 2013 a port in eastern Chinafinally allowed a Valemax to dock andunload a cargo of iron ore. However, thebanhas largelyremainedinplace.

Faced with opposition from the Chi-nese and under greater pressure toreduce costs as iron ore demand slowed,Vale’s new chief executive Murilo Fer-reira focused his efforts on whatanalysts see as a “Plan B” – a $1.4bn portterminal in Malaysia, which opened atthebeginningofNovember.

Valemax ships are now able to trans-port iron ore from Brazil to the TelukRubiahterminal,wherethecargocanberedistributedtootherAsiancountries insmaller vessels. While it is not as effi-cient as shipping iron ore in Valemaxesdirectly to China. it still cuts the logisticscosts of the majority of the export route,saysSLW’sMrGaldi.

Comprised of a deepwater wharf andfive stockyards where different types ofiron ore can be blended, the terminalalso allows Vale to customise its iron oreshipments to the particular needs ofeachcountry intheregion.

Mr Ferreira says: “Teluk Rubiah is acornerstone of Vale’s business strategyof investing in solutions that aim toenhance the company’s capability tosupply iron ore more efficiently to Asianmarkets.”

“The distribution centre brings ourminescloser toourcustomers inAsia.”

‘Plan B’ puts Vale back inthe driving seat – at a costMining

The new $1.4bn TelukRubiah port terminal allowsspeedier transportation,reports Samantha Pearson

Traffic control: Teluk Rubiah port terminal in Malaysia — Mohd Darus bin Hasib/Flyborg Films

‘The distribution centrebrings ourmines closer toour customers in Asia’

Wednesday 3 December 2014 ★ FINANCIAL TIMES 3

ContributorsJoe LeahyBrazil bureau chief

Samantha PearsonBrazil correspondent

Shawn DonnanWorld trade editor

Thalita CarricoEditorial assistant

Marcus TroyjoBricLab, Colombia University

Aban ContractorCommissioning editor

Steven BirdDesigner

Andy MearsPicture editor

Graham ParrishGraphic artist

Keith FrayStatistics journalist

For commercial opportunities in print,digital and events please contactJohn Moncure at john.moncure@ft.com,or Ximena Martinez at Ximena Martinezat ximena.martinez@ft.com

All FT reports are available on FT.com atft.com/reports

Follow us on Twitter: @ftreports

ad hoc tax breaks, stimulating lendingby state banks and other means havecreated uncertainty. If the governmentcan stabilise investor expectations andallowthereal tosettleatamorecompet-itive level without sparking higher infla-tion, Brazil’s economy could begin torediscover itscompetitivebalance.

“Brazil is a large economy withdynamic companies that are creative,aggressive and willing to grow andembark on projects,” says LisandroMiguens, head of Debt Capital MarketsforLatinAmerica at JPMorgan.

“We just need to have some sort of aclearhorizon,”headds.

Mr Petry of Apex-Brasil says that, ofthe Fortune 500 list of largest compa-nies,490arealreadyoperating inBrazil.

The country held three big auctionsfor airport terminals over the past cou-ple of years, selling for R$8.3bn the con-cessions for Rio de Janeiro’s Galeãointernational airport to Singapore’sChangi Airport alongside domestic con-glomerate Odebrecht. In the same auc-tion, the operators of airports in Munichand Zurich, together with a domesticinfrastructuregroupCCR,committedtopay R$1.8bn for the rights to overhauland operate Belo Horizonte’s airport in

the state of Minas Gerais. “In a littlewhile, Brazil should return to a betterrateofgrowth,”saysMrPetry.

In the auto industry, producers havetotal projects lined up worth $80bn,according to consultancy RolandBerger, although not all of this may berealiseduntil themarketrecovers.

Aside from luxury producers, such asBMW and Land Rover Jaguar, newcom-ers include China’s BYD, which plans toinvest $100m in a facility to manufac-ture electric buses in the city of Campi-nas,SãoPaulostate.

“Along with the buses and batteries,our dream is to build solar panels andenergy storage systems here to help theregion achieve its zero emissions goals,”says Wang Chuanfu, BYD’s founder andchairman.

Continued frompage1

Foreign investors are also participat-ing in the Brazilian healthcare industry,with Siemens setting up a R$50m fac-tory inSantaCatarinastate,not far fromBMW, for diagnostic imaging. RivalsPhilips and GE are also investing in thesameindustry.

Some Brazilian exporters remainkeenly competitive. Embraer, theworld’s third largest builder of aircraft,is planning to enter the military trans-port market. Its KC-390 transport jet isdesigned to steal market share from theC-130 Hercules military transport air-craftofLockheedMartinof theUS.

In spite of falling prices and drought,agriculture remains a strong driverof Brazilian competitiveness, withnational champions, such as JBS, theworld’s largest protein company, mak-ingforeignacquisitions.

Mario Veraldo, commercial directorin Brazil for Maersk Line, the world’slargest shipping company, says: “Whenwe talk to our clients, nobody in theagricultural export industry is bearish,everybody is bullish because the worldneeds to eat and the quality of what Bra-zilproduces isgood.”

He says that, with commodity pricesfalling, clients were now talking abouthow to add value rather than just ship-ping raw grain to markets, such as Asia,whichprocess theproducts there.

“What we see is that our clients aretalking differently about this than theywere before. It is not for the next quar-ter, it is for the longer term, but it isthere,”hesays.

Even in Brazil’s oil and gas sector,which has suffered negative news flowfrom a political kickback scandal at thecountry’s main operator, Petrobras, thestate-controlled group, there is oppor-tunity, saysMrPetry.

The country’s giant pre-salt discover-ies, so-called because they lie in ultra-deep water under a layer of the com-pound, are gradually being prepared forproduction.

“We are still seeing a lot of demand fortheoilandgassector,”saysMrPetry.

Strugglingwiththetransition

$52bnForeign directinvestmentinflows to theend of October

6.5%The increase inforeign capitalmarketinvestment

New Trade Routes Brazil

F or those who have followedAndré Esteves’ career over thepast decade, the headquartersof his investment bank BTGPactual could not be more fit-

ting.SãoPaulo’smostostentatiousofficebuilding arches over an 18th-centurycottage built by the Bandeirantes – theadventurers and fortune seekers fromPortugal who carved out Brazil’s hugeterritory.

Seen as a modern-day Bandeirantehimself, Mr Esteves has pursued anequally aggressive expansion strategysince founding BTG Pactual in 2009, fol-lowing his acquisition of UBS’s LatinAmericanassets.Afterconqueringpartsof Latin America to become the region’slargest standalone investment bank,BTG Pactual bought Swiss private bankBSI in July in a move that doubled theBrazilian bank’s assets under manage-menttomorethan$200bn.

BTG Pactual bought the wealth man-agement bank from Italian insurer Gen-erali for about $1.7bn – the largest over-seas acquisition by a Brazilian companysofar thisyear,accordingtoDealogic.

While BTG Pactual’s ambitiousexpansion strategy partly reflects MrEsteves’ vision, it also reflects the inter-nationalisationofBrazil.

As Brazilian businesses have ex-panded abroad, creating links with therest of Latin America and beyond, thecountry’s banks have seen ever greaterdemand for their services outside Brazil– both from companies and wealthyindividuals. Brazil’s own slowing econ-omy, which is set to grow just 0.2 percent this year, has given the country’slargest banks even more reason todiversify theirrevenuestreams.

Located across the road from BTGPactual’s office, Itaú BBA is an evenmore dominant force in Latin America.Alongside its commercial bank, Itaú-Unibanco, Itaú ranks as Latin America’slargestbankbymarketvalue.

In January, Itaú announced theacquisition of Chile’s CorpBanca in adeal totalling nearly $3bn – the largestbanking merger in Latin America since2008. US activist investor Cartica hastried to block the deal, arguing that the

agreement undervalues CorpBanca. IfItaú can pull off the complex acquisi-tion, it would mark a turning point forthebankintheregion.

Jean-Marc Etlin, chief executive ofItaúBBAInvestmentBank,saysthedeal“is very important in supporting ourmission in investmentbanking,which isto be seen by corporations in Latin

America as the go-to bank for raisingcapital, for advice on debt and equityissues; and to be seen by people outsidethe region as the bank that can guidethemthroughLatinAmerica”.

Itaú has also expanded aggressivelyinto the key Mexican market, obtaininga broker-dealer licence in Latin Amer-ica’s second-largest economy in the

middleofNovember,afteropeningshopearlier in the year under Alberto Mulas,Mexico’s first national housing commis-sioner.

Furthermore, the expansion of itsoffices in Europe has helped the bankcapture large cross-border deals. Itaúwas chosen this year to advise Spain’sTelefónica on its $9bn acquisition of theBrazilian broadband unit of Paris-basedVivendi, GVT – the largest acquisition ofa Brazil-based company in 2014,accordingtoDealogic.

“That’s exactly the kind of deal wewant to do: cross-border, a large trans-action where a non-Latin Americancompany invests into the region, andhelping Latin American businessesdevelopingabroad,”saysMrEtlin.

Partly thanks to the deal, Itaú is nowleading the regional and Brazil fee rank-ings compiled by Dealogic for the year-to-date, followed by Credit Suisse andthen BTG Pactual. However, Mr Estevesalso has ambitious plans in the region,especially intheMexicanmarket.

In August, he told the Financial Timesthat BTG Pactual already has about 30people working in Mexico, but is study-ing the possibility of making an acquisi-tion in the country as a way to speed upthebank’sregionalexpansion.

However, he emphasised that thebank is not just looking to become aLatinAmericanbank.

“We don’t have a specific geographicagenda at this stage,” said Mr Esteves.“We consolidated our presence in LatinAmerica and we think we still haveplenty of space in certain parts of LatinAmerica, like Mexico and Argentina,but we also have a strong presence in theUS,EuropeandAsia.”

In fact, after the BSI acquisition morethan half of BTG Pactual’s assets willnowbeoutsideBrazil.

“[The BSI acquisition] is not a LatinAmerican move, it’s a global move,” saidMr Esteves. “It’s got a global base of cli-entsand ithasan important franchise inEurope, Asia and the Middle East, andsomething inLatinAmerica.”

It is too early to say if such moves arereally part of a Bandeirantes-type strat-egy to conquer other continents in thesame way Itaú has done in Latin Amer-ica, saysLuisMiguelSantacreuatAustinAsis,abankingsectorconsultancy.

“In time, we will be able to tellwhether these acquisitions are turning[BTG Pactual] into a global player orwhether they were being opportunisticand will later sell these assets to make aprofit.”

Banks forced tomove abroad in search of growthFinance Facedwith aslowing economy athome, institutions areexpanding elsewhere,says Samantha Pearson

Ambitious plans: Andre Esteves, CEO, BTG Pactual investment bank — ManuCorreia/FT

4 ★ FINANCIAL TIMES Wednesday 3 December 2014

New Trade Routes Brazil

I t is easy to see why BG Group of theUK is an enthusiastic investor inBrazil.

The company hit the landmark100,000 barrels a day mark in

October in its projects in Brazil andaveraged 81,000 bpd during the thirdquarter, making the country its second-largestcontributorafter theUK.

The strong promise of Brazil, in whichthe company has invested $8bn overtwo decades and plans to invest another$3bn annually in the coming years, hasled it to base its chief technology officerRichardMoore inRiodeJaneiro.

“We were prompted to come to Brazilby the success of our exploration activ-ity here,” says Mr Moore, who has a PhDin sedimentology from the University ofLeeds.

BG Group and other international oilgroups have been drawn to Brazil by thediscovery of some of the largest offshoreoilfields in recent history off the south-eastcoast.

Known as the pre-salt, these fields lie5km or more below the surface of theocean, buried under a 2km layer of salt.Petrobras, the operator of the pre-saltfields and BG Group’s partner, says theaverage daily production of the pre-saltfields has risen 10-fold from 2010 untilMaythisyear, reaching411,000bpd.

“This currently represents approxi-mately 20 per cent of our total produc-tion, and in 2018 it is expected to reach52 per cent of the company’s oil produc-tion,”Petrobrassays.

Just as the original discoveries weremade possible only by sophisticatedtechnology, so the exploitation ofthe pre-salt is requiring research intohow to operate at depths that are

equivalent to the height of a Himalayanmountain. The ultra-deep nature of thepre-salt wells means they face higherpressure and heat, while the salt causesgreatercorrosion.

To handle the research requirementsof the discoveries, Petrobras has set up aresearch centre near a technology parkhosting most of its main partners andcontractors.

The park includes oil services pro-vider Schlumberger, oil equipment,software and services supplier BakerHughes, their rival Halliburton, under-water technology group FMC, specialistin pipes Tenaris Confab, BG Group, aswell as Siemens, General Electric andEMC.

The presence of the research anddevelopment centres of these multina-tionals is attracting other partners, suchas software services and consultancyfirm, Capgemini, which is developingbigdatawithEMCatthepark.

“We work together on the oil and gassector,” says Walter Cappilati, head oftheLatamregionforCapgemini.

BG Group is planning to open its glo-bal technology centre at the park nextyear, reinforcing its research base inBrazil.

As a partner of Petrobras, with inter-ests in five big discoveries and with fivefloating production, storage andoffloading platforms in operation inBrazil, BG Group is obliged to invest1 per cent of its revenue a year in R&Dunder local regulations.

Mr Moore manages a global team of40 in four countries from his base inBrazil. They are researching subjectssuch as the behaviour of carbonate rockreservoirs. These are notoriously tricky

sedimentary rock formations thataccount for much of the pre-salt andindeedglobaloilfields.

“There are some excellent outcrops ofcarbonate rocks that are analogous tothepre-salt,”hesays.

The team also co-ordinates with uni-versities in Brazil to harness their brain-power. The company is establishing anational centre for studying carbonaterock at the Federal University of Rio deJaneiro, for instance.

“We are trying to create a world-classfacility for understanding carbonatereservoirs,”saysMrMoore.

BG Group is also working with a tech-nical institute in the northeastern stateof Bahia, Senai Cimatec-BA, andanother northeastern educationalfacility, the Federal University of RioGrande do Norte, in co-operation withImperial College, London, and the Uni-versity of British Columbia in Canada

on a “full waveform inversion project”.The technology will allow scientists tobuild detailed images from 3D seismicdata of underground geological forma-tions, including the pre-salt oil reser-voirsof theSantosBasin.

Theproject isbeingpoweredbyoneofthe fastest supercomputers in theregion.

Another project is a partnershipbetween Imperial College and the uni-versities of São Paulo and Campinas tostudygases.

In particular, the project is looking atcapturing and reinjecting carbon diox-ide into reservoirs to help production,along with other measures to mitigategreenhouse gases and harness them forproductivepurposes.

“What we are doing is again leverag-ing the opportunity to address in a sig-nificant way a problem that is facing thewhole industry,”saysMrMoore.

Country becomesan internationalhub for researchand developmentOil Rio centre attracts companies from around theglobe keen to explore deeperwaters, says Joe Leahy

Brazilian trade

FT graphic. Sources: Thomson Reuters Datastream; IMF

Merchandise trade, sum over previous12 months, ($bn)

0

50

100

150

200

250Exports

Imports

Brazil’s GDP growthAnnual % change

0

2

4

6

8

Growth comparedReal GDP, rebased

100

120

140

160

180

1991 95 2000 05 10 15

BrazilMexicoUS

2000 02 04 06 08 10 12 141991 95 2000 05 10 15

Brazil's trading partnersPer cent of total trade

URUGUAY

GUYANASURINAME

CO

LO

MB

IA

PERU

BOLIVIA

CHILE

PARAGUAY

ARGENTINA

VENEZUELA

Brasília

Negro

Amazonas

Madeira

PACIFICOCEAN

ATLANTICOCEAN

1000 km

B R A Z I LALAGOAS

BAHIA

GOIÁS

AMAZONAS

RORAIMAAMAPÁ

PARÁ

ACRE

RONDÔNIA

MARANHÃO

PIAUÍ

CEARÁ

TOCANTINS

MATO GROSSO

PERNAMBUCO

SERGIPE

MINAS GERAISMATO GROSSO

DO SULSÃO PAULO

SANTACATARINA

RIO GRANDEDO SUL

PARANÁ

RIO GRANDEDO NORTE

PARAÍBA

ESPÍRITO SANTO

RIO DE JANEIRO

Rio de JaneiroSão Paulo

Rest of world

JapanArgentina

US

ChinaEU

2013

2000

26.2

2.0

22.711.3

4.7

33.1

20.5

17.2

12.87.53.1

38.9

A group of tourists was taking a helicopter tour of thebeautiful seaside region of Angra dos Reis, south of Rio deJaneiro. The area is made up of hundreds of tiny islands – atropical paradise favoured by Brazil’s wealthiest for theirsecond home on the beach. One of the passengers marvelledat a sumptuous mansion that stood alone in an islet. Heasked the pilot: “Does it belong to a dotcom billionaire?”“No,” the pilot replied, “to a tax lawyer.”

This anecdote is indicative of the complex web of winnersand losers that results from one the most distinctive traits ofdoing business in Latin America’s largest economy, the so-called “Brazil cost”. The notion represents the end result ofthe many different factors that make it so expensive toproduce and consume in the country.

Brazil cost essentially stems from the confluence of heavybureaucracy, over-regulation, meagre infrastructure andlack of policy vision.

For most of its 500-year-plus history, Brazil’s connectionto the world economy was essentially that of a provider ofraw materials, setting the tone for the country’s economiccycles: gold, rubber, sugarcane, coffee. All infrastructure wasorientated to the export of those commodities.

Consequently, not a lot was done in terms of transportinterconnecting Brazil’s regions. And when commoditiescycles were gone, so was the infrastructure. There are fewerthan half the railway miles in service in Brazil today thanthere were in the US at the end of the Civil War.

Another consequence of an economy specialising in a fewlow value-added goods is that everything else was importedat high prices that were made even more dear by localimport taxes. This was true in 1808, when the Portugueseroyal family, fleeing Napoleon’s wrath, made Rio de Janeirothe capital of its empire. And it is true today.

Despite talk of regional economic integration underMercosur, a bottle of good Argentine wine is sold in NewYork at half the price you would pay at a supermarket in SãoPaulo. The structure of relative prices is so absurd that one ofthe priorities of middle-class pregnant couples is flying toMiami for a week to buy as many baby-related products asthey can – not only clothing or strollers, but also diapers.

This situation did not necessarily improve when Brazil’sindustrialisation picked up after the second world war.Capital formation was mainly aimed at strengthening themanufacturing sector and was obtained through foreignloans, printing money and taxes accruing from the high costof entry for multinational corporations into the Brazilianmarket. That is why foreign debt, inflation and an oneroustax burden as a percentage of GDP have occupied prominentpositions in enlarging the Brazil cost for the past 50 years.

Government meddling in everyday business life – a legacyof Brazil’s Portuguese state heritage – has been made all themore complicated by atendency to over-regulate.In the past 10 years, Brazilapproved about 4m laws atfederal, state and municipallevel. That is more than 800a day. One law every twominutes.

No wonder the country isa paradise for legaldecipherers. Many havemade a living out of thisextra layer that erodes itscapacity to compete.

The “Brazil cost” is furtherexplained by a political economy model that never reallyfavoured investment as a driver of growth. This helpsexplain the poor and outdated infrastructure that makeslogistics so expensive.

Bureaucracy tops it all. In Brazil, for each public workerdevoted to classical tasks performed by government (foreignpolicy, defence, education, health) there are 60 employeesdoing something else. The more regulations are enacted, thelarger the demand for more bureaucrats to execute, judgeand audit them. According to World Bank data, Brazil is oneof the most difficult countries to start a business. It takes 13procedures for the legal establishment of a company andabout 119 days until the process is complete. Add to that thehigh cost of credit and a tax burden at 37 per cent of GDP andyou will understand what Brazil cost is.

Understanding its genesis is the first step towards curbingthe Brazil cost. Next, it takes enormous political will,technical expertise and vision on the part of those leadingthe country to do so. Structural reforms would unchainenormous wealth-building potential for all.

The writer is director of BRICLab at Columbia University, wherehe teaches international affairs

Bureaucraticquagmire is the costof doing business

In thepast 10years,Brazil approvedabout4mlawsatfederal, stateandmunicipal level.That’smore than800aday.One lawevery twominutes

Parked on the tarmac at Embraer’sGavião Peixoto airport, with its slightlydrooping wings, is the prototype ofBrazil’s latestproposedexportproduct–theKC-390militarytransportplane.

A queue of people in military uni-forms and civilian dress from aroundthe world waits to enter through a pas-senger side door to assess whether theywillbuytheplanefor theirair forces.

With capacity to carry three jeeps or80 soldiers and to be used as a tanker forin-flight refuelling, the jet transporterwill replace the Hercules C-130 fromLockheed Martin of the US in Brazil’s

military. Five other countries are alsosaid to be interested in the aircraft,including Colombia, Portugal andArgentina.

The ambitious project is typical of acompany that is Brazil’s highest-profileindustrial exporter. Aside from defence,Embraer is the world’s third-largestcommercial aircraft maker. It hasplaced Brazilian aviation on the mapthrough a willingness to tap into globalsupply chains rather than seek protec-tionfromthem.

“Philosophically, we are for more freetrade,” says Frederico Fleury Curado,Embraer chief executive. “Embraer is alivingexampleofhowfreetradeworks.”

Brazil has long been a country with avibrant aviation industry. Aside frommanufacturing and exporting aircraft,the domestic market is one of theworld’s most active for jet liners, execu-tive aircraft and helicopters. Brazil has

the second-largest fleet of executive jetsin the world and the second-largest ofagricultural aircraft after the US,accordingtothegovernment.

The country could also become afocus for international airport buildersand operators. The government hasauctioned off concessions for the mainairports in São Paulo, Rio de Janeiro,Brasília and Belo Horizonte, the capitalof the populous state of Minas Gerais, todomestic and international private sec-toroperators.

PresidentDilmaRousseff isnowintheprocess of trying to upgrade moreregional airports by encouraging pri-vate investment.

“There are about 700 airports in Bra-zil, but those operating on commercialterms number only 100. We want toreach 270,” says Wellington MoreiraFranco,ministerofcivilaviation.

In a country in which businesses and

investors groan about the “Brazil cost” –the country’s overwhelming burden oftaxes, bureaucracy, inefficiency andcorruption that increases overheads –the aviation industry has been able toshowit is stillpossible tocompete.

Indeed, the sector is too global andcompetitive for a single company oreven country to attempt to go it aloneand try to develop all its own technol-ogy, saysEmbraer’sMrCurado.

A presentation on the KC-390 to Con-gress shows the array of global partnersinvolved in the project, from Germancompany Liebherr, which is supplyingthe air-conditioning system, to

US-based Rockwell Collins, which isprovidingthebasicavionics.

Proof that Embraer is globally com-petitive is that it is ranked third in itsown market, Brazil, and therefore notdependent on protection or local con-tent rules imposed on airlines in thecountry. “We don’t believe in protec-tionism. We would not have survived ifwe had depended on protectionism,”says Mr Curado. “Brazil has to be part oftheglobalsupplychain.”

The country’s airport building pro-gramme could go some way to helpinginternationalise further the aviationindustry, says Cesar Cunha Campos,directorofFGVProjetos,aconsultancy.

In a paper on the government’sregional airport programme, he says theaim is to attract $2.9bn, mostly from theprivate sector, to upgrade the 270regionalairports inthefirstphase.

If the government can mobilise the

investment, thebenefits to theeconomywill be immediate. “In 2010, accordingto the Airports Council International ofNorth America, airports accounted for8percentofUSGDPandfor7percentofjobs growth, demonstrating, a signifi-cantreturnoninvestment,”hesays.

Proper planning is crucial. KualaLumpur began building a new interna-tional airport with a projected cost of$2.5bn. This blew out to $4.4bn becauseof constant changes in design anddelays.

Mr Moreira says it is important to cre-ate an attractive investment environ-ment, so Brazil can overcome its limita-tions in terms of transport infrastruc-ture.

Outdated regulations, such as onelimiting foreign direct participation inairports to 20 per cent, need to bechanged. “The regulations will have tobeclearandrespected,”hesays.

Competitive Embraer spreads its wings at home and abroadAviation

The government hopes tobuild on aircraft maker’ssuccess, reports Joe Leahy

Brazil is known for having one of thecleanest energy supplies in the world.With hydropower supplying more thanthree-quarters of the country’s electric-ity, there are many opportunities forcompanies willing to invest in the grow-ingmarketofalternativeenergy.

But the country is facing its secondyear of drought. To compensate for areduction in electricity output, the gov-ernmenthashadnooptionotherthantoturnonmorethermoelectricplants.

According to the Energy ResearchCompany, the result was a decrease of6.15 per cent from 2012 to 2013 in theshare of renewables in the mix. Despitethat, in the same period, solar and windenergy increased from 1.894MW to2.207MW,agrowthof16.5percent.

To have an idea of Brazil’s potentialfor solar energy, consider Porto Alegre,

the capital city of the southern state ofRio Grande do Sul. The city lies in aregion in the country that receives lessintense sunlight, but more hours of sun-light thanotherregions.

Seeing big opportunities, the Chineseelectric carmaker and battery manufac-turer BYD decided on Campinas, in theSão Paulo region, to open the company’sfirst South American manufacturingfacility, with an investment of R$200m($80m).

The company plans to build solarpanels and energy storage systems. Inthe first phase, BYD will produce elec-tricbusesandrecyclable ironphosphatebattery packs. It then plans to build aresearch and development centre for itsphotovoltaic, smart grid and LED light-ingbusinesses.

Brazil is enjoying a great moment forrenewable energy, says AdalbertoMaluf, BYD’s marketing director: “Withshort-term issues such as drought andless generation of conventional energy,we think solar energy will grow 70 percent for large auctions and 30 per centforsmallerprojects.”

The ministry of mines and energypredicts a 15 per cent fall in the installa-tion cost of solar power by 2015. By2020, the ministry expects a cut of

30-50 per cent, because of industrial-scale production and improved per-formance. BYD plans to produce 1,000electric buses a year from 2015. The buscan travel 300km a day on a singlecharge and has a battery that is chargedin two hours and has a life expectancy of40 years. Consumption is 1kW per kilo-metre at a cost of R$0.20, while a con-ventional bus requires 1 litre of dieselper2km,atacostofR$2.50.

The falling cost of renewables meansthey can, at times, compete with fossilfuels. Lower energy costs also meangreater competitiveness. Since auctionswere introduced,priceshavedroppedtoa record low. At the last auction in Octo-ber, the solar energy price was settled at£54 per MWh; a few years ago it was£127 per MWh. Last year, the cost ofonshore wind was as low as £27 perMWh,against£95perMWhintheUK.

Brazil’s secretary of energy planning,Altino Ventura, says wind and solarenergy receive no government subsi-dies. “Because of our climate, windfarms have greater potential of electric-ity per unit of installed capacity thanelsewhere,” he says. The farms have acapacity of 60-65 per cent, against a glo-balaverageof40-45percent.

On the other hand, the UK think-tank

Policy Exchange says that despite auc-tions, unusually high wind speeds and asurplus of discount wind turbines, thecost reductions in Brazilian wind powerreflect hidden incentives in grid charg-ingstructures.

In 2009, GE won its first contract for awind energy project in Brazil. “Despiteinitial challenges, we are making equip-ment at a competitive price,” said SergioSouza,headofsales forLatinAmerica.

Since 2011, GE has manufacturedequipment in Campinas. In 2012, itdeveloped a turbine specifically for theBrazilian market. This year, it cele-brates its 1,000th hub produced locally.The company has invested R$1bn in aresearch and development centre in RiodeJaneiro.

Analysts predict that wind willaccount for 9.5 per cent of Brazil’sinstalled capacity by 2022. GE forecaststhe market will grow 40 per cent by2016 and that 900 GE wind turbines willbe installedbytheendof theyear.

Mr Souza says Brazil is consolidatingas one of the main wind power marketsin the world. In addition, it is one of thefew countries that produces 2GW a year.

“There is no way this sector will cooldown in the next few years,” he says. “Itsfuture isbright.”

Companies see sunny outlook for renewablesClean energy

Sector unlikely to cool asforeign interests eyeattractive auction prices andideal climate for alternativepower, writes Thalita Carrico

The fallingcost ofrenewablesmeans thatthey can,at times,competewith fossilfuels

700The number ofairports, but only100 operatecommercially

$2.9bnThe sum thegovernmenthopes to raise forregional airports

The projectis beingpowered byone of thefastestsuper-computersin the region

GUEST COLUMN

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