Apparel in Portugal

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2000 Icon Group International, Inc.

Apparel in Portugal: AStrategic Entry Report, 1998


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iii


About Icon Group International, Inc.Icon Group International, Inc.s primary mission is to assist managers with their international information needs.U.S.-owned and operated, Icon Group has field offices in Paris, Hong Kong and Lom, Togo (West Africa). Createdin 1994, Icon Group has published hundreds ofmulti-client databases, and global/regional market data, industry andcountry publications.

Global/Regional Management Studies. Summarizing over 190 countries, management studies are generallyorganized into regional volumes and cover key management functions. The human resource series covers minimumwages, child labor, unionization and collective bargaining. The international law series covers media control andcensorship, search and seizure, and trial justice and punishment. The diversity management series covers a variety ofenvironmental context drivers that effect global operations. These include womens rights, childrens rights,discrimination/racism, and religious forces and risks. Global strategic planning studies cover economic risk

assessments, political risk assessments, foreign direct investment strategy, intellectual property strategy, and exportstrategies. Financial management studies cover taxes and tariffs. Global marketing studies focus on target segments(e.g. seniors, children, women) and strategic marketing planning.

Country Studies: Often managers need an in-depth, yet broad and up-to-date understanding ofa countrys strategicmarket potential and situation before the first field trip or investment proposal. There are over 190 country studiesavailable. Each study consists ofanalysis, statistics, forecasts, and information ofrelevance to managers. The studiesare continually updated to insure that the reports have the most relevant information available. In addition to rawinformation, the reports provide relevant analyses which put a more general perspective on a country (seen in thecontext ofrelative performance vis--vis benchmarks).

Industry Studies: Companies are racing to become more international, ifnot global in their strategies. For over 2000product/industry categories, these reports give the reader a concise summary of latent market forecasts, pro-forma

financials, import competition profiles, contacts, key references and trends across 200 countries of the world. Somereports focus on a particular product and region (up to four regions per product), while others focus on a productwithin a particular country.


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Executive Report on Strategies in Portugal iv


Table ofContents1 INTRODUCTION & METHODOLOGY 10

1.1 What does this report cover? 101.2 How to Strategically Evaluate Portugal 101.3 Latent Demand and Accessibility in Portugal 12

2 APPAREL 162.1 Latent Demand and Accessibility: Background 162.2 Latent Demand: Aspects ofInterest 17

2.2.1 Market Profile 172.2.2 Statistical Data 172.2.3 Best Sales Prospects 18

2.3 Accessibility: The Structure ofCompetition 182.3.1 Domestic Production 182.3.2 Imports 192.3.3 End-User Analysis 19

2.4 Accessibility: Key Factors 202.4.1 Import Climate 202.4.2 Distribution/Business Practices 202.4.3 Financing 21

2.5 Key Contacts 212.5.1 Useful Contacts: Trade Organizations 212.5.2 Portuguese Importers 212.5.3 Trade Promotion Opportunities 23

3 THE ECONOMICS OF LATENT DEMAND IN PORTUGAL 253.1 Executive Summary 253.2 Economic Issues in Portugal 26

3.2.1 Economic Fundamentals and Dynamics 26

3.2.2 Economic Growth 273.2.3 Inflation 283.2.4 External Accounts 293.2.5 Budget Consolidation/Privatization 293.2.6 Financial Markets 303.2.7 Employment 303.2.8 Dynamic Markets 313.2.9 Coarse Grain 313.2.10 Other Agriculture 323.2.11 Government Intervention Risks 323.2.12 Trade Deficit Risks 323.2.13 Infrastructure Situation 33

4 EXPORT ACCESSIBILITY IN PORTUGAL 35

4.1 Executive Summary 354.2 Exporting to Portugal 35

4.2.1 The Banking System 354.2.2 Banking Soundness 364.2.3 Financing Export Strategies 364.2.4 Financing Projects 364.2.5 Trade Regulations and Standards 364.2.6 Valuations on Imports 374.2.7 Licenses Required for Imports 374.2.8 Controls on Exports 38


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Executive Report on Strategies in Portugal v


4.2.9 Documentation Required for Trade 384.2.10 Bills ofLading and Airway Bills 394.2.11 Commercial Invoices 39

4.2.12 Certificate ofOrigin 394.2.13 Entering Temporary Imports 394.2.14 Labeling Issues 404.2.15 Restrictions on Imports 404.2.16 Local Standards 414.2.17 Madeira 414.2.18 Azores 414.2.19 Bonded Warehouses 414.2.20 Advanced Rulings on Classification 424.2.21 Entry and Re-Export 424.2.22 Samples and Advertising Materials 424.2.23 Duty Refund 434.2.24 Drawback 43

5 DIRECT INVESTMENT ACCESSIBILITY IN PORTUGAL 445.1 Executive Summary: Infrastructure 445.2 Executive Summary: Natural Resources 465.3 Executive Summary: Industry 485.4 Direct Investment in Portugal 49

5.4.1 Attitudes Toward Foreign Direct Investment 495.4.2 Investment Regime 505.4.3 Restrictions 505.4.4 Privatization Law 505.4.5 National Groups 505.4.6 Finance/Insurance 515.4.7 Research and Development Programs 515.4.8 Residence/WorkPermits 51

5.4.9 Convertibility 515.4.10 Exchange Controls 515.4.11 Expropriation Risks 525.4.12 Future Expropriation 525.4.13 Dispute Settlement Risks 525.4.14 International Arbitration 525.4.15 Direct Investment Incentives and Requirements 525.4.16 Taxes 535.4.17 Special Regime 535.4.18 Private Ownership/Enterprise 545.4.19 Competitive Equality 545.4.20 Privatization Program 545.4.21 Patents 555.4.22 Copyrights 55

5.4.23 Trademarks 555.4.24 Competition Law 555.4.25 Bureaucratic Procedures 565.4.26 Financial Markets 565.4.27 Financial Instruments 565.4.28 Portfolio Investment 565.4.29 StockMarket 575.4.30 Defensive Measures 575.4.31 Political Violence Risks 57


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Executive Report on Strategies in Portugal vi


5.4.32 Corruption Risks 575.4.33 The Local Labor Market 585.4.34 General Conditions 58

5.4.35 Labor-Management Relations 595.4.36 ILO 595.4.37 Choice ofTechnology 595.4.38 Trade Zones & Free Ports 605.4.39 Key Bilateral Investment Agreements 605.4.40 Capital Outflow and Repatriation Risks 60

6 MARKETING & DISTRIBUTION IN PORTUGAL 616.1 Executive Summary 616.2 Marketing and Distribution in Portugal 62

6.2.1 Local Representative 626.2.2 Exclusive Distributor 626.2.3 The Iberian Peninsula 626.2.4 Impact ofthe EU 63

6.2.5 Slow Down 636.2.6 Distribution and Sales Channels 636.2.7 Agents/Distributors 646.2.8 Franchising Activities 646.2.9 Direct Marketing Options 656.2.10 Joint Venture and Licensing Options 656.2.11 Creating a Sales Office 666.2.12 Selling Strategies 676.2.13 Advertising and Trade Promotion 676.2.14 Pricing Issues 686.2.15 Supplying Customer Service 686.2.16 Public Sector Marketing 686.2.17 TrademarkProtection 69

6.2.18 Copyright Protection 696.2.19 Patent Protection 696.2.20 Hiring Local Counsel 69

7 HUMAN RESOURCE ASSESSMENT IN PORTUGAL 717.1 Executive Summary 717.2 Human Resources in Portugal 72

7.2.1 Unionization in Portugal 727.2.2 Collective Bargaining in Portugal 737.2.3 Workweekand MinimumWages in Portugal 737.2.4 Forced Labor in Portugal 747.2.5 Working Ages and Child Labor in Portugal 74

8 POLITICAL RISK ASSESSMENT IN PORTUGAL 78

8.1 Executive Summary: Government 788.2 Executive Summary: Military Organization 808.3 Democracy in Portugal 818.4 Political Issues in Portugal 82

8.4.1 Economic Relationship with the United States 828.4.2 Politics and the Business Environment 838.4.3 The Political System 83

9 LEGAL RISK ASSESSMENT IN PORTUGAL 859.1 Executive Summary 85


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Executive Report on Strategies in Portugal vii


9.2 Legal Issues in Portugal 869.2.1 Privacy, Search and Seizure 869.2.2 Trial Justice in Portugal 86

9.2.3 Excessive Punishment in Portugal 8710 CULTURAL AND DEMOGRAPHIC RISKS IN PORTUGAL 89

10.1 Executive Summary 8910.2 Cultural Issues in Portugal 91

10.2.1 Racial, Ethnic and Discrimination Issues in Portugal 9110.2.2 Women's Rights and Gender Issues in Portugal 9310.2.3 Religion in Portugal 9510.2.4 Fundamental Human Rights in Portugal 96

11 HISTORICAL BACKGROUND 9811.1 Social and Political History 98

11.1.1 U.S.-Portuguese Relations 9811.1.2 Government 9911.1.3 Major Cultural and Historical Events 99

11.2 Business Customs in Portugal 100


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Executive Report on Strategies in Portugal viii


List ofExhibitsSummary ofKey Drivers in Portugal 14

Population (k): 1998 in Portugal & International benchmarks 14GDP/Capita (PPP) in Portugal & International benchmarks 14Urbanization %: 1998 in Portugal & International benchmarks 15Largest City (%) in Portugal & International benchmarks 15# ofLarge Cities in Portugal & International benchmarks 15Ethnic Groups: # present in Portugal & International benchmarks 15

Key Economic Drivers in Portugal 25GDP/Capita (PPP) in Portugal & International benchmarks 26GDP: Agriculture % in Portugal & International benchmarks 26GDP: Industry % in Portugal & International benchmarks 26GDP: Services % in Portugal & International benchmarks 26

Key Infrastructure Drivers in Portugal 45Railways: Total km in Portugal & International benchmarks 45Highways: Total km in Portugal & International benchmarks 46Airports: total in Portugal & International benchmarks 46

Key Natural Resource Drivers in Portugal 47Latitude (abs degrees) in Portugal & International benchmarks 48Land Usage: Arable % in Portugal & International benchmarks 48Number ofPorts in Portugal & International benchmarks 48# ofRare Minerals in Portugal & International benchmarks 48

Key Industry Drivers in Portugal 49Industry Prod Growth rate in Portugal & International benchmarks 49

Key Marketing Drivers in Portugal 61Radio stations: AM in Portugal & International benchmarks 61Radio stations: FM in Portugal & International benchmarks 62Television stations in Portugal & International benchmarks 62

Key Labor Drivers in Portugal 71

Labor in services %: 1998 in Portugal & International benchmarks 71Labor in agriculture %: 1998 in Portugal & International benchmarks 72Min Wage ($/mo): 1997/98 in Portugal & International benchmarks 72Workweek(hours): 1997/98 in Portugal & International benchmarks 72Minimum Age: 1997/98 in Portugal & International benchmarks 72

Children in Portugal 760-14 years (%) in Portugal & International benchmarks 76Infant mortality rate in Portugal & International benchmarks 76Life expectancy: total in Portugal & International benchmarks 77Min Employment Age in Portugal & International benchmarks 77Military age in Portugal & International benchmarks 77

The Government in Portugal 79# ofParties in Portugal & International benchmarks 79

Largest party % in Portugal & International benchmarks 80Top two parties % in Portugal & International benchmarks 80Border Disputes # in Portugal & International benchmarks 80

The Military in Portugal 81Military age in Portugal & International benchmarks 81Military Spending % ofGDP in Portugal & International benchmarks 81

The Legal System in Portugal 85Murders/100kpop in Portugal & International benchmarks 85Thefts/100kpop in Portugal & International benchmarks 85Suicide/100kpop in Portugal & International benchmarks 86


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Executive Report on Strategies in Portugal ix


Key Demographic Drivers in Portugal 90Population (k): 1998 in Portugal & International benchmarks 90Birth Rate: 1998 in Portugal & International benchmarks 90

Death Rate: 1998 in Portugal & International benchmarks 91Urbanization %: 1998 in Portugal & International benchmarks 91Density (pop/km sq) in Portugal & International benchmarks 91

Key Ethnic Drivers in Portugal 92Religions: # Present in Portugal & International benchmarks 92Languages: # Present in Portugal & International benchmarks 93Ethnic Groups: # present in Portugal & International benchmarks 93

Women in Portugal 94Life Expectancy: female in Portugal & International benchmarks 95Total Fertility rate in Portugal & International benchmarks 95Literacy: female in Portugal & International benchmarks 95

Religion in Portugal 96Religions: # present in Portugal & International benchmarks 96Religions: max % present in Portugal & International benchmarks 96


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Apparel in Portugal 10


1 INTRODUCTION & METHODOLOGY

1.1 WHAT DOES THIS REPORT COVER?

The primary audience for this report is managers involved with the highest levels of the strategicplanning process, and consultants who help their clients with this task. The user will not onlybenefit from the hundreds of hours that went into the methodology and its application, but alsofrom its alternative perspective on strategic planning in Portugal.

This report helps executives evaluate strategic investment and entry alternatives in Portugal. Inorder to evaluate Portugal, Icon Group International, Inc. draws on a methodology developed byProfessor Philip Parker at INSEAD in Fontainebleau, France. The methodology decomposes a

countrys strategic potential along two key dimensions: (1) latent demand, and (2) accessibility.A country may have very high latent demand, yet have low accessibility, making it a lessattractive market than many smaller potential countries having higher levels ofaccessibility.

This report provides a strategic profile ofPortugal along these lines. Throughout the discussion,literally hundreds of statistics on Portugal are benchmarked against regional and global averages.The reader can thus quickly understand where Portugal fits into the regional and globalperspective. The report first investigates the economic fundamentals affecting Portugal. Thesefundamentals are the source for Portugals latent demand. Then, the subsequent chapters detailPortugals accessibility. This evaluation covers a number of entry alternatives, including exportstrategies, and local direct investment strategies. If a firm decides to have a local presence in

Portugal, this requires a strategic understanding of local business conditions. The conditionsinvestigated in this report include local marketing (advertising, distribution, pricing issues) andentry strategies (opening an office, joint venturing, etc.), as well as human resources management(labor laws, costs, regulations). Because local presence can increase exposure, the report nextassesses a number of factors affecting business risks in Portugal (again, benchmarked againstregional and global averages). These include: political risks, legal risks, cultural/demographicrisks. Risks can only be evaluated within a historical context; history, alas, often repeats itself.The final chapters summarize Portugals economic, political and social history. In doing so, thereader has a full appreciation ofhistorys role in shaping Portugals current potential.

1.2 HOW TO STRATEGICALLY EVALUATE PORTUGAL

Probably the most efficient way of evaluating Portugal is to consider key dimensions whichthemselves are composites of multiple factors. Composite approaches have long been used bystrategic planners. The biggest challenge in this approach is to choose the appropriate factors thatare the most relevant to international planners.


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Framework for Prioritizing Countries

Demand/Market Potential Driven Firm

Relative Accessibility

Accessibility/Supply Averse Firm

Hi h

Low

Low Hi h

LatentDemand

Hi hestPriorit

LowPriorit

LowestPriorit

ModeratePriorit

Hi hPriorit

Relative Accessibilit

High

Low

Low High

LatentDemand

HighestPriority

LowPriority

LowestPriority

ModeratePriority

HighPriority


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The two measures of greatest relevance are latent demand and market accessibility. Thefigure above summarizes the key dimensions and recommendations of such an approach. Usingthese two composites, one can prioritize all countries of the world. Countries of high latent

demand and high relative accessibility (e.g. are easy to enter for your firm compared to others)are given highest priority. There is a continuum from high priority countries, to those which havelow latent demand and low accessibility. The above figure shows two different scenarios. Thisapproach can only be implemented, however, provided that each country in question isbenchmarked; in this report, we benchmarkagainst regional and global averages.

In the top figure, the firm is driven by market potential, whereas the bottom figure represents afirm that is driven by costs, or an aversion to difficult markets. This report treats the reader ascoming from a generic firm approaching the global market neither a market driven, nor a costdriven company. Planners must therefore augment this report with their own company-specificfactors that might change the priorities (e.g. a Canadian firm may have higher accessibility in

Canada than a German firm).

1.3 LATENT DEMAND AND ACCESSIBILITY IN PORTUGAL

The remainder of this report provides an extremely detailed overview of factors driving latentdemand and accessibility in Portugal. Latent demand is largely driven by economicfundamentals. Latent demand only represents half the picture. A country may at first sightappear to be attractive due to a high latent demand, but it is often less attractive when oneconsiders how easy it might be to serve that entire potential. While accessibility will always varyfrom one company to another for a given country, minimally the following domains should be

considered when evaluating Portugals accessibility:

Portugals openness to Trade

Portugals openness to Direct Investment

Local Marketing and Entry Strategy Alternatives

Local Human Resources

Local Risks

Across these domains, a number of not so obvious factors can affect accessibility. While thisreport provides hundreds ofcomparative benchmarks, consider the following examples offactorshaving substantial impact on a countrys accessibility compared to regional and globalbenchmarks:

Demographics (demand concentration)

Economics (development and openness)

Culture (heterogeneity)

Political Stability


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Summary ofKey Drivers in PortugalKey drivers Portugal Reg. Avg. Global Avg.______________________________________________________________________________________________________

Population (k): 1998 9812 15048 26096'' (k): 2000 9807 15073 26875'' (k): 2010 9791 15082 30699'' (k): 2020 9730 14992 34473

Macroeconomics GDP/Capita (PPP) 12400 12712 7214'' GDP Growth 96-97 % 3 2 2'' GDP Growth/yr to 2000 2 2 2

Access Urbanization %: 1998 37 70 55'' Urbanization %: 2000 38 71 56'' Urbanization %: 2010 44 75 61'' Urbanization %: 2020 52 79 67

'' Largest City (%) 8 21 20'' # ofLarge Cities 1 2 2Culture Religions: # present 9 7 8

'' Languages: # present 1 3 4'' Ethnic Groups: # present 8 5 5

______________________________________________________________________________________________________ Source: Icon Group International, Inc., copyright 1998

Population (k): 1998 in Portugal & International Benchmarks

0

10000

20000

30000

Portugal Region World

Population(k):1998

GDP/Capita (PPP) in Portugal & International Benchmarks

0

5000

10000

15000


GDP/Capita(PPP)


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Urbanization %: 1998 in Portugal & International Benchmarks

0

20

40

60

80


Urbanization%:1998

Largest City (%) in Portugal & International Benchmarks

0

510

15

20

25


LargestCity(%)

# ofLarge Cities in Portugal & International Benchmarks

0

0.5

1

1.5

2


#ofLargeCities

Ethnic Groups: # present in Portugal & International Benchmarks

0

2

4

6

8


EthnicGroups:#present


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2 APPAREL

2.1 LATENT DEMAND AND ACCESSIBILITY: BACKGROUNDThe U.S. has a large share ofthe Portuguese market for sportswear and casual apparel. Thanks tothe traditionally acclaimed quality ofAmerican sportswear for quality and durability, this share isexpected to increase in the near future. U.S exports to Portugal are expected to increase by about10-15 percent annually. However, marketing techniques must become more aggressive andflexible to increase market share. Franchisers of apparel, mainly casual and sportswear shouldlook to Portugal and the potential it offers. Designers may consider having their clothingmanufactured in Portugal and exported from Portugal to other EU countries.

The textile industry, which is concentrated in northern Portugal, employs about 25 percent of thelabor force and is responsible for about 22 percent of total Portuguese exports. Apparel is themost important sector of this industry and has grown significantly in the last decade. There aremany new clothing chains operating in this market. Portuguese imports are divided into threesegments: fashion products (imported mainly from Italy and France): medium-priced good-quality apparel (in which U.S. products generally compete); and less expensive articles (from theFar East). Imports of apparel cover about 17 percent ofmarket demand. EU countries are themost important suppliers, accounting for about 90 percent of Portugal's imports. The mainEuropean exporting countries are France (24 percent), Italy (22 percent), Spain (21 percent), andGermany (12 percent).

Portugal is a major producer of textiles and apparel. At present, emphasis is on licensedproduction that is not only consumed locally but also exported to many countries. Many foreignbrands are thus not only entering Portugal, but are also finding new markets through Portugal'sexisting export connections.

Total market size for sports/leisure/casual apparel in Portugal, in 1997, was USD 5.8 billion.Domestic production ofsports/leisure/casual apparel during 1997 is estimated at USD 6.8 billion.There are about 4,000 Portuguese firms producing sports and casual apparel in Portugal,employing 215,000 workers. Portugal's imports ofsports and casual apparel in 1997 were USD 1billion.


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2.2 LATENT DEMAND: ASPECTS OF INTEREST

2.2.1 Market ProfilePortugal is a major producer of textiles and apparel and the country's economy relies heavily onthis sector.

Although most ofthe demand is met by local production, imports and foreign-licensed productionofapparel has been steadily increasing. At present, emphasis is on licensed production that is notonly consumed locally but also exported to many countries. Many foreign brands are thus not

only entering Portugal, but are also finding new markets through Portugal's existing exportconnections.

Total market size for sports/leisure/casual apparel in Portugal, in 1997, was USD 5.8 billion.Domestic production ofsports/leisure/casual apparel during 1997 is estimated at USD 6.8 billion.There are about 4,000 Portuguese firms producing sports and casual apparel in Portugal,employing 215,000 workers. About 30-percent ofthe production is exported mainly to Germany,France, U. Kingdom, Italy and Spain. Portugal imports of sports and casual apparel in 1997were USD 1 billion.

2.2.2 Statistical DataOfficial Portuguese trade statistics are not updated. Therefore, it is very difficult to accuratelydefine market data. Import and export statistics for 1997 were provided by ANIVEC - NationalAssociation ofApparel Manufacturers. All other statistics are unofficial estimates.

0

2000

4000

6000

8000

10000

1997 1998(est) 1999(est) 2000(est)

SPORTSANDCASUALAPPARELMARKET

INPORTUGAL

(US$mln)


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SPORTSANDCASUALAPPARELMARKETSIZE(inUSdollarmillions)

ProjectedAvg.Annual

Growthrateforfollowing

1997199819992years

ImportMarket1,0041,1051,21515-20%

LocalProduction6,8127,4858,23410-15%Exports2,0082,2102,32002-05%

TotalMarket5,8086,3807,12920-25%ImportsfromU.S56710-15%

Exchangerate170172EstimatedFutureInflationRate:3%LastYear'sImportMarketShareandmajorCompetitors:France(24%);Italy(22%);Spain(21%),andGermany(12%).

Source:ANIVEC-NationalAssociationofApparelManufacturers.

2.2.3 Best Sales Prospects

Most promising Subsectors within the Sector, along with estimated 1998 total market size ofeachSubsector in USD million:

Casualwear(men,womenandchildren)1,410

Sportswear 1,320Lingerie 1,250

2.3 ACCESSIBILITY: THE STRUCTURE OF COMPETITION

2.3.1 Domestic ProductionAs noted above, Portugal is a major producer of apparel. Its total apparel production was USD6.8 billion in 1997 and has increased by an annual average of15 percent since 1996. In 1997 thePortuguese textile and apparel sector constituted 30 percent ofthe country s total consumer goods

production.Imports are encouraged as a means of introducing better quality standards and more effectivemarketing methods, while local production helps foreign brands to enter other markets fromPortugal. Because Portugal is a member of the EU, local production by U.S. brands is anattractive prospect.


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Foreign brands enter the market mostly in the form oflocal production under license. Almost allof the internationally known jeans brands are produced and sold either under license or withinfranchise agreements. A small portion is imported directly and sold expensively in specialty

stores.

Some foreign brands which have entered Portugal in the form of joint ventures or franchises are:Alain Manoukian, Banana Republic, Benetton, Calvin Klein, Donna Karen, Gant, GAP, Lacoste,Le Coq Sportif, Lee, Levi s, O' Neill, Paul & Shark, Polo Ralph Lauren, and Wrangler.2.3.2 Imports

Portuguese imports are divided into three segments: fashion products (imported mainly from Italyand France): medium-priced good-quality apparel (in which U.S. products generally compete);

and less expensive articles (from the Far East). Imports of apparel cover about 17 percent ofmarket demand. EU countries are the most important suppliers, accounting for about 90 percentof Portugal imports. The main European exporting countries are France (24 percent), Italy (22percent), Spain (21 percent), and Germany (12 percent). Imports ofsportswear from the U.S. areexpected to increase at an annual rate ofabout 15-20 percent during next two years.

In general, more expensive designer brands are imported directly for sale to the upper middleclass end-users in specialized "boutiques".Apart from being very popular, U.S. clothing has a good reputation among Portuguese buyers andend-users. U.S. manufactured apparel is considered to be durable and of high quality.Franchisers of apparel, mainly casual and sportswear should look to Portugal and the potential itoffers. U.S. designers may consider having their clothing manufactured in Portugal and exportedfrom Portugal to other EU countries.

The U.S. has a large share ofthe Portuguese market for sportswear and casual apparel. Thanks tothe traditionally acclaimed quality ofAmerican sportswear, this share is expected to increase inthe near future. U.S exports to Portugal are expected to increase by about 10-15 percent annually.However, because European exporters generally have a better knowledge of the Portuguesemarket and are geographically closer, U.S. marketing techniques must become more aggressiveand flexible to increase market share.

2.3.3 End-User AnalysisEnd-users of imported casual and sports apparel are generally label-conscious urban youngpeople. The popularity of baseball, football, and basketball in Portugal has resulted in a highdemand for T-shirts and hats with American sports team logos.


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Quality sportswear is important to Portuguese consumers for functional activities as well asrelaxing on the weekend; indeed, they are willing to pay a high price to assure their comfort andensure their status.

2.4 ACCESSIBILITY: KEY FACTORS

2.4.1 Import ClimateThere are no restrictions on the importation ofcasual and sportswear into Portugal. The customsduty for apparel imported from the U.S. is 14 percent ad valorem. U.S. suppliers can eliminatethis disadvantage by franchising their production to local companies, or by joint ventures withlocal manufacturers. In general, Portuguese importers prefer to import from the manufacturerdirectly instead ofthrough export companies.

Customs duties were eliminated for trade between EU members-countries in 1993. Portugalapplies the current EU Common External Tariff (CXT) on imports from non-US countries,including the U.S. a valued-added Tax (VAT) of17 percent is applied in Portugal on sports andcasual ware, whether produced domestically or imported. The import climate for Americanproducts is excellent.

The labels must provide the country oforigin and cleaning instructions.2.4.2 Distribution/Business Practices

U.S companies can sell casual and sportswear apparel in Portugal through an agent, using adistributor or by establishing a subsidiary.High quality, imported or locally produced foreign casual and sportswear apparel are usually (andmore effectively) sold in small, specialty, chain stores.

One point to be noted by foreign suppliers is that intellectual property rights are not yet fullyprotected in Portugal although progress is rapidly being made in the area ofpertinent legislation.As a result well-known brands can sometimes be imitated. Both Levi's and Lacoste, for example,have suffered from this weakness. As stated above, joint ventures are feasible and recommendedin view ofPortugal's existing industrial and trading infrastructure in this area. Franchising is alsorecommended and applied increasingly as a means for penetrating the Portuguese as well asneighboring markets.


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2.4.3 FinancingThe usual practice offoreign firms selling to a new customer is to require cash against documentson the first sale or two. Distributors accept the use ofconfirmed and irrevocable letters ofcredit.Payment practices in Portugal are cash and 60, 90 and 120 day terms. However, large companiestypically pay two to three months after delivery.2.5 KEY CONTACTS

2.5.1 Useful Contacts: Trade OrganizationsANIVEC-(NationalAssociationofClothingManufacturers)Av.Boavista,3523-7thFl

4150PORTO,PORTUGALPhone:(351-2)610-0050

Fax:(351-2)610-0049APT-(PortugueseTextilesandClothingAssociation)

RuaGoncaloCristovao,96-1stFl4000PORTO,PORTUGAL

Phone:(351-2)317961Fax:(351-2)310343

2.5.2 Portuguese ImportersAMBINOVA

LargoMouzinhodeAbuquerque,133500VISEU,PORTUGAL

Fax:(351-32)421445

AntonioFortesModas,Lda.

LargoEng.AntoniodeAlmeida,70-7.Sala4064100PORTO,PORTUGAL

Phone:(351-2)830-1100Fax:(351-2)830-1104

AntonioMaiadaCostaTeixeiraBarbosaRuadaSaudade,59-Sala118

4000PORTO,PORTUGALPhone:(351-2)600-9694

Fax:(351-2)600-9695

AQUAJET

Igreja-Barcelos4750BARCELOS,PORTUGALPhone:(351-53)824331

Fax:(351-53)824332


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CasaMaia,S.A.

RuadeCedofeita,120-1.4050PORTO,PORTUGALPhone:(351-2)202-2899

DESPORNAUTICA-ImportacaoeExportacao,Lda.

Av.SantosDumond,511050LISBOA,PORTUGAL

Fax:(351-1)795-6127

DELVESTE-ComercioeConfeccoes,Lda

Fradelos4760VILANOVADEFAMALICAO,PORTUGALPhone:(351-52)48126

Fax:(351-52)48534

DIVERDIS-ComercioInternacional,Lda.

RuaCidadedePoitiers,32-MonteFormosa3000COIMBRA,PORTUGAL

Fax:(351-39)494487

DuplaTextil-ImportacaoeExportacao,Lda.

RuaD.CarlosMascarenhas,32-RA1070LISBOA,PORTUGAL

Fax:(351-1)387-3067

F.S.RIBEIRO,S.A.RuaHeroisdeChaimite,43-1Apartado1061

2676ODIVELAS,PORTUGALPhone:(351-1)938-6214

Fax:(351-1)938-8126HelderA.MoraisFerreira

RuaAntonioAroso,486

4100PORTO,PORTUGAL

Phone:(351-2)618-4696INSTALPORT-RepresentacoeseComercio,Lda.

RuaAiresdeOrnelas,744000PORTO,PORTUGAL

Phone:(351-2)510-6085Fax:(351-2)510-3715

IsabelGomesCastroPhone(351-2)510-4305/575-934

Fax:(3561-2)510-4305

JOTABE-TexteisLar,S.A.

RuaVelosoSalgado5354454LECADAPALMEIDA,PORTUGAL

Phone:(351-2)996-3970Fax:(351-2)996-6031


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MODISIL-ModaseConfeccoes,Lda.

Pateiras4785TROFA,PORTUGALFax:(351-52)414008

Resende&Baptista,Lda.

RuaBaraodeForrester,7074000PORTO,PORTUGAL

Phone:(351-2)200-3618Fax:(351-2)313248

VESTIMA-ComerciodeVestuario,Lda.FraccaoA-Barroco,174

4465LECADOBALIO,PORTUGALPhone:(351-2)953-5967

Fax:(351-2)953-5969

2.5.3 Trade Promotion Opportunities

The trade events offering the best opportunities for U.S. firms to promote their products during1998-1999 are:

SELECTIV 'MODA - September 18-20, 1998 at EXPONOR, Porto

MOD' TISSIMO - October 9-10, 1998 at EXPONOR, Porto

MODATEXTIL - October 23-25, 1998 at EXPONOR, Porto

MOD' TISSIMO - March 1999 at EXPONOR, Porto

MOD' TISSIMO - October 1999 at EXPONOR, Porto

For additional information on these trade shows, contact:

EXPONOR-FeiraInternacionaldoPorto

4450LECADAPALMEIRA,PORTUGALPhone:(351-2)998-1400Fax:(351-2)995-7499

and:

FILMODA - September 3-6, 1998 at FIL, Lisbon

FILMODA - February 4-7, 1999 at FIL, Lisbon

FILMODA - September 2-5, 1999 at FIL, Lisbon


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For additional information on these trade shows, contact:

FIL-LisbonInternationalFair

PracadasIndustrias1300LISBOA,PORTUGAL

Phone:(351-1)3601500Fax:(351-1)3639048


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3 THE ECONOMICS OF LATENT DEMAND IN

PORTUGAL

3.1 EXECUTIVE SUMMARY

GDP: purchasing power parity - $122.1 billion (latest official estimate)

GDP real growth rate: 2.5% (latest official estimate)

Annual purchasing power per capita: purchasing power parity - $12,400(latest official estimate)

GDP composition by sector: agriculture: 6%; industry: 36%; services:58% (latest official estimate)

Budget: revenues: $48 billion; expenditures: $52 billion, including capitalexpenditures of$7.4 billion (latest official estimate)

Economic aid: donor: ODA, $248 million (official estimate of latest yearavailable); recipient: ODA, $70 million (official estimate of latest yearavailable)

Key Economic Drivers in PortugalKey drivers Portugal Reg. Avg. Global Avg.______________________________________________________________________________________________________Macroeconomics GDP/Capita (PPP) 12400 12712 7214

'' GDP: Agriculture % 6 12 20'' GDP: Industry % 36 32 28'' GDP: Services % 58 54 52'' Inflation Rate CPI % 3 18 29'' GDP Growth 96-97 % 3 2 2'' GDP Growth/yr to 2000 2 2 2'' Savings Rate 4 21 16

Structure Population (k): 1998 9812 15048 26096'' Urbanization %: 1998 37 70 55'' Largest City %: 1998 8 21 20'' Adult Literacy %: 1998 85 97 79



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GDP/Capita (PPP) in Portugal & International Benchmarks

0

5000

10000

15000


GDP/Capita(PPP)

GDP: Agriculture % in Portugal & International Benchmarks

0

5

10

15

20


GDP:Agriculture%

GDP: Industry % in Portugal & International Benchmarks

0

10

20

30

40


GDP:Industry%

GDP: Services % in Portugal & International Benchmarks

48

50

52

54

56

58


GDP:Services%

3.2 ECONOMIC ISSUES IN PORTUGAL

3.2.1 Economic Fundamentals and Dynamics

In 1997, Portugal had a deficit/GDP ratio of 2.4%, debt/GDP ratio of62.5%, inflation of 2.2%, a stable escudo within the European Monetary


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System for the past three years, and long-term interest rates below 6%.This more than met the criteria for joining the European single currencyset out in the 1992 Treaty on European Union. Accordingly, on May 2,

1998, European Union (EU) leaders approved Portugal's membership inthe group of eleven EU member states that will irrevocably fix exchangerates and adopt a single currency, the Euro, on January 1, 1999.Declining inflation and long-term interest rates and rising confidence inPortugal resulted in investment- and private consumption-led realeconomic growth of 4% in 1997 that continued in the 4-4.5% range in1998. Portugal's external accounts remained broadly in balance andfinancial markets were buoyant in 1997 and 1998, with bond yieldsfalling sharply to match their German equivalents and the stock marketexpanding rapidly. Unemployment declined to 5.9% in the first quarter of1998. GDP per capita on a purchasing power parity basis rose to over

70% ofthe EU average in 1997 from 52.9% ofthe EC average in 1985.

3.2.2 Economic Growth

Falling inflation and interest rates in Portugal over the past two yearsyielded steady economic growth beginning in the second half of 1996.The Portuguese economy grew 3.6% in real terms in 1996, 4% in 1997and is expected to grow 4-4.5% in 1998 and 1999. Domestic demandrose by 5.1% in 1997 while net external demand declined by 1.4%.

Gross fixed capital formation expanded by 12.9% in real terms in 1997(versus 7.7% in 1996). Heavy investment in public infrastructure (public

investment up 12.9%) and construction of family housing (mortgagecredit up 26.4%) dominated investment activity. Lower interest ratesreduced the cost of capital and eased firms' interest burdens and liquidityconstraints. Between December 1995 and December 1997, mortgageinterest rates (loans of5 years or more) declined by 4.4 percentage points,permitting larger average loans without higher associated debt service.

Private consumption grew 3% in 1997, as increasing real incomes andemployment boosted consumer confidence. Sharply lower nominalinterest rates improved families' liquidity and triggered a sharp (29.6%)increase in non-residential consumer credit. Imports of home durable

goods jumped by 9.7% and vehicle purchases increased by 7.4%. Goods and services exports slowed to 8.2% in real terms in 1997 (versus

9.6% in 1996), while imports of goods and services expanded 10.3%(versus 7.8% in 1996). Portugal's terms of trade improved marginally in1997 (0.7% for exports and 0.3% for imports). Export demand directed toPortuguese products continued to expand rapidly in 1997 and Portugueseexporters continued to increase their market shares in real terms. Thelatter owed much to the increase in productive capacity of the


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manufacturing sector, notably exports from the two year-old AutoEuropa(Ford/VW) plant. In 1997, AutoEuropa produced 131,400 multipurposevans and generated sales of $2.27 billion (2.2% of GDP). The plant

exported 98.3% production to major European markets (Germany, UK,France).

Capacity utilization in manufacturing rose to 81% in 1997, with higherthan average rates in the automobile sector (84%) and other equipmentgoods sector (85%). Higher demand spurred an increase in productivecapacity, with the industrial production index increasing by 5.3% in 1997(1.6% in 1996) and the intermediate goods index increasing by 7.6% in1997 (0% in 1996). The government believes supply-side expansiontypical of Portugal's stage of development and business cycle mitigatedthe "overheating effects" ofstrong demand growth through mid-1998.

For 1998, the lagged effect ofinterest rate reductions continued to be felt.Continued job creation, real wage increases, rising external demanddirected at Portuguese exports, completion ofmajor public infrastructureprojects and the expansionary impact of the 1998 Lisbon WorldExposition boosted real growth by 4-4.5%. Gross fixed capital formationgrew by approximately 7.5-9.5%, private consumption by 3-3.75%, andexports of goods and services by 9-10%. Historically high demand forhome construction, continued highway and railroad building (funded by a7.4% increase in EU co-funded public investment in the 1998 budget),and completion of EXPO '98 real estate development ensure continuedstrong expansion of public investment in 1998. Continued recovery of

key EU markets (France and Germany) imply further increase inPortuguese exporters' market share. Tourist revenues stemming fromEXPO '98 boosted economic activity and reduced the current accountdeficit in 1998. Imports of goods and services rose 8-10%, in line withcontinued economic growth. Economic growth on the upper end ofthe 4-4.5% range was clearly above the trend growth of the economy, however,and could begin to generate "overheating effects" in early 1999.Similarly, employment fell by another 0.5 percentage points to about5.5%, nearer Portugal's natural rate of unemployment, implying somewage pressures toward the end ofthis year or early next.

3.2.3 Inflation Average consumer price inflation declined to 2.2% in 1997 and 2.1% in

March 1998. Based on the EU's harmonized index, Portuguese 12-monthaverage inflation rate fell to 1.7% in February 1998 versus 1.6% for theEU-15 and 1.1% for the average ofthe three EU members with the lowestinflation (Ireland, France, and Austria). Disinflation continued to dependon a stable exchange rate and wage moderation. Portuguese financial


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authorities supported a cautious but steady decline in interest rates and astable parity of the Portuguese Escudo against the German Mark in thesecond half of 1997 and the first half of 1998. Nominal private sector

wage settlements averaged 3.5% in 1997 versus 4.4% in 1996.Government, labor, and management failed to reach agreement on acollective bargaining reference wage increase for 1998 under the"Strategic Social Pact" signed in December 1996, but wage settlementsaveraged 3.1% in the first quarter of1998.

3.2.4 External Accounts

Portugal's current account deficit in relation to GDP rose from 1.4% in1996 to about 2% in 1997 and was expected to be in the range of1.5-2%in 1998 on a national accounts (accrual) basis. Surpluses on services

(especially tourism) and unilateral transfers (from the EU and emigrants)offset the large merchandise trade deficit and continuing deficit oninvestment income. The merchandise trade deficit rose to $9.55 billion(9.3% ofGDP) as rapidly expanding private investment boosted importsof heavy equipment and machinery. Tourism revenues rose to theequivalent of2.3% ofGDP in 1997, EU transfers remained at 3% ofGDPand emigrants' remittances remained at 3.4% ofGDP. The basic balancestrengthened in 1997 as foreign direct investment rose to $1.7 billion(1.7% ofGDP). Foreign portfolio investment surged to $7 billion (6.8%ofGDP). Gold (at book value) and other official reserves stood at $18.5billion at end-March 1998, while Portugal's direct public external debt

stood at $14.6 billion at end-February 1998. When residents' portfolioinvestment in long-term foreign bonds and money market instruments isincluded, Portugal's net external position remains strongly positive (12%ofGDP).

3.2.5 Budget Consolidation/Privatization

The general government budget deficit declined to 2.4% and public debtto 62.5% ofGDP in 1997. The budget deficit remained at 2.5% ofGDPin 1998 and should decline to 1.5% ofGDP by the year 2000. The keybudget challenge remains to control current expenditures and strengthencurrent revenues without raising tax rates (mainly through more efficienttax administration and further crackdowns on evasion and fraud). Thegovernment believes Portugal's "social deficit" (education and healthneeds) precludes more severe current cutbacks. It looks to revenueenhancement to maintain current budget balance and make room forcontinued public investment amounting to at least 4% ofGDP per year.

The government continues to privatize state-owned firms and use theproceeds to reduce public debt. In 1997, the government generated


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receipts of PTE 868 billion ($4.9 billion) and it applied three-quarters ofthis to debt reduction. In June 1997, the government sold 29.6% (firsttranche) of the state-owned electric utility EDP through a public

offering/direct sale that raised PTE 391 billion ($2.2 billion). InSeptember, the government sold an additional 26% (third tranche) ofPortugal Telecom through a public offering/direct sale that raised PTE363 billion ($2 billion). The government also sold 35% of its shares inthe highway management firm BRISA ($554 million) and 90% of itsstake in the chemical firm QUIMIGAL ($45 million). In 1998, thegovernment planned to sell up to 20% (second tranche) ofEDP and lowerits debt/GDP ratio to 60% or less.

3.2.6 Financial Markets

In line with the increasing likelihood that Portugal would join theEuropean single currency in January 1999, nominal yields on 10-yearPortuguese bonds fell from 6.97% in December 1996 to 5.68% inDecember 1997. Following formal confirmation on May 2, 1998, thatPortugal would join the Euro zone, long-term interest rates dipped below5%, virtually converging with their German equivalents. Short-termcentral bank rates dropped to 4% and commercial bank lending anddeposit rates declined to 10% and 5%, respectively. The Lisbon StockExchange (BVL) boomed in line with stronger economic growth, a stableinvestment climate and continued success of Portugal's privatizationprogram. Led by the telecommunications, financial services, and

insurance sectors, the BVL-30 index rose 79% in 1997 (52% in $ terms)and by 41% in the first five months of 1998 (43% in $ terms). Totalmarket capitalization (stocks and bonds) rose to some $104 billion (morethan 100% of estimated GDP) in 1998. Foreign portfolio investment of$7 billion -- one-third into stocks (notably ofnewly privatized firms EDPand PT) and two-thirds into bonds -- fueled the securities market rise in1997. Domestic government debt issues carry AAA rating and foreigncurrency issues AA- rating. The U.K. was the largest source of foreignportfolio investment ($2.6 billion), followed by the United States ($1.3billion) and Germany ($1.1 billion).

3.2.7 Employment Strengthening economic growth reduced unemployment in 1997. The

number ofemployed grew by 1.9% in 1997, after edging up by only 0.6%in 1996, while the number of unemployed dropped by 5.7%. Theunemployment rate accordingly fell to 6.7% in 1997 and the trendremained downward -- 6.5% in the fourth quarter of1997 and 5.9% in thefirst quarter of1998. Short-term ("non-permanent contract") employmentjumped by 15.7% in 1997, while long-term ("permanent contract")


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employment declined by 0.6%. This suggests that high severance andsocial costs associated with the permanent contract labor regime continueto hamper employment growth. Youth unemployment remained high

(14.6%) and appeared marked among educated youth, signaling amismatch between what students are learning and what the labor marketdemands. In the first quarter of 1998, however, the number ofunemployed youth (15 - 24 year-olds) fell by 15%.

Portugal continues to register the lowest manufacturing wage costs (basesalary plus benefits) in the EU (about $6/hour). It has one of the lowestrates of days lost to strikes (29 days/1,000 employees). Overall, wagesare about one-third of the EU average. The minimum wage in Portugalwas $337/month during 1997. Portugal's unit labor costs rose 4% in1997, the result of growth in compensation per employee of 6% and

productivity growth of 2%. The government believes massive increasesin productivity in manufacturing are a direct result of heavy investment,particularly by foreign multinationals, in a variety of leading sectors(automotive, electronics). The level ofunionization is low in the privatesector and strikes are rare. Public sector union strikes are more common,particularly in the transport sector.

3.2.8 Dynamic Markets

Portugal's ongoing public infrastructure building program offers majorgrowth opportunities for civil engineering firms and suppliers ofconstruction equipment and materials. EU co-funding in transportation,

communications, ports and environmental projects ensures strong growthfor firms in these sectors over the medium-term. Construction andoutfitting of public hospitals and private clinics offer continued marketopenings. The planning and construction ofa new Lisbon airport as wellas construction of an LNG terminal will offer a large array of businessopportunities. Private housing construction has boosted demand for arange of products in the home construction and supply sectors.Investment in Portugal's tourist industry continues to expand to meetincreased tourism demand. Privatization in the energy and aviationsectors offers additional market prospects. Other high-growth sectorsinclude automotive manufacturing, semiconductors, electronics, plastics,

food processing, and franchising services.

3.2.9 Coarse Grain

Prior to 1991, Portugal was a strong market for U.S. coarse grains,particularly corn and sorghum. However, in that year Portugal began toapply the EU's variable import levy system to the corn sector. As a result,U.S. coarse grain exports dropped from over USD 93 million in 1990 to


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European Union, and emigrants' remittances. In 1997, the Bank ofPortugal estimates that Portugal ran a current account deficit ofabout 2%of GDP on a national accounts (accrual) basis. The merchandise trade

deficit (FOB basis) rose to about 9.3% of GDP, while the deficit oninvestment income narrowed to less than 0.5% of GDP. Tourismrevenues rose to $2.4 billion (2.4% of GDP), EU transfers rose to $3.1billion (3% of GDP), and emigrants' remittances rose to $3.5 billion(3.4% of GDP). Merchandise exports (machinery and equipment,vehicles, clothing, footwear, textiles, wood and cork, industrialchemicals) rose to $23.1 billion (FOB). Imports (vehicles, machinery andequipment, appliances, petroleum, chemicals, and food) rose to $33.5billion (CIF). Portugal recorded net foreign direct investment inflows of$72 million in 1997 (versus net outflows of$58 million in 1996): foreigndirect investment inflows ofUSD 1.725 billion offset Portuguese foreign

direct investment outflows of $1.656 billion. Net foreign portfolioinvestment inflows were $1.215 billion (versus net outflows of $1.8billion in 1996). Foreign investment in Portuguese bonds and stocksjumped to $7 billion (from $4.2 million in 1996), while Portugueseinvestment in foreign stocks and bonds remained stable at about $5.8billion. Foreign exchange reserves stood at $12.9 billion, while gold (atbook value) stood at $3.265 billion at end-1997. Direct state externaldebt of$13.9 billion was 74% oftotal foreign reserves in December 1997.

3.2.13 Infrastructure Situation

Portugal is rapidly improving its road, energy, and sanitationinfrastructure with the help of substantial structural funds from the EU.During the period 1997 - 2000, Portugal will invest some USD 20 billionin regional development projects, including major infrastructure projects,with approximately one-third of the financing provided by the EU. TheEU-backed investment will be deployed in virtually every sector of theeconomy. A large proportion is being applied in highways, ports,subways, and rail lines.

The ten top infrastructure projects underway with large EU fundinginclude: Northern rail line modernization (USD 700 million), Natural gasregional pipelines (USD 700 million), Airports/ports modernization (USD

930 million), Porto subway (USD 500 million), Lisbon subway (USD 1.4billion), Low-cost housing (USD 2 billion), Alqueva dam (USD 380million). Proposed projects: Lisbon airport for the year 2007 (USD 2.1billion), LNG terminal (USD 500 million)

American and foreign equipment and services enjoy an excellentreputation and have numerous opportunities in the modernization of the


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4 EXPORTACCESSIBILITY IN PORTUGAL

4.1 EXECUTIVE SUMMARY

Exports: total value: $25.8 billion (f.o.b., official estimate for latest year);commodities: clothing and footwear, machinery, corkand paper products,hides partners: EU 80%, other developed countries 9% (US 4.5%)

Imports: total value: $34.2 billion (c.i.f., official estimate for latest year);commodities: machinery and transport equipment, agricultural products,chemicals, petroleum, textiles partners: EU 72%, other developedcountries 8% (US 3%), less developed countries 17%

External debt: $13.6 billion (latest official estimate)

Currency: 1 Portuguese escudo (Esc) = 100 centavos

Exchange rates: Portuguese escudos (Esc) per US$1 - 160.35 (January1997), 154.24 (1996), 151.11 (1995), 165.99 (1994), 160.80 (1993),135.00 (1992)

4.2 EXPORTING TO PORTUGAL

4.2.1 The Banking System

Total assets of the banking system were approximately PTE 41 trillion(USD 241 billion) in 1997. The purchase ofBanco Comercial dos Acores(BCA) by Banco Internacional do Funchal (BANIF), the sale ofBanco deFomento e Exterior (BFE) to Banco Portugues de Investimento (BPI), andthe sale of the residual government share in Banco Totta e Acores (BTA)to private investors left the Caixa Geral de Depositos (CGD) group theonly financial institution in government hands at the end of 1996. Thegovernment's share of total shareholder equity in the banking systemaccordingly declined to 30% in 1996 from 90% ten years ago.

The five largest banking groups in Portugal by total assets (weightedaccording to ownership shares) are as follows: the Champalimaud Group

(USD 59 billion), including Banco Pinto e Sotto Mayor (BPSM), BTA,Credito Predial Portugues (CPP) and Chemical Bank-Portugal; the BancoComercial Portugues (BCP) Group (USD 55 billion), including BancoPortugues do Atlantico (BPA) and part ownership in four other smallerbanks; state-owned CGD Group (USD 53 billion), including BancoNacional Ultramarino (BNU); the BPI Group (USD 33 billion), includingBFE and part ownership in two smaller banks; and Banco Espirito Santo eComercial de Lisboa (BESCL) (USD 20 billion). These five groups


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account for an estimated 83% of total assets and more than 90% of theprofits ofthe banking system.

Nevertheless, Portuguese banks remain small by European standards --the top three noted above were ranked 81st, 85th, and 152nd largest inEurope, respectively, in 1995. Liberalized financial markets and greaterEuropean competition limit the scope for significant oligopolisticbehavior. Financial margins declined to 2.3% in 1997 from 2.65% in1995. Commercial and consumer loan rates fell to 11-12% and depositrates to 3-5%. Greater consumer and business awareness ofcredit optionsand stiff foreign competition were expected to accentuate this downwardtrend in 1998 and should continue to do so in 1999.

4.2.2 Banking Soundness

The average solvency ratio was in 1997 ofabout 8.7%. Bad loans amountto an estimated 5.3% of total loans, in line with international norms, butare a higher percentage in the agricultural sector. Portugal has transposedinto national law key EU financial Directives covering bankingcoordination (the "community passport"), auditing on a consolidatedbasis, capital structure, solvency, and money-laundering. A depositguarantee fund is in place and the Fund's resources stood at PTE 52billion (USD 350 million) at the end of 1995. In June 1995, depositguarantees were extended to include deposits taken by Portuguese banksin other EU countries. Banks' shares trade freely on the stockexchange.

4.2.3 Financing Export Strategies

Short-term and medium-term financing are readily available. Overdraftsare the most common source of short-term finance for corporations. Theissuance ofcommercial paper began in 1993 and has grown rapidly. Theplacement of bonds by corporations is the preferred medium-termfinancing instrument. Intercompany borrowing is also common.

4.2.4 Financing Projects

Contractors may be required to bring financing proposals for majorprojects bids on a case-by-case basis although generally the Governmentfinances the project. Project financing is available for a wide variety ofprojects ranging from bridges to gas pipeline construction.

4.2.5 Trade Regulations and Standards

The EU Customs Code (Code) was fully adopted in Portugal as ofJanuary 1, 1993. Special tariffs exist for tobacco, alcoholic beverages,petroleum and automotive vehicles. The Code adopts the directives ofthe


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General Agreement on Tariffs and Trade (GATT) including theamendments that resulted from the Uruguay Round ofwhich Portugal is asignatory member.

Portugal uses the Harmonized Nomenclature and Classification System(HS) and applies import duties according to a maximum and minimumrate schedule. The minimum tariff schedule is applied to goodsoriginating in countries entitled to the benefits of most-favored nationtreatment (that is, members of the GATT and countries with which theEU has signed trade agreements) including the United States and mostother countries.

Most import duties are levied on an ad valorem basis. However, specifictariffs and compound tariffs (the basis for weight may be gross, legal netor actual net weight) are also used for some imports. Please note that

importers must pay the value-added tax (IVA) which ranges up to 17% infull at the time of importation from a non-EU country. Imports from EUcountries only pay the IVA when a product is sold. This detailencourages many distributors to import indirectly from the U.S. via otherEU countries.

4.2.6 Valuations on Imports

The customs value of imported goods is found by a set of six methods.The most commonly used customs value is the "transaction valuemethod", which is the sales price in open market conditions when the

product is sold in EU Customs Territory. If this method cannot beapplied the others may be successively used, the sixth being a last resort.The "transaction value method" is based on the price actually paid by theimporter to receive the merchandise in EU territory (no matter the port ofentry).

The invoice price is generally used as the "transaction value method" ofan import if it is clear that the price reflects market conditions and nodoubt exists as to the accuracy of the details supplied. The transactionvalue method is usually the CIF price including any brokeragecommissions and packing and excluding any duties payable in Portugal orEU countries.

4.2.7 Licenses Required for Imports

Because Portugal is a member of the EU, the majority of importedproducts enjoy liberal import procedures. However, there are certainproducts which require import licenses called import certificates foragriculture products and international import certificates for strategic/dualuse products (products that may be used for both military and civilian


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purposes). For dual use products a certificate of delivery may also berequired. There are also some licenses required for the import of textileproducts and for some industrial products from certain countries although

not from the United States. Applications for import licenses should besubmitted to the General Directorate of External Commerce. Tobacco,alcoholic beverages and automobiles are still subject to some importcontrols, generally resulting from bilateral agreements.

4.2.8 Controls on Exports

Since May 1988 Portugal has adopted EU directives regardingexportation. Presently, Portuguese exporters need to obtain an exportdeclaration (this is a simplified procedure generally handled by a customshouse broker) before they ship their merchandise. The export declaration

is used for Portuguese Customs purposes but one copy should staytogether with other export documentation.

In principle, the export declaration cannot be obtained without a receipt ofdeposit confirming that the merchandise is physically deposited in acustoms area or an export warehouse. Export warehouses are approvedby Customs authorities and generally facilitate the process of exporting.They do so by issuing export declarations as soon as the exporter informsthe Customs authorities that the merchandise is available, and by makingsaid merchandise available for Customs inspection.

Portuguese Customs regulations have recently approved the

implementation of simplified export proceedings. This allows authorizedexporters, exporters of perishables and express mail operators to exportmerchandise directly from their establishments. They are only required topresent a commercial invoice to the Customs Authorities. The deposit ofa guarantee is no longer required for exporters to have access tosimplified export procedures.

4.2.9 Documentation Required for Trade

The following documents are required for ocean or air cargo shipments toPortugal: a bill of lading or an airway bill accompanied by commercialinvoices.

Certain products require special documents: food products need acertificate of health in Portuguese; electric materials and constructionequipment/machinery need a certificate of conformity to EU directives;grapes, alcoholic beverages and tobacco need a certificate ofauthenticity.Certificates oforigin may also be required ifthe origin can in any way beattributed to a country subject to quantitative or other restrictions.


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4.2.10 Bills ofLading and Airway Bills

Bills of lading and airway bills require no consular legalization.

However, these documents should, ifpossible state the origin. "To order"bills of lading are acceptable if they bear the shipper's endorsement. Twocopies ofthe document used in Portuguese or English are required.

4.2.11 Commercial Invoices

Portuguese Customs requires two copies of commercial invoices, but atleast one additional copy should be provided to the importer.Commercial invoices should have an accurate and specific description ofthe goods with Free On Board (F.O.B.) value followed by an itemizeddescription ofexpenses or Cost Insurance and Freight (C.I.F.) value. The

invoice should indicate the country oforigin. If the invoices are intendedto certify the origin of the goods, they must have a certification by achamber ofcommerce (or by U.S. Customs or port authorities).

In cases involving commodities that have undergone industrialtransformation not representing full process ofmanufacture in the countryoforigin, or which have passed through free ports or zones, the respectivecommercial invoice shall bear notation issued by the PortugueseConsulate having jurisdiction in that area.

4.2.12 Certificate ofOrigin

Certificates of origin are not required on direct shipments (ocean, air orparcel post) or for goods transshipped via a waybill in which the origin isstated. For shipments not covered by a commercial invoice, a through billof lading or air waybill stating the origin must be accompanied by acertificate of origin if the origin can be attributed to one country beingsubject to quantitative or any other restrictions.

Certificates oforigin forms are obtainable from Portuguese Consulates orauthorized Chambers of Commerce. Certificates must be authenticatedby an authorized Chamber ofCommerce or the Portuguese consul, uponpresentation of satisfactory evidence of origin, either at the port oforiginal shipment or the port oftransshipment.

4.2.13 Entering Temporary Imports

Foreign goods may enter Portuguese territory under temporary duty-freeadmission. Temporary entry can be allowed for goods in transit, formanufacturing, for temporary storage in bonded warehouses or fortemporary importation. Generally temporary entry of goods requires thedeposit of a guarantee for import duties and VAT. However, in some


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cases, exemptions and partial guaranties can be made. In transitmerchandise can be entered without guarantee by residents ofthe EU whomake regular entries in transit or under carnet TIR, carnet ATA or a

NATO 302 form. Guaranties are reimbursed when the merchandiseleaves the territory of the EU. Professional materials, merchandise to bepresented in exhibitions, teaching materials, medical/surgical andlaboratory equipment, and other materials listed in the EU customs codecan be temporarily imported duty-free under a carnet ATA. Temporaryimportation allows the merchandise to stay in the EU territory as foreignmerchandise for a period of24 months.

4.2.14 Labeling Issues

Generally all products must be marked according to EU directives.

Imported goods need to be marked with an indication of origin. Theindication "made in" is no longer accepted in Portugal. All importedproducts sold directly to the public must be marketed with the label"Fabricado em" which is the Portuguese translation of "Made in". Falseindication oforigin is prohibited.

Generally all products directly sold to the public must have their labels ormarkings translated into Portuguese especially the composition and usageinstructions and should indicate clearly its validity and the name andaddress ofthe importer.

There may be special requirements for some products such as

pharmaceuticals, detergents, tobacco, fertilizers, alcoholic beverages andfoodstuffs containing preservatives and colorings. There are also specialrequirements for the packaging and labeling of dangerous or toxicproducts.

Jewelry and other articles ofgold, silver or platinum must be assayed andhallmarked in Portugal by the assayer's office in Lisbon or Porto. Theimportation ofthese articles is limited to those firms or persons registeredin the assayer's office.

There are no special requirements for marking the outside of cases forshipment to Portugal except that weights, when marked, should be in

kilograms. Dangerous products must be marked according to theinstructions ofthe UN.

4.2.15 Restrictions on Imports

As an EU country Portugal follows the EU Customs Code and has noprohibited imports. However, some products are subject to very strict


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controls such as strategic products, wildlife, hazardous articles, non-sportfirearms and ammunition, etc.

4.2.16 Local Standards

Portugal uses NP EN ISO 9000 Standards, which are equivalent to ISO9000 standards. Exporters must demonstrate through a certifying entitythat the products offered meet equivalent quality standards. On July 2,1983 the legal framework for the "Portuguese Quality System" wasestablished to monitor quality methods in Portugal. The "PortugueseQuality System" is organized in three areas: metrology, normalization,and qualification. The IPQ (Portuguese Institute for Quality) certifiesstandards in Portugal and is one of the entities responsible for the"Portuguese Quality System".

4.2.17 Madeira

The Madeira's International Business Center includes an Industrial FreeZone (41 licensed firms), a Financial Services Center (43 licensed bankbranches), an International Services Center (2,833 licensed firms) and anInternational Shipping register (148 licensed firms). Madeira offersexemptions from corporate or individual income tax on licensedcompanies through the year 2011. It also offers grants ofup to 100% ofemployee training costs and up to 50% of the cost of energy-savingchanges in production measures. The Free Zone offers total exemptionfrom customs duties on goods and raw materials imported into the zone;exemption from quotas on exports to the EU of goods produced in thezone; no payment ofEU duties on local value-added; and no payment ofEU duties on products incorporating EU raw materials and components.Foreign-owned firms have the same opportunities as domestic firms.

4.2.18 Azores

The Azores has established a Free Trade Zone on the island of SantaMaria with tax and financial incentives.

4.2.19 Bonded Warehouses

Foreign products may be entered into Portugal and be stored in bondedwarehouses duty-free for an unlimited period of time. There are fivetypes ofbonded warehouses depending on its public or private nature andwhether its management is endorsed by the Customs authorities or byprivate entities (established in the territory of the EU). In some bondedwarehouses it is possible to do some handling, assembling and ormanufacturing ofthe stored goods.


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4.2.20 Advanced Rulings on Classification

Advanced rulings on tariffclassifications for each type ofproduct may be

obtained upon request, in writing, to Customs at Porto or Lisbon. Therequest should include the name and address of the person who wants theruling plus detailed descriptions, composition, applications of the productand as well as samples duly packed and labeled or photographs, plans orcatalogs. The nomenclature on which the classification is desired, thesuggested classification and other information necessary for an adequateruling may also be supplied.

An advanced ruling may lose validity if it is no longer compatible withnew regulations or with new interpretation of the nomenclature used andthis information is given to the holder of the ruling. There may apostponement (ofup to six months or the period ofvalidity ofany importcertificate issued) of the loss ofvalidity of an advanced ruling -- for dutydetermination purposes or calculation of quantity restrictions -- ifimport/export contracts have already been made or certificates ofimportation have been issued.

4.2.21 Entry and Re-Export

Foreign merchandise landed in Portugal must be declared for importationor temporary entry into the EU territory within a period of 45 days iflanded by sea or 20 days iflanded by air or from land. After arrival, ifthemerchandise cannot be immediately declared to customs because

documentation is missing or because ofany other reason, it will be storedex-officio by the port authority in temporary storage customs warehouses,the cost ofwhich is variable according to the nature of the merchandise.Any merchandise may be reshipped out of EU territory either before orafter customs clearance. Normal re-exportation is made when themerchandise is entered under one of the temporary entry regimes. Re-exportation may be done after submission of a special customsdeclaration.

4.2.22 Samples and Advertising Materials

As an EU country and member of the Convention to Facilitate theImportation ofSamples and Advertising Matter, Portugal grants duty freeentry to giveaway samples properly labeled (except Tobacco andMatches), up to a duty value of175 ECUs and up to a VAT (value addedtax) value ofthe same amount.

Samples for which the duty is greater than these amounts may also beadmitted duty free if they are intended for exhibitions, conventions orsimilar events, or other promotional purposes that justify the quantity


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being imported. The person making the declaration should providejustification for the larger quantity.

Samples are subject to the same documentation requirements that apply toordinary commercial shipments and require a symbolic value for customsdeclaration purposes on the shipping documents or commercial invoices.

Catalogs, price lists, brochures, pamphlets may also be entered duty freeunder the same conditions as the samples, if the name of themanufacturer/seller is readily apparent.

4.2.23 Duty Refund

Once goods have been cleared through customs, collected duties or excesspayments may be refunded if at the moment of payment they were not

due. Refund for undue and excess payments can be claimed within aperiod of three years. Refund ofduties can also be obtained ifa customsclearance declaration is canceled after the payment ofduties. If importedmerchandise is defective or does not meet the contracted specificationsand is refused and re-exported by the importer, he may request a dutyrefund within a period of12 months.

There are other conditions, defined by the EU Committee, under whichpaid import duties may be refunded. All refunds must be requested by theinterested parties.

4.2.24 Drawback

Importers may take advantage of "drawbacks" for all types ofmerchandise, except those subject to quantity restrictions or anyagricultural leveling duty or similar imposition when the merchandise wascleared. Drawbacks allow the reimbursement of any duties paid on rawmaterials, parts, or components imported for the manufacture ofa productin country for later exportation. This will be possible only if there are norestrictions to the exportation of the products that resulted from theimported merchandise and that the intended exportation tookplace.


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5 DIRECT INVESTMENTACCESSIBILITY IN

PORTUGAL

5.1 EXECUTIVE SUMMARY: INFRASTRUCTURE

Electricity: capacity: 8.83 million kW (latest official estimate)

Electricity - production: 33.1 billion kWh (latest official estimate)

Telephone system: domestic: generally adequate integrated network ofcoaxial cables, open wire, microwave radio relay, and domestic satelliteearth stations international: 6 submarine cables; satellite earth stations - 3Intelsat (2 Atlantic Ocean and 1 Indian Ocean), NA Eutelsat; tropospheric

scatter to Azores; note - an earth station for Inmarsat (Atlantic OceanRegion) is planned

Railways: total: 3,068 km; broad gauge: 2,761 km 1.668-m gauge (464km electrified; 426 km double track) narrow gauge: 307 km 1.000-mgauge; note: in 1994, Portugal had 3,520 km of track of which 464 kmwere electrified

Highways: total: 68,732 km; paved: 59,110 km (including 587 km ofexpressways); unpaved: 9,622 km (latest official estimate)

Waterways: 820 km navigable; relatively unimportant to nationaleconomy, used by shallow-draft craft limited to 300 metric-ton cargo

capacity

Pipelines: crude oil 22 km; petroleum products 58 km; note: there is a 700km natural gas pipeline which connects with one in Spain carryingAlgerian natural gas which is to open in 1997; the secondary lines thatwill be 300 km long have not yet been built

Merchant marine: total: 84 ships (1,000 GRT or over) totaling 556,069GRT/906,790 DWT; ships by type: bulk 9, cargo 47, chemical tanker 6,container 5, liquefied gas tanker 4, oil tanker 7, passenger-cargo 1,refrigerated cargo 1, roll-on/roll-off cargo 2, short-sea passenger 2 note:Portugal has created a captive register on Madeira for Portuguese-owned

ships; ships on the Madeira Register (MAR) will have taxation andcrewing benefits ofa flag ofconvenience; Portugal owns an additional 10ships (1,000 GRT or over) totaling 322,887 DWT operating under theregistries ofCyprus, Liberia, and Panama (latest official estimate)

Airports: 67 (latest official estimate)


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Highways: Total km in Portugal & International Benchmarks

0

50000

100000

150000


Highways:Totalkm

Airports: total in Portugal & International Benchmarks

0

50

100

150


Airports:total

5.2 EXECUTIVE SUMMARY: NATURAL RESOURCES

Location: Southwestern Europe, bordering the North Atlantic Ocean, westofSpain

Area: total: 92,391 sq km; land: 91,951 sq km; water: 440 sq km; note:

includes Azores and Madeira Islands Comparative area: slightly smaller than Indiana

Land boundaries: total: 1,214 km; border countries: Spain 1,214 km

Maritime claims: continental shelf: 200-m depth or to the depth ofexploitation; exclusive economic zone: 200 nm; territorial sea: 12 nm

Climate: maritime temperate; cool and rainy in north, warmer and drier insouth

Terrain: mountainous north ofthe Tagus, rolling plains in south

Elevation extremes: lowest point: Atlantic Ocean 0 m; highest point:

Ponta do Pico in Azores 2,351 m

Natural resources: fish, forests (cork), tungsten, iron ore, uranium ore,marble

Land use: arable land: 26%; permanent crops: 9%; permanent pastures:9%; forests and woodland: 36%; other: 20% (latest official estimate)

Irrigated land: 6,300 sq km (latest official estimate)


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Natural hazards: Azores subject to severe earthquakes

Environment: current issues: soil erosion; air pollution caused by

industrial and vehicle emissions; water pollution, especially in coastalareas

Environment - international agreements: party to: Air Pollution,Biodiversity, Climate Change, Desertification, Endangered Species,Hazardous Wastes, Marine Dumping, Marine Life Conservation, OzoneLayer Protection, Ship Pollution, Tropical Timber 83, Wetlands signed,but not ratified: Air Pollution-Volatile Organic Compounds,Environmental Modification, Law of the Sea, Nuclear Test Ban, TropicalTimber 94

Key Natural Resource Drivers in PortugalKey drivers Portugal Reg. Avg. Global Avg.______________________________________________________________________________________________________Climate Latitude (abs degrees) 39 48 25

'' Degrees (C) 20 10 20'' Monthly high (min C) 21 14 25'' Monthly high (max C) 40 37 37'' Monthly low (min C) -1 -19 1'' Monthly low (max C) 13 8 15

Terrain Land: Total area (km sq) 92080 505147 580201'' Usage: Arable % 32 21 13'' Usage: Crops % 6 2 4

'' Usage: Pastures % 6 17 17'' Usage: Forest % 40 19 23'' Usage: Other % 16 31 37'' Usage: Irrigated % 7 3 2'' Elevation: average (m) 95 138 245

Marine Inland waterways (km) 820 3515 2765'' Number ofPorts 7 8 4'' Water area (km sq) 440 298399 75116

Mineral Offshore Reserves: oil bbl/cap 0 0 0'' Offshore Reserves: gas/cap 0 1 3'' Oils % world reserves 0 59329 556237

'' # ofRare Minerals 4 1 2'' Rare minerals: % world res 4 4 14



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5.4.2 Investment Regime

Portugal maintains a simple, post facto registration regime for foreign

investment. Foreign investors need only register with the Foreign Trade,Tourism, and Investment Promotion Agency (ICEP) within thirty daysfrom the day they make their investment.

5.4.3 Restrictions

Portugal restricts non-EU investment in regular air transport to 49%. Itrestricts non-EU investment in television operations to 15% (by a singlenon-EU investor). It subjects complementary telecommunicationsservices to licensing and restricts non-EU investors' participation in thecapital ofcomplementary telecommunications operators to 25%. Portugal

also restricts foreign investors' participation in the capital of publicservice telecommunications operators to 25%. The government hasproposed legislation to modify some ofthese restrictions.

5.4.4 Privatization Law

Portugal's current privatization law (Number 11/90 of April 5, 1990)allows the Council of Ministers to specify restrictions on foreignparticipation in the privatization of state-owned enterprises on a case-by-case basis.

5.4.5 National Groups

Portuguese authorities tend, as a matter ofpolicy, to favor national groupsover foreign groups in order to "enhance the critical mass of Portuguesecompanies in the economy." The restrictions in the privatization law existlargely for this reason (with the original justification being that domesticgroups, but not foreign investors, were nationalized at the time of the1974 revolution.) Even when this and other legal restrictions areremoved, however, the government is in a position to use indirectmeasures to favor national groups over foreign firms. In the privatizationprocess, the government can set limits on the size offirms allowed to bidon an impending privatization, thereby reducing the ranks ofthe effective

foreign competition. In the regulatory process, the government can delayor deny approvals for foreign firms to expand operations or to acquire ormerge with private Portuguese firms on a variety of technical grounds,thereby supporting Portuguese groups.


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5.4.6 Finance/Insurance

The creation of new credit institutions or finance companies, acquisition

of a controlling interest in such financial firms, and establishment ofsubsidiaries require authorization by the Bank of Portugal (for EU firms)or the Ministry of Finance (for non-EU firms). In both cases, theauthorities take prudential considerations into account, but in the case ofnon-EU firms, the Ministry of Finance also considers the impact on theefficiency of the financial system and the internationalization of theeconomy. Foreign insurers from non-EU countries seeking to establish anagency in Portugal must post a special deposit and financial guarantee andmust have been authorized for such activity for at least five years.

5.4.7 Research and Development Programs

U.S. and other foreign firms are allowed to participate in government-backed research and development programs on par with Portuguese firms.These programs offer cash grants ofbetween 30% and 70% of the cost ofinvestment in R & D.

5.4.8 Residence/Work Permits

Companies employing more than five workers must limit foreign workersto 10% of the workforce. Companies can request exceptions to this limitif the foreign workers have special technical expertise. EU and Brazilianworkers are not considered foreign for the purpose ofcalculating the 10%

limit. EU workers must obtain a residence card for EU nationals but arenot required to have workpermits. Non-EU workers are required to haveboth a residence visa and a workpermit.

5.4.9 Convertibility

Portugal maintains no current or capital account restrictions. Portugal isone of eleven EU Member States that will enter the third phase ofEuropean Economic and Monetary Union (EMU) and adopt a new singlecurrency, the Euro, on January 1, 1999. The Portuguese Escudo isexpected to be converted to the Euro at close to its central parity against

the ECU (about PTE 200 per Euro).

5.4.10 Exchange Controls

The BankofPortugal retains the right to impose temporary restrictions oncapital flows in exceptional circumstances. The import or export ofgold(in any form), currency, and travelers' or other bearer checks exceedingPTE 2.5 million ($15,000) must be declared to customs.


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5.4.11 Expropriation Risks

There have been no cases ofexpropriation offoreign assets or companies

in Portugal

Documents

Apparel in Portugal