Doing  Business  In  Brazil  

By:  Angeline  Boyer                  Paul  Cutrupi                  Maria  Fernandez  

 Tracey  Waller        

October  2014  Board  MeeCng  

Agenda:    

   Review  the  Analysis  of  Expanding  Our  Company  to  Brazil  

 

Culture:  The  People  Influences  on  Brazilian  Culture  •  Portuguese  –  parCcularly  for  language,  customs  and  religion    •  Africans  •  Indians      ComposiCon  of  the  PopulaCon  •  More  than  half  of  the  populaCon  is  comprised  of  Brazilians  of  European  

descent.  •  Approximately  two-­‐fiRhs  of  the  populaCon  is  mulaSoes  (people  of  mixed  

African  and  European  ancestry)  and  MesCzos  (people  of  mixed  European  and  Indian  ancestry)  

•  A  small  proporCon  of  the  populaCon  is  enCrely  African  or  Afro-­‐Indian  •  A  smaller  proporCon  of  the  populaCon  is  Asian  •  Indians  are  the  smallest  of  the  major  ethnic  groups    

Culture:  The  People  •  Brazil  is  the  fiRh  largest  country  in  the  world  and  one  of  

the  most  diverse.    •  Different  areas  vary  significantly  depending  on  the  

regional  influences.      •  Regional  influences  come  from  Africa,  Holland,  France,  

Germany,  Poland,  Italy  and  Japan,  among  others.    •  Two-­‐thirds  of  the  populaCon  are  Roman  Catholic  and  a  

majority  of  the  remainder  of  the  populaCon  is  Protestant.    

•  The  cultural  idenCty  of  the  country  is  being  challenged  by  the  commercial  and  cultural  imports  from  Europe  and  North  America.    

Culture:  What  to  Consider  •  Portuguese  and  Brazilian  Portuguese  

vary  significantly.  Ensure  the  proper  language  is  used  for  transacCons  and  in  communicaCon  

 •  Family  loyalty  is  the  most  important  

thing  in  Brazilian  culture.    As  a  result,  nepoCsm  is  an  issue  

•  Brazilians  are  open  to  speaking  about  many  subjects,  but  they  consider  family  and  home  life  to  be  private  topics  when  it  comes  to  business  acquaintances  

 •  SubjecCve  feelings  and  emoCons  tend  to  lead  the  decision-­‐making  process  for  

Brazilians    •  Brazilians  consider  class  and  status  to  be  very  important    

Culture:  What  to  Consider  •  Punctuality  is  not  a  priority    •  Sharing  a  good  meal  is  an  important  component  in  

developing  a  business  relaConship  

•  Brazilians  can  be  offended  by  aggressive  business  a_tudes  and  confrontaCons  

•  Brazilians  tend  to  place  more  value  in  the  individual  they  are  doing  business  with  instead  of  the  company  the  individual  represents    

 •  Futbol  or  soccer  is  a  common  topic  of  conversaCon  among  Brazilians    •  Physical  contact  is  common  

•  Women  are  sCll  somewhat  viewed  as  subordinates    

Brazil’s  Infrastructure  

Infrastructure  

•  Brazil  is  5th  in  the  world  in  territorial  extension  •  Enormous  capacity  of  natural  resources  •  CompeCng  globally  with  other  countries,    Brazil’s  logisCc  structure  has  operaConal  problems  

•  Lack  of    skilled  logisCc  workforce  is  another  factor  that  restrains  the  improvement  of  the  Brazilian  logisCc  system  

                     Infrastructure  –  The  Network  

The  Brazilian  transportaCon  network  lacks  a  greater  variety  of  opCons  to  the  companies:  

•  214,000  km  of  roads  (1,600  km  of  them,  unpaved)    

•  30,000  km  of  railways    •  14,000  km  of  waterways  

Infrastructure  -­‐  Roads  

60%  of  the  cargo  in  Brazil  relies  on  roads,  which  is  the  greatest  weaknesses  of  the  system  

Average  Trucking  Time  from  San  Paulo  (Brazil’s  Main  Industrial  City)  to  other  ciCes  Brazil  is  4hr-­‐40hrs    

Infrastructure  -­‐  Ports  Since  1995,    Brazil  has  invested  1  billion  USD  in:  •  AcquisiCon  of  modern  equipment  •  Physical  infrastructure  •  Training  of  manpower    

With  this  Port  improvements,      it  is  esCmated  that  around    30%  of  the    vessels  worldwide  can  now  dock  in  Brazil      

I  Infrastructure  –  Ports    Con’t  

•  Because  of  Poor  Road  and  Railways,  access  to  cargo  container  faciliCes  at  the  port  cause  massive  delays  

•  Brazilian  Ports  Bureaucracy    -­‐  Every  ship  that  arrives  in  the  country  waits  at  least  5.5  days  to  have  the  goods  delivered  by  Government  agencies  (i.e.  the  Ministry  of  Agriculture  and  the  Docks)      

•  The  world  average  for  this  process  is  three  days        

Brazil’s  Currency    Currency  -­‐  Brazilian  Real    – USD  -­‐  2.42  R$  to  $1  USD  (as  of  10/9/2014)  – Not  considered  a  “hard”  currency  – Trending  upward  in  value  (source:  finance.yahoo.com)  

Economic  –  Overview    Economic  Growth  Rate,  in  terms  of  GDP:  

–  Fell  only  in  2009  (.33%)  during  the  world  financial  crisis  (Brazil  is  dependent  on  its  exports,  which  fell  sharply  that  year)  

–  Grew  7.53%  in  2010  as  exports  rebounded;  growth  conCnued  but  slowed  due  to  global  uncertainty  resulCng  from  European  debt  crisis.      

–  In  2013,  GDP  grew  2.53%  and  is  projected  to  grow  at  a  rate  of  3%+  over  the  next  few  years  

Economic  Overview  Con’t    •  Transparency.org  Rank:    72/175;  Score  of  42/100  (CorrupCon  issues)  •  World  Bank  Ease  of  Doing  Business  Rank:  116/189,  up  from  118  in  2013    

Source:  Transparency.org  

     Economic  Environment  -­‐  SWOT  

•  Largest  and  most  sophis0cated  financial  system  in  La0n  America    •  Good  loan  quality:  non-­‐performing  loans  were  3.4%  total  assets  in  2012    •  Stress  Tests  showed  that  most  Brazilian  banks  can  endure  extreme  external  shocks    •  Credible  fiscal  policy  demonstrates  stability  for  FDI  

•  Abundant  natural  resources,  especially  rare  earth  minerals  (strong  exports)  •  5.5%  2013  Unemployment  Rate—a  bit  arCficial  because  of  bolstering  by  government  

Strengths:    

Weaknesses:    •  High  infla0on  -­‐  6.2%  in  2013.    Tight  labor  market,  rising  wages,  High  

food  price,    rapid  expansion  of  consumer  credit    •  Heavy  government  involvement  in  economic  growth  (~40%  of  GDP)  –  

higher  federal  minimum  wage  than  other  OECD  and  BRICs;  causes  labor  costs  to  grow  more  quickly  than  producCvity.  Therefore,  heavier  tax  burden  than  many  other  emerging  markets.    But  lacking  educaCon:    10%  of  the  populaCon  holds  a  post-­‐secondary  degree  (Chile  =  25%;  Mexico  =  15%;    Avg  OECD  =  30%)  

•  “Custo  Brasil”:  the  indirect  costs  of  doing  business    -­‐  DistribuCon,  Government  procedures,  especially  LogisCcs  

•  Extremely  High  Growth  Poten0al:  poliCcal  stability;  large  market.    Government  has  set  high  interest  rates  and  taken  many  regulatory  measures  to  encourage  FDI    

•  Strong  FDI  Inflow:  Very  high  level  of  FDI  in  Brazil.  Currently  the  8th  largest  economy  in  the  world;  expected  to  become  #5  in  20  –  30  years.    Various  local  governments  offering  tax  incenCves  and  foreign  firms  funding  infrastructure  development.    Brazilian  Central  Bank  (BCB)  takes  posiCve  stance  on  FDI    

•  Rela0vely  Low  External  Debt:  As  compared  to  most  emerging  economies  stronger  net  liability  posiCon  in  the  internaConal  market.  15.0%  of  GDP  in  2013  

OpportuniCes:    

Threats:    •  Near-­‐term  Vola0lity  in  Currency  Exchange  Rate:    However,  foreign  

exchange  reserves  will  serve  to  miCgate  damage    •  Corrup0on  in  both  public  and  private  sectors:    

•  Bribery  is  significant  issue  in  internaConal  business  especially  •  RegulaCons  have  been  set,  but  are  rarely  enforced.        •  Two  cases  of  bribery  have  been  addressed  in  12  years.      •  Insecure  property  rights.    The  judicial  system  is  not  imparCal  in  

terms  of  poliCcal  influence.  •  Strong  Shadow  Economy:    “Informal  employment”  is  2nd  highest  in  

BRICs.    ~50%  by  the  late  2000s.    

     Economic  Environment  -­‐  SWOT  

•  Resources  need  to  be  allocated  toward  creaCng  a  comprehensive  tax  strategy,  a  solid  plan  for  repatriaCng  profits,  and  a  strategy  to  manage  exchange  rate  fluctuaCons.      

•  Create  division  within  the  Brazil  SBU  that  is  directly  responsible  for  handling  the  “Custo  Brazil.”    To  be  headed  by  senior  management.    

•  Risk  Management  with  respect  to  dealing  with  corrupCon  issues  and  consequences  of  shadow  economy  is  criCcal  to  avoid  issues  in  the  US  

     Economic  Strategy  ConsideraCons  

For  our  firm  to  be  successful  in  Brazil:  

Legal  Aspects  •  The  laws  in  Brazil  are  introduced  by  state  and  federal  governments  and  

the  legal  structure  is  quite  comprehensive    •  The  tax  system  is  complex  and  there  are  problems  associated  with  

protecCng  intellectual  property  rights  •  While  industrial  and  trade  policies  are  not  characterized  with  a  free  

compeCCve  environment,  there  are  delays  in  decisions  taken  by  the  judiciary  

•  There  are  lot  of  risks  apparent  in  the  country’s  legal  framework  because  of  disorganizaCon  of  the  regulatory  environment  

•  Government  policies  have  been  inhibiCng  compeCCon  because  of  high  levels  of  product  market  regulaCon    

   There  is  hope  that  the  legal  environment  in  Brazil  will  improve  considerably  with  the  implementaCon  of  the  anC-­‐corrupCon  law  introduced  in  January  2014.  

 (Marketline,  2014)  

     PoliCcal  Aspects  -­‐  Risks  The  main  poliCcal  advantage  in  Brazil  is  that  it  is  a  strong  federal  

republic  and  it  is  constantly  striving  towards  economic  integraCon.    The  Main  PoliCcal  risks  are  as  follows  

 •  Freedom  of  speech  is  not  guaranteed  in  Brazil  (Ex.  murder  of  

several  human  rights  acCvists  and  journalists  in  2013.)  •  The  country  is  characterized  with  weak  rule  of  law  In  2012,  

the  World  Bank  ranked  Brazil  only  in  the  52  percenCle  relaCve  to  rule  of  law.    

•  There  is  a  prevalence  of  violent  crime  and  gang  wars  ,  which  are  rampant  in  most  of  the  major  ciCes.    They  invariably  impact  business  acCviCes  adversely.  

•  There  is    increasing  incidence  of  public  protests  directed  at  raising  issues  of  high  inflaCon,  corrupCon  and  poor  public  services.    

 

(Marketline,  2014)  

                       PoliCcal  Aspects  –  Going  Forward    

Future  prospects  appear  to  be  good  because  governmental  efforts  of  cleaning  up  the  electoral  process  have  led  to  posiCve  outcomes      

•  The  Clean  Criminal  Record  Law,  which  was  implemented  in  2012,  disqualifies  poliCcians  with  criminal  convicCons  from  holding  elected  office  and  is  proving  to  be  quite  effecCve  

•  The  Marco  Civil  Law  has  been  introduced  in  2014  and  aims  at  safeguarding  the  right  to  freedom  of  expression.  It  promises  liberty  of  online  expression  to  all  Brazilian  ciCzens  

•  It  is  important  for  the  government  to  deal  with    protests  tacvully    so  that  there  is  no  violence    and  they  do  not  become  more  widespread  in  other  regions  of  the  country    

(Marketline,  2014)  

Summary  Topic   Risk  

Culture    

Despite  nepoCsm  in  the  country  due  to  the  value  Brazilians  place  on  their  families  ,  most  of  the  cultural  differences  between  Brazilians  and  Americans  can  easily  be  managed  to  form  successful  business  relaConships.    

Infrastructure    

Roadway  and  Railways    are  Sub  Standard.  Ports  are  more  efficient    but  it  is  below  World  Standards  

Economic   The  outlook  for  economic  growth  in  Brazil  is  expected  to  be  among  the  most  posiCve  in  the  world.    This  outweighs  the  risks.    Though  government  involvement  is  heavy,  it  strongly  encourages  FDI.  

Legal/PoliCcal   Despite  the  highlighted  legal  and  poliCcal  issues  ,  it  is  a  strong  federal  republic  and  it  is  constantly  striving  towards  economic  integraCon.  There  is  potenCal  for  improvement  because  laws  are  introduced  by  state  and  federal  governments.    

Low  Risk   High  Risk  

European  descent  

African/European  &  European  Indian  

African  &  African  Indian  

Asian  Indian  

World  Bank  Ranking  rela0ve  to  rule    

of  law  0  

2  

4  

6  

Brazil:  >5.5  days    

World:  3  days    

Average  Days’  Delay  at  Ports  

Largest  Country  

214,000  km  roads    30,000  km    railways    

14,000  km    waterways    

of  cargo  relies  on  roads,  the  greatest  weaknesses  of  the  

system  

Transparency.org  

World    Bank  Ease  of    Doing  Business  

72/175  

116/189  

HIGH  INFLATION  –  6.2%  

low  unemployment  –  5.5%  

Currently  the  world’s   largest  economy  

Projected  to  become    in  20  –  30  years  

                       Board  MeeCng  Takeaway  

Our  board  recognizes  that  doing  business  in  Brazil  presents  many  risks.    We  believe  we  have  idenCfied  the  major  potenCal  pivalls  and  can  therefore  manage  the  issues.    We  conclude  that  the  opportunity  for  success  outweighs  the  risk,  and  we  will  expand  the  company  into  Brazil.    

Sources  •  hSp://export.gov/brazil/staCc/

CC_BR_DoingBusiness_CCG_PDF_Chap4_TransportaCon_Latest_eg_br_063770.pdf  •  hSp://export.gov/brazil/staCc/

CC_BR_DoingBusiness_CCG_PDF_Chap4_TransportaCon_Latest_eg_br_063770.pdf  •  Marketline.  2014.  Country  Profile  Series:  Brazil  •  hSp://www.ey.com/PublicaCon/vwLUAssets/Doing_business_in_Brazil_2011/$FILE/Doing

%20Business%20in%20Brazil%202011.pdf  •  hSp://www.kpmg.com/IE/en/IssuesAndInsights/ArCclesPublicaCons/Pages/Expanding-­‐into-­‐Brazil-­‐

pub1.aspx  •  hSp://www.heritage.org/research/reports/2012/09/brazil-­‐restoring-­‐economic-­‐growth-­‐through-­‐

economic-­‐freedom  •  hSp://www.deloiSe.dbbrazil.com.br/show.aspx?idCanal=GTm1grWswpt2TqhrKjS9hg  •  hSp://www.transparency.org/country#BRA_Overview  •  hSp://www.doingbusiness.org/data/exploreeconomies/brazil/  •  hSp://www.britannica.com/EBchecked/topic/78101/Brazil/25112/Cultural-­‐life  •  hSp://books.google.com/books?id=rYr0AQAAQBAJ&pg=PT23&dq=cultural+influences+on

+business+in+brazil&hl=en&sa=X&ei=haU6VI3UCouOyATuooKACA&ved=0CGMQ6AEwCQ#v=onepage&q=cultural%20influences%20on%20business%20in%20brazil&f=false    

•  hSp://books.google.com/books?id=cpqjfxZsDHQC&printsec=frontcover#v=onepage&q=brazil&f=false