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How investors see Brazil and Brazil sees the world
in co-operation with
Foreword Executive Summary Introduction Part one: Cornerstones of success Part two: Social and intellectual capital I. Talent and education II. Innovation in thinking and action III. Brazilians abroad Conclusion: The beginning of the future 4 5 6 9 15 15 19 22 26
About this report
Brazil unbound: How investors see Brazil and Brazil sees the world is an HSBC report produced in co-operation with the Economist Intelligence Unit. The report draws on in-depth interviews with country experts and analysts, Economist Intelligence Unit forecasts, and a survey of executives in 536 companies across 18 industries, during April-May 2010. Around one third of survey respondents were based in Brazil and a further 11% in Latin America; 20% were based in Asia-Pacific, 15% in North America, and 12% in Western Europe. Over two-fifths (41%) of companies had annual global revenues of $500m or less, and 22% had annual revenues above $10bn. In terms of seniority, 58% of respondents were C-suite or board members.
the Middle East and China. a four-month summer celebration of the country’s cultural offerings at London’s Southbank Centre. This programme of activity is centred around our sponsorship of Festival Brazil. Working in 88 countries. whether you are already experienced in working with Brazil or are just starting to explore its opportunities. overtaking Britain and France. this Economist Intelligence Unit report identifies and explores the challenges that now face this dynamic country. As part of our global Cultural Exchange programme. Bringing together the views and opinions of the global business community. I hope that. while São Paulo will rank higher than Paris and Shanghai as the world’s sixth wealthiest city. With growth set to continue. Zarir J Cama Group Manager.Foreword Brazil’s economic resilience over recent years has captured the world’s attention. HSBC Holdings plc 4 . this report will prove valuable to your business. In 2010. South Africa. we see the understanding of different cultures as an essential part of building international relationships and business expertise. it has been forecast that by 2025 Brazil will become the world’s fifth largest economy. as it distanced itself from the political and economic uncertainty of the 1980s. Festival Brazil provides insight into one of the world’s most prominent economies. Group Management Office. HSBC celebrates the vibrancy and excitement of modern Brazil with a series of international events and activities across ten markets from the UK and Brazil to North America. All eyes have been on its growth.
Poor teaching and resourcing in secondary education means that school leavers are among the world’s least educated. However. coupled with a boom in global demand for Brazil’s copious supplies of commodities. will take years to address. infrastructure and fractious politics. provide the cash needed for vital investments for years to come. This report. a new stable currency. the state of innovation. especially in agriculture. a facet that may derive from learning to cope with economic upheaval. This is reflected in our survey. Indeed. Education standards may be higher in most parts of Asia. Part two focuses on three essential areas of the business operating environment: the market for talent. with almost one quarter of those respondents (24%) giving a warm reception to Brazilian products. Privatisation. As part of a general policy of trade diversification. greater investment in R&D and closer relations between companies and universities would have a disproportionately positive impact on innovation. Weaknesses in the education system impair the supply of relevant workplace skills. macroeconomic and business challenge after another. according to 42% of survey respondents. and the dilemmas facing Brazilian companies as they expand abroad. if used wisely. Interest has risen steadily over the past 15 years as the country has managed to overcome one political. Co-operation with universities works well. In particular. corruption. Brazil has been transformed from “country of tomorrow” to “once-in-a-lifetime opportunity”. Some of the key conclusions of this report and the main challenges facing Brazil include the following: Poor infrastructure takes a heavy toll on business. and only 6% say it is “poor”. Brazilian brands still lack the global draw of their Western counterparts. This indicates that better education. Beyond the charmed circle of a few high-profile companies. While many of the graduates of Brazil’s universities are viewed as top class. In our survey. to list just a few deep-seated problems. based on interviews and a survey of 536 senior executives worldwide. One way to promote innovation is through business co-operation with academic institutions. less than 10% of products and services sold by their companies have actually been developed there. and a shift in state funding from tertiary to secondary education. this flexibility does not translate adequately into innovation. China has become Brazil’s largest export and import partner. business has broken new ground in environmental and agricultural technologies.Executive summary Brazil has never been so popular among investors as it is now. as almost one third (32%) report that such co-operation “failed to live up to expectations”. investors could help more. or even plan to have one in the short term in Brazil. Moreover. compared with less than one quarter (23%) who say that such co-operation “failed to live up to expectations” or was “very unsuccessful” (5%). have boosted foreign currency earnings and fired up consumer spending. That said. the potential for waterways remains largely unexplored. other Asian countries. Brazilian-based companies would appear to get the rough end of such deals (or perhaps are too optimistic about their potential). better teacher training. Experience seems relatively limited. Brazilian managers are deemed to be on a par with their peers in developed markets. investors laud the flexibility and maturity of their Brazilian staff. especially with China. to name but a few achievements. Some 57% of surveyed executives do not have a dedicated R&D facility. Brazil has also expanded its share of trade with the rest of Latin America. Companies find they must fill the skills gaps themselves with their own training. and superior to those from other emerging markets. Brazil lags in innovation. Brazilian firms still suffer from poor brand recognition abroad. freight depends on costly road haulage. Investors praise the abilities of their Brazilian managers. say investors. improved infrastructure. At least one third of investors surveyed say skills shortages represent one of the biggest operating problems. 60% say the relationship has been “positive” and 12% “very positive”. macroeconomic and industry context. at present. the quality of management is “probably worse in China and India”. there are few railroads. there are too few of them. In spite of some improvement in logistics. with almost one half (47%) of US-based companies reporting this as their greatest challenge. but positive. Of survey respondents whose Brazil-based operations already work with local universities. Brazil focuses on “South-South” trade relations. but. 5 . But its new-found economic and political stability – which helped the economy withstand recent global financial shocks – allows policymakers to make a serious start on addressing these issues. Brazil scores poorly on most innovation rankings. These conditions can add one quarter or more to the cost of getting goods to market. the parlous state of the infrastructure tops the list of obstacles faced by investors in Brazil. largely endorses the general optimism about Brazil’s prospects. Part one of the report sets Brazil’s recent transition into its political. in which 84% of respondents say that Brazilian brand names are not well recognised or not highly regarded abroad. Logistics experts call for better co-ordination between different layers of government and the private sector. and deeper analysis suggests that even the meagre investments into innovation could produce better results. bureaucracy. and at least one quarter of respondents expect no progress on that score over the next three years. one of the biggest changes in Brazilian trade policy under President Lula has been the expansion of trade and investment with China. say investors. and provides investment and finance to secure supplies of key minerals. of course. the perception of Brazilian brands changes somewhat among China-based executives. Educationalists call for a more relevant curriculum. Yet almost half (49%) of survey respondents describe the capacity of Brazilian-based businesses to integrate the latest international technology into their operations as either “very good” or “excellent”. liberalisation. which are being exported worldwide. Only 3% of US-based respondents believe that Brazilian brands are both recognised and highly regarded. Although something of a truism. nearly one half of respondents (49%) point to “low standard or costly infrastructure” as the main operating obstacle. The transition is. far from over: education. Over one half of respondents (51%) say that. the Middle East and Africa. the smooth handover of political power. and ports and airports are congested. the country’s natural riches in agriculture and mining – and potentially offshore oil too – will. However.
Investor queasiness over the election in 2002 of the left-wing President Luiz Inácio Lula da Silva (“Lula”). a powerful signal that Brazil’s domestic concerns matter beyond its borders. and that its talents are the envy of the world. fast-growing market opportunity on a par with China. fast-growing market opportunity on a par with China. A supplier of key commodities to the world. Despite the fact that income distribution remains among the most skewed in the world – recent improvements aside – social inequalities and traditional stereotypes linked to culture and sport were cited respectively by only 13% and 9% of respondents. India and China) rather than to the country’s long-standing structural deficiencies. India or Russia” (49%) – although Chinese companies were far less favourably disposed to such a comparison – and as “an emerging player on the international stage” (40%). what do you consider to be the main image today of Brazil in the world? (% of respondents) A young. Overall. respondents to the Economist Intelligence Unit’s survey prefer to point to the “B” in BRICs (the oddball category of fast-growing emerging giants comprising Brazil. 6 . Russia. suffering only a brief and shallow dip. that its companies are a force to reckon with abroad. Brazil’s leaders will see it as global recognition of the country’s importance in the world. are certainly more realistic today than at any point in the country’s recent history. When asked about Brazil’s image in the world. More executives see Brazil primarily as “a young. the world’s fifth-most populous country and the eighth-largest economy. the memory of hyperinflation in the late 1980s and the 2002 IMF bail-out is receding fast. For investors.Introduction Brazil is in fashion. has proven misplaced. Such sentiments. The economy is poised to expand by nearly 8% this year. Brazil’s economy rode the global financial crisis. than as “a market with high potential but held back its poor business environment” (31%) or even “a supplier of key commodities” (20%). sending lesser hosts into a spiral of debt. A market with high potential but held back its poor business environment. Once known for its severe stop-go economic cycles. India or Russia. and turning domestic enterprises into world beaters. An emerging player on the international stage. While such mega events can strain a country’s budget and test its infrastructure. 0 10 20% 13% 9% 31% 40% 49% 20 30 40 50 60 70 80 90 100 Source: Economist Intelligence Unit. whose two terms end this year. developing a foreign policy doctrine that reflects global ambitions. Retains its stereotypical image associated with culture and sport. Brazil’s glass is now “half full”. Principally known for extremes of wealth and poverty. it is Latin America’s largest market. Hosting the football World Cup in 2014 and the Summer Olympics in 2016 would seem a fitting cap to the momentous economic changes witnessed over the previous two decades. With 192 million consumers. And today’s policymakers angst less about financial turmoil and more about who and how to access newly discovered deepwater oil reserves. if not new.
and its companies’ brands. The consolidation of macroeconomic stability in the past decade has meant that the country’s large internal market potential is finally being realised.In some respects. Brazil’s potential sustainable growth is much lower than it should be because of a failure to address structural reform. according to 58% of executives surveyed. according large developing nations such as Brazil a greater voice at a time when the setting of global rules is dominating headlines. and the country’s role in the world – and evaluates why the optimism is justified. however. therefore. Judged by its history. Since GDP per head is significantly higher than in China – and especially India – comparisons to Asian rates of growth are not entirely appropriate. innovation is stunted. this new prominence should come as no surprise. its capacity to innovate. macroeconomic. with notable exceptions. the country still has much ground to make up. such rates are far from sustainable given infrastructure deficiencies. There is also plenty of commercial substance behind Brazil’s new popularity among investors. such factors as its abundant natural resources. Part one looks at the political. Swathes of its workforce are poorly educated. And it hasn’t escaped investors that emerging markets have generally come through the financial crisis in better shape than have developed markets. During the global economic crisis. little known abroad. Part two draws on the views of business executives both in the country and worldwide and identifies three key aspects of business on which Brazil’s future depends: its development of skills. having focussed on home advantage are. political stability and cheap labour force – often features of primarily export-driven economies – were far less regarded. industry and infrastructure foundations that have enabled the country to soar ahead. By contrast. 7 . Brazil has been a leading light in the G20 (group of 20 leading economies). judged by today’s competition. This report is divided into two parts. Although GDP growth this year is expected to approach Asian rates. Along with South Africa and India. the G20 superseded the G8 as the main platform for global governance. Brazil has done well. infrastructure unfit for purpose. Brazil’s young and sizeable population and its burgeoning middle class are both by far the most attractive features of the country. even so.
The Brazilian National Congress Designed by the world famous architect Oscar Niemeyer 8 .
These factors put Brazil in a position to emerge relatively quickly from the global downturn. A $30bn swap deal with the Federal Reserve Board (the US central bank) increased trust in the Brazilian banking sector and underpinned strong growth of deposits in recent years. as well as voting in state governors and a new Congress. Indeed. seen by many as the 9 . Although some large companies. the Programa de Aceleração do Crescimento (PAC). despite being in the midst of a full-blown economic crisis of confidence. especially in the parliament. Power has alternated since 1995 between two main parties: Lula’s Partido dos Trabalhadores (PT. Switching party allegiances in pursuit of career advancement is common among politicians and contributes to the fractious nature of the political system. Both broadly agree to continue or defend the successful policies of the past fifteen years. during the global financial crisis. and the centrist Partido da Social Democracia Brasileira (PSDB – or social democrats). despite many unhappy experiences of “economic miracles” gone sour from hyperinflation and foreign debt default. Lula’s shift to the economic policy centre ground ahead of the 2002 elections has broadened cross-party consensus in favour of disciplined monetary and fiscal policies. On account of the lax rules governing party allegiances. growth acceleration programme launched in early 2007. The state development bank. The state remains firmly entrenched in the running of the economy. he has promoted a relatively uncharismatic former civil chief of staff and energy and mines minister. showing greater loyalty to interest groups than to either party or policy. For all the corruption in Brazil’s political system. floating exchange rates and inflation targeting – introduced at the behest of the IMF in the wake of the upheavals caused by the 1997-98 Asian and Russian crisis – remain sacrosanct. The country’s voters will elect a new president in October 2010. enabling domestic and foreign investors to lengthen their planning horizons. to defend his legacy. Brazil’s political environment remains a drag on implementing reforms needed to sustain more dynamic GDP growth. many Brazilians overseas switched their assets out of US banks to Brazilian banks. the country’s conservatively-managed banks were not exposed to the risky assets that felled counterparts in the US and Europe. Few commentators harbour serious worries about the main candidates and their policies. This has underpinned a more stable macroeconomic environment. The failures of free market models exposed by the global financial crisis vindicated several of Brazil’s statist policies. who typically have considerable influence over their states’ delegations in Congress. A new economic era Brazil’s is a diversified economy with strong corporate and financial sectors. and the PSDB challenger. The consolidation of greater political stability also comes as a welcome relief for a population which following the end of military rule in 1985 has seen wild political swings and a host of ill-fated economic plans aimed at promoting growth and quashing hyperinflation. Dilma Rousseff. The country’s recession was brief and shallow: the economy contracted by a mere 0. He ends his second term with unprecedented popularity ratings above 80% (thanks in large part to successive increases in the minimum wage and social policies that has lifted some 12 million families out of poverty). Yet he has resisted the temptation to change a constitution that forbids him a third term. a pulp and paper group. played a major role in supporting credit at a time when private banks around the world were retrenching sharply. The outgoing President Lula took over the reins from Fernando Henrique Cardoso in 2003 relatively smoothly. a total of 18 political parties are represented in Congress and governing coalitions are typically unwieldy affairs. also advocate a state-led development strategy to a greater or lesser degree. Instead. the country has demonstrated its political maturity. Although four parties typically account for around 70% of seats in the chamber of deputies and over half those in the senate. or Workers’ Party).Part one: Cornerstones of success Maintaining political consensus Brazil’s new-found political stability has provided a sturdy base for expansion. suffered from poor derivatives deals. These policy anchors were vital in enabling Brazil in 2008 to withstand (to the surprise of many) a series of external economic shocks that in the past would have triggered major instability. The difference seems to be that a decade of responsible debt management. such as Aracruz. as they were perceived to be safer. Notwithstanding all these positive political developments. José Serra. after the two-term limit of Luiz Inácio Lula da Silva (known as “Lula”) expires. the president is critically dependent on the support of state governors. Banco Nacional de Desenvolvimento Econômico e Social (BNDES). and some support from the government’s flagship infrastructure development programme. National elections no longer pose any threat of a radical shift in macroeconomic policy orientation. In contrast to Russia. This legacy is not simply one of implementing free-market ideas. Moreover. congressional representatives tend to be extremely provincial. Ms Rousseff.2% in 2009 – with the help of some credit expansion. a low external debt burden and highly diversified export industries and markets.
1 5.6 11. but this readjustment may not be smooth. this may not last. US$ bn) Exchange rate R:US$ (av) a – Actual. conserving its forex reserves. Yet. arguably. the macroeconomic outlook is far from risk-free. b – Economist Intelligence Unit forecasts. Brazil responded to the downturn by letting its currency depreciate.2a 4.0 1.5 4.0 -127.9 -3.7 307.8c 2.5 1.1c 153. will devalue accordingly.4 197. Although the budget deficit is relatively small for a G20 country.3 178.1 -1.83 10 .7 -2. Officials hope that the local currency.86 5. and market rates are far higher.4c 1. Forecast summary (% unless otherwise indicated) 2008a Real GDP growth Consumer price inflation (av) Money market interest rate (av) d Exports of goods fob (US$ bn) Imports of goods fob (US$ bn) Current-account balance (% of GDP) External debt (year-end. prompting all three main credit rating agencies to give the country an investment grade rating.2 -171.5 194.7% in 2010. high public spending imposes a huge burden on monetary policy to keep inflation tamed. Brazil has.80 2011b 4. By Brazilian standards. d – Selic overnight rate.5% in the previous 25 years).5% of GDP. The current account could also deteriorate rapidly.4 10.7% (compared to average annual growth of 2.5a 279. and opacity in itself can jeopardise confidence if the positive mood ever shifts. creative accounting has played a part in keeping the primary budget on target. The Economist Intelligence Unit expects Brazil’s economy to shoot ahead.3 -200. become a net foreign creditor as foreign debt shrank and international reserves soared. Moreover.9 10. especially in a difficult external financing environment.7 -1. the deficit amounted to 1.9 -173. and the Economist Intelligence Unit forecasts a deficit of 2.7 12. The benchmark Selic interest rate at over 10% is one of the highest in the world.8%. interest rates are historically low. Indeed. by 7. since 2008. but given the still-large public-debt financing requirements. c – Economist Intelligence Unit estimates. and fiscal and current-account deficits could all too easily re-open. Source: Economist Intelligence Unit.3% of GDP in the 12 months to end-May 2010. Moreover.more promising BRIC economy. Six consecutive years of surplus ended in 2008. Last year. in 2010 – a fitting end to President Lula’s second four-year term that has seen annual average economic growth of 4. the latter is also crowding out private borrowing. at 3. the Real.7 253.3 318. A double-dip global downturn may yet hit Brazil on the rebound.8 5. 2009a -0.00 2010b 7.
transport networks and utilities” as the main operational 11 . such as JBS S. natural gas for 8%. Although the sector was opened up to foreign competition in 1995. in fact. Brazil is finally being recognised as an agriculture superpower. High and complex taxation. thanks in large part to tax breaks and a good supply of credit. have merged after the former got burnt by derivatives contracts. The introduction in 2003 of flex-fuel car engines has encouraged a partial renewal of the passenger-car fleet. expanded in Africa. leads the world. have linked a productive agricultural base into a sophisticated food and drinks industry. the state oil giant. In our survey. and rigid labour markets are further legitimate investor grievances. copper. and improved Brazil’s environmental credentials (the adverse impact of dam-building aside). which places Brazil 40th out of 82 countries despite the expectation of some mild improvements in coming years. making Brazil a major oil exporter over the longer term.A and Marfrig. Manufactured exports have. beef and poultry meat. declined from almost 60% of total export earnings in 2000 to 40% in 2010. Brazil boasts the most diversified economy in Latin America with export industries ranging from petrochemicals to aeronautics. Brazil’s energy profile. coffee. but it is the millions of drivers that have to negotiate the dangerously unpaved roads that prevail everywhere except the main routes – and even many of these are potholed or need resurfacing. including huge reserves of iron ore in the mining province of Carajás in the northern Amazon region and the south-eastern state of Minas Gerais. nearly one half of respondents (49%) point to “low standard or costly infrastructure including telephones. and is now operating in five continents. Unilever and Coca Cola. which account for some 43% of total foreign sales. and continues to attract investors in new dams in the Amazon. Local groups in processed meat products. excessive bureaucracy. The commodities boom that peaked in 2008. and significant resources of manganese. Deeper underground lie other sources of rich foreign currency earnings. in many respects. The explosion of demand enabled powerful local multinationals to emerge. sugar. and nuclear for 1%. the country’s recent discovery of huge oil reserves below the deep waters off its southern coast will eventually shift the energy balance. Meanwhile. The country also produces industrial quantities of biofuels such as sugarcane ethanol used in cars. but overall earnings virtually tripled in this period thanks to extensive and efficient exploitation of bountiful natural assets and high commodity prices. global commodity trading groups such as Cargill and Bunge. although smaller family-owned farms have found it hard to integrate into this booming market economy. Likewise. while others. Agronomists have developed new species to boost productivity in less fertile areas. Petrobras. allowing drivers to choose the cheapest option. Shaky infrastructure Car makers may rejoice. While green energy sources have helped to wean the economy off imported oil. the world’s sixth-largest reserves of uranium. Poor infrastructure is one major reason that Brazil scores low in the Economist Intelligence Unit’s business environment rankings (based on 12 key business operating criteria). The company also acquired Inco of Canada in 2006 – with its large reserves of nickel – diversified into copper. have seen solid growth in Brazil and driven much of the sector’s consolidation. 88% of new sales were flex-fuel vehicles. These developments have gone hand in hand with a local car industry that has held up well in the global crisis. It is the world’s largest exporter of orange juice. the largest producer of niobium.Natural advantages: Land and energy Improvements in the policy mix have allowed public and private investors to focus on developing the country’s industrial and natural resource base. Around 80% of the country’s electricity comes from hydro-electric plants. Its grain and leguminous harvest increased from 100m tonnes in 2003 to 134m tonnes in 2009. But ask local businessmen with international ambitions about their greatest concern. accounting for some 45% of energy consumption in 2009. continues to dominate. including almost 100 new species of soya beans per year. is also investing in biofuels (biodiesel and sugarcane ethanol via a joint venture with Tereos International. Flex-fuel cars can run both on petrol and sugarcane ethanol. Brazil’s privatised mining group. a subsidiary of the French co-operative. tin and gold. It expects to boost its iron ore output by 50% to 450m tonnes by 2014. helping to make Brazil the world’s the sixth-largest manufacturer and fourth-largest and fastest-growing market for light vehicles. The list of Brazil’s other mineral riches is also notable: the world’s number three bauxite producer. Petroleum derivatives accounted for 39% of total energy consumption. a sluggish judiciary. in 2009. coal for 5%. and the parlous state of the infrastructure will almost certainly top the list. such as Sadia and Perdigão. Vale. In 2008. corruption. complex customs rules. the sale of petrol. for example. for the first time. The World Bank Doing Business report and other international rankings tell a similar story. have also prospered. long present in Brazil. domestic sales of ethanol exceeded. has powered Brazil’s commodities exports. coupled with seemingly insatiable demand from China. the world’s largest iron ore exporter.
the state of transport infrastructure is particularly dire. 12 . The logistical nightmare does not end when goods finally get to ports for export. the solution lies in better collaboration between private sector operators and the state at various levels. Lack of key skills including management. In a fragmented market. Which of the following operational obstacles present the greatest challenges to your business operations in Brazil? (% of respondents) Low standard or costly infrastructure including. substantial effort is required to get the right people around the table to discuss priorities. far more than selected corruption. As access to credit has improved. Failure to honour contracts. utilities. The exceptions are the main toll roads managed by private operators since the late 1990s. investment and responsibilities. this would produce the greatest efficiencies. freight depends on costly road haulage. Ultimately. Rising wages/low productivity. even though this method is slow and costly. But despite government efforts to get more freight on trains. even though Brazil has a 48. Underdeveloped retail and distribution systems. pay later Once seen as ‘Americans without credit’. He believes that if logistics operators focused at each stage on time rather than cost. Brazilians are starting to enjoy the rush of debt-induced purchasing power. drivers are more worried about “fiscal compliance” – that is. Meanwhile. they are congested and expensive. rather than into physical infrastructure).000 km network of navigable rivers. This can add one quarter or more to the cost of getting goods to market. Investing in infrastructure has been at the heart of President Lula’s growth programme (the so-called PAC. corruption. According to Andrew Morgan. The country’s 30. He cites an example of one company’s grain exports to Russia that ran into trouble because the Brazilian logistics manager was unaware of the different rail container sizes used in Russia. Waterways currently account for only 13% of haulage. Brazil’s great potential for river transport remains largely unexploited. such as the food industry. and shops have facilitated even relatively small purchases such as shoes with installment-payments. Difficult relations with organised labour. Little more than 10% of Brazil’s road network is paved. say investors. Although ports such as at Santos near São Paulo. have undergone some modernisation over the past 15 years. telephones. Freight operators all along the supply chain tend to see “low cost” as the key performance indicator. bribery. such as the main São Paulo-Rio de Janeiro motorway. while limited private sector investment in transport will not make up the shortfall. and ports and airports are congested. Mr Morgan sees problems in the lack of a big picture. transport networks. household consumption has boomed. weak corporate governance. Many fleets comprise owner drivers with ageing vehicles. the potential for waterways remains largely unexplored. And this extends to the final export destination. Credit risk.000-km rail network has grown by 20% since it was privatised and upgraded in the late 1990s. launched in 2007). Fewer than half of the targets for 2010 have been met (with much of the proposed financing going to first-time home owners. it is possible to negotiate with the state over transport needs and investment. Poor quality control. poor governance (34%) or skills shortages (32%). filling out the right tax invoice – than whether the goods arrive on time. The problem is that no-one takes “end-to-end” responsibility for the whole logistics journey. Consume now. No-one takes a strategic view of transport which would end up saving money. As well as growing car usage (with 25m vehicles now on the roads) more than 60% of cargo transportation is by truck. Availability of credit.obstacle. Where there is a big player. it remains underused (with rare exceptions such as lines operated by iron ore exporters) accounting for only 25% of total freight movement. especially at harvest times when trucks laden with grain arrive for loading. 0 10 24% 21% 20% 17% 15% 14% 9% 34% 32% 49% The fragmented nature of transportation is even more apparent in rail transport. founding chairman of Supply Chain Europe. like Vale. and this makes it hard for a company to develop an overarching view of its logistics needs. High public spending commitments are crowding out the paltry 1% of GDP that is proposed for investment in infrastructure. and will surely become an important issue to be resolved before the flood of visitors pours in for the football World Cup and Olympics. Aside from the need for continuing investment. but progress has been limited. It is a similar story with the country’s main airports. which is involved with freight logistics in Brazil’s food industry. there are few railroads. In spite of some improvement in logistics. the result of soaring demand. which handles around one quarter of the country’s foreign trade. and even these are poorly maintained. Saturated markets. Despite difficulties of getting goods to 20 30 40 50 60 70 80 90 100 Source: Economist Intelligence Unit.
980 13.370.9 1.2b 5. 13 .194. according to the FGV. that holds the key to Brazil’s long-term growth and prosperity.6 2.927.260 1. Never great savers (given the legacy of hyperinflation). Brazil’s tantalising market of 192 million.2 2013c 204.6 7. Foreign chains such as Carrefour (France).9 1. The share of the population aged 14 or under is around 28%.360 1.520 9. and with public financing for social housing.3 2008a 191. at least. and Wal-Mart (US) have diversified into non-food and wholesale activities.4 1.990 6. up from 42% in 2004. although it remains in its infancy. and reaching 184 million in mid-2010.290 11.070 11. Over one half of all households in large urban centres are middle class.9 -0.021.720 12. in order to increase its exposure to electronic goods demand and the lower-income market segment. It forecasts that the rate will stabilise at around 1.088.110b 674.6 1. jobs and skills. real income gains and credit expansion have pushed up disposable incomes and made ordinary Brazilians feel a little richer.5 0.5b disposable income (%) Source: Economist Intelligence Unit. and a government pledge to finance at least 1 million homes for the poor and the middle class.7 2011c 199.8 -0.5 2.5 1.390b 10. Brazilians are now able to borrow to finance the good life.8 2012c 201. the country can count on a robust working-age population to pay taxes and pension contributions (assuming growth in the formal sector).637.39 per woman in 2000 to an expected 1.7b 2007a 18.104.22.168. Ponto Frio and Casas Bahia. Large retailing groups have also thrived. now at 7.450 12.2b 988.088.shops. a Rio de Janeiro think tank and business school.366. a social researcher from the Fundação Getúlio Vargas (FGV).1 6. The mortgage market. with credit rising from 25% of GDP in 2005 to 45% of GDP today.299. Equivalent to only 1. though is still only around 3% of GDP.573.3 1. in marked contrast to many developed economies. training. set the stage for a consumer boom.2 2. a French retailer) recently agreed to buy two local non-food outlets. Pão de Açucar (controlled by Casino.256.016. Following the 1998 privatisation of the telecoms industry the sale of mobile phones rose spectacularly.3b 1. as Part Two of this report explores.8 6.270. Falling unemployment.8 1.1b 15.0 2014c 206.4 4.2 2006a 186.127.6 3.6 GDP (US$ bn at 881.080 2010c 196. youthful consumers is simply too mouth-watering a prospect to bypass. Some 20 million Brazilians over the past six years have been reclassified out of poverty.8 -1.5 1. according to Marcelo Neri. indicating huge scope for growth. Brazil: Population.150 2. and this age group will still comprise at least one in five Brazilians for another 20 years.610 543. households are setting their sights on the bigger prize of home ownership. overtaking the number of fixed lines in 2003. which was almost non-existent in the 1990s.7 Growth of real 2. its education.320 9.3 1.317. Time and demographics are on Brazil’s side. according to Instituto Brasileiro de Geografia e Estatística (IBGE).442. With appetites for consumer goods now thoroughly whetted.240.76 in 2010. The eventual control of inflation in the mid-1990s and the success of the new stable currency.9 656. But for the next decade.800b 841.198.3% of GDP at end-2005.5 1.9 2009b 194. It is the nurturing of this younger generation. it increased to 2.4 5. personal computers.4 987.7 1. This has generated rapacious demand for cars. at least over the medium term. the mortgage stock has risen in absolute terms. pouring further fuel on consumer fires.760 10.660 1.0 6.8 1.1% of GDP at end-2008.3 0.7b 6.890 8. has started showing signs of life.5 by the 2020s.150 1.3 6. But ageing will set in thereafter: the country’s birth rate has declined from 2. income and market size 2005a Population (m) 184. the Real.0 5.9 818.8 market exchange rates) Private consumption (US$ bn) Private consumption per head (US$) GDP per head (US$ at PPP) Personal disposable income (US$ bn) 531.5% in major urban centres.3 2. TV sets and mobile phones.
Curitiba. The oldest university in Brazil. founded in 1912. 14 .The Federal University of Parana.
3 7.9 years. The federal government spends some 3% of its budget on education. according to official figures. especially in Asia. launched the Instituto de Co-Responsabilidade pela Educação.5 and 7. share best practices of change management.3 3. Such private efforts are spreading.1 years in 2008. An Economist Intelligence Unit report on post-secondary education in Brazil concluded: “Rather than operating educational institutions. Following his retirement as president of Philips Latin America. Much of the training takes place after recruits are hired. the private sector should work in public-private partnerships related to education.1 40-49 7.2 6. the system’s failings are having direct consequences for the quality of the workforce.7 7. Talent and education The learning curve Thirty years ago. that money for education be spent on teacher training and partnerships with state-run schools. in the north-east. held back by poor teacher training. according to João Batista Araújo e Oliveira.8 9. and share new technology solutions. One major reason for this divergence has been a lack of investment in education. Brazilian 15-year-olds ranked 53rd in mathematics. These dilemmas exist at post-secondary education too. rightly in many instances.8 9. and still-high truancy rates. they merely scratch the surface. There are also big regional disparities. they have to fill the yawning gap left by the country’s scrappy education system themselves. according to Alberto Rodriguez. He estimates the annual cost to the education system and the wider economy of such educational shortcomings at around $600m. But in Brazil. ahead only of Mozambique. a former World Bank official.7 years. successful initiatives in South Korea and Europe.” Average years of formal education by gender. But this level is still short of the 10 years recommended by Unesco and achieved by neighbouring Chile. civil servants and managers. In 2008. government education bodies insist.2 years to 7.3 6. Teachers are also often part of the problem rather than the solution. In Brazil. Brazil and South Korea had similar levels of GDP per capita – today the Asian tiger is over three times richer (in PPP terms). and carry the simple objective: to make the classroom work.1 9. The system involves 200. those who cannot afford a private education – remains particularly inadequate.1 9.5 8. They just don’t know the practice. responsibilities are spread over numerous tiers of government. “They can talk about [child development psychologist] Piaget but they cannot organise a classroom. 50 million pupils.5 50-59 > 60 6.2 30-39 7. shortcomings in physical infrastructure including a lack of nurseries.9 4. Meanwhile. The system can boast a few successes. the second worst drop-out rate in the world. Part of the problem is the structure of the education system.5 9. Only one half of the country’s children complete secondary education. and try to catch up with competitors. The more developed south and south-east have 7. Peru and Argentina. some 20% of the working-age population could not read. Companies step in Companies in Brazil often find that if they want the skills they need. respectively.000 educational units. The average number of years of formal education in the working-age population has also risen over the past 20 years from 5.4 Educational level achieved in working-age population (25-64 age group): Basic education: 63% Secondary education: 27% Higher education: 10% Source: IBGE. The quality of education for the majority of the country’s children and teenagers – that is. As Paulo Renato Souza.7 8. 2008 (in years) 20-24 Men Women Total Source: IBGE. The idea follows similar. A highly decentralised mish-mash. a World Bank education specialist.3 4. Almost all children aged between 7 and 14 attended school in 2008. a slight improvement on the 25% level of functional illiteracy recorded five years earlier. In OECD-run tests across 57 countries in 2006. often underperforming. provide financial support for programmes to enhance teacher qualification. age groups. Although younger people tend to have had more years in school than their parents. 25-29 8. Reports of waste in schools are rife – computers left in their boxes because teachers don’t know how to use them for example. but some initiatives try to get in earlier. notes: “We need pupils actually to learn something.” says Mr Rodriguez. and 3 million. the poorer north-east averages 5. 52nd in sciences and 48th in reading. a former education minister.” 15 . write or understand basic text.Part two: Social and intellectual capital I. but it is the public sector schools run by states and municipalities that manage much of it. for example. an initiative to raise education standards in his home state of Pernambuco. they are still ill prepared for the modern job market. Marcos Magalhães.
But local managers do excel in creativity and innovation. In addition.” says Mr Averbach. a recruitment firm. There is simply not enough labour force to meet the needs at all levels in Brazil. Alistair Cox. Much of the quality talent that enters the workforce comes from several well-respected universities and business schools in Brazil. president of the South America division of Korn Ferry. In which of the following areas of education or skills relevant to your business do you believe the Brazilian labour market satisfies your needs or falls short? (% of respondents) Basic literacy or numeracy Secondary education Tertiary education Languages IT 13% 11% 11% 9% 16% 56% 61% 59% 61% 58% 70% 68% 54% 48% 62% 17% 21% 35% 43% 23% 34% 20% 21% 23% 19% Science 10% Engineering Mobility Work ethic Soft skills (ie. “You cannot lose the opportunity to set up a link between the corporate world and the university. an executive search company. it seems. a local marketing company.” Companies have few problems with those who are qualified – there just aren’t enough of them. typically suffers a shortage of electricians and mechanics. says that India provides a valuable example to follow: Brazil needs to invest in information technology and attract the talent currently working outside Brazil. Some of the more promising students attend leading foreign business schools. According to Sergio Averbach. demand for the right skills has simply intensified. the success of Brazilian managers internationally is more “due to their outstanding influence and leadership skills. finance and marketing are also highly rated. Others though have attracted criticisms for lacking relevant “people-related” training that is increasingly required by international management. when compared with their peers in developed markets. a consultancy. the story at the top of the pyramid is of intensifying competition for managerial skills. describing their training as “totally inadequate”). He adds that companies can spur post-secondary institutions to explore real-world situations by encouraging employee participation in educational programmes and offering students hands-on experience through internships and work-study programmes. many of which are ranked as the best in Latin America. “I recently received 10 presidents of construction companies. “Board members often tell me they are having trouble hiring people from CEO to factory staff. Notable deficiencies among staff include language skills (43% report shortfalls there) and science knowledge (34%). AES president for Latin America and Africa. over one half of respondents also say that the Brazilian workforce matches their needs. Brazilian managers also appear to lack international experience and multicultural awareness. 16 . cultural sensitivity. Brazilian staff are often seen as lacking initiative. Still. etc) 0 18% 20% 16% 23% 10 20 30 40 50 60 70 80 90 100 Exceeds needs Matched needs Falls short Source: Economist Intelligence Unit. The lack of key skills is the biggest operating challenge faced by nearly one third of survey respondents – and as much as 47% of US-based companies – on a par with corruption and not far behind the problems of poor infrastructure. Getting foreigners to fill the gap can also be frustrating. The company has to invest in training its own workforce to meet its needs. but the volumes are not there. Creaming off While the mass of under-educated Brazilians languish. “Quality is not a constraining factor.” says Mr Gutierrez. a US electricity company that has invested some $6bn in Brazil since 1997 and plans to double in size within five years. business schools are catering for a new crop of professional managers. Management experience. Although deemed highly creative. Students from leading (usually state-run) universities in Brazil are rated highly by foreign multinationals. CEO of Intrabase. AES. All these issues become starkly apparent from the Economist Intelligence Unit’s own survey.” With rapid economic expansion and rising foreign investment. problem solving. CEO of Hay Group. according to a 2009 comparative survey by Heidrick & Struggles. with engineering companies being among the more satisfied (although it is worth noting too that the US Chamber of Commerce in São Paulo recently found that 41% of its members were unhappy with the quality of engineers. but increasingly home-grown institutions such as the highly regarded Insper and IBMEC have emerged and been successful. than to the ability to create the new and the different.Every bit helps.” notes Andrew Vesey.
an aggressive emerging market investment bank. About the same. Several Brazilian-born business leaders have risen to global prominence in recent years.How would you rate. but the quality of management is “probably worse in China and India”. About the same. How would you rate the quality of Brazilian managers compared with those in: a) other emerging markets? (% of respondents) Generally superior. Education standards may be higher in most parts of Asia than in Brazil. respectively. knowledge of foreign cultures. the skills and knowledge of Brazilian managers in the following areas? (% of respondents) Management experience. according to 42% of respondents. president of DuPont Latin America. International experience People management. What. 0 8% 42% 50% 10 20 30 40 50 60 70 80 90 100 Source: Economist Intelligence Unit. 10 Very high 1 20 2 30 40 3 50 60 4 70 80 90 Very low 5 100 Source: Economist Intelligence Unit. The sky’s the limit At the very top. Generally inferior. Generally inferior. Strategic thinking. says Eduardo Wanick. and superior to those from other emerging markets. Alain Belda and Brazilian-born Carlos Ghosn have enjoyed high-flying careers at Alcoa and Renault-Nissan. Finance. Creativity/Innovation. started his career with the Brazilian brewer Ambev (which later merged with Interbrew and Anheuser Busch). Brazilian managers are deemed to be on a par with developed market peers. André Esteves now heads BTG. the CEO of ABInbev. some argue. Marketing. 0 5% 9% 7% 10% 8% 16% 10% 21% 12% 24% 32% 36% 28% 30% 30% 36% 32% 34% 43% 38% 38% 31% 35% 40% 42% 41% 23% 16% 14% 13% 13% 3% 3% 39% 26% 14% 13% 5% 3% 2% 13% 5% 3% 2% 1% b) developed markets? (% of respondents) Generally superior. Carlos Brito. there seems to be no shortage of role models to inspire the most ambitious Brazilian executives. Overall. etc). relative to management in developed markets. 0 10 20 30 31% 19% 51% 40 50 60 70 80 90 100 Source: Economist Intelligence Unit. may be holding back the next generation of business leaders is the ability to think innovatively. Relevant technical skills Multicultural awareness (languages. 17 .
the vast majority of this is spent on higher education. “co-creating” and so on. Unlike many other nationalities.” Secondary school teachers do not have to be accredited with a formal qualification. but it tends to lower the overall quality of graduates. “they don’t freeze when their mistakes are pointed out”. First. he says. this seems not only unfair but also grossly inefficient. The elite are already well catered for. Second. These students are at a big advantage when getting into the highly competitive and high-quality state universities. and has even had to alter the syllabus at IBMEC to get weaker state school candidates up to scratch. Related to this is a third issue – the need to be more equitable. who are needed to provide the nation’s middle management. 18 . director of business development at Duke Corporate Education. A question of class Mr Silveira argues for reform in three areas to meet Brazil’s future business needs. for example.namely the failure of secondary schools to prepare students for the world of work. and who dominate higher education (and who will earn most in their future careers). but find themselves struggling through. the state oil group. To paraphrase an old Soviet-era joke about bosses and workers: “they pretend to teach us. Duke CE’s courses are rare in a country where MBAs are focused on academic research rather than the needs of companies. mathematics and computer science. technicians and engineers.” he notes. secondary education. so that those who are most able to pay. he believes. is spending an estimated $150m per year on training. one of several executives who took over and restructured the business school IBMEC in 1998. from top management to the shop floor.and low-performing schools. He wants officials to “create a learning architecture” that educates for life. With only around 1 in 5 school leavers going to college. But while dealing with some of the most motivated and employable talent he sees much deeper problems in Brazil’s education system . grade 1 skills or else see students fall behind. Feedback is taken constructively and at face value. Mr Silveira has seen the problem first hand. sees a particular need for the soft skills of management – communication. but they have not been trained to think rigorously or analyse data. giving feedback. “There is a big disconnect between high school and university. are not funded by poorer taxpayers who benefit least from the education system. and we pretend to learn. Business should be less worried about the quality coming out of the top of the education system and focus on the mid-ranking school leavers. according to VanDyck Silveira. address the mismatch between what business needs from school leavers and what the bureaucrats in the education ministries put on the syllabuses. and greater transparency about which are the high. This deprives potential employers of a corps of competent middle management and technical staff. Many of the private colleges they go on to are merely “diploma mills”. This means ensuring proper training and qualifications for teachers. Mr Silveira. They may have had classes in 15th century Portuguese literature. Petrobras.Business education – not just for the boardroom The size of Brazil’s market for business education is around $1bn. While around 7% of the government budget goes to education generally. but they barely know the subjects they are supposed to be teaching. having attended expensive secondary schools where teaching is rigorous and includes a strong dose of science and mathematics. shift funding away from the top universities towards primary and secondary education. and requires higher education institutes to teach basic. remarks Mr Silveira. Positive discrimination can help. They may be able to run a classroom. The problem stems from the quality of teaching in what amounts to “a pact of mediocrity”. Companies are increasingly taking on the burden of improving employee skills that should have been covered within the education system. The rest have a poor grounding in science. But he also believes that the highly flexible approach of his Brazilian students makes them well placed to benefit. and too often dropping out of.
when focusing more on the human factors.II.” says KornFerry’s Mr Averbach. Broadband penetration. Availability of university graduates. but that it is also inefficient with its resources.” says Mr Wanick from DuPont. Over one half of respondents (51%) say that. and that figure rises to 38% in three years’ time. Innovation in thinking and action A certain mindset While Brazilian industry can boast several centres of excellence—notably energy. R&D spending. An Economist Intelligence Unit innovation model that measures countries according to both their readiness and success in innovation ranks Brazil 52nd out of 82 countries. less than 10% of products and services sold by their companies have actually been developed in Brazil. but only 0. the São Paulo-born CEO of Azul airlines (and founder of the low-cost JetBlue airline in the US). although the likes of IBM and General Electric have recently announced decisions to establish their own research centres in Brazil. Availability of scientists and engineers. Flight attendants are happy to read the company manual. say investors. By contrast. 28% of patents are registered in the US.2% of world patents originate from this market. “Innovations that are developed locally are not frequent. the number of science graduates. Which of the following technological factors most impact your firm’s ability to innovate in Brazil? (% of respondents) Technical skills of the workforce. More interestingly. education levels. Yet conditions for innovation on the shop-floor are more promising. Quality of IT and communications infrastructure. 19 . Whichever view one takes. or even plan to have one in the short term in Brazil. aerospace and agribusiness— education deficiencies hold back innovation in the wider economy. “Everybody agrees that innovation is important but people do not necessarily behave that way. and notes that the country is likely to slip further down the rankings in coming years. but Brazil’s weedy performance comes through in the views and experiences of companies surveyed.” laments Mr Wanick. the business environment. at present.5% of world GDP at purchasing power parity (PPP). 0 10 13% 33% 30% 28% 28% 23% 46% 41% 20 30 40 50 60 70 80 90 100 Source: Economist Intelligence Unit. Brazilian-based companies are seen as well able to integrate the latest international technology into their operations. but few actually raise issues during meetings or try to improve processes. broadband penetration. The Brazilian executive “has in his DNA the ability to change direction with greater ease than in any other region in the world”. and at least one quarter of respondents expect no progress over the three years. Some 57% of surveyed executives say that they do not have a dedicated R&D facility. He is not the only investor to draw such conclusions. But research conducted with Insead business school suggests that Brazilian managers are less able when it comes to “creating the new and the different”. “Innovation starts when people are able to speak their mind. and only 6% saying it is “poor”. Spending on R&D by the public sector (government). This suggests that not only is Brazil insufficiently innovative compared with its peers. Spending on R&D by the private sector. with almost one half (49%) of survey respondents describing this capacity as “very good” or “excellent”. the model shows that its ranking of the factors that contribute to innovation (for example. only 29% expect to develop half of their products and services in Brazil. Brazil accounts for some 3. Brazil cannot deny its poor record of innovation. Moreover. “There is a tolerance for ambiguity that is much stronger in Brazil than in other countries. Whether this is the result of a lack of inventiveness or systemic failures in the business environment is hard to gauge. observes a culture of deference among his Brazilian staff.” he says. Total spending on R&D in the country. is still higher than the measure for innovation successes (measured by the number of patents filed globally). But others would disagree with this assessment. although in itself low. quite probably because they have had to deal with a succession of economic crises that taught them how to succeed in the midst of instability. David Neeleman. Many investors regard their Brazilian staff to be “flexible and adaptable”. etc). by failing to translate investments into practical innovation.
The new product. Local firms. The project was developed entirely in Latin America. The new R500m green plastics plant. Brazil boasts some impressive green credentials. from General Motors. Greenfield thinking One vital area of innovation where Brazil excels is in the development of green technologies. The plastic was developed from sugarcane ethanol by Braskem’s research and development centre in southern Brazil in partnership with Japan-based Toyota Tsusho. Braskem is working with Novozymes. and the country has experimented successfully in biofuels such as sugarcane ethanol. which is being set up in Triunfo. are also breaking new ground in green plastics (see case study below). Such models now account for more than 90% of new vehicles in the fast-growing automotive market (see Part one). hit headlines when it announced the development of so-called “green plastics”. Toyota. will be produced on an industrial scale by the beginning of 2011.” says Mr Wanick – not to mention carjackings and other forms of attack). named Armura. which is already widely used as biofuel in the car industry. the petrochemical unit of Odebrecht. 20 . Five Braskem. in a research project to produce a sugarcane-derived polypropylene. Case study DuPont: Middle class army DuPont has recently launched its version of ‘the people’s’ bullet-proof vehicle in Brazil based on a light and affordable armouring concept. such as Braskem. but the innovation is viewed as a breakthrough in the search for renewable alternatives to oil-derived plastics.000 tonnes. Brazil is the largest market in the region for armoured vehicles. The company has capitalised on Brazil’s experience in ethanol. Local manufacturers and suppliers such as Magneti Marelli developed a “flex-fuel” engine in the 1990s. Honda and Hyundai. or a combination of the two. The product will cost around 20% more than an equivalent non-green product. which avoids the use of naphta. allowing cars to run on either petrol or ethanol. In addition. southern Brazil.000 murders a year is like a small war. Brazil-based companies are also involved in research on a second generation of biofuels (such as cellulose). Case study Braskem: A future in green plastics 20 30 40 50 60 70 80 90 100 Source: Economist Intelligence Unit. In order to put its product on the market. mostly in Brazil. but there is plenty more demand for Armura in the rest of Latin America and further afield. also a unit of Odebrecht.000 instead of $30. Mitsubishi. “The potential is huge. Despite international criticism over Amazon deforestation (and worries over potential new oil wealth). although the performance of biodiesel has proved less convincing.” says Mr Wanick. unveiling a prototype of the “green car of the future” which included Braskem’s innovative material. a Danish-based biotechnology company. offers protection against 97% of firearms in circulation in Brazil. The armour is also much lighter (less than 100 kg against more than 200 kg for regular armour). at a much reduced cost ($10. although he declines to provide hard numbers.000 or more). Brazil’s President Lula promoted the company’s technology on a visit to Europe. according to Braskem. will have an annual capacity of 200. Electricity needs are largely met through hydro power. according to DuPont. The concept is appealing to a growing middle-class population that lives in a state of constant insecurity. Braskem’s ethanol is supplied by ETH Bio-Energia. The new sugarcane-derived polyethylene. a major industrial conglomerate. b) in the next three years? (% of respondents) 0-10% 11-50% 51-90% 91-100% 0 10 15% 23% 26% 36% 20 30 40 50 60 70 80 90 100 Source: Economist Intelligence Unit. says Eduardo Wanick. says the company. president of DuPont Latin America. DuPont provides complete prefab kits (its own products are called SentryGlas and Devlar) to authorised car dealers. especially in urban centres (“40.What proportion of the products and services sold by your company in Brazil was developed in Brazil? a) in the past three years (% of respondents) 0-10% 11-50% 51-90% 91-100% 0 10 13% 16% 21% 51% models are currently available.
railway and port logistics. E e-energy (efficient resource management).” he says. Both its industrial sites in Triunfo and in Camaçari. 21 . “maybe the standard should come out of Brazil”. has also invested time and energy to influence the curriculum of universities so they train engineers in mining. which recently launched new courses (IT and English. a global software giant. Brazilian-based companies would appear to get the rough end of the deal (or are perhaps too optimistic). Of survey respondents whose Brazil-based operations already work with local universities. compared with less than one quarter (23%) who say that such co-operation “failed to live up with their expectations” or was “very unsuccessful” (5%). Case study SAP Labs: Software in Brazil SAP. How would you characterise co-operation between your Brazilian operations and local universities/academic institutes? (% of respondents) Very positive Positive Failed to live up to expectations Very unsuccessful 0 5% 23% 12% 60% 10 20 30 40 50 60 70 80 90 100 Source: Economist Intelligence Unit. and E supporting small and micro businesses through the development of dedicated software. These include: E e-health (such as electronic data management of health records to ease the exchange of information along the health chain. cosmetics and personal hygiene products. as well as integration among hospitals). launched a new programme in 2009 that involves universities in its innovation process from its Brazilian base. a leading Brazilian cosmetics company. which focused on topics relevant to Brazil’s future needs. Mr Rezelman says research modelling is due to start at the end of 2010 and the whole process is expected to take up to five years. Braskem’s vice-president. but “re-engineering may come out of Brazil. Meanwhile. The industrial standard may still come from the US or China. Braskem currently employs around 200 researchers.Green plastic resins are expected to find an eager market among manufacturers of packaging. in some IT sectors where Brazil is most advanced. as almost one third (32%) report that such co-operation “failed to live up to expectations”. Braskem also has a PVC research centre in São Paulo and partnerships with academic institutes and universities at home and abroad. Braskem has already secured contracts with Tetra Pak and the Japanese Shiseido cosmetics firm. Vale. host innovation centres (pilot plants and laboratories).” says Erwin Rezelman. Its investments so far suggest that the company may well fulfil 9% a long-stated aspiration to be a world leader in biopolymers. in São Leopoldo in southern Brazil. Europe and the US. says that 20% of the company’s sales come from products launched in the past three years. the mining company. 60% say the relationship has been “positive” and 12% “very positive”. such as e-banking. president of SAP Labs. The evidence to date seems reasonably positive. Natura. such as with Gainesville’s University of Florida. the University of Massachusetts and the Dutch Polymer institutes. Examples of success include the local subsidiary of General Motors which hosts a research and development centre that works closely with São Paulo University’s engineering school. and has filed 250 patents in Brazil. Groups of between 10 to 20 selected students from various universities follow a two-year programme at SAP. is already advertising that it will use Braskem’s green plastics as part of its sustainability policy. E risk management and safety (sharing information among various agencies and victims of accidents and natural disasters). from local doctors to hospitals and chemists. One quarter of its initial production will be exported to Asia. E infrastructure and mobility (Brazil has a series of challenges ahead of the 2014 football World Cup and the 2016 Summer Olympics in Rio de Janeiro). Moreover. It set up its research laboratory within the local Unisinos University. near the north-eastern city of Salvador. Local issues “will influence the software that we will be developing. Back to school One way to promote innovation is through business co-operation with universities and academic institutes. Luiz de Mendonça. automotive. and renewable energy sources) as a result of SAP’s engagement.
following military procurement contracts.1 36.9 1.0 319.778 -5.9 1.5 2013b 42.108 -6.932 -5.51 1.6 294. Perhaps more remarkable than the inrush of FDI. China and Africa.18 20.9 1. are showing interest too.0 1.2 2.82c 18.9 3.7 2009a 25.12 19.5 14.92 2.77 2. While relations with the US remain strong.6 1.9 2.94 2.9 2.8 14.1 1.3 1. The purchase by Vale of Inco in 2006. It has raised its profile with more military spending (albeit from a miniscule base).3 511.5 2008a 45.148 -7.1 36.9 2.0 30. new players from Mexico.5 -2. A relatively strong currency has also helped. especially Spain.0 1.5 24. a strategic defence agreement with France.5 248. 2007a 34.5 424.0 2. Colombia and Chile.0 1.1 2.0 384.7 10.6 195.532 10.5 2011b 35.4 214. Most of the world’s 100 largest multinational companies are operating in the country: annual foreign direct investment (FDI) inflows grew from a mere $10bn in 1996 to peak at $45bn in 2008.6 8.08c 18. are the international acquisitions and investment being made by Brazilian multinationals – something that was not always encouraged by past governments.9 1. before falling back to $26bn in 2009.7 8.9 2012b 40.478 22. Brazil is shifting focus to other Latin American countries.9 2010b 30.79 1.2 1.7 10.289 -6.3 2.9 8.0 1.89 2. and diplomatic forays into the Middle East.6 9. sent outbound direct investment that year soaring to over $28bn (although it has subsequently fallen back substantially).5 12.062 -28.646 -6.9 1.7 38.5 34.04 19.7 1.6 2.23 21.2 2.27 22. pushing total FDI stock to $320bn.0 466.04c 20.9 9.1 2.8 1.2 1.315 -20. Foreign direct investment 2005a 2006a Foreign direct investment (US$ bn) Inward direct investment Inward direct investment (% of GDP) Inward direct investment (% of gross fixed investment) Outward direct investment Net foreign direct investment Stock of foreign direct investment Stock of foreign direct investment per head (US$) Stock of foreign direct investment (% of GDP) Share of world inward direct investment flows (%) Share of world inward direct investment stock (%) Source: Economist Intelligence Unit. But it is Brazil’s appeal to foreign investors and the recent boldness of its own companies abroad that is giving substance to its global ambitions.9 9. after China.89 2. Such ventures have been propelled in part by cheap financing from the state-owned development bank BNDES.69c 17. and making Brazil the second-largest emerging market recipient of FDI.III.77 2. Brazilians abroad Making a name for themselves Brazil’s voice on the world stage is being heard more loudly and more often nowadays.7 18.0 1.32 22 .3 2.8 15.2 -9.59 2.0 2014b 45.1 27.0 349. While traditionally FDI has come from the US and Europe.00 2.0 24.0 1. which invested over $5bn in the past five years to help Brazilian companies expand abroad. for example.
a steel maker. both of which are planning significant international expansion. healthy profits. As well as Vale. China has become its largest export and import partner. the Middle East and Africa has also increased. a former president of Embrapa. where it had built a strong brand. particularly in Africa. the perception of Brazilian brands is different among China-based executives. with almost one quarter of those respondents (24%) declaring a warm attitude to Brazilian products. Brazilian scientists from the state of Minas Gerais are also visiting Angola and Mozambique. Brazilian companies see opportunities for acquisitions in other emerging markets. China is expected to become a “primary trading partner with Brazil in the next three years”.A focus on “South-South” relations. and lower assets prices abroad mean that foreign markets are beckoning. big names range from the fashionable sandals of Havaianas to aircrafts of Embraer. and 31% looking to China. This is reflected in our survey. with 66% pointing to interest in firms elsewhere on the continent. though its sizeable domestic market mitigates some of the urgency of overseas expansion. JBS is now the most international Brazilian company. State-owned oil group. While the world’s leading food groups are planting roots in the country in anticipation of 40% growth in the sector over the coming decade. “What has been achieved in the Brazilian cerrado is applicable to the African savannah. two Portuguese-speaking countries. such as Gerdau. with four-fifths of its sales abroad. Brand new But beyond the charmed circle and the dynamic newcomers. Only 3% of US-based respondents think that Brazilian brands are both recognised and highly regarded. The solution to global food security is “creating technology and investing in research”. other Asian countries. However. Embrapa opened a regional base in Ghana in 2008. And executives are clearly alert to this trend. to support technology development. This might be why Brazilian companies feel they have more of an advantage (or at least less of a disadvantage) when operating in other emerging markets such as China. 23 . The development of Brazil’s agriculture sector in particular has provided fertile ground for two-way international expansion. Having emerged stronger from fierce consolidation in its domestic market. a state agronomy agency. compared with 51% who point to the US and 49% to Latin America. Petrobras. a cosmetics manufacturer. Other. and BNDES is financing Brazil-based companies to export tractors and other machinery to Africa. he says. it is now looking to expand elsewhere in Latin America. as part of a general policy of trade diversification.” says Eliseu Alves. The global financial crisis may have delayed some foreign ventures. But competing effectively abroad also requires wider brand recognition. in which 84% of respondents say that Brazilian brand names are either not well recognised or not highly regarded abroad. but strong domestic growth. and the share of trade with the rest of Latin America. and meat packers JBS and Marfrig have launched aggressive acquisitions in the US. According to Fundação Dom Cabral business school. compared with 43% focusing on US companies. according to a joint UN and OECD report. and Natura. The world’s banking sector will soon hear more of state-owned Banco do Brasil and Itaú Unibanco. is perhaps one of the biggest changes in Brazilian trade policy under President Lula. innovations in agronomy have been a passport for Brazilians to enter new markets. according to 63% of respondents. lesser-known groups are also making headway. A typical journey of corporate expansion by new companies is being taken by Totus. and will go further afield in time. An elite group of Brazil’s international players have already achieved this recognition. Similarly. Brazilian brands still lack the international draw of their Western counterparts. a software company that targets small and medium-sized businesses.
announced that the Chinese aircraft industry would start manufacturing its own regional jets without the help of Embraer. The new port and plant are scheduled to open by 2013. Two other mines have also been sold by Votorantim and Itaminas to Chinese companies. China became Brazil’s main trading partner. China’s insatiable demand for raw materials is matched by Brazil’s willingness and ability to supply them. set up its joint venture with a Chinese state-owned company seven years ago – a requirement for accessing the market – opening a plant in Harbin. Embraer. president of Embraer’s Chinese subsidiary. topping $36bn in both 2008 and 2009. and protecting Brazil’s trade from the worst of the global financial turmoil. All the while. overtaking the US (imports of which from Brazil plummeted by 43% in 2009) and Argentina. Brazil has found it hard to export value-added products to China. currently being built by EBX. an aircraft manufacturer. the future of Embraer’s manufacturing activities in China may now depend on political and diplomatic arrangements to smooth the way for higher value investments. which will have annual capacity of 5m tonnes of steel. the Brazilian oil company. E Wisco invested $354m in MMX. and announced that it was setting up a maintenance centre in Beijing. bilateral trade with China has leapt by more than 50% since 2007. in China’s North East. of which iron ore and soya beans comprised two thirds of the total. imports of Chinese manufactured goods declined by 20%. Wisco will take a 70% stake in the new plant.” says Guan Dongyuan. from Brazil’s perspective? For some Brazilian manufacturers with global ambitions. It was a difficult situation for the Brazilian firm. “The creation of Embraer China Technical Services shows our long-term commitment and confidence in the growing Chinese aviation market. resulting in a bilateral trade surplus for Brazil of $4. the Brazilian telecommunications company. 70 aircraft have been produced for Chinese clients and 30 more are to be delivered shortly (including 25 models imported from Brazil). however. The Chinese government says it will eventually import steel (rather than iron ore) from Brazil. to which it lent $10bn last year in return for a guaranteed oil supply. The other side of the coin While Embraer ponders its future in China. Commodities dominate sales to China. earlier this year. a Rio de Janeiro mining group owned by Mr Batista. to buy Chinese equipment. Nevertheless.China-Brazil trade: A raw deal The spectacular growth of Sino-Brazilian trade in recent years is one of the clearest indicators of Brazil’s success in tapping into the dynamisim of emerging Asia. The Chinese authorities.3bn. a local billionaire. which argues that its Chinese plant only has enough work to last until the start of 2011. So what’s not to like about the relationship. Co-operation in transport and fertilisers are also being considered. E The Chinese Development Bank intends to grant a $1bn loan to Oi. Sinopec may also buy stakes in two Petrobras oilfields in northern Brazil and a refinery in Rio de Janeiro (Comperj). It has asked the authorities for a licence to manufacture its larger Embraer 190 locally. As the global commodities boom in the latter part of the decade sent prices of Brazil’s main export products rocketing. It is not hard to see why. the latter has unveiled some of its own ambitious plans for Brazil: E China Petroleum Corporation (Sinopec) has signalled its intention to grant new loans to Petrobras. 24 . the story is about more than the commodity trade – and for them it is not always a happy one. E Wuhan Iron and Steel Corporation (Wisco) intends to set up a $5bn steel plant near Rio de Janeiro in the new Açu port. a holding company owned by Eike Batista. So far.
state-led investment strategies. And these trends would appear to play to Brazil’s own strengths and traditions. Western Europe. Source: Economist Intelligence Unit. forced into a local joint venture that puts at risk their intellectual property. Middle-East. please specify. China. Europe or Japan. India. and a flair for dealing in opaque business environments.Which markets will become the primary trading partners with Brazil in the next three years? (% of respondents) Other Latin America. India. Of course other emerging markets do not always make perfect allies: companies like Embraer have experienced the classic dilemma of Western investors in China. in one sense. The US. 0 1% 12% 11% 12% 25% 10% 63% 22% 49% 51% Where do you envision an increase in acquisitions by Brazilian companies in the next three years? (% of respondents) Other Latin America. Middle-East. That Brazilian companies are eyeing the Chinese market is. The US. Africa. Central/Eastern Europe. Companies go where there is growth. please specify. 25 . Central/Eastern Europe. But on another level. this represents a major shift in the balance of economic power. a new era of global relationships may be characterised more by a battle for scarce resources. Other. Rest of Asia. Africa. only to be expected. Emerging market companies. Rest of Asia. China. managers and innovations may find more in common with one another than merely adopting the business norms and ideas that emanate from the US. as globalisation resumes its onward march following the upheavals of the economic downturn. Other. Western Europe. Yet. 3% 9% 21% 15% 16% 14% 31% 23% 43% 66% 10 20 30 40 50 60 70 80 90 100 0 10 20 30 40 50 60 70 80 90 100 Source: Economist Intelligence Unit. products. than through the market-led orthodoxies of the past.
It also takes a long time for companies to build up a brand that is sufficiently well known to open foreign doors. As this report has shown. executives are sanguine about the 2010 presidential election and the end of the Lula era. Importantly. but if recent successes are any guide. is the theory. in turn. which will attract more investment and sustainable growth. will help to fund investment into education and infrastructure. that a decade of macroeconomic stability will simply be maintained. That.Conclusion: The beginning of the future Brazil today seems better placed than ever to dispose of its frustrating. Nevertheless. building rail links and laying broadband cable can take a decade or more. A decade of macroeconomic prudence has given the economy a sturdy platform for investment. and unleashed the considerable pent-up energy of local business both at home and abroad. a poor education system will leave the country short of skills for many years to come. In some respects. the prize will be worth the effort. and businesses have factored this change into their long-term strategies. and filling potholed roads. moniker “the country of the future”. 26 . as they do. and on Brazil’s current trajectory there is no reason to think it cannot be achieved. assuming. at least. but Brazil has yet to move beyond the relatively easy task of supplying commodities to a customer that is desperate to buy. new skills and technologies. know-how. Sound policies and a growing domestic market have attracted foreign money. if clichéd. But Brazil is not quite there yet. enlightened economic policy is the easy part of transition. a virtuous circle is turning. This. It will take many years. Sales to China may be booming. growth and foreign expansion.