2. Doing Business in Brazil

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

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

5. Population & Labor  In 2002, 24% of labor force employed in Agriculture, 56% in service sector & 20% in manufacturing  Population is migrating towards costal & urban centers, 81.7% of population live in cities  Brazil has 31 major metropolitan centers with population of greater than 1 million

6. Brazilian Economy  Brazil is an emerging industrial-service economy, Agriculture accounts for less than 10% of GDP  Brazil initiated Market reforms since 1990’s  Inflation has fallen to 9.3% (still high) in 2003 from 2,708% in 1993 – “Real Plan”  Real Plan was initiated to stabilize economy in the aftermath of Contagion  Real was devaluated in 2001 & IMF extended $41 Billion loan to bail Brazilian economy

7. Real Stabilization Plan  Real Stabilization Plan imposed a serious burden on Brazil’s growth  During 1990 to 2001 Brazil’s economy grew by 8% from US$465 Billion in 1991 to $504 Billion in 2001  In Contrast Chinese economy grew from $387 Billion in 1990 to $1.1 trillion in 2001  Brazil’s GDP declined in second half of 90’s  High interest rates & inflation is hurting growth

8. Economic Crisis of 2001  Real Stabilization plan imposed a high exchange rate against US Dollar to keep local prices under control  In 1999 nominal interest rates reached 45%, high debt level of 61% of GDP coupled with Asian Crisis & Mexican Peso crisis pressurized ‘Real’ to be devalued in 2001  $41 Billion loan from IMF in 2001  $15.7 Billion loan in 2002, additional $30 Billion standby loan in 2002  High debt levels makes Brazil dependent on FDI

9. Comparison with BrazilMexicoChile GDP in US$ Billion502.5617.863.5 GDP % Growth1.54.43.2 Real Interest Rate11.8%3.5%2.9% Annual Inflation7.4%5.5%3.8% Exports$61.7B$171.2B$16.1B Exports of Goods & Services/GDP 13.427.631.8 Imports of Goods & Services/GDP 14.430.030.8 High Tech Exports in Billions of USD 18.622.43.4 PV of External Debt$223.8B$157B$34.9B Total Debt Service (% of exports) 90.730.226 Source: World Bank database 2002

10. A fragile Economy  High levels of debt ($223.8 Billion) requires high debt servicing, 90.7% of exports  Brazil trails Mexico in terms of high tech exports & overall exports  Brazil had a lower growth rate all through 1990’s  Higher interest rates and inflation when compared to Mexico & Chile

11. Brazil’s Competitiveness  Brazil is ranked:  46 th in Growth Competitiveness Index (GCI)  35 th in Technology Index (TI)  45 th in Public Institutions Index  67 th in Macroeconomic Environment Index  Korea in Comparison is 21 st in GCI, 18 th in TI, 10 th in Macroeconomic Environment Index  Brazil has upside potential to increase its competitiveness given its natural resources

12. Brazil’s Factor Endowments  Brazil is rich in natural resources  Land, minerals, Water, Forests  Brazil has an advanced technology  telecom infrastructure  Skilled labor  Indigenous technology sector  Booming Biotech Industry  Brazil has established core sector  Leading producer of Aluminum & Steel  Brazil has a young & skilled population  Over 250,000 are enrolled in Graduate program in 2002

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

14. Firm Strategy and Rivalry  Liberalization in 90’s and FTA agreements increased competitiveness of local firms  Eg: Number of Auto models has increased from 40 to 400  MNC’s, Local firms compete for customers with more than 70,000 consumer products  Intense Rivalry at home market has helped firms like Norberto, Embraer Odebrecht etc to compete globally

15. Related & Supporting Industry  Brazil’s Auto & Engineering industry is benefited by steel, rubber & auto parts industry  Brazil has a strong Agribusiness sector with chemicals, pesticides, seeds etc  A strong higher education system supplies industry with talented employees

16. Demand Conditions  A strong home demand exists in Brazil  A population of 172 Million  A strong demand for consumer products, Autos etc at home supports expansion abroad by Brazilian companies  Free Trade Area agreement with other South American countries creates a larger market

17. FDI in Brazil  Brazil attracts large amount of FDI  $117 Billion in FDI from 1995-2000  US is the largest investor – Over 40% of FDI  MNC’s are the major source of FDI  80% of Fortune 500 firms have invested in Brazil  Government policies favor FDI & has abolished state monopolies  Predictable & transparent rules reduces red tape

18. FDI Incentives  Government incentives encourage FDI  70% of FDI are in services, 28% in manufacturing  Low wages & skilled labor availability  34% of banking is done by MNC banks  Investments in Amazon region, Northeast region is tax exempt  Export Processing Zones created to promote FDI and exports  Investments in technology sector is exempt from income tax and has several other benefits

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

20. Free Trade Champion  Founder Member of Mercosur (South American Free Trade area)  Active in promotion & creation of FTAA  FTAA will boost exports from Brazil  Brazil exports $60 billion worth goods to US in 2002  Steel, Chemicals, Soy, Paper & pulp, coffee etc  US accounts for 24% of Brazil’s exports, Argentina accounts for 10%  Brazil contributes just 0.9% of global trade

21. Infrastructure - Transportation  Infrastructure varies largely based in economic disparities  Urban centers in South & South east have good facilities  Rural areas are quite undeveloped  Road transportation accounts for 63% freight  1.7 million kms of roads, only 10% is paved  Rail transport is very limited  Only 28,000 Kms  Air & Waterways are still developing

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

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

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

25. Consumption patterns  Class A & B – Upper class & Upper middle class accounts for 52% of consumption  Class A & B make 10 times or more of the minimum wages  Class C consumers ( 4-10 times the minimal wages) account for 28% of consumption  Class D & E ( 1-3 times the minimum wages) account for the rest 20%  Local products, Local brands concentrate on Class C & lower consumers (30% of market)

26. Privatization  Brazil had a huge state owned enterprises  Privatization started in 1990’s raised $105 billion

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

28. Culture and Business

29. Hot Sectors – Oil & Gas  Investments is encouraged in hot sectors which offers excellent opportunities for investors  Oil & Gas Exploration & drilling  State owned enterprise Petrobras has 49% market share, Private sector controls the rest  15% growth rate, contributes 5.7% of GDP  Opportunities in offshore drilling, offshore equipment, and services  Rising energy demand promises good returns  Oil & Gas equipment market is estimated at $6 billion

30. Hot Sectors – Banking  Inadequate banking services offers excellent opportunity in retail banking  About 60 million bank accounts currently exist  6 MNC banks have 33% of market share  Banking sector accounts for 8.6% of GDP  Increasing middle class will attract more retail banks  Market for financial services is growing

31. Hot Sector - Automobiles  Brazil’s transportation sector depends on roads  Brazil has about 15 car manufacturers  Low cost labor and high quality is promoting auto parts industry primarily for exports  2002 revenues in auto parts exports was $11 billion  MNC’s control 69% market share Auto parts

32. Hot Sector – Pharmaceuticals  Brazil is the largest market for Pharmaceuticals – 2002 market was $5.2 Billion  Imports $2.5 Billion worth of medicines and drugs  Generic drugs are gaining popularity and accounts for 30% of the market  MNC investments are for generic drugs

33. Hot Sector – Power & Telecom  Brazil’s expansion in gas based power plants has created a market for electric power equipment - $2Billion a year  Alternatives such as renewable sources such as solar power equipment is being encouraged  Privatization is enabling a fast growth in telecom sector  Currently, 40 million land lines, 29 million cell phones  Total revenues of $8 Billion

34. Hot Sector - Retailing  Brazil has a sophisticated retail sector with self service type stores and giant retailers like Wal-Mart & Carrefour etc.  FDI in retail sector was $1.6 billion in 2001  Brazil’s retailing sector is no par with US and Europe  Opportunity exists in food retailing and targeting class C consumers  A strong TV media helps advertisers and FDI in TV & other media is encouraged

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

36. Closing Thoughts  Brazil is a country of contrasts.  A high tech industry in Aviation, deep sea oil exploration, machinery etc  Yet 34% of population live below poverty line  Income disparity is very high  Economic liberalization is driving the economy  Increasing the fiscal discipline, controlling inflation, & lowering deficits is the key for economic stability  Higher Social investments in education and health care is needed  Government is also pursuing spending plans to increase wages, aid to farmers

37.  Brazil’s current economic growth and stability can be upset by:  High spending plans which is ballooning domestic debt  High real interest rates in hampering investments  Pension fund & tax reforms are urgently needed  Globalization and exports are key for Brazil’s economy  Brazil needs to address the medium term economic issues for future success