Brazil has emerged as South America’s leading economy, accounting for almost half of the region’s total GDP. Such primacy is the result of an historic hat trick the soccer-mad country has scored over the past 20 years.
First up is political stability. Since 1995, three presidents have been popularly elected including a smooth transition between the first two who belonged to different parties. Second is economic stability. After peaking above 1,000% in the early 90s, Brazil solved its inflation problems. The current annual rate is 6%. Finally, there is social stability. In the new century, about 40 million Brazilians -- more than the entire population of Canada -- have escaped poverty to join the middle class.
What does all this mean for Canadian firms? Says Jean Cardyn, EDC’s São Paulo-based regional vice-president for South America: “Brazil is now the world’s sixth largest economy in GDP terms ahead of Canada’s. More important, its annual GDP growth rates will exceed Canada’s and those of other developed economies for the foreseeable future.”
And for Canadian supply chain managers that can only mean that Brazil will figure increasingly into their companies’ sourcing and sales plans and thus become an important cog in their international supply chains. Yet navigating Brazil’s still emerging transportation infrastructure will prove a challenge.
Flying down to Rio
At present, the only direct air link to Brazil is the Air Canada Toronto—São Paulo flight. Other airlines such as Tam Airlines, LAN Chile, and American Airlines fly from New York. Freight forwarders such as Mellohawk Logistics Inc. in Mississauga can arrange seamless intermodal trucking links to and from New York.
As for ocean shipping, there are irregular charter sailings that stop in Halifax. Otherwise, there are intermodal connections by rail or road to ports in New York, Mobile, Houston, Norfolk etc.
CN Rail is actively moving goods coming up from Brazil to Mobile where they are loaded on to trains for Canadian destinations. Products such as lentils and soybeans move from Western Canada in the other direction.
After arriving in Brazil, goods still must wend their way through its creaky transportation and logistics network. Its ports are among the slowest and most costly in the world due to poor infrastructure, high taxes, excessive red-tape and deficient road and rail access. According to a recent report, lack of investment has resulted in inefficient ports where it costs on average US$200 to load or unload a single container, compared to US$110 in European ports or US$75 in Asian ports.
And then there’s Brazilian Customs. Except for perishables, it can take three to 10 days for cargo to be cleared. However, Arnon Melo, president & managing director of Mellowhawk Logistics, claims he has never encountered any problems. (He left Brazil as a young man to come to Canada to study.) “Unlike 30 years ago, customs in Brazil is now more open and transparent,” he says. “But officials are still very bureaucratic -- if forms are not filled out properly -- everything stops.”
His secret is getting approval before goods arrive in Brazil and ensuring you have used the proper import permit and that the rest of paperwork is perfect.
“Never try to fix the problem after the cargo arrives,” he says.
But things are changing. Brazil’s logistics infrastructure is about to get a makeover. In August 2012, President Dilma Rouseff announced a US$66 billion investment package to pay for laying 6,200 miles of railway tracks and building or widening 4,660 miles of federal highways. Other plans for updating airports, ports and waterway transportation are emerging.
The private sector is also getting involved. The centrepiece of those plans is the proposed US$2.7 billion port of Açu, 400 km north of Rio de Janeiro. Its planned annual capacity is 350 million metric tons making it potentially the largest port in the Americas. Located inside the Açu Superport industrial complex, which spans 90 square kilometres comprising two terminals with 17 kms of piers and 40 berths, the port will be able to handle ships of up to 400,000 tonnes.
The project is separate from Brazil’s preparations for the 2014 soccer World Cup and the 2016 Olympic Games.
Why it’s impossible to ignore Brazil
Currently, it is the world’s:
- 6th largest economy with an annual GDP of US$2.1 trillion
- 5th largest population – 191 million people
- 5th largest land mass – more than two million sq. km
(The only other countries with that combination and an annual GDP of US$600 billion or more are the US, India, China and Russia.) As well, Brazil is the world’s leading exporter of iron ore, soy beans, coffee, and orange juice, beef, chicken and sugar.
The Canadian connection
While the opportunities in selling to Brazil are huge, so are the challenges. Some Canadian firms have enjoyed notable success, starting with Brazilian Traction, Light and Power Company in 1899 which later became known as Brascan. It introduced hydro-electric power, telephone and streetcar systems to Rio de Janeiro and Saõ Paulo. After a long and complicated history as a multi-sector conglomerate, the firm still retains a solid Brazilian foothold as Brookfield Brazil, a wholly-owned subsidiary of Brookfield Asset Management Inc.
Other Canadian firms have not been so fortunate, especially the forays by Canadian telecom giants including Bell Canada, Nortel and Celestica in 1990s. “They lost hundreds of millions of dollars by offering the wrong products, using the wrong strategies and choosing the wrong partners,” says James Mohr-Bell, Saõ Paulo -based executive director of the Brazil-Canada Chamber of Commerce.
More recently, other Canadian firms have found a more successful formula for doing business profitably in Brazil. The “key to the mint” is dealing successfully with custo Brasil. It’s the complex web of government duties, taxes, and social costs set up years ago to protect domestic producers from imports by driving up business costs for foreign competitors.
Exporters need to find a savvy advisor who knows how to apply local rules creatively. Ricardo Barros, a Toronto-based certified international business developer with Atlantic Trade International pulled off a jeitinho or “little fix” to get around paying duties for a Canadian canola oil exporter. He simply pointed out to Customs officials that since Brazil did not produce any canola oil there was no domestic industry to protect.
To overcome such barriers to imported goods, Canadian firms must develop innovative solutions. One is participating in global value chains (GBVs). That involves becoming a reliable supplier to global conglomerates. It is especially helpful for small- and medium-sized firms which often lack the resources to penetrate overseas markets on their own. If they can catch on with such firms in Canada or elsewhere, they can strengthen their case to do the same for their Brazilian operations.
It is becoming easier for Canadian firms to start right away here at home with subsidiaries of major Brazilian corporations. These include AB InBev, which owns Labatt Breweries and Alexander Keith’s, mining giant Vale S.A. that picked up Inco and most recently, JBS US, a division of Brazil’s JBS S.A, which purchased embattled Alberta-based meat packer XL Foods. As well, according to EDC, 33 of the global GBVs it deems important to Canada including giants such as Siemens, Tata, and General Electric etc. are active in Brazil.
According to Raul Papaleo, Toronto-based president of the Brazil-Canada Chamber of Commerce, even large firms are doing it. He cites examples of Bombardier supplying parts to Embraer S.A. for some of its aircraft.
Another approach is to leverage the tax advantages of duty-free zones. Brazil’s largest is in Manaus, a city on the Amazon River of almost two million people about 3,000 km northwest of Rio de Janeiro. Global manufacturers ship in so-called complete-knock–down (CKD) kits containing all the parts needed for high-end consumer electronics, motorcycles and motorized water sport vehicles for assembly and distribution.
But Manaus can only be reached by plane or ship but not by truck or rail. It is far from the major coastal cities and markets.
In return for creating jobs in a remote region, foreign firms enjoy a wide variety of tax concessions. Brightex, a Vancouver-based maker of lightning-strike pipeline protection devices estimates that the CKD approach would reduce the cost of each unit by 60%, making them more affordable and competitive.
But according to staff at the Canadian consulate in Saõ Paulo, among the world’s emerging markets, Brazil possesses a number of unique qualities. On the positive side, it has a huge and growing group of middle class consumers eager to spend. Companies operating in Brazil enjoy generous margins and large profits.
But unlike the other BRIC countries (Russia, India and China) it is not a low-cost producer. So a winning strategy for Canadian firms is not to outsource production there to reduce production costs and boost profit margins. A more viable, medium-term one is to manufacture goods domestically with a trusted, well-connected partner to compete effectively against existing players and enjoy the same profit margins not to mention protection from foreign imports.
Papaleo believes this could take three to five years.
An unexpected benefit of made-in-Brazil goods is that they are more likely to stay there and not creep back to Canada and compete as bargain-priced items against the original products. Over the longer term, as the production quality of the Brazilian goods rises, foreign firms can benefit from so-called south-to-south trade – export sales direct to emerging markets in Latin America, Asia or even Africa.
The challenge then becomes how Canadian firms can gain a solid foothold, empowering them to do business in Brazil rather than do business with Brazil. Ultimately it boils down to four Ps -- products, partners, policies and patience.
The proper recipe
Doing business in Brazil can become complicated very quickly. However, a more positive view emerges from comparing its pulsating market dynamics with the ingredients and their flavours that make up its national drink, the caipirinha.
First there’s sugar (sweet) which stands for its resource wealth – agriculture, forestry, energy and minerals. The second is cachaça – Brazil’s signature liquor made from fermented sugar cane juice (the kick) representing margins and profits. The third is ice or water symbolizing the spirit and energy of its almost 200 million people. Finally, there’s lime juice (sour) a proxy for custo Brasil, the costly hassles of dealing with duties, taxes, laws and regulations.
Once overseas firms find the proper recipe or business plan that includes partners, products, policies and patience, doing business in Brazil becomes a true pleasure like sipping a well-mixed caipirinha.
The biggest Latin American infrastructure story is the widening of the Panama Canal to be completed in 2015. It will double its annual capacity to 600 million tons while creating a construction chain reaction that ripples through the entire region.
In response, other national leaders are aggressively introducing innovative funding and construction techniques to modernize their own outmoded harbours, airports, highways and railways. Among them is the soon-to-be opened US$ 700 million Quito Ecuador airport, a private-public partnership (P3) project led by a Canadian firm, Aecon Group Inc.
Decision makers throughout the entire region realize that modern facilities are crucial to their countries’ future export-led prosperity. Canadian companies benefit first from helping to build such projects and second from the more efficient trading activities such projects deliver.