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Brazil's Samba Economy - Monday, 14 May 2012

Brazil’s samba economy will keep on dancing
They call it the samba surge. Once described as the perpetual country of the future, Brazil is finally fulfilling its promise.
A reveller from the Vila Isabel samba school parades on the first night of the annual Carnival parade in Rio de Janeiro’s Sambadrome
Studies estimate that 50m of Brazil’s 200m people have joined its middle class over the past seven years Photo: Reuters

By Andrew Cave

9:30PM BST 12 May 2012

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South America’s largest nation has overtaken the UK as the world’s sixth-largest economy, it expects to follow last year’s 7pc GDP growth with a 4pc advance this year and similar growth in the next few years, and is basking in an anticipated oil windfall of up to 90bn barrels.

The fifth-largest country in the world, with GDP per head that is greater than either India or China, Brazil increased its inflow of foreign direct investment by 87pc to $48bn (£30bn) in 2010 alone, putting the nation fifth in the world rankings of capital inflows

Inflation, which averaged a staggering 1,429pc between 1990 and 1994, is now down to 6pc, the unemployment rate is 5.7pc, compared with a 10.8pc average for the European Union and 8.2pc in the US, and the middle class is on the march.

Studies estimate that 50m of Brazil’s 200m people have joined its middle class over the past seven years. It has been dubbed the C-class, with wry observers saying that stands for casa (houses), cars, computers and cellphones.

“Brazil always used to be called the land of the future but the joke was that the future never actually arrived,” says Jaap Kuiper, managing director for Latin America at the decorative paints arm of chemicals giant AkzoNobel.
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What changed all that is Brazil’s new position as China’s most important partner in its commodities boom, which has led to Brazilian exports surging from $50bn in 2000 to more than $200bn.

With the 2014 World Cup and 2016 Rio de Janeiro Olympics seeing proposed infrastructure investments of $90bn and $30bn respectively, The Economist devoted an issue to the nation’s boom under the cover headline of “Getting it Together Again”.

Not surprisingly, growth-starved Britain wants to get in on the act. Britain is Europe’s third-largest overseas investor in Brazil, behind Germany and the Netherlands, and UK Trade and Investment (UKTI) has recently produced two reports aimed at stimulating investment in Brazil.

It is urging UK companies to bid for more than £20bn-worth of Brazilian infrastructure projects relating to the Pedra de Ferro mining project in the north-east of the country as well as projects at the World Cup and Olympics.

British companies, including Rio Tinto, Shell, Unilever, BP, Wellstream, JCB Rexam, De La Rue, GlaxoSmithKline, Bunzl and credit-checking business Experian, already have significant investments in Brazil.

Moreover, BG Group has said that its £1.1bn sale of its majority stake in a Brazilian gas distribution business will allow it to invest more in upstream exploration and development projects in the nation.

Two names from Britain’s rich industrial past are also powering Brazilian expansion under the Dutch flag, following AkzoNobel’s acquisitions of Courtaulds in 1998 and ICI 10 years later.

Courtaulds opened its marine and protective coatings factory in Rio de Janeiro back in 1926 – five years before the erection of the city’s famous Christ the Redeemer statue, while ICI’s strong Brazilian business was a major reason for the company’s takeover.

Together, the two former British-owned operations account for about two-thirds of AkzoNobel’s €950m (£764m) Brazilian sales, which in turn is a sizeable slice of the group’s €16bn turnover.

Ton Buchner, chairman and chief executive of AkzoNobel, says: “I have been coming to Brazil regularly since 2000 and it has changed significantly.

“People were always saying that Brazil had this tremendous promise in itself but it never seemed to come out. But from 2005 onwards, the country has really delivered, grown and expanded.

“I would say that Brazil from 2000 to 2005 and then from 2005 to 2011 are two completely different pictures. I have seen this growth and Brazil is a country that is now fired up on many cylinders.”

Brazil’s commodities boom has clearly been a major driver.

Petrobras, the oil giant that is Brazil’s largest company, now has 650 refineries, 30,000km of pipelines, 80,000 workers and a stock market capitalisation of $164bn.

However, Brazil is also the world’s largest producer of iron ore, sugar, tobacco, orange juice, soya beans and, of course, coffee.

In addition, the nation has a major pulp and paper industry, fuelled by the conversion of former rainforest land to fast-replenishing eucalyptus trees.

“There’s been a fundamental richness in natural resources that has supported Brazil’s growth,” says Buchner, “and it has also been driven by consistent government policies over a period of time. Brazil has been predictable.

“What you see in Brazil, and one of the reasons why there are not so many imports into Brazil, is that the country is a domestic market that has a tremendous amount of local content requirement and, as a result, there is a tremendous amount of domestic supply of many, many products.

“Brands may have been introduced from abroad but you see a very high number of products in all the industries, from electric motors to paint, that are manufactured domestically.

“Brazil is a country that has relatively high import barriers so, as a result, many international companies have set up locally and these are businesses that supply to Brazil but they do not export very much from Brazil.

“It is Brazil for Brazil. But this is the fourth-largest market for AkzoNobel and our aspiration is to increase our Brazilian turnover to €1.5bn by 2015.”

Buchner warns, however, that Brazil’s cultural differences and onerous fiscal regime – the nation has 85 different business taxes, including punitive export duties – mean that foreign entrants coming into the market now face an uphill battle, particularly in industries where local players are already well established.

The worry, therefore, is that the UK, whose total exports to the BRIC economies of Brazil, Russia, India and China are still less than its sales to Ireland, may miss out on the Brazilian boom.

Still, plenty of British firms are rising to the challenge. UKTI reports a 500pc increase in interest in Latin America business opportunities generally from British companies over the past few years, and some major UK brands are targeting the country.

Luxury car maker Rolls-Royce is planning to enter Latin America for the first time in its 107-year history by launching a dealership in Brazil, while retail success story SuperGroup has said it will add Brazil to its existing franchises in Colombia, Panama and Venezuela if it can find a way of overcoming onerous import duties.

Edward Oakden, UKTI sectors group managing director, says the Pedra de Ferro project brings opportunities for British firms involved in mine infrastructure, road and rail-building, and the construction of shipping and container terminals and port developments.

A forthcoming UKTI trade mission to Brazil will give firms the opportunity to make direct contact with the bidding process.

One British infrastructure company targeting Brazil is Balfour Beatty, which last year set up an office in the country with the aim of winning business there.

“We are increasing the focus of our activity in markets where opportunities are bigger and growth rates higher than in the UK,” says chief executive Ian Tyler.

“We began making inroads into Brazil last year and Brazil and India are now priority emerging markets.

“Brazil represents a larger infrastructure market than the UK, is allowing private capital to play a growing role in infrastructure provision, and is making determined efforts to reduce corruption.

“In 2011, Brazil began a four-year growth acceleration programme to invest more than $500bn in logistics, including transportation, energy and social development.

“It is also encouraging for us to see the government’s endeavours to ensure the financing of this growth. Brazil has been letting infrastructure concessions since 1995 and introduced public-private partnerships in 2004.”

Plenty of challenges remain for Brazil, however. In terms of the ease of doing business, the country is ranked 126th in the world by the World Bank, while in terms of tax, it’s ranked 150th.

Richard Turner, deputy consul general at the British Consul in Sao Paulo and deputy director for trade and investment in Brazil for UKTI, tells of a UK whisky-maker whose finance department in Brazil is its largest anywhere in the world because the tax and accounting regulations are so complex.

The nation is also notoriously bureaucratic, with registration of some companies taking as long as two years, while Brazil’s social charges can add 70pc to 80pc to the cost of each employee’s wages.

The import taxes in particular call for a thoughtful approach to the Brazilian market.

Charles Morgan, chairman of Morgan Motor Company, is in talks with Felipe Cavalieri, chief executive of heavy construction vehicles distributor BMC, about potentially becoming Morgan’s first distributor in Latin America.

However, he says Brazil’s high import duties might mean that it makes more sense to operate there with a different business model, assembling car bodies and chassis in the country itself.

“We have never done that anywhere outside Britain before,” he said, “but we might do it in Brazil.

“There’s also a cultural aspect that’s very important. Do not think that we are going to fly the British flag. We are going to tailor a car for the Brazilian market. If that means painting it in the green and yellow of the Brazilian flag, so be it.”

Another mid-sized British firm expanding in Brazil is Brandenburg UK, a Birmingham-based designer and manufacturer of eco-friendly solutions for the management of pests, biting insets, bacteria and viruses.

The firm has already made the move to set up a small office in Sao Paulo but managing director Mathew Kaye says import duties are now amounting to 126pc of sales.

To combat this, he is planning to set up a manufacturing site in the northern Brazilian state of Amazonia, where there are attractive tax breaks designed to bring in investment.

Brazil has many challenges to surpass before it can be certain that it is finally fulfilling its promise. Economists warn that the inflation rate, while nothing like the hyperinflation of the past, is still too high and Brazil’s challenge is how to grow at a faster pace without taking it higher.

Infrastructure investments will help that objective, as well as relieve congestion in Rio de Janeiro and Sao Paulo’s car-packed streets and regenerate some of the nation’s housing stock.

AkzoNobel is helping by donating more than 370,000 litres of paint, which have already been used to renovate more than 2,000 buildings.

The company, which last week announced a contract to supply coatings for the roof of Brazil’s Maracana Stadium, which will host the 2014 World Cup final, has also launched a programme to repaint the 1,500 properties in Santa Marta, a once drug-infested favela in Rio de Janeiro.

It will take more than a lick of vividly-coloured paint to solve Brazil’s other challenges, which include weak secondary schooling, lagging innovation and poor brand recognition of Brazilian products outside their home territory.

Most commentators agree that the direction of travel for Brazil is positive, however.

The country used to be likened to a chicken in flight, flapping its wings with enormous effort to result in the passage of only a few yards. Now it is becoming a more accomplished bird of flight just as its neighbour Argentina is nationalising oil assets and showing worrying signs of reverting to the type of rule that has blighted South American economies for decades.

Economists expect Brazil’s samba economy to carry on dancing over the next two decades, surpassing Germany to become the world’s fourth-largest economy behind the US, China and Japan.

It will not be for the fainthearted but, faced with little excitement on domestic dance floors, the outstretched arms of Christ the Redeemer will look increasingly welcoming to British companies.
Brazil in numbers

$48bn Amount by which Brazil increased its inflow of foreign direct investment in 2010

6pc Brazil’s inflation rate, having averaged 1,429pc between 1990 and 1994

$90bn Amount being spent on infrastructure projects relating to 2014 World Cup

80,000 Number of workers employed by Petrobas, the oil giant that is Brazil’s largest company

€950m British companies ICI and Courtaulds account for two-thirds of AkzoNobel’s Brazilian sales



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