The Custo Brasil - President Rousseff, tear down this wall!

by Matthew Gleason, Berners Consulting São Paulo

Brazil is an extremely attractive market given the large population and growing consumer class, but the Custo Brasil represents a significant barrier to entry. Custo Brazil is a common term for the “Brazil Cost” – costs that exist only in Brazil, putting the country at a competitive disadvantage internationally. In this article, we take a look at the causes, manifestations, and consequences of the Custo Brazil.

With low GDP growth in 2012 of just 0.9% and inflation of around 5.8%, the Brazilian economy continues to underwhelm. With other South American countries like Chile, Peru, and Uruguay seeing growth rates of 5.5%, 6.1%, and 3.6% respectively, Brazil’s sluggish economic performance cannot be blamed on the overall global economy. Even as the Rousseff administration attempts to stimulate the economy through narrow and temporary tax cuts to selected industries, investors and entrepreneurs operating inside the country are beginning to focus their blame on one thing: the “Custo Brasil”.

The Custo Brasil or Brazil Cost is well known throughout the country as that which raises the cost of doing business. The Custo Brasil is why the country ranks 130th out of 185 countries in the World Bank’s Doing Business Report (it is ahead of only India among the BRICS). It is why everything from consumer goods and electronics, to cars and heavy machinery costs so much more than in the rest of the world. It can be defined differently depending on who you ask, but it is essentially a result of Brazil’s extremely poor infrastructure, excessive bureaucracy, and infamous tax code.

Poor Infrastructure

According to a study produced by the Federation of Industry in the State of São Paulo, companies spend an extra USD 8.5 billion per year as a result of poorly maintained infrastructure such as dilapidated freeways and ports with insufficient capacity. According to the ILOS institute, 30% of the price of soybeans produced in the Matto Grosso and shipped through the Santos port is a direct result of transportation. Goods can sit for weeks before they are finally shipped.

Besides poor infrastructure in terms of the country’s roads and ports, Brazil suffers from high energy costs even though 70% of its energy is derived from hydropower, generally considered a cheaper form of energy. A study put out by the Federation of Industry of Rio de Janeiro found that the average cost of energy in Brazil is 50% higher than the global average and more than double that of other emerging economies.

To her credit, Rousseff has begun attacking the country’s infrastructure problems through a series of concessions. These concessions will allow private companies to bid on projects and allow them to operate large swaths of the country’s roads and rail lines as well as managing a number of the country’s ports and airports for up to 30 years in some cases.

The government has also reduced taxes on energy which account for a hefty 45% of the total costs according to a report by research institute, Acende Brasil. These changes, though positive, amount to only a fraction of the overall Custo Brasil.

Excessive Bureaucracy

In Brazil, starting a business can take an average of 119 days, which is outrageous when considering the average for Latin America and the Caribbean is 56 days and a mere 12 days for OECD countries. The time combined with various visits and payments to numerous bureaucratic agencies can give even the most motivated entrepreneur pause. Once a business is up and running, the bureaucracy continues to impede. Construction permits take around 470 days to obtain and both enforcing contracts and resolving insolvency can take years according to the World Bank’s Doing Business Report.

Cumbersome Tax Code

Brazil also ranks poorly (156 out of 185) in terms of its tax code. The corporate income tax rate is 34%, but depending on the industry, companies can see almost 70% of their profits eaten away in total taxes and contributions.

The cost of maintaining labor is significant with companies paying around 40% in taxes and contributions for each employee. Simply complying with the Country’s complicated system can take on average 2600 man hours, which is significant given that the average for Latin America is 367 days. The costs are considerable given that companies have to maintain a significant staff to oversee their compliance (Petrobrás, for example, maintains a staff of around 900), or spend money hiring firms to oversee their compliance for them.

If President Rousseff is really serious about returning the country to the growth rates of the last decade she will have to reform the tax code, and not merely cut a few rates for favored industries. She will have to expend political capital by slashing bureaucracy, which won’t be easy given the country’s powerful public unions. Finally, she must continue to put the country’s management of infrastructure into private hands.

Some changes will be painful and politically expensive given the groups and powerful interests that benefit from the Custo Brazil, but the country’s future growth will depend on Dilma’s willingness to bring down this wall.

Sources: World Bank, Exame, Terra

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Signs of recovery in Brazilian manufacturing

by Barbara Banhara, Berners Consulting São Paulo

A report released by the National Industry Confederation (CNI) shows that Brazilian manufacturing posted a downtime reduction in January, representing the best results since February 2008.

According to some specialists, Brazilian production increased in January due to an overall reduction in inventory at the end of 2012, resulting in a lack of supply versus demand.

The reduction was highlighted through two indicators: utilized capacity and hours worked. The analysis considered 21 sectors with 16 of them posting an increase in capacity utilization, with production of machinery and electrical components seeing the greatest increase.

Though it is still too early to say that Brazilian manufacturing is going to post significant results this quarter, given that the recovery depends on a number of external factors, the fact remains that consumption and investment are on the rise.

For further information, please contact info@berners-consulting.net.

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“Start-up Brasil”: Brazilian government’s initiative to foster technological entrepreneurism

by Leonardo Tamura, Berners Consulting São Paulo

“TI Maior”, or Greater IT, is a strategic program created by the Ministry of Science, Technology and Innovation (MCTI), part of the National Strategy for Science, Technology and Innovation, that aims to strengthen the Brazilian software industry.

In 2011, revenues in the IT sector (telecom not included) grew 11.3% compared to 2010 and surpassed USD 100 billion, which represents 4.4% of the Brazilian GDP. By 2020, the global IT market is expected to surpass USD 3 trillion, and Brazil wants to position itself as a competitive player. The government’s expectations are for the local IT industry to reach USD 200 billion, representing 6% of the national GDP, with USD 20 billion in exports.

Currently, the market is divided into 8,520 companies that develop, produce, and distribute software and provide services with micro and small companies representing 94% of the companies that develop and produce software. Typically characterized by low investment and a high potential for driving economic and social development, the IT industry pushes innovation through the creation of disruptive technologies and business models leading to new services, products and markets. This segment is considered by the Brazilian government as an important element of the global economy and a possible relief to the financial crisis.

One of the most recent initiatives of the Greater IT program is called “Start-Up Brasil”. The program is focused on software and services for IT start-ups and is offering: access to mentors and investors; research financing, development, and innovation; market and technological consulting; infrastructure; partnerships with universities, research institutes, and incubators; contacts to national and international companies; and access to national and international markets.

The “Start-up Brasil” program will prepare selected technology-based companies and connect them to global tendencies and markets. It is also intended to establish private-public partnerships to generate an ecosystem to foster technology-based entrepreneurship.

The program is divided into 3 phases that will (1) select start-ups accelerators, (2) select start-ups from Brazil or abroad, and (3) insert the start-ups in the accelerators’ infrastructure to drive them through a complete innovation process (R&D + Management + Market + Funding) for 6 to 12 months.

The first phase has been concluded as the Ministry of Science, Technology and Innovation (MCTI) announced the selected accelerators: Aceleratech, Microsoft, Papaya, Pipa, Wayra (Telefónica Group), 21212, Fumsoft, Outsource, and Start You Up.

The next phase, expected to be finished by the end of July, will select 40 to 60 start-ups. Up to 25% will be international start-ups, and each one will receive an investment of BRL 200,000 (close to USD 100.000). Until 2016, the overall goal is to accelerate 150 start-ups. The MCTI’s investments are expected to reach up to BRL 40 million. The nine accelerators will invest BRL 36 million in total in exchange to a minority stake in each company.

Sources: MCTI, Valor

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China’s one-child policy is topic of China’s National People’s Congress

According to the Chinese Bureau of Statistics, 16.7% of the Chinese population will be over 60 years old. Already in this year, 200 million people (about 15% of the population) are in this demographic segment. China’s trend toward an ageing society, and the problems associated with this trend, have been known for a long time. Tackling this problem requires a multi-faceted approach. One essential factor is the softening or even abandonment of the “one child policy.” Government institutions as well as delegates to the People’s Congress have now picked up on this topic, with some of them calling for the immediate introduction of a “two child policy.” However, rescinding the existing policy on a large-scale will take some time; currently, only a few provinces are having initial discussions on allowing couples to have two children. Furthermore, the effectiveness of a new policy is questionable. Already, many couples are reaching their financial limits with just one child, not least because there is a growing demand for high-quality and, therefore, expensive education.

Source: Epoch Times

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Drafting the new Chinese luxury consumer

by Miriam Fritz, Berners Consulting Stuttgart

Chinese luxury consumers are clearly on the rise. A recent study by Roland Berger Consultants estimates a CAGR of 25% between 2010 and 2015 and expects that Chinese consumers to account for 40% of the global new luxury market consumption by 2015. But what is their purchase decision based upon? Brand awareness is certainly among the most decisive factors, and its significance is increasing. The most important source for brand awareness, however, is not advertisement or commercials, but rather social networks and friends. This, on one hand, shows the continuous importance to align decision-making with the social peer group one identifies with. On the other hand, luxury consumption behavior is projected to become more individualistic and focused on unique brands.

Apart from increasing brand awareness, another noticeable feature of Chinese luxury consumers is their age, distinguishing them from the average luxury buyers in developed countries. As an example, Chinese Dollar millionaires are 39 years old on average. Even Chinese “Super Rich” are only 41 years on average. These are also called the “Wealthy Second Generation” of Chinese entrepreneurs and Chinese private enterprises, who e.g. inherited or will inherit a business led, owned and often founded by their parents.

Source: Roland Berger

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Final speech of Wen Jiabao focuses on smog problem

In his final speech, Wen Jiabao put emphasis on a topic that gained increasing attention from the Chinese public as well as in international media: air pollution and smog. Up to half of the pollution in China’s cities is caused by vehicle exhaust. The departing Chinese government under Wen and Hu Jintao has already launched a generous subsidy scheme for battery driven vehicles. At the same time, these subsidies apparently still don’t suffice as Chinese consumers are highly reluctant to purchase an electric vehicle.

The reason is certainly the considerable price but also the limited range of EVs. To name an example, it will still cost more than 40.000 USD – despite generous subsidies of up to 30.000 USD – to purchase the e6 of BYD, the Chinese pioneer in battery technology. Recent suggestions include expanding the pilot city project from the current 5 cities to 20 cities. As Wen Jiabao stated, more is to be done. It should give rise to optimism that Wen put the serious air quality problem as a priority topic in his final speech to parliament. Not only is Chinas one-party regime a good prerequisite for a fast, centralized decision making, but also the public discontent is noticeably on the rise.

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Chinese investors in Germany face a dilemma – choppy seas on the way to Germany

„Saviour in the hour of need or dangerous dragon?“ Chinese companies’ image remains a topic of great tension: for some, Chinese companies represent a welcome source of capital or the ticket to the Chinese market, for others a threat in the (inter-)national competitive landscape or for one’s own technology. Today we focus on the negative aspects of Chinese companies’ image and on some background info and possible causes.

Chinese companies are often greeted with suspicion when they show interest in a German investment target. This often goes hand in hand with concerns about know-how drain, production relocation or even dismantling of the German target company. The Chinese investor does have influence on these concerns, which in most cases these days are unfounded. In practice, however, this is easier said than done, but even a small effort, if done smartly, can have a big effect. Is it intrinsically bad news for employees of a German company with a long tradition to learn that your new majority shareholder will be Chinese? Not necessarily, but if this learning goes hand in hand with uncertainty regarding the objectives and strategy of the new, often unknown investor, it can quickly create insecurity. The same holds for the general public. Therefore, clear articulation by the investor toward the employees and the media regarding the objectives of the investment will alleviate concerns and raise acceptance of the ownership change.

In most cases, Chinese investors do follow a long-term strategy aimed at growth and business expansion for the German company and its German locations. However, Chinese investors often lack awareness for public communication of these plans as well as effective communication channels and tactics – says Martin Brudermüller, spokesman of the Asia-Pacific Committee of the German Economy (APA): “They are not good at this. They still have to learn this.”

Source: EU-Info

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