2011 ohio hispanic business summit - exporting to brazil - david m wilson

David M. Wilson, Kegler Brown

Brazil: The Basics

3 Make or Break Issues

2012 and Beyond

dwilsonjdmba

[email protected]

EXPORTING OHIO TO LATIN AMERICA: A BRAZILIAN CASE STUDY

Exporting Ohio to Latin America: A

Brazilian Case Study

Brazil: The Basics


2012 and Beyond

3 Issues that could Make or Break your Brazilian Business Strategy

-Organizational Structure

-Labor

-Regulation & Tax

Brazil: The Basics

-Facts

-Opportunities

-Risks

2012 & Beyond

-Infrastructure

-Inflation & Currency

-Regulation

P E S T

10 Seconds or LESS

My name is . . .

I’m with . . .

And:

One experience I had related to Brazil is . . .

One question I have related to Brazil is . . .

When I think of Brazil, I think of . . . business or non business related

Brazil: The

Basics


2012 and Beyond

Brazil: The Basics


2012 and Beyond

http://www.howmuchdotheyweigh.com/wp-content/uploads/2011/02/gisele-bundchen.jpg

Brazil: The Basics

Political

The ability of government to respond to and NOT create political risk

Economic

Macro trends, Currency risks

Social

The ability of stakeholders to identify vulnerabilities & apply pressure to the company to change its behavior

Technological

Infrastructure, IP Protection, Government Incentives

Brazil: The Basics


2012 and Beyond

P E S T

What are the Political, Economic, Social and Technological reasons

to enter Brazil?

export, manufacture, distribute, design . . .

Political Risk

-The ability of government to respond to political risk

-The ability of government to NOT cause political risk

Brazil: The Basics

Government Structure

Level of Corruption

Appropriation Concerns

Bureaucracy

Brazil: The

Basics


2012 and Beyond

P E S T

The unit of measurement

for political risk is

STABILITY

Political Risk



Brazil: The Basics

Government Stability

Stable Republic Since 1985

Multiple Peaceful Elections

Democratic Constitution

Functioning Executive, Legislative and Judicial Branches

Multiple Party System

Increasingly developed services: Fire, Police, EMS

Brazil: The Basics


2012 and Beyond

P E S T



STABILITY

Denmark*

1st

USA

22nd

Brazil

69th

China

78th

India

87th

Russia

154th

Political Risk



Brazil: The Basics

Level of Corruption

Transparency International 2010 CPI index

The abuse of entrusted power for private gain

Perception of corruption in public sector

2010 (most current

USA: 22 of 180

Apx. 88th percentile

Brazil: 69 of 180

Apx. 62nd percentile

1995 (year 1 of CPI)

USA: 15 of 41

Apx. 63rd percentile

Brazil: 36 of 41

Apx .13th percentile

Rousseff Cleaning House

Jettisoned 5 cabinet members since June

Brazil: The Basics


2012 and Beyond

P E S T



STABILITY

Political Risk



Brazil: The Basics

Appropriation concerns Long history of privatization & recent commitments

Talk of reviving old laws for a few categories

land restrictions on % of land in a district that foreigners may buy

1971 law found unconstitutional but is being revisited (no talk of taking land)

Brazil: The Basics


2012 and Beyond

P E S T



STABILITY

Political Risk



Brazil: The Basics

Bureaucracy?

Brazil: The Basics


2012 and Beyond

P E S T



STABILITY

Brazil: The Basics

Largest Latin American economy

7 largest in the World

Developed financial markets

Young workforce

Brazil 39.3%

United States 30.5%

China 29.4%

Increasing domestic demand

Growing Middle Class

Over 35 million Brazilians entered the middle class from 2003 to 2009

estimates predict an additional 20 million will climb the ladder by 2014

Per Capita GDP larger than China or India

Brazil $10,816

China $4,382

India $1,371

Rich Commodities Base – Energy, Mining, Agribusiness

Vies with Australia as worlds largest exporter of iron ore

Fertile Land: 1/3rd global coffee, ½ of all global sugarcane exports, major world player in beef, poultry, soybeans and corn

Recent oil field discovery 15bn to 70-100bn barrels

NPV of this discovery is apx $500bn apx 20% of GDP

Rainforest, Hydro

Brazil: The

Basics


2012 and Beyond

P E S T

Macro Trends

Brazil: The Basics

Currency

General

Weak exchange rate generally makes a country’s exports cheaper

Central banks in Japan, South Korea and Taiwan have recently intervened to make their currencies cheaper

China continues to suppress the value of its currency to strengthen exports

Brazilian Real

1.59 end of August, crossed 1.9 (intraday) September

Selling in September Foreign investment attracted by high returns began to sell in September largely

due to fear of Greek crisis

notably Japan

Central bank lowered benchmark rate by .5%

Many view the valuation as stabilizing after >45% increase since 2008

Brazil: The

Basics


2012 and Beyond

P E S T

Brazil: The Basics

Currency Risk

Transaction exposure – commitment to make payment at future date

Solutions:

Forward Contracts

Risk Sharing Agreements

Foreign Currency Options

Translation exposure – accounting based changes in consolidated FS Taking the value on 1 day and reporting on your statements

Solutions:

Swap (assets, debts, and/or liabilities with someone else, e.g., a bank or another company)

Economic exposure – non zero changes in expected cash flows due to changes in currency (real not just nominal)

Solutions:

Diversification

Brazil: The Basics


2012 and Beyond

P E S T

Brazil: The Basics

Stakeholders

Shareholders, NGOs, Interest Groups, Consumers, Local Communities. . .

Factors

Cultural Norms, Languages

“Culture eats strategy for breakfast” – Oded Shenkar

Demographics

GINI index (inequality of income)

Ethnic Conflict

Brazil: The Basics


2012 and Beyond

P E S T

Social Risk

-The ability of stakeholders to identify vulnerabilities & apply

pressure to the company to change its behavior

How substantive is the stakeholder?

How intense is the threat?

Brazil: The Basics

Brazil: The Basics


2012 and Beyond

P E S T

Geert Hofstede’s Cultural Dimensions

Power Distance

Individualism

Masculinity

Uncertainty Avoidance

Long-Term Orientation

www.geert-hofstede.com

http://www.geert-hofstede.com/



Brazil: The Basics

Solutions

Decouple your brands / products

Charge premium on specific brands for CSR projects, not all consumers

Partner with NGOs

Reputational benefit, they understand the industry and may help keep you up to date with shifts in pressure

Admit Wrongs

People are more likely to believe your CSR reports when you tell them what you are doing wrong (and how you addressing it)

Brazil: The Basics


2012 and Beyond

P E S T

Social Risk





Brazil: The Basics

Education

Past

Present

Brazil: The Basics


2012 and Beyond

P E S T

2000

- ½ Brazilian students graduated grade school

- 3 out of 4 adults were functionally illiterate

-Goal to reach OECD standard over next decade

-75,000 scholarships to attend world’s top

universities (only 9,000 a few months ago)

Social Risk





Brazil: The Basics

Technological

Infrastructure

Power

Public Health

IP Protection

Codified IP law protected by the Brazilian Constitution

Industrial Property Law, Law No. 9279, as amended (May 15, 1996)(Braz).

Provides for contracts involving technology transfer, technical and scientific services, franchising and protection against unfair competition

Instituto Nacional da Propriedade Industrial (INPI)

Federal agency in charge of regulating and registering patents, trademarks, industrial designs, approving licensing and other agreements

Copyright Law, Law No. 9610, as amended (Feb 20, 1998)(Braz).

Regulates Brazilian Copyrights and some Software Law

Rights are enforceable

Patent holder is entitled to prevent others from using, producing, selling, offering, or importing a patented product or process

Patent holder is entitled to be indemnified for improper use

Government Incentives

Brazil: The Basics


2012 and Beyond

P E S T

3 Issues that can Make or Break Your

Brazilian Business Strategy

Brazil: The Basics


2012 and Beyond

Labor

Entry Method & Organizational Structure

Regulation & Tax

Entry Method & Organizational

Structure

Wholly Owned Subsidiaries

Non-Equity Alliance

Licensing agreements

Supply agreements

Distribution agreements

Non-Equity joint venture

Heads of Agreement (Similar to US Memo of Understanding)

Equity Alliance

Joint venture

Brazil: The

Basics


2012 and Beyond

Stable Brazilian legal system leads

to fairly predictable results – but

you may not always like them


Structure

Wholly owned subsidiary

Foreign capital in Brazil treated quite liberally

Current legislation does not distinguish between domestic & foreign owned companies

Investments may be freely made & are not subject to any prior approval, license or authorization from authorities

But must be registered with Central Bank’s online system

No max or min limit on investment amount

Levels if wish to employee non-Brazilians

No max or min term for the investment (repatriate anytime)

Amounts paid by a Brazilian company to a foreign investor are NOT subject to any withholding tax

Amounts over the initial registration are generally treated as capital gains and subject to 15% tax (25% if investor resides in a tax haven)

Foreign investors are free to use any of the available company forms

Brazil: The Basics


2012 and Beyond


Structure

Sociedade Limitada (LTDA)

Sociedade Anônima (SA)

Sociedade Simples

Sociedade em Nome Coletivo

Sociedade em Comandita Simples

Sociedade em Comandita por ações

Sociedade em Comum

Sociedade em conta de Participação

Associações

Fundações

Cooperativas

Consórcio

Brazil: The Basics


2012 and Beyond


Structure Sociedade Limitada (LTDA)

Similar to US LLC

Liability limited to partner’s quotas Quotas may be freely transferred according to the articles of association

May not be traded publicly

Simplicity & Flexibility

Reduced Maintenance Costs

Less Formal Requirements

Must have at least 2 partners

Brazilian partners are not required

May be managed by one or more persons, partners or other entity Manager must reside in Brazil

If foreign manager, must possess a permanent Brazilian Visa with authorization to act as manager of a specific company

Generally preferred for wholly owned subsidiaries

Sociedade Anônima (SA)

Similar to US Corporation

May issue securities, debentures and may be publicly held

Higher Maintenance Costs

More formal requirements

Generally preferred for ventures comprised of a large number of different shareholder groups

Brazil: The Basics


2012 and Beyond

Distributorship & Agency Relationships

Brazilian agency relationships is governed by the Brazilian Civil Code and by special legislation, Law n. 4.886/1965

Exclusivity is NOT presumed unless expressly established in an agency agreement

However exclusivity is common and will likely be required by potential agents

Exclusivity entitles the agent to compensation related to direct sales made by the company without assistance of the agent

Termination

There are specific enumerated “just” reasons for the termination of an agency agreement

Termination is typically both difficult & costly

Generally, an agent is entitled to no less that 1/12th of the total amount received during the time of agency or an amount equal to the monthly average compensation received multiplied by the remaining months left in the agency contract term.

An agent is also generally entitled to reimbursement for investments, such as office rent and equipment expenses

Brazil: The Basics


2012 and Beyond


Structure


Structure

Joint Venture

May be created with or without a joint company

Contractual joint ventures between your LTDA/SA and a Brazilian company

Low cost entry and exit to new markets, industries and industry segments

Opportunity for learning

Provides a contractual framework for operations without generating the problems associated with an agency relationship

Enables each party to take full responsibility for its contribution to the venture while minimizing the issues associated with exclusivity

Enables low cost entry and exit

May later evolve into equity alliance

Brazil: The

Basics


2012 and Beyond


Structure

Brazil: The Basics


2012 and Beyond

Should you vertically integrate?

Some or all of the value chain, acquire rather than joint venture

Transaction Costs

Is the exchange subject to high threats of opportunism due to high transaction specific investments?

Is the exchange subject to high threats of opportunism due to uncertainty and complexity?

Capabilities

Do you have valuable, rare and costly to imitate resources?

Real Options

To retain flexibility: exchanges characterized by high levels of uncertainty should not be vertically integrated

For additional information on this topic please reference: Gaining & Sustaining Competitive Advantage Third

Edition, Jay B. Barney, 2007

Labor – It’s more than just the 13th

salary

Brazil: The Basics


2012 and Beyond

Labor rights are outlined in the Brazilian Constitution, as well as

laws, decrees, provisional measures, ordinances and regulations,

international conventions and treaties (ratified by the Brazilian

government), company policies, Supreme Court decisions, Superior

Labor Court decisions and customs


salary

Basic Principals

Worker Protection: the worker is considered the weaker party in the relationship

In labor-related conflicts, at any level or jurisdiction, whenever there is a doubt regarding evidence, the court’s decision will favor the worker

The law most favorable to the worker will be applied

The conditions most favorable to the worker will be presumed

Actual facts prevail over written documents

Protected salary (generally cannot lower an employee’s salary)

Defense of workers honor and ethical code

Nondiscriminatory practices

Continuity of employment relationship

Brazil: The Basics


2012 and Beyond


salary

Direct agreements between employees and employers to resolve conflicts are not valid

The Brazilian constitution provides the right to sue as an individual guarantee

There are ways to settle

Arbitration, union conciliation commissions. . .

but they do NOT prevent the right of individual claims

Every 12 months employees are entitled to 30 calendar days paid vacation

In addition to the 13th salary (Christmas bonus equal to 1/12 the salary for each month of that year)

Every month employer must deposit an amount = to 8% of employees salary into Unemployment Fund

If employee is dismissed without cause, the employee may withdraw the amount

Employer must pay a penalty equal to 40% of the amount and an additional 10% to the government

Brazil: The Basics


2012 and Beyond


salary Not at will

30 days prior notice (some agreements may require longer period of time)

Notice shall specify whether the 30 days must be worked or not worked

If worked may be absent for 7 consecutive days or may leave 2 hours early every day

For cause if:

A dishonest act

Improper conduct

Regularly doing business on behalf of himself or for a third party

Criminal conviction

Inadequate discharge of duty

Habitual drunkenness

Currently debate on this cause; many courts consider it a social problem and not a just cause

Violation of trade secrets

Act of disobedience or insubordination

Abandonment of employment

Injurious act to the honor of any person during working hours (except in self defense)

Persistent gambling

Brazil: The Basics


2012 and Beyond


salary

Brazilian v. Non-Brazilian

Staff of companies with three or more employees must be 2/3 Brazilian

And, at least 2/3rds of the payroll must be paid to Brazilians

Salaries paid to employees in Brazil cannot be based on foreign currency

Federal, State and Municipal Taxes

Contribution for Financing Social Security COFINS

7.6% calculated based on gross revenue from the sale of goods or services

Contribution to the Social Integration Plan PIS

Brazil: The Basics


2012 and Beyond

Regulation & Tax

Import Export Process

Minimum Wage

Privatization

Recent Tax & Regulation Changes

Brazil: The Basics


2012 and Beyond

“If you’re honest and want to comply with the tax code, you

need an accountant and a tax lawyer for life” -The Economist, September 24, 2011 quoting a São Paulo based economist

Regulation & Tax

Import Export Process

Register with the governmental registration system

Secretary of Foreign Trade SECEX, SISCOMEX system

Subject to significant variability

Obtain importing license if required

Automatic

Non-Automatic (process may take several months)

ANVISA, IBAMA, MAPA, DECEX, CNEN, ANP, ANEEL, DPF, COMEX, MCT . . .

Radar

Simplified

Ordinary

Tax / Duty

Generally all imports are subject to import duty, IPI, ICMS, PIS and COFINS

Import duty is calculated on the total CIF (cost, insurance & freight)

Are charged based on the tariff classification of the product

Import Tariffs rage from 0 – 35% with an average applied tariff rate of 11.5%

The import duty rate for machinery and equipment not produced local MAY be reduced to 2% upon request of the importer to the competent authorities

Brazil: The Basics


2012 and Beyond

Regulation & Tax

MERCOSUL southern common market

Free from import duty with certificate of origin

However Exceptions to Common External Tariff (CET)

Brazil is permitted 93 exceptions to the CET

June, 2009 the trade minister raised several import duty rates:

August, 2009 MERCOSUL members approved tariff increases on

hundreds of products within the CET

Primarily dairy, textiles, bags, backpacks, suitcases up to the

bound level apx 31.4%

Brazil: The

Basics


2012 and Beyond

Member Countries

Brazil

Argentina

Uruguay

Paraguay

Applied

Venezuela

Not yet ratified by

Paraguay

Associate Member

Bolivia

Chile

Columbia

Ecuador

Peru

Observer of

Agreement Mexico

Regulation & Tax

Recent Tax Changes July, 2011

1% tax on foreign derivatives

August, 2011 Three prong plan to continue to spur economic growth

September, 2011 30% Increase in industrial product tax on cars (37-55%)

Exempt if 65% domestic parts (Brazil, Mexico or Mercosul country)

Oct 6, 2011 Renault SA announced plans to increase its Brazilian production capacity by 100,000 vehicles

Brazil will be the companies 2nd largest market after France

Expects sales of 3 million vehicles annually by 2013 with 25% from Brazil

October 10, 2011 Chinese auto maker JAC announced it would build a factory in Brazil – output set to begin in 2014

Brazil: The Basics


2012 and Beyond

Regulation & Tax

Minimum Wage

January 2012 increases 14%

Currently R$ 545 per month x 13 (US$ 12,540)

Likely to reach R$ 817 per month by 2015 (US$18,800)

54 million Brazilians at min wage level

Increased domestic demand

Likely increases consumption

Risks

Some industries may see significant increases in COGS

Brazil: The

Basics


2012 and Beyond

Regulation & Tax

Privatization

Infrastructure Need

Auction method

Airports

São Gonçalo do Amarante Airport – R$ 170 million (3x reserve)

3 more by end of 2011

Oilfield Rights

Brazil: The Basics


2012 and Beyond

The Brazilian President’s office emphasized, “[t]he government does not intend to

get involved in these investments. These investments are going to be a long-term,

private sector affair. The private sector must play a key role.”

2012 & Beyond

Infrastructure

Currency Rally & Inflation

Regulation

Brazil: The Basics


2012 and Beyond

Infrastructure

Brazil: The Basics


2012 and Beyond

Unlike the United States, Brazil is only beginning to develop its infrastructure capabilities

Domestic Growth

2014 World Cup

2016 Olympics

President Rousseff

Infrastructure background

Lula’s Program for Accelerated Growth Coordinator and is known for her technical analysis

History of funding with private capital

Opportunities exist for

US companies with capabilities to assist in infrastructure development

US companies that already possess the ability to design, develop, manufacture or deliver goods

Infrastructure

Brazil: The Basics


2012 and Beyond

Logistics

Rail

ALL Monopoly on rail concessions it operates

Excess capacity (profitable lines at near full capacity

ANTT road & rail regulator Recent concessions changes enables competitors to pay ALL an access fee

Road

Creating and paving many connecting routes

Air

Privatization Operations, construction opportunities

Telecom

30% of households have broadband

http://en.wikipedia.org/wiki/File:All-logisticalogo.jpg

Inflation, Currency, Macro Trends

Brazil: The Basics


2012 and Beyond

Inflation

Analyst’s views very on inflation: 2012-2013 Range: low 3% to high 6%

Disagreements largely relate to labor productivity and fiscal accounts

Factors

Significant FDI lured by high interest rates and growth

Government Focus

Education

Increases in productivity

Increases in the pool of educated labor decreases wage pressure which reduces inflation concerns

Reduce Costs

Eliminated Payroll taxes for labor intensive industries like furniture and textiles in August


Brazil: The Basics


2012 and Beyond

GDP Projections: mid to high single digit growth in 2013

GDP Gap

Min wage increase .6% + reduction in tax revenues from new industrial policies .4% = 1% GDP gap from expenditures & decrease of tax revenues

New Oil fields provide wealth to help fund infrastructure investment

Involvement of private sector capital in infrastructure development may reduce need for Government infrastructure expenditures (Increased privatization and licensing likely)

Impact of E.U.

Greek debt default and general credit drop of the EU which triggers a regional recession will likely also reduce growth in the US and China

This reduction in global demand will likely lead to decreased commodity prices

The impact of external noise would likely be smoothed by Brazilian fiscal and monetary counter cyclical policies; however, GDP growth would likely decrease to 2-3% in 2013

Many analysts agree that the

main risk for the Brazilian

economy is not local, rather the

potential deterioration of the E.U.


Brazil: The Basics


2012 and Beyond

Currency

Largely dependent on EU crisis

If no EU recession and developed banks print more money

this increased liquidity will likely keep rates low for several

years. This will likely lead to increased Brazilian Real

appreciation

Many analysts project as strong as BR$1.5 to US$1

If global distress then Brazilian Real could likely weaken to

1.7 or worse


Brazil: The Basics


2012 and Beyond

Macro Trends

Min Wage

January 2012, 14% min wage increase – 54 million

receive min wage

Should support consumption and prevent downside

demand pressures

Even if EU recession, unlikely that Brazil will experience

recession

Consumption is a high % of the Brazilian economy

May impact cost of labor and COGS in your industry

Regulation

Brazil: The Basics


2012 and Beyond

A Bigger Brazil: 3 prong plan to continue to spur economic growth

US$ 16 Billion in tax breaks (over 2 years)

Eliminate payroll taxes for labor intensive industries

Software, Textiles, Shoes, Furniture

Buy Brazil Initiative

Allows government agencies to pay up to 25% more for

locally produced products than similar foreign goods

Particularly when purchasing for defense, health, or high tech

communications equipment

Subsidized Loan Programs

David M. Wilson, Kegler Brown

Brazil: The Basics


2012 and Beyond

dwilsonjdmba

[email protected]

EXPORTING OHIO TO LATIN AMERICA: A BRAZILIAN CASE STUDY

Additional Sources

UBS Investment Research: Emerging Economic Focus, UBS, August 29, 2011

A Closer Look at Brazil’s Credit Boom, Deutsche Bank EM Special Publication, July 22, 2011

Anchoring, De-Anchoring, Re-Anchoring, Bradesco Corretora Economics BBI Equity Research, September 6, 2011

Economic Outlook: Brazil, BBVA, Third Quarter 2011

Brazil Auctions Rights to Airport, WSJ, August 23, 2011

The Geopolitics of Brazil: An Emergent Power’s Struggle with Geography, STRATFOR, July 14, 2011

The Aging World, Ned Davis Research Inc, July 21, 2011

Japanese Dump Real Funds at Fastest Pace Since Earthquake: Brazil Credit, Bloomberg, September, 30, 2011

First they went for the currency, now for the land, The Economist, September 24, 2011

Gaining & Sustaining Competitive Advantage Third Edition, Jay B. Barney, 2007

Privatization and the Distribution of Assets and Income in Brazil, Economic Reform Project: Global Policy Program, July, 2000