Brazil����������unboundHow investors see Brazil and Brazil sees the world

inco-operationwith

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3

Contents

Foreword� 4

Executive�Summary� 5

Introduction� 6

Part�one:��Cornerstones�of�success� 9

Part�two:�Social�and�intellectual�capital� 15� I.Talentandeducation 15 II.Innovationinthinkingandaction 19 III.Braziliansabroad 22

Conclusion:�The�beginning�of�the�future�� 26

About�this�report

Brazil unbound: How investors see Brazil and Brazil sees the worldisanHSBCreportproducedinco-operationwiththeEconomistIntelligenceUnit.Thereportdrawsonin-depthinterviewswithcountryexpertsandanalysts,EconomistIntelligenceUnitforecasts,andasurveyofexecutivesin536companiesacross18industries,duringApril-May2010.AroundonethirdofsurveyrespondentswerebasedinBrazilandafurther11%inLatinAmerica;20%werebasedinAsia-Pacific,15%inNorthAmerica,and12%inWesternEurope.

Overtwo-fifths(41%)ofcompanieshadannualglobalrevenuesof$500morless,and22%hadannualrevenuesabove$10bn.Intermsofseniority,58%ofrespondentswereC-suiteorboardmembers.

4

Foreword

Brazil’s economic resilience over recent years has captured the world’s attention. All eyes have been on its growth, as it distanced itself from the political and economic uncertainty of the 1980s.

Withgrowthsettocontinue,ithasbeenforecastthatby2025Brazilwillbecometheworld’sfifthlargesteconomy,overtakingBritainandFrance,whileSãoPaulowillrankhigherthanParisandShanghaiastheworld’ssixthwealthiestcity.

In2010,HSBCcelebratesthevibrancyandexcitementofmodernBrazilwithaseriesofinternationaleventsandactivitiesacrosstenmarketsfromtheUKandBraziltoNorthAmerica,SouthAfrica,theMiddleEastandChina.ThisprogrammeofactivityiscentredaroundoursponsorshipofFestivalBrazil,afour-monthsummercelebrationofthecountry’sculturalofferingsatLondon’sSouthbankCentre.

Workingin88countries,weseetheunderstandingofdifferentculturesasanessentialpartofbuildinginternationalrelationshipsandbusinessexpertise.AspartofourglobalCulturalExchangeprogramme,FestivalBrazilprovidesinsightintooneoftheworld’smostprominenteconomies.

Bringingtogethertheviewsandopinionsoftheglobalbusinesscommunity,thisEconomistIntelligenceUnitreportidentifiesandexploresthechallengesthatnowfacethisdynamiccountry.Ihopethat,whetheryouarealreadyexperiencedinworkingwithBrazilorarejuststartingtoexploreitsopportunities,thisreportwillprovevaluabletoyourbusiness.

Zarir�J�Cama�GroupManager,GroupManagementOffice,HSBCHoldingsplc

5

Executivesummary

Brazilhasneverbeensopopularamonginvestorsasitisnow.Interesthasrisensteadilyoverthepast15yearsasthecountryhasmanagedtoovercomeonepolitical,macroeconomicandbusinesschallengeafteranother.Privatisation,liberalisation,anewstablecurrency,thesmoothhandoverofpoliticalpower,tonamebutafewachievements,coupledwithaboominglobaldemandforBrazil’scopioussuppliesofcommodities,haveboostedforeigncurrencyearningsandfiredupconsumerspending.Brazilhasbeentransformedfrom“countryoftomorrow”to“once-in-a-lifetimeopportunity”.Thetransitionis,ofcourse,farfromover:education,bureaucracy,corruption,infrastructureandfractiouspolitics,tolistjustafewdeep-seatedproblems,willtakeyearstoaddress.Butitsnew-foundeconomicandpoliticalstability–whichhelpedtheeconomywithstandrecentglobalfinancialshocks–allowspolicymakerstomakeaseriousstartonaddressingtheseissues.Moreover,thecountry’snaturalrichesinagricultureandmining–andpotentiallyoffshoreoiltoo–will,ifusedwisely,providethecashneededforvitalinvestmentsforyearstocome.

Thisreport,basedoninterviewsandasurveyof536seniorexecutivesworldwide,largelyendorsesthegeneraloptimismaboutBrazil’sprospects.PartoneofthereportsetsBrazil’srecenttransitionintoitspolitical,macroeconomicandindustrycontext.Parttwofocusesonthreeessentialareasofthebusinessoperatingenvironment:themarketfortalent;thestateofinnovation;andthedilemmasfacingBraziliancompaniesastheyexpandabroad.SomeofthekeyconclusionsofthisreportandthemainchallengesfacingBrazilincludethefollowing:

Poor�infrastructure�takes�a�heavy�toll�on�business.

Althoughsomethingofatruism,theparlousstateoftheinfrastructuretopsthelistofobstaclesfacedbyinvestorsinBrazil.Inoursurvey,nearlyonehalfofrespondents(49%)pointto“lowstandardorcostlyinfrastructure”asthemainoperatingobstacle.Inspiteofsomeimprovementinlogistics,freightdependsoncostlyroadhaulage;therearefewrailroads;thepotentialforwaterwaysremainslargelyunexplored;andportsandairportsarecongested.Theseconditionscanaddonequarterormoretothecostofgettinggoodstomarket,sayinvestors.Logisticsexpertscallforbetterco-ordinationbetweendifferentlayersofgovernmentandtheprivatesector.

Weaknesses�in�the�education�system�impair�the�supply�of��

relevant�workplace�skills.�

WhilemanyofthegraduatesofBrazil’suniversitiesareviewedastopclass,therearetoofewofthem.Poorteachingandresourcinginsecondaryeducationmeansthatschoolleaversareamongtheworld’sleasteducated.Companiesfindtheymustfilltheskillsgapsthemselveswiththeirowntraining.Atleastonethirdofinvestorssurveyedsayskillsshortagesrepresentoneofthebiggestoperatingproblems,withalmostonehalf(47%)ofUS-basedcompaniesreportingthisastheirgreatestchallenge.Educationalistscallforamorerelevantcurriculum,betterteachertraining,andashiftinstatefundingfromtertiarytosecondaryeducation.

Investors�praise�the�abilities�of�their�Brazilian�managers.

EducationstandardsmaybehigherinmostpartsofAsia,but,sayinvestors,thequalityofmanagementis“probablyworseinChinaandIndia”.Indeed,Brazilianmanagersaredeemedtobeonaparwiththeirpeersindevelopedmarkets,andsuperiortothosefromotheremergingmarkets,accordingto42%ofsurveyrespondents.Inparticular,investorslaudtheflexibilityandmaturityoftheirBrazilianstaff,afacetthatmayderivefromlearningtocopewitheconomicupheaval.However,thisflexibilitydoesnottranslateadequatelyintoinnovation.

Brazil�lags�in�innovation;�investors�could�help�more.�

Brazilscorespoorlyonmostinnovationrankings,anddeeperanalysissuggeststhateventhemeagreinvestmentsintoinnovationcould

producebetterresults.Some57%ofsurveyedexecutivesdonothaveadedicatedR&Dfacility,orevenplantohaveoneintheshortterminBrazil.Overonehalfofrespondents(51%)saythat,atpresent,lessthan10%ofproductsandservicessoldbytheircompanieshaveactuallybeendevelopedthere,andatleastonequarterofrespondentsexpectnoprogressonthatscoreoverthenextthreeyears.Yetalmosthalf(49%)ofsurveyrespondentsdescribethecapacityofBrazilian-basedbusinessestointegratethelatestinternationaltechnologyintotheiroperationsaseither“verygood”or“excellent”,andonly6%sayitis“poor”.Thisindicatesthatbettereducation,improvedinfrastructure,greaterinvestmentinR&Dandcloserrelationsbetweencompaniesanduniversitieswouldhaveadisproportionatelypositiveimpactoninnovation.Thatsaid,businesshasbrokennewgroundinenvironmentalandagriculturaltechnologies,whicharebeingexportedworldwide.

Co-operation�with�universities�works�well.�

Onewaytopromoteinnovationisthroughbusinessco-operationwithacademicinstitutions.Experienceseemsrelativelylimited,butpositive.OfsurveyrespondentswhoseBrazil-basedoperationsalreadyworkwithlocaluniversities,60%saytherelationshiphasbeen“positive”and12%“verypositive”,comparedwithlessthanonequarter(23%)whosaythatsuchco-operation“failedtoliveuptoexpectations”orwas“veryunsuccessful”(5%).Brazilian-basedcompanieswouldappeartogettheroughendofsuchdeals(orperhapsaretoooptimisticabouttheirpotential),asalmostonethird(32%)reportthatsuchco-operation“failedtoliveuptoexpectations”.

Brazil�focuses�on�“South-South”�trade�relations,�especially��

with�China.�

Aspartofageneralpolicyoftradediversification,oneofthebiggestchangesinBraziliantradepolicyunderPresidentLulahasbeentheexpansionoftradeandinvestmentwithChina.ChinahasbecomeBrazil’slargestexportandimportpartner,andprovidesinvestmentandfinancetosecuresuppliesofkeyminerals.BrazilhasalsoexpandeditsshareoftradewiththerestofLatinAmerica,otherAsiancountries,theMiddleEastandAfrica,especiallyinagriculture.

Brazilian�firms�still�suffer�from�poor�brand�recognition�abroad.�

Beyondthecharmedcircleofafewhigh-profilecompanies,BrazilianbrandsstilllacktheglobaldrawoftheirWesterncounterparts.Thisisreflectedinoursurvey,inwhich84%ofrespondentssaythatBrazilianbrandnamesarenotwellrecognisedornothighlyregardedabroad.Only3%ofUS-basedrespondentsbelievethatBrazilianbrandsarebothrecognisedandhighlyregarded.However,theperceptionofBrazilianbrandschangessomewhatamongChina-basedexecutives,withalmostonequarterofthoserespondents(24%)givingawarmreceptiontoBrazilianproducts.

6

Introduction

Brazilisinfashion.HostingthefootballWorldCupin2014andtheSummerOlympicsin2016wouldseemafittingcaptothemomentouseconomicchangeswitnessedovertheprevioustwodecades.Whilesuchmegaeventscanstrainacountry’sbudgetandtestitsinfrastructure,sendinglesserhostsintoaspiralofdebt,Brazil’sleaderswillseeitasglobalrecognitionofthecountry’simportanceintheworld;apowerfulsignalthatBrazil’sdomesticconcernsmatterbeyonditsborders;thatitscompaniesareaforcetoreckonwithabroad;andthatitstalentsaretheenvyoftheworld.

Suchsentiments,ifnotnew,arecertainlymorerealistictodaythanatanypointinthecountry’srecenthistory.Onceknownforitsseverestop-goeconomiccycles,thememoryofhyperinflationinthelate1980sandthe2002IMFbail-outisrecedingfast.Investorqueasinessovertheelectionin2002oftheleft-wingPresidentLuizInácioLuladaSilva(“Lula”),whosetwotermsendthisyear,hasprovenmisplaced.Brazil’seconomyrodetheglobalfinancialcrisis,sufferingonlyabriefandshallowdip.Theeconomyispoisedtoexpandbynearly8%thisyear.Andtoday’spolicymakersangstlessaboutfinancialturmoilandmoreaboutwhoandhowtoaccessnewlydiscovereddeepwateroilreserves,developingaforeignpolicydoctrinethatreflectsglobalambitions,andturningdomesticenterprisesintoworldbeaters.

Forinvestors,Brazil’sglassisnow“halffull”.With192millionconsumers,itisLatinAmerica’slargestmarket,theworld’sfifth-mostpopulouscountryandtheeighth-largesteconomy.WhenaskedaboutBrazil’simageinthe

world,respondentstotheEconomistIntelligenceUnit’ssurveyprefertopointtothe“B”inBRICs(theoddballcategoryoffast-growingemerginggiantscomprisingBrazil,Russia,IndiaandChina)ratherthantothecountry’slong-standingstructuraldeficiencies.MoreexecutivesseeBrazilprimarilyas“ayoung,fast-growingmarketopportunityonaparwithChina,IndiaorRussia”(49%)–althoughChinesecompanieswerefarlessfavourablydisposedtosuchacomparison–andas“anemergingplayerontheinternationalstage”(40%),thanas“amarketwithhighpotentialbutheldbackitspoorbusinessenvironment”(31%)oreven“asupplierofkeycommodities”(20%).Despitethefactthatincomedistributionremainsamongthemostskewedintheworld–recentimprovementsaside–socialinequalitiesandtraditionalstereotypeslinkedtocultureandsportwerecitedrespectivelybyonly13%and9%ofrespondents.

Overall,�what�do�you�consider�to�be�the�main�image�today�of�Brazil�in�the�world?

(%ofrespondents)

Source: Economist Intelligence Unit.

A young, fast-growing market opportunity on a par with China, India or Russia.

An emerging player on the international stage.

A market with high potential but held back its poor business environment.

A supplier of key commodities to the world.

Principally known for extremes of wealth and poverty.

Retains its stereotypical image associated with culture and sport.

0 10 20 30 40 50 60 70 80 90 100

49%

40%

31%

20%

13%

9%

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Insomerespects,thisnewprominenceshouldcomeasnosurprise.AlongwithSouthAfricaandIndia,BrazilhasbeenaleadinglightintheG20(groupof20leadingeconomies).Duringtheglobaleconomiccrisis,theG20supersededtheG8asthemainplatformforglobalgovernance,accordinglargedevelopingnationssuchasBrazilagreatervoiceatatimewhenthesettingofglobalrulesisdominatingheadlines.Andithasn’tescapedinvestorsthatemergingmarketshavegenerallycomethroughthefinancialcrisisinbettershapethanhavedevelopedmarkets.ThereisalsoplentyofcommercialsubstancebehindBrazil’snewpopularityamonginvestors.Theconsolidationofmacroeconomicstabilityinthepastdecadehasmeantthatthecountry’slargeinternalmarketpotentialisfinallybeingrealised.Brazil’syoungandsizeablepopulationanditsburgeoningmiddleclassarebothbyfarthemostattractivefeaturesofthecountry,accordingto58%ofexecutivessurveyed.Bycontrast,suchfactorsasitsabundantnaturalresources,politicalstabilityandcheaplabourforce–oftenfeaturesofprimarilyexport-driveneconomies–werefarlessregarded.

Judgedbyitshistory,therefore,Brazilhasdonewell;judgedbytoday’scompetition,however,thecountrystillhasmuchgroundtomakeup.AlthoughGDPgrowththisyearisexpectedtoapproachAsianrates,suchratesarefarfromsustainablegiveninfrastructuredeficiencies.SinceGDPperheadissignificantlyhigherthaninChina–andespeciallyIndia–comparisonstoAsianratesofgrowtharenotentirelyappropriate;evenso,Brazil’spotentialsustainablegrowthis

muchlowerthanitshouldbebecauseofafailuretoaddressstructuralreform.Swathesofitsworkforcearepoorlyeducated;innovationisstunted;infrastructureunfitforpurpose;anditscompanies’brands,havingfocussedonhomeadvantageare,withnotableexceptions,littleknownabroad.

Thisreportisdividedintotwoparts.Partonelooksatthepolitical,macroeconomic,industryandinfrastructurefoundationsthathaveenabledthecountrytosoarahead.ParttwodrawsontheviewsofbusinessexecutivesbothinthecountryandworldwideandidentifiesthreekeyaspectsofbusinessonwhichBrazil’sfuturedepends:itsdevelopmentofskills,itscapacitytoinnovate,andthecountry’sroleintheworld–andevaluateswhytheoptimismisjustified.

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The�Brazilian�National�Congress��DesignedbytheworldfamousarchitectOscarNiemeyer

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Partone:Cornerstonesofsuccess

Maintaining�political�consensus�

Brazil’snew-foundpoliticalstabilityhasprovidedasturdybaseforexpansion.Nationalelectionsnolongerposeanythreatofaradicalshiftinmacroeconomicpolicyorientation.Thecountry’svoterswillelectanewpresidentinOctober2010,afterthetwo-termlimitofLuizInácioLuladaSilva(knownas“Lula”)expires,aswellasvotinginstategovernorsandanewCongress.Fewcommentatorsharbourseriousworriesaboutthemaincandidatesandtheirpolicies.Powerhasalternatedsince1995betweentwomainparties:Lula’sPartidodosTrabalhadores(PT,orWorkers’Party);andthecentristPartidodaSocialDemocraciaBrasileira(PSDB–orsocialdemocrats).Bothbroadlyagreetocontinueordefendthesuccessfulpoliciesofthepastfifteenyears.

Lula’sshifttotheeconomicpolicycentregroundaheadofthe2002electionshasbroadenedcross-partyconsensusinfavourofdisciplinedmonetaryandfiscalpolicies.Thishasunderpinnedamorestablemacroeconomicenvironment,enablingdomesticandforeigninvestorstolengthentheirplanninghorizons.Theconsolidationofgreaterpoliticalstabilityalsocomesasawelcomereliefforapopulationwhichfollowingtheendofmilitaryrulein1985hasseenwildpoliticalswingsandahostofill-fatedeconomicplansaimedatpromotinggrowthandquashinghyperinflation.

ForallthecorruptioninBrazil’spoliticalsystem,especiallyintheparliament,thecountryhasdemonstrateditspoliticalmaturity.TheoutgoingPresidentLulatookoverthereinsfromFernandoHenriqueCardosoin2003relativelysmoothly,despitebeinginthemidstofafull-blowneconomiccrisisofconfidence.Heendshissecondtermwithunprecedentedpopularityratingsabove80%(thanksinlargeparttosuccessiveincreasesintheminimumwageandsocialpoliciesthathasliftedsome12millionfamiliesoutofpoverty).Yethehasresistedthetemptationtochangeaconstitutionthatforbidshimathirdterm.Instead,hehaspromotedarelativelyuncharismaticformercivilchiefofstaffandenergyandminesminister,DilmaRousseff,todefendhislegacy.

Thislegacyisnotsimplyoneofimplementingfree-marketideas.Thestateremainsfirmlyentrenchedintherunningoftheeconomy,despitemanyunhappyexperiencesof“economicmiracles”gonesourfromhyperinflationandforeigndebtdefault.MsRousseff,andthePSDBchallenger,JoséSerra,alsoadvocateastate-leddevelopmentstrategytoagreaterorlesserdegree.Thefailuresoffreemarketmodelsexposedbythe

globalfinancialcrisisvindicatedseveralofBrazil’sstatistpolicies.Thestatedevelopmentbank,BancoNacionaldeDesenvolvimentoEconômicoeSocial(BNDES),playedamajorroleinsupportingcreditatatimewhenprivatebanksaroundtheworldwereretrenchingsharply.

Thedifferenceseemstobethatadecadeofresponsibledebtmanagement,floatingexchangeratesandinflationtargeting–introducedatthebehestoftheIMFinthewakeoftheupheavalscausedbythe1997-98AsianandRussiancrisis–remainsacrosanct.ThesepolicyanchorswerevitalinenablingBrazilin2008towithstand(tothesurpriseofmany)aseriesofexternaleconomicshocksthatinthepastwouldhavetriggeredmajorinstability.Althoughsomelargecompanies,suchasAracruz,apulpandpapergroup,sufferedfrompoorderivativesdeals,thecountry’scon-servatively-managedbankswerenotexposedtotheriskyassetsthatfelledcounterpartsintheUSandEurope.A$30bnswapdealwiththeFederalReserveBoard(theUScentralbank)increasedtrustintheBrazilianbankingsectorandunderpinnedstronggrowthofdepositsinrecentyears.Indeed,duringtheglobalfinancialcrisis,manyBraziliansoverseasswitchedtheirassetsoutofUSbankstoBrazilianbanks,astheywereperceivedtobesafer.

Notwithstandingallthesepositivepoliticaldevelopments,Brazil’spoliticalenvironmentremainsadragonimplementingreformsneededtosustainmoredynamicGDPgrowth.Althoughfourpartiestypicallyaccountforaround70%ofseatsinthechamberofdeputiesandoverhalfthoseinthesenate,atotalof18politicalpartiesarerepresentedinCongressandgoverningcoalitionsaretypicallyunwieldyaffairs.Onaccountofthelaxrulesgoverningpartyallegiances,congressionalrepresentativestendtobeextremelyprovincial,showinggreaterloyaltytointerestgroupsthantoeitherpartyorpolicy.Moreover,thepresidentiscriticallydependentonthesupportofstategovernors,whotypicallyhaveconsiderableinfluenceovertheirstates’delegationsinCongress.Switchingpartyallegiancesinpursuitofcareeradvancementiscommonamongpoliticiansandcontributestothefractiousnatureofthepoliticalsystem.

A�new�economic�era�

Brazil’sisadiversifiedeconomywithstrongcorporateandfinancialsectors,alowexternaldebtburdenandhighlydiversifiedexportindustriesandmarkets.ThesefactorsputBrazilinapositiontoemergerelativelyquicklyfromtheglobaldownturn.Thecountry’srecessionwasbriefandshallow:theeconomycontractedbyamere0.2%in2009–withthehelpofsomecreditexpansion,andsomesupportfromthegovernment’sflagshipinfrastructuredevelopmentprogramme,theProgramadeAceleraçãodoCrescimento(PAC),growthaccelerationprogrammelaunchedinearly2007.IncontrasttoRussia,seenbymanyasthe

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morepromisingBRICeconomy,Brazilrespondedtothedownturnbylettingitscurrencydepreciate,conservingitsforexreserves.Moreover,Brazilhas,since2008,becomeanetforeigncreditorasforeigndebtshrankandinternationalreservessoared,promptingallthreemaincreditratingagenciestogivethecountryaninvestmentgraderating.

TheEconomistIntelligenceUnitexpectsBrazil’seconomytoshootahead,by7.8%,in2010–afittingendtoPresidentLula’ssecondfour-yeartermthathasseenannualaverageeconomicgrowthof4.7%(comparedtoaverageannualgrowthof2.5%intheprevious25years).Yet,themacroeconomicoutlookisfarfromrisk-free.Adouble-dipglobaldownturnmayyethitBrazilontherebound,andfiscalandcurrent-accountdeficitscouldalltooeasilyre-open.AlthoughthebudgetdeficitisrelativelysmallforaG20country,at3.3%ofGDPinthe12monthstoend-May2010,thismaynotlast.Indeed,arguably,creativeaccountinghasplayedapartinkeepingtheprimarybudgetontarget,andopacityinitselfcanjeopardiseconfidenceifthepositivemoodevershifts.

Moreover,highpublicspendingimposesahugeburdenonmonetarypolicytokeepinflationtamed.ThebenchmarkSelicinterestrateatover10%isoneofthehighestintheworld,andmarketratesarefarhigher.ByBrazilianstandards,interestratesarehistoricallylow,butgiventhestill-largepublic-debtfinancingrequirements,thelatterisalsocrowdingoutprivateborrowing.

Thecurrentaccountcouldalsodeterioraterapidly.Sixconsecutiveyearsofsurplusendedin2008.Lastyear,thedeficitamountedto1.5%ofGDP,andtheEconomistIntelligenceUnitforecastsadeficitof2.7%in2010.Officialshopethatthelocalcurrency,theReal,willdevalueaccordingly,butthisreadjustmentmaynotbesmooth,especiallyinadifficultexternalfinancingenvironment.

Forecast�summary�(%�unless�otherwise�indicated)�

� 2008a� 2009a� 2010b� 2011b

RealGDPgrowth 5.1 -0.2a 7.8 4.5

Consumerpriceinflation(av) 5.7 4.9 5.4 4.6

Moneymarketinterestrate(av)d 12.4 10.1c 10.3 11.5

Exportsofgoodsfob(US$bn) 197.9 153.0 178.2 194.3

Importsofgoodsfob(US$bn) -173.1 -127.7 -171.7 -200.9

Current-accountbalance(%ofGDP) -1.7 -1.5a -2.7 -3.3

Externaldebt(year-end;US$bn) 253.4c 279.8c 307.0 318.5

ExchangerateR:US$(av) 1.83 2.00 1.80 1.86

a–Actual.b–EconomistIntelligenceUnitforecasts.c–EconomistIntelligenceUnitestimates.d–Selicovernightrate.

Source: Economist Intelligence Unit.

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Natural�advantages:�Land�and�energy�

Improvementsinthepolicymixhaveallowedpublicandprivateinvestorstofocusondevelopingthecountry’sindustrialandnaturalresourcebase.BrazilboaststhemostdiversifiedeconomyinLatinAmericawithexportindustriesrangingfrompetrochemicalstoaeronautics.Manufacturedexportshave,infact,declinedfromalmost60%oftotalexportearningsin2000to40%in2010,butoverallearningsvirtuallytripledinthisperiodthankstoextensiveandefficientexploitationofbountifulnaturalassetsandhighcommodityprices.

Brazilisfinallybeingrecognisedasanagriculturesuperpower.Thecommoditiesboomthatpeakedin2008,coupledwithseeminglyinsatiabledemandfromChina,haspoweredBrazil’scommoditiesexports,whichaccountforsome43%oftotalforeignsales.Itistheworld’slargestexporteroforangejuice,coffee,sugar,beefandpoultrymeat.Agronomistshavedevelopednewspeciestoboostproductivityinlessfertileareas,includingalmost100newspeciesofsoyabeansperyear.Itsgrainandleguminousharvestincreasedfrom100mtonnesin2003to134mtonnesin2009.

Theexplosionofdemandenabledpowerfullocalmultinationalstoemerge,althoughsmallerfamily-ownedfarmshavefoundithardtointegrateintothisboomingmarketeconomy.Meanwhile,globalcommoditytradinggroupssuchasCargillandBunge,longpresentinBrazil,havelinkedaproductiveagriculturalbaseintoasophisticatedfoodanddrinksindustry.UnileverandCocaCola,forexample,haveseensolidgrowthinBrazilanddrivenmuchofthesector’sconsolidation.Localgroupsinprocessedmeatproducts,suchasJBSS.AandMarfrig,havealsoprospered,whileothers,suchasSadiaandPerdigão,havemergedaftertheformergotburntbyderivativescontracts.

Deeperundergroundlieothersourcesofrichforeigncurrencyearnings,includinghugereservesofironoreintheminingprovinceofCarajásinthenorthernAmazonregionandthesouth-easternstateofMinasGerais.Althoughthesectorwasopeneduptoforeigncompetitionin1995,Brazil’sprivatisedmininggroup,Vale,theworld’slargestironoreexporter,continuestodominate.Itexpectstoboostitsironoreoutputby50%to450mtonnesby2014.ThecompanyalsoacquiredIncoofCanadain2006–withitslargereservesofnickel–diversifiedintocopper,expandedinAfrica,andisnowoperatinginfivecontinents.

ThelistofBrazil’sothermineralrichesisalsonotable:theworld’snumberthreebauxiteproducer;theworld’ssixth-largestreservesofuranium;thelargestproducerofniobium;andsignificantresourcesofmanganese,copper,tinandgold.

Likewise,Brazil’senergyprofile,inmanyrespects,leadstheworld.Around80%ofthecountry’selectricitycomesfromhydro-electricplants,accountingforsome45%ofenergyconsumptionin2009,andcontinuestoattractinvestorsinnewdamsintheAmazon.Petroleumderivativesaccountedfor39%oftotalenergyconsumption,naturalgasfor8%,coalfor5%,andnuclearfor1%.

Whilegreenenergysourceshavehelpedtoweantheeconomyoffimportedoil,andimprovedBrazil’senvironmentalcredentials(theadverseimpactofdam-buildingaside),thecountry’srecentdiscoveryofhugeoilreservesbelowthedeepwatersoffitssoutherncoastwilleventuallyshifttheenergybalance,makingBrazilamajoroilexporteroverthelongerterm.Thecountryalsoproducesindustrialquantitiesofbiofuelssuchassugarcaneethanolusedincars.In2008,domesticsalesofethanolexceeded,forthefirsttime,thesaleofpetrol.Petrobras,thestateoilgiant,isalsoinvestinginbiofuels(biodieselandsugarcaneethanolviaajointventurewithTereosInternational,asubsidiaryoftheFrenchco-operative.

Theintroductionin2003offlex-fuelcarengineshasencouragedapartialrenewalofthepassenger-carfleet;in2009,88%ofnewsaleswereflex-fuelvehicles.Flex-fuelcarscanrunbothonpetrolandsugarcaneethanol,allowingdriverstochoosethecheapestoption.Thesedevelopmentshavegonehandinhandwithalocalcarindustrythathasheldupwellintheglobalcrisis,thanksinlargeparttotaxbreaksandagoodsupplyofcredit,helpingtomakeBraziltheworld’sthesixth-largestmanufacturerandfourth-largestandfastest-growingmarketforlightvehicles.

Shaky�infrastructure�

Carmakersmayrejoice,butitisthemillionsofdriversthathavetonegotiatethedangerouslyunpavedroadsthatprevaileverywhereexceptthemainroutes–andevenmanyofthesearepotholedorneedresurfacing.PoorinfrastructureisonemajorreasonthatBrazilscoreslowintheEconomistIntelligenceUnit’sbusinessenvironmentrankings(basedon12keybusinessoperatingcriteria),whichplacesBrazil40thoutof82countriesdespitetheexpectationofsomemildimprovementsincomingyears.TheWorldBankDoingBusinessreportandotherinternationalrankingstellasimilarstory.Highandcomplextaxation,excessivebureaucracy,complexcustomsrules,corruption,asluggishjudiciary,andrigidlabourmarketsarefurtherlegitimateinvestorgrievances.

Butasklocalbusinessmenwithinternationalambitionsabouttheirgreatestconcern,andtheparlousstateoftheinfrastructurewillalmostcertainlytopthelist.Inoursurvey,nearlyonehalfofrespondents(49%)pointto“lowstandardorcostlyinfrastructureincludingtelephones,transportnetworksandutilities”asthemainoperational

12

obstacle,farmorethanselectedcorruption,poorgovernance(34%)orskillsshortages(32%),thestateoftransportinfrastructureisparticularlydire.Inspiteofsomeimprovementinlogistics,freightdependsoncostlyroadhaulage;therearefewrailroads;thepotentialforwaterwaysremainslargelyunexplored;andportsandairportsarecongested.Thiscanaddonequarterormoretothecostofgettinggoodstomarket,sayinvestors.

Which�of�the�following�operational�obstacles��present�the�greatest�challenges�to�your�business�operations�in�Brazil?

(%ofrespondents)

Source: Economist Intelligence Unit.

InvestingininfrastructurehasbeenattheheartofPresidentLula’sgrowthprogramme(theso-calledPAC,launchedin2007),butprogresshasbeenlimited.Fewerthanhalfofthetargetsfor2010havebeenmet(withmuchoftheproposedfinancinggoingtofirst-timehomeowners,ratherthanintophysicalinfrastructure).Highpublicspendingcommitmentsarecrowdingoutthepaltry1%ofGDPthatisproposedforinvestmentininfrastructure,whilelimitedprivatesectorinvestmentintransportwillnotmakeuptheshortfall.

Littlemorethan10%ofBrazil’sroadnetworkispaved,andeventhesearepoorlymaintained.Theexceptionsarethemaintollroadsmanagedbyprivateoperatorssincethelate1990s,suchasthemainSãoPaulo-RiodeJaneiromotorway.Aswellasgrowingcarusage(with25mvehiclesnowontheroads)morethan60%ofcargotransportationisbytruck,eventhoughthismethodisslowandcostly.Manyfleetscompriseownerdriverswithageingvehicles,andthismakesithardforacompanytodevelopanoverarchingviewofitslogisticsneeds.AccordingtoAndrewMorgan,foundingchairmanofSupplyChainEurope,whichisinvolvedwithfreightlogisticsinBrazil’sfoodindustry,driversaremoreworriedabout“fiscalcompliance”–thatis,fillingouttherighttaxinvoice–thanwhetherthegoodsarriveontime.

Thefragmentednatureoftransportationisevenmoreapparentinrailtransport.Thecountry’s30,000-kmrailnetworkhasgrownby20%sinceitwasprivatisedandupgradedinthelate1990s.Butdespitegovernmenteffortstogetmorefreightontrains,itremainsunderused(withrareexceptionssuchaslinesoperatedbyironoreexporters)accountingforonly25%oftotalfreightmovement.

Meanwhile,Brazil’sgreatpotentialforrivertransportremainslargelyunexploited.Waterwayscurrentlyaccountforonly13%ofhaulage,eventhoughBrazilhasa48,000kmnetworkofnavigablerivers.

Thelogisticalnightmaredoesnotendwhengoodsfinallygettoportsforexport.AlthoughportssuchasatSantosnearSãoPaulo,whichhandlesaroundonequarterofthecountry’sforeigntrade,haveundergonesomemodernisationoverthepast15years,theyarecongestedandexpensive,especiallyatharvesttimeswhentrucksladenwithgrainarriveforloading.Itisasimilarstorywiththecountry’smainairports,theresultofsoaringdemand,andwillsurelybecomeanimportantissuetoberesolvedbeforethefloodofvisitorspoursinforthefootballWorldCupandOlympics.

Asidefromtheneedforcontinuinginvestment,MrMorganseesproblemsinthelackofabigpicture.Freightoperatorsallalongthesupplychaintendtosee“lowcost”asthekeyperformanceindicator.No-onetakesastrategicviewoftransportwhichwouldendupsavingmoney.Hebelievesthatiflogisticsoperatorsfocusedateachstageontimeratherthancost,thiswouldproducethegreatestefficiencies.Theproblemisthatno-onetakes“end-to-end”responsibilityforthewholelogisticsjourney.Andthisextendstothefinalexportdestination.Hecitesanexampleofonecompany’sgrainexportstoRussiathatranintotroublebecausetheBrazilianlogisticsmanagerwasunawareofthedifferentrailcontainersizesusedinRussia.

Ultimately,thesolutionliesinbettercollaborationbetweenprivatesectoroperatorsandthestateatvariouslevels.Wherethereisabigplayer,likeVale,itispossibletonegotiatewiththestateovertransportneedsandinvestment.Inafragmentedmarket,suchasthefoodindustry,substantialeffortisrequiredtogettherightpeoplearoundthetabletodiscusspriorities,investmentandresponsibilities.

Consume�now,�pay�later�

Onceseenas‘Americanswithoutcredit’,Braziliansarestartingtoenjoytherushofdebt-inducedpurchasingpower.Asaccesstocredithasimproved,andshopshavefacilitatedevenrelativelysmallpurchasessuchasshoeswithinstallment-payments,householdconsumptionhasboomed.Despitedifficultiesofgettinggoodsto

Low standard or costly infrastructure including, telephones, transport networks, utilities.

Failure to honour contracts, bribery, corruption, weak corporate governance.

Lack of key skills including management.

Poor quality control.

Rising wages/low productivity.

Underdeveloped retail and distribution systems.

Credit risk.

Availability of credit.

Difficult relations with organised labour.

Saturated markets.

0 10 20 30 40 50 60 70 80 90 100

49%

34%

32%

24%

14%

15%

17%

20%

21%

9%

13

shops,Brazil’stantalisingmarketof192million,youthfulconsumersissimplytoomouth-wateringaprospecttobypass.Theeventualcontrolofinflationinthemid-1990sandthesuccessofthenewstablecurrency,theReal,setthestageforaconsumerboom.Fallingunemployment,nowat7.5%inmajorurbancentres,realincomegainsandcreditexpansionhavepushedupdisposableincomesandmadeordinaryBraziliansfeelalittlericher.

Some20millionBraziliansoverthepastsixyearshavebeenreclassifiedoutofpoverty,accordingtoMarceloNeri,asocialresearcherfromtheFundaçãoGetúlioVargas(FGV),aRiodeJaneirothinktankandbusinessschool.Overonehalfofallhouseholdsinlargeurbancentresaremiddleclass,upfrom42%in2004,accordingtotheFGV.Nevergreatsavers(giventhelegacyofhyperinflation),Braziliansarenowabletoborrowtofinancethegoodlife,withcreditrisingfrom25%ofGDPin2005to45%ofGDPtoday,pouringfurtherfuelonconsumerfires.

Thishasgeneratedrapaciousdemandforcars,personalcomputers,TVsetsandmobilephones.Followingthe1998privatisationofthetelecomsindustrythesaleofmobilephonesrosespectacularly,overtakingthenumberoffixedlinesin2003,andreaching184millioninmid-2010.

Largeretailinggroupshavealsothrived.ForeignchainssuchasCarrefour(France),andWal-Mart(US)havediversifiedintonon-foodandwholesaleactivities.PãodeAçucar(controlledbyCasino,aFrenchretailer)recentlyagreedtobuytwolocalnon-foodoutlets,PontoFrioandCasasBahia,inordertoincreaseitsexposuretoelectronicgoodsdemandandthelower-incomemarketsegment.

Withappetitesforconsumergoodsnowthoroughlywhetted,householdsaresettingtheirsightsonthebiggerprizeofhomeownership.Themortgagemarket,whichwasalmostnon-existentinthe1990s,hasstartedshowingsignsoflife,althoughitremainsinitsinfancy.Equivalenttoonly1.3%ofGDPatend-2005,itincreasedto2.1%ofGDPatend-2008,andwithpublicfinancingforsocialhousing,andagovernmentpledgetofinanceatleast1millionhomesforthepoorandthemiddleclass,themortgagestockhasriseninabsoluteterms,thoughisstillonlyaround3%ofGDP,indicatinghugescopeforgrowth.

TimeanddemographicsareonBrazil’sside,atleastoverthemediumterm.Theshareofthepopulationaged14orunderisaround28%,andthisagegroupwillstillcompriseatleastoneinfiveBraziliansforanother20years.Butageingwillsetinthereafter:thecountry’sbirthratehasdeclinedfrom2.39perwomanin2000toanexpected1.76in2010,accordingtoInstitutoBrasileirodeGeografiaeEstatística(IBGE).Itforecaststhattheratewillstabiliseataround1.5bythe2020s.Butforthenextdecade,atleast,thecountrycancountonarobustworking-agepopulationtopaytaxesandpensioncontributions(assuminggrowthintheformalsector),inmarkedcontrasttomanydevelopedeconomies.Itisthenurturingofthisyoungergeneration,itseducation,training,jobsandskills,thatholdsthekeytoBrazil’slong-termgrowthandprosperity,asPartTwoofthisreportexplores.

Brazil:�Population,�income�and�market�size

2005a� 2006a� 2007a� 2008a� 2009b� 2010c� 2011c� 2012c� 2013c� 2014c

Population(m) 184.2 186.8 189.3 191.9 194.4 196.8 199.3 201.6 204.0 206.6

GDP(US$bnat 881.8 1,088.9 1,366.3 1,637.9 1,573.4 1,927.6 2,021.7 2,088.9 2,198.2 2,317.9marketexchangerates)

Privateconsumption 531.5 656.6 818.4 988.0 987.4 1,194.0 1,253.1 1,299.8 1,370.5 1,442.3(US$bn)

Privateconsumption 2,890 3,520 4,320 5,150 5,080 6,070 6,290 6,450 6,720 6,980perhead(US$)

GDPperhead 8,610 9,110b 9,800b 10,390b 10,360 11,150 11,660 12,260 12,990 13,760(US$atPPP)

Personaldisposable 543.3 674.2b 841.7b 1,016.3b 1,127.6 1,270.8 1,252.8 1,240.3 1,240.5 1,256.9income(US$bn)

Growthofreal 2.5b 5.7b 6.2b 7.1b 15.5 -0.7 -1.8 0.2 -0.5 0.7disposableincome(%)

Source: Economist Intelligence Unit.

14

The�Federal�University�of�Parana,�Curitiba.�TheoldestuniversityinBrazil,foundedin1912.

15

Parttwo:Socialandintellectualcapital

I.��Talent�and�education

The�learning�curve

Thirtyyearsago,BrazilandSouthKoreahadsimilarlevelsofGDPpercapita–todaytheAsiantigerisoverthreetimesricher(inPPPterms).Onemajorreasonforthisdivergencehasbeenalackofinvestmentineducation.InBrazil,thesystem’sfailingsarehavingdirectconsequencesforthequalityoftheworkforce.In2008,some20%oftheworking-agepopulationcouldnotread,writeorunderstandbasictext,aslightimprovementonthe25%leveloffunctionalilliteracyrecordedfiveyearsearlier.Thequalityofeducationforthemajorityofthecountry’schildrenandteenagers–thatis,thosewhocannotaffordaprivateeducation–remainsparticularlyinadequate,heldbackbypoorteachertraining,shortcomingsinphysicalinfrastructureincludingalackofnurseries,andstill-hightruancyrates.Onlyonehalfofthecountry’schildrencompletesecondaryeducation,thesecondworstdrop-outrateintheworld,aheadonlyofMozambique,accordingtoAlbertoRodriguez,aWorldBankeducationspecialist.

Thesystemcanboastafewsuccesses.Almostallchildrenagedbetween7and14attendedschoolin2008,accordingtoofficialfigures.Theaveragenumberofyearsofformaleducationintheworking-agepopulationhasalsorisenoverthepast20yearsfrom5.2yearsto7.1yearsin2008.Butthislevelisstillshortofthe10yearsrecommendedbyUnescoandachievedbyneighbouringChile,PeruandArgentina.Therearealsobigregionaldisparities.Themoredevelopedsouthandsouth-easthave7.5and7.7years,respectively;thepoorernorth-eastaverages5.9years.Althoughyoungerpeopletendtohavehadmoreyearsinschoolthantheirparents,theyarestillillpreparedforthemodernjobmarket.InOECD-runtestsacross57countriesin2006,Brazilian15-year-oldsranked53rdinmathematics,52ndinsciencesand48thinreading.

Partoftheproblemisthestructureoftheeducationsystem.Ahighlydecentralisedmish-mash,responsibilitiesarespreadovernumeroustiersofgovernment.Thefederalgovernmentspendssome3%ofitsbudgetoneducation,butitisthepublicsectorschoolsrunbystatesandmunicipalitiesthatmanagemuchofit.Thesysteminvolves200,000educationalunits,50millionpupils,and3million,oftenunderperforming,civilservantsandmanagers,accordingtoJoãoBatistaAraújoeOliveira,aformerWorldBankofficial.

Teachersarealsooftenpartoftheproblemratherthanthesolution.Reportsofwasteinschoolsarerife–computersleftintheirboxesbecauseteachersdon’tknowhowtouse

themforexample.“Theycantalkabout[childdevelopmentpsychologist]Piagetbuttheycannotorganiseaclassroom.Theyjustdon’tknowthepractice,”saysMrRodriguez.Heestimatestheannualcosttotheeducationsystemandthewidereconomyofsucheducationalshortcomingsataround$600m.AsPauloRenatoSouza,aformereducationminister,notes:“Weneedpupilsactuallytolearnsomething.”

Average�years�of�formal�education�by�gender,�age�groups,�2008(inyears)

20-24 25-29 30-39 40-49 50-59 >60

Men 9.1 8.8 7.7 7.3 6.2 4.3

Women 9.8 9.5 8.5 7.7 6.3 3.9

Total 9.4 9.2 8.1 7.5 6.3 4.1

Source: IBGE.

Educational�level�achieved�in�working-age�population�(25-64�age�group):

Basiceducation:63%

Secondaryeducation:27%

Highereducation:10%

Source: IBGE.

Companies�step�in

CompaniesinBraziloftenfindthatiftheywanttheskillstheyneed,theyhavetofilltheyawninggapleftbythecountry’sscrappyeducationsystemthemselves.Muchofthetrainingtakesplaceafterrecruitsarehired,butsomeinitiativestrytogetinearlier.FollowinghisretirementaspresidentofPhilipsLatinAmerica,MarcosMagalhães,forexample,launchedtheInstitutodeCo-ResponsabilidadepelaEducação,aninitiativetoraiseeducationstandardsinhishomestateofPernambuco,inthenorth-east.Suchprivateeffortsarespreading,andcarrythesimpleobjective:tomaketheclassroomwork,andtrytocatchupwithcompetitors,especiallyinAsia.

Theideafollowssimilar,successfulinitiativesinSouthKoreaandEurope.ButinBrazil,theymerelyscratchthesurface.Meanwhile,governmenteducationbodiesinsist,rightlyinmanyinstances,thatmoneyforeducationbespentonteachertrainingandpartnershipswithstate-runschools.

Thesedilemmasexistatpost-secondaryeducationtoo.AnEconomistIntelligenceUnitreportonpost-secondaryeducationinBrazilconcluded:“Ratherthanoperatingeducationalinstitutions,theprivatesectorshouldworkinpublic-privatepartnershipsrelatedtoeducation,sharebestpracticesofchangemanagement,providefinancialsupportforprogrammestoenhanceteacherqualification,andsharenewtechnologysolutions.”

16

Everybithelps,itseems.“Youcannotlosetheopportunitytosetupalinkbetweenthecorporateworldandtheuniversity,”saysMrGutierrez,CEOofIntrabase,alocalmarketingcompany.Headdsthatcompaniescanspurpost-secondaryinstitutionstoexplorereal-worldsituationsbyencouragingemployeeparticipationineducationalprogrammesandofferingstudentshands-onexperiencethroughinternshipsandwork-studyprogrammes.

Creaming�off�

Whilethemassofunder-educatedBrazilianslanguish,thestoryatthetopofthepyramidisofintensifyingcompetitionformanagerialskills.Muchofthequalitytalentthatenterstheworkforcecomesfromseveralwell-respecteduniversitiesandbusinessschoolsinBrazil,manyofwhicharerankedasthebestinLatinAmerica,accordingtoa2009comparativesurveybyHeidrick&Struggles,arecruitmentfirm.Studentsfromleading(usuallystate-run)universitiesinBrazilareratedhighlybyforeignmultinationals.

Inaddition,businessschoolsarecateringforanewcropofprofessionalmanagers.Someofthemorepromisingstudentsattendleadingforeignbusinessschools,butincreasinglyhome-growninstitutionssuchasthehighlyregardedInsperandIBMEChaveemergedandbeensuccessful.Othersthoughhaveattractedcriticismsforlackingrelevant“people-related”trainingthatisincreasinglyrequiredbyinternationalmanagement.

Althoughdeemedhighlycreative,Brazilianstaffareoftenseenaslackinginitiative.AccordingtoSergioAverbach,presidentoftheSouthAmericadivisionofKornFerry,anexecutivesearchcompany,thesuccessofBrazilianmanagersinternationallyismore“duetotheiroutstandinginfluenceandleadershipskills,thantotheabilitytocreatethenewandthedifferent.”

Withrapideconomicexpansionandrisingforeigninvestment,demandfortherightskillshassimplyintensified.“BoardmembersoftentellmetheyarehavingtroublehiringpeoplefromCEOtofactorystaff,”saysMrAverbach.“Irecentlyreceived10presidentsofconstructioncompanies.ThereissimplynotenoughlabourforcetomeettheneedsatalllevelsinBrazil.”

Companieshavefewproblemswiththosewhoarequalified–therejustaren’tenoughofthem.AES,aUSelectricitycompanythathasinvestedsome$6bninBrazilsince1997andplanstodoubleinsizewithinfiveyears,typicallysuffersashortageofelectriciansandmechanics.“Qualityisnotaconstrainingfactor,butthevolumesarenotthere,”notesAndrewVesey,AESpresidentforLatinAmericaandAfrica.Thecompanyhastoinvestintrainingitsownworkforcetomeetitsneeds.

Gettingforeignerstofillthegapcanalsobefrustrating.AlistairCox,CEOofHayGroup,aconsultancy,saysthatIndiaprovidesavaluableexampletofollow:BrazilneedstoinvestininformationtechnologyandattractthetalentcurrentlyworkingoutsideBrazil.

AlltheseissuesbecomestarklyapparentfromtheEconomistIntelligenceUnit’sownsurvey.Thelackofkeyskillsisthebiggestoperatingchallengefacedbynearlyonethirdofsurveyrespondents–andasmuchas47%ofUS-basedcompanies–onaparwithcorruptionandnotfarbehindtheproblemsofpoorinfrastructure.Notabledeficienciesamongstaffincludelanguageskills(43%reportshortfallsthere)andscienceknowledge(34%).

Still,overonehalfofrespondentsalsosaythattheBrazilianworkforcematchestheirneeds,withengineeringcompaniesbeingamongthemoresatisfied(althoughitisworthnotingtoothattheUSChamberofCommerceinSãoPaulorecentlyfoundthat41%ofitsmemberswereunhappywiththequalityofengineers,describingtheirtrainingas“totallyinadequate”).

In�which�of�the�following�areas�of�education�or�skills�relevant�to�your�business�do�you�believe�the�Brazilian�labour�market�satisfies�your�needs�or�falls�short?

(%ofrespondents)

Source: Economist Intelligence Unit.

Brazilianmanagersalsoappeartolackinternationalexperienceandmulticulturalawareness,whencomparedwiththeirpeersindevelopedmarkets.Butlocalmanagersdoexcelincreativityandinnovation.Managementexperience,financeandmarketingarealsohighlyrated.

Basic literacy or numeracy

Secondary education

Tertiary education

Languages

IT

Science

Engineering

Mobility

Work ethic

Soft skills (ie, problem solving, cultural sensitivity, etc)

0 10 20 30 40 50 60 70 80 90 100

13% 17%70%

68%11% 21%

11% 54% 35%

9% 48% 43%

16% 61% 23%

20% 59% 21%

18% 61% 20%

10% 56% 34%

23%16% 62%

23% 58% 19%

Exceeds needs Matched needs Falls short

17

How�would�you�rate,�relative�to�management�in�developed�markets,�the�skills�and�knowledge�of�Brazilian�managers�in�the�following�areas?

(%ofrespondents)

Source: Economist Intelligence Unit.

Overall,Brazilianmanagersaredeemedtobeonaparwithdevelopedmarketpeers,andsuperiortothosefromotheremergingmarkets,accordingto42%ofrespondents.EducationstandardsmaybehigherinmostpartsofAsiathaninBrazil,butthequalityofmanagementis“probablyworseinChinaandIndia”,saysEduardoWanick,presidentofDuPontLatinAmerica.

How�would�you�rate�the�quality�of�Brazilian�managers�compared�with�those�in:�

a)� other�emerging�markets?

(%ofrespondents)

Source: Economist Intelligence Unit.

b)�developed�markets?

(%ofrespondents)

Source: Economist Intelligence Unit.

The�sky’s�the�limit

Attheverytop,thereseemstobenoshortageofrolemodelstoinspirethemostambitiousBrazilianexecutives.SeveralBrazilian-bornbusinessleadershaverisentoglobalprominenceinrecentyears.CarlosBrito,theCEOofABInbev,startedhiscareerwiththeBrazilianbrewerAmbev(whichlatermergedwithInterbrewandAnheuserBusch).AlainBeldaandBrazilian-bornCarlosGhosnhaveenjoyedhigh-flyingcareersatAlcoaandRenault-Nissan,respectively.AndréEstevesnowheadsBTG,anaggressiveemergingmarketinvestmentbank.What,someargue,maybeholdingbackthenextgenerationofbusinessleadersistheabilitytothinkinnovatively.

Management experience.

International experience

People management.

Relevant technical skills

Multicultural awareness (languages, knowledge of foreign cultures, etc).

Strategic thinking.

Finance.

Marketing.

Creativity/Innovation.

0 10 20 30 40 50 60 70 80 90 100

39% 13% 1%35%

24%5% 40% 26% 5%

9% 32% 42% 14% 3%

7% 36% 41% 13% 2%

21% 32% 31% 13% 3%

10% 36% 38% 13% 3%

16% 30% 38% 14% 2%

8% 30% 43% 16% 3%

34% 23% 5%10% 28%

Very high 1 2 3 4 Very low 5

12%

Generally superior.

About the same.

Generally inferior.

0 10 20 30 40 50 60 70 80 90 100

42%

50%

8%

Generally superior.

About the same.

Generally inferior.

0 10 20 30 40 50 60 70 80 90 100

19%

51%

31%

18

Business�education�–�not�just�for�the�boardroom�

ThesizeofBrazil’smarketforbusinesseducationisaround$1bn,accordingtoVanDyckSilveira,directorofbusinessdevelopmentatDukeCorporateEducation.Petrobras,thestateoilgroup,forexample,isspendinganestimated$150mperyearontraining.Companiesareincreasinglytakingontheburdenofimprovingemployeeskillsthatshouldhavebeencoveredwithintheeducationsystem.

MrSilveira,oneofseveralexecutiveswhotookoverandrestructuredthebusinessschoolIBMECin1998,seesaparticularneedforthesoftskillsofmanagement–communication,givingfeedback,“co-creating”andsoon.ButhealsobelievesthatthehighlyflexibleapproachofhisBrazilianstudentsmakesthemwellplacedtobenefit.Unlikemanyothernationalities,“theydon’tfreezewhentheirmistakesarepointedout”.Feedbackistakenconstructivelyandatfacevalue,hesays.

DukeCE’scoursesarerareinacountrywhereMBAsarefocusedonacademicresearchratherthantheneedsofcompanies.ButwhiledealingwithsomeofthemostmotivatedandemployabletalentheseesmuchdeeperproblemsinBrazil’seducationsystem-namelythefailureofsecondaryschoolstopreparestudentsfortheworldofwork.

Theelitearealreadywellcateredfor,hebelieves,havingattendedexpensivesecondaryschoolswhereteachingisrigorousandincludesastrongdoseofscienceandmathematics.Thesestudentsareatabigadvantagewhengettingintothehighlycompetitiveandhigh-qualitystateuniversities.

Theresthaveapoorgroundinginscience,mathematicsandcomputerscience.Theymayhavehadclassesin15thcenturyPortugueseliterature,buttheyhavenotbeentrainedtothinkrigorouslyoranalysedata,remarksMrSilveira.Thisdeprivespotentialemployersofacorpsofcompetentmiddlemanagementandtechnicalstaff.“Thereisabigdisconnectbetweenhighschoolanduniversity,”henotes.Manyoftheprivatecollegestheygoontoaremerely“diplomamills”.

MrSilveirahasseentheproblemfirsthand,andhasevenhadtoalterthesyllabusatIBMECtogetweakerstateschoolcandidatesuptoscratch.Positivediscriminationcanhelp,butittendstolowertheoverallqualityofgraduates,andrequireshighereducationinstitutestoteachbasic,grade1skillsorelseseestudentsfallbehind.

Theproblemstemsfromthequalityofteachinginwhatamountsto“apactofmediocrity”.ToparaphraseanoldSoviet-erajokeaboutbossesandworkers:“theypretendtoteachus,andwepretendtolearn.”Secondaryschoolteachersdonothavetobeaccreditedwithaformalqualification.Theymaybeabletorunaclassroom,buttheybarelyknowthesubjectstheyaresupposedtobeteaching.

A�question�of�class

MrSilveiraarguesforreforminthreeareastomeetBrazil’sfuturebusinessneeds.First,addressthemismatchbetweenwhatbusinessneedsfromschoolleaversandwhatthebureaucratsintheeducationministriesputonthesyllabuses.Hewantsofficialsto“createalearningarchitecture”thateducatesforlife,fromtopmanagementtotheshopfloor.

Second,shiftfundingawayfromthetopuniversitiestowardsprimaryandsecondaryeducation.Thismeansensuringpropertrainingandqualificationsforteachers,andgreatertransparencyaboutwhicharethehigh-andlow-performingschools.Whilearound7%ofthegovernmentbudgetgoestoeducationgenerally,thevastmajorityofthisisspentonhighereducation.

Relatedtothisisathirdissue–theneedtobemoreequitable,sothatthosewhoaremostabletopay,andwhodominatehighereducation(andwhowillearnmostintheirfuturecareers),arenotfundedbypoorertaxpayerswhobenefitleastfromtheeducationsystem.Withonlyaround1in5schoolleaversgoingtocollege,thisseemsnotonlyunfairbutalsogrosslyinefficient.

Businessshouldbelessworriedaboutthequalitycomingoutofthetopoftheeducationsystemandfocusonthemid-rankingschoolleavers,whoareneededtoprovidethenation’smiddlemanagement,techniciansandengineers,butfindthemselvesstrugglingthrough,andtoooftendroppingoutof,secondaryeducation.

19

II.��Innovation�in�thinking�and�action�

A�certain�mindset

WhileBrazilianindustrycanboastseveralcentresofexcellence—notablyenergy,aerospaceandagribusiness—educationdeficienciesholdbackinnovationinthewidereconomy.DavidNeeleman,theSãoPaulo-bornCEOofAzulairlines(andfounderofthelow-costJetBlueairlineintheUS),observesacultureofdeferenceamonghisBrazilianstaff.Flightattendantsarehappytoreadthecompanymanual,butfewactuallyraiseissuesduringmeetingsortrytoimproveprocesses.“Innovationstartswhenpeopleareabletospeaktheirmind,”hesays.Heisnottheonlyinvestortodrawsuchconclusions.

Butotherswoulddisagreewiththisassessment.ManyinvestorsregardtheirBrazilianstafftobe“flexibleandadaptable”,quiteprobablybecausetheyhavehadtodealwithasuccessionofeconomiccrisesthattaughtthemhowtosucceedinthemidstofinstability,sayinvestors.“ThereisatoleranceforambiguitythatismuchstrongerinBrazilthaninothercountries,”saysKornFerry’sMrAverbach.TheBrazilianexecutive“hasinhisDNAtheabilitytochangedirectionwithgreatereasethaninanyotherregionintheworld”.ButresearchconductedwithInseadbusinessschoolsuggeststhatBrazilianmanagersarelessablewhenitcomesto“creatingthenewandthedifferent”.

Whicheverviewonetakes,Brazilcannotdenyitspoorrecordofinnovation.“Everybodyagreesthatinnovationisimportantbutpeopledonotnecessarilybehavethatway,”saysMrWanickfromDuPont.Brazilaccountsforsome3.5%ofworldGDPatpurchasingpowerparity(PPP),butonly0.2%ofworldpatentsoriginatefromthismarket.Bycontrast,28%ofpatentsareregisteredintheUS.

AnEconomistIntelligenceUnitinnovationmodelthatmeasurescountriesaccordingtoboththeirreadinessandsuccessininnovationranksBrazil52ndoutof82countries,andnotesthatthecountryislikelytoslipfurtherdowntherankingsincomingyears.Moreinterestingly,themodelshowsthatitsrankingofthefactorsthatcontributetoinnovation(forexample,thenumberofsciencegraduates,educationlevels,thebusinessenvironment,R&Dspending,broadbandpenetration,etc),althoughinitselflow,isstillhigherthanthemeasureforinnovationsuccesses(measuredbythenumberofpatentsfiledglobally).ThissuggeststhatnotonlyisBrazilinsufficientlyinnovativecomparedwithitspeers,butthatitisalsoinefficientwithitsresources,byfailingtotranslateinvestmentsintopracticalinnovation.

Which�of�the�following�technological�factors�most�impact�your�firm’s�ability�to�innovate�in�Brazil?�

(%ofrespondents)

Source: Economist Intelligence Unit.

Whetherthisistheresultofalackofinventivenessorsystemicfailuresinthebusinessenvironmentishardtogauge,butBrazil’sweedyperformancecomesthroughintheviewsandexperiencesofcompaniessurveyed.“Innovationsthataredevelopedlocallyarenotfrequent,”lamentsMrWanick.Some57%ofsurveyedexecutivessaythattheydonothaveadedicatedR&Dfacility,orevenplantohaveoneintheshortterminBrazil,althoughthelikesofIBMandGeneralElectrichaverecentlyannounceddecisionstoestablishtheirownresearchcentresinBrazil.

Overonehalfofrespondents(51%)saythat,atpresent,lessthan10%ofproductsandservicessoldbytheircompanieshaveactuallybeendevelopedinBrazil,andatleastonequarterofrespondentsexpectnoprogressoverthethreeyears.Moreover,only29%expecttodevelophalfoftheirproductsandservicesinBrazil,andthatfigurerisesto38%inthreeyears’time.

Yetconditionsforinnovationontheshop-flooraremorepromising;whenfocusingmoreonthehumanfactors,Brazilian-basedcompaniesareseenaswellabletointegratethelatestinternationaltechnologyintotheiroperations,withalmostonehalf(49%)ofsurveyrespondentsdescribingthiscapacityas“verygood”or“excellent”,andonly6%sayingitis“poor”.

Technical skills of the workforce.

Availability of scientists and engineers.

Total spending on R&D in the country.

Availability of university graduates.

Spending on R&D by the private sector.

Quality of IT and communications infrastructure.

Spending on R&D by the public sector (government).

Broadband penetration.

0 10 20 30 40 50 60 70 80 90 100

46%

41%

23%

28%

28%

30%

33%

13%

20

What�proportion�of�the�products�and�services�sold�by�your�company�in�Brazil�was�developed��in�Brazil?

a)� in�the�past�three�years�

(%ofrespondents)

Source: Economist Intelligence Unit.

b)�in�the�next�three�years?

(%ofrespondents)

Source: Economist Intelligence Unit.

�Case�study��DuPont:�Middle�class�army

DuPonthasrecentlylauncheditsversionof‘thepeople’s’bullet-proofvehicleinBrazilbasedonalightandaffordablearmouringconcept.Thenewproduct,namedArmura,offersprotectionagainst97%offirearmsincirculationinBrazil,accordingtoDuPont,atamuchreducedcost($10,000insteadof$30,000ormore).Thearmourisalsomuchlighter(lessthan100kgagainstmorethan200kgforregulararmour).

TheprojectwasdevelopedentirelyinLatinAmerica,mostlyinBrazil,saysEduardoWanick,presidentofDuPontLatinAmerica.Theconceptisappealingtoagrowingmiddle-classpopulationthatlivesinastateofconstantinsecurity,especiallyinurbancentres(“40,000murdersayearislikeasmallwar,”saysMrWanick–nottomentioncarjackingsandotherformsofattack).

Inordertoputitsproductonthemarket,DuPontprovidescompleteprefabkits(itsownproductsarecalledSentryGlasandDevlar)toauthorisedcardealers.Five

modelsarecurrentlyavailable,fromGeneralMotors,Toyota,Mitsubishi,HondaandHyundai.“Thepotentialishuge,”saysMrWanick,althoughhedeclinestoprovidehardnumbers.Brazilisthelargestmarketintheregionforarmouredvehicles;butthereisplentymoredemandforArmuraintherestofLatinAmericaandfurtherafield.

Greenfield�thinking

OnevitalareaofinnovationwhereBrazilexcelsisinthedevelopmentofgreentechnologies.DespiteinternationalcriticismoverAmazondeforestation(andworriesoverpotentialnewoilwealth),Brazilboastssomeimpressivegreencredentials.Electricityneedsarelargelymetthroughhydropower,andthecountryhasexperimentedsuccessfullyinbiofuelssuchassugarcaneethanol.LocalmanufacturersandsupplierssuchasMagnetiMarellidevelopeda“flex-fuel”engineinthe1990s,allowingcarstorunoneitherpetrolorethanol,oracombinationofthetwo.Suchmodelsnowaccountformorethan90%ofnewvehiclesinthefast-growingautomotivemarket(seePartone).Brazil-basedcompaniesarealsoinvolvedinresearchonasecondgenerationofbiofuels(suchascellulose),althoughtheperformanceofbiodieselhasprovedlessconvincing.Localfirms,suchasBraskem,arealsobreakingnewgroundingreenplastics(seecasestudybelow).

�Case�studyBraskem:�A�future�in�green�plastics

Braskem,thepetrochemicalunitofOdebrecht,amajorindustrialconglomerate,hitheadlineswhenitannouncedthedevelopmentofso-called“greenplastics”.Brazil’sPresidentLulapromotedthecompany’stechnologyonavisittoEurope,unveilingaprototypeofthe“greencarofthefuture”whichincludedBraskem’sinnovativematerial.

Thenewsugarcane-derivedpolyethylene,whichavoidstheuseofnaphta,willbeproducedonanindustrialscalebythebeginningof2011.Theproductwillcostaround20%morethananequivalentnon-greenproduct,saysthecompany,buttheinnovationisviewedasabreakthroughinthesearchforrenewablealternativestooil-derivedplastics.

TheplasticwasdevelopedfromsugarcaneethanolbyBraskem’sresearchanddevelopmentcentreinsouthernBrazilinpartnershipwithJapan-basedToyotaTsusho.Inaddition,BraskemisworkingwithNovozymes,aDanish-basedbiotechnologycompany,inaresearchprojecttoproduceasugarcane-derivedpolypropylene.

ThecompanyhascapitalisedonBrazil’sexperienceinethanol,whichisalreadywidelyusedasbiofuelinthecarindustry.Braskem’sethanolissuppliedbyETHBio-Energia,alsoaunitofOdebrecht.ThenewR500mgreenplasticsplant,whichisbeingsetupinTriunfo,southernBrazil,willhaveanannualcapacityof200,000tonnes,accordingtoBraskem.

0-10%

11-50%

51-90%

91-100%

0 10 20 30 40 50 60 70 80 90 100

21%

51%

13%

16%

9%

0-10%

11-50%

51-90%

91-100%

0 10 20 30 40 50 60 70 80 90 100

36%

26%

23%

15%

9%

21

Greenplasticresinsareexpectedtofindaneagermarketamongmanufacturersofpackaging,automotive,cosmeticsandpersonalhygieneproducts.BraskemhasalreadysecuredcontractswithTetraPakandtheJapaneseShiseidocosmeticsfirm.OnequarterofitsinitialproductionwillbeexportedtoAsia.Meanwhile,Natura,aleadingBraziliancosmeticscompany,isalreadyadvertisingthatitwilluseBraskem’sgreenplasticsaspartofitssustainabilitypolicy.

Braskemcurrentlyemploysaround200researchers,andhasfiled250patentsinBrazil,EuropeandtheUS.LuizdeMendonça,Braskem’svice-president,saysthat20%ofthecompany’ssalescomefromproductslaunchedinthepastthreeyears.

BothitsindustrialsitesinTriunfoandinCamaçari,nearthenorth-easterncityofSalvador,hostinnovationcentres(pilotplantsandlaboratories).BraskemalsohasaPVCresearchcentreinSãoPauloandpartnershipswithacademicinstitutesanduniversitiesathomeandabroad,suchaswithGainesville’sUniversityofFlorida,theUniversityofMassachusettsandtheDutchPolymerinstitutes.Itsinvestmentssofarsuggestthatthecompanymaywellfulfilalong-statedaspirationtobeaworldleaderinbiopolymers.

Back�to�school

Onewaytopromoteinnovationisthroughbusinessco-operationwithuniversitiesandacademicinstitutes.Theevidencetodateseemsreasonablypositive.OfsurveyrespondentswhoseBrazil-basedoperationsalreadyworkwithlocaluniversities,60%saytherelationshiphasbeen

“positive”and12%“verypositive”,comparedwithlessthanonequarter(23%)whosaythatsuchco-operation“failedtoliveupwiththeirexpectations”orwas“veryunsuccessful”(5%).Brazilian-basedcompanieswouldappeartogettheroughendofthedeal(orareperhapstoooptimistic),asalmostonethird(32%)reportthatsuchco-operation“failedtoliveuptoexpectations”.

How�would�you�characterise�co-operation�between�your�Brazilian�operations�and�local�universities/academic�institutes?

(%�of�respondents)

Source: Economist Intelligence Unit.

ExamplesofsuccessincludethelocalsubsidiaryofGeneralMotorswhichhostsaresearchanddevelopmentcentrethatworkscloselywithSãoPauloUniversity’sengineeringschool.Vale,theminingcompany,hasalsoinvestedtimeandenergytoinfluencethecurriculumofuniversitiessotheytrainengineersinmining,railwayandportlogistics.

Very positive

Positive

Failed to live up to expectations

Very unsuccessful

0 10 20 30 40 50 60 70 80 90 100

60%

12%

23%

5%

9%

�Case�study��SAP�Labs:�Software�in�Brazil�

SAP,aglobalsoftwaregiant,launchedanewprogrammein2009thatinvolvesuniversitiesinitsinnovationprocessfromitsBrazilianbase,inSãoLeopoldoinsouthernBrazil.ItsetupitsresearchlaboratorywithinthelocalUnisinosUniversity,whichrecentlylaunchednewcourses(ITandEnglish,andrenewableenergysources)asaresultofSAP’sengagement.Groupsofbetween10to20selectedstudentsfromvariousuniversitiesfollowatwo-yearprogrammeatSAP,whichfocusedontopicsrelevanttoBrazil’sfutureneeds.Theseinclude:

E e-health(suchaselectronicdatamanagementofhealthrecordstoeasetheexchangeofinformationalongthehealthchain,fromlocaldoctorstohospitalsandchemists,aswellasintegrationamonghospitals);

E e-energy(efficientresourcemanagement);

E infrastructureandmobility(Brazilhasaseriesofchallengesaheadofthe2014footballWorldCupandthe2016SummerOlympicsinRiodeJaneiro);

E riskmanagementandsafety(sharinginformationamongvariousagenciesandvictimsofaccidentsandnaturaldisasters);and

E supportingsmallandmicrobusinessesthroughthedevelopmentofdedicatedsoftware.

Localissues“willinfluencethesoftwarethatwewillbedeveloping,”saysErwinRezelman,presidentofSAPLabs.TheindustrialstandardmaystillcomefromtheUSorChina,but“re-engineeringmaycomeoutofBrazil,”hesays.Moreover,insomeITsectorswhereBrazilismostadvanced,suchase-banking,“maybethestandardshouldcomeoutofBrazil”.MrRezelmansaysresearchmodellingisduetostartattheendof2010andthewholeprocessisexpectedtotakeuptofiveyears.

22

III.�Brazilians�abroad�

Making�a�name�for�themselves

Brazil’svoiceontheworldstageisbeingheardmoreloudlyandmoreoftennowadays.WhilerelationswiththeUSremainstrong,BrazilisshiftingfocustootherLatinAmericancountries,ChinaandAfrica.Ithasraiseditsprofilewithmoremilitaryspending(albeitfromaminisculebase),astrategicdefenceagreementwithFrance,followingmilitaryprocurementcontracts,anddiplomaticforaysintotheMiddleEast.

ButitisBrazil’sappealtoforeigninvestorsandtherecentboldnessofitsowncompaniesabroadthatisgivingsubstancetoitsglobalambitions.Mostoftheworld’s100largestmultinationalcompaniesareoperatinginthecountry:annualforeigndirectinvestment(FDI)inflowsgrewfromamere$10bnin1996topeakat$45bnin2008,

beforefallingbackto$26bnin2009,pushingtotalFDIstockto$320bn,andmakingBrazilthesecond-largestemergingmarketrecipientofFDI,afterChina.WhiletraditionallyFDIhascomefromtheUSandEurope,especiallySpain,newplayersfromMexico,ColombiaandChile,areshowinginteresttoo.

PerhapsmoreremarkablethantheinrushofFDI,aretheinternationalacquisitionsandinvestmentbeingmadebyBrazilianmultinationals–somethingthatwasnotalwaysencouragedbypastgovernments.ThepurchasebyValeofIncoin2006,forexample,sentoutbounddirectinvestmentthatyearsoaringtoover$28bn(althoughithassubsequentlyfallenbacksubstantially).Suchventureshavebeenpropelledinpartbycheapfinancingfromthestate-owneddevelopmentbankBNDES,whichinvestedover$5bninthepastfiveyearstohelpBraziliancompaniesexpandabroad.Arelativelystrongcurrencyhasalsohelped.

Foreign�direct�investment

�� 2005a� 2006a� 2007a� 2008a� 2009a� 2010b� 2011b� 2012b� 2013b� 2014b

Foreign�direct�investment�(US$�bn)

Inwarddirect 15.1 18.8 34.6 45.1 25.9 30.0 35.0 40.0 42.0 45.0investment

Inwarddirect 1.7 1.7 2.5 2.8 1.6 1.6 1.7 1.9 1.9 1.9investment(%ofGDP)

Inwarddirect 10.7 10.5 14.5 14.7 9.9 8.5 8.9 9.5 9.0 8.8investment(%ofgrossfixedinvestment)

Outwarddirect -2.5 -28.2 -7.1 -20.5 10.1 -6.0 -5.0 -5.5 -6.1 -6.7investment

Netforeigndirect 12.6 -9.4 27.5 24.6 36.0 24.0 30.0 34.5 36.0 38.3investment

Stockofforeigndirect 195.6 214.3 248.9 294.0 319.9 349.9 384.9 424.9 466.9 511.9investment

Stockofforeigndirect 1,062 1,148 1,315 1,532 1,646 1,778 1,932 2,108 2,289 2,478investmentperhead(US$)

Stockofforeigndirect 22.2 19.7 18.2 17.9 20.3 18.2 19.0 20.3 21.2 22.1investment(%ofGDP)

Shareofworldinward 1.59 1.51 1.79 3.00 2.89 2.77 2.89 2.94 2.77 2.92directinvestmentflows(%)

Shareofworldinward 2.04 1.82c 1.69c 2.04c 2.08c 2.12 2.18 2.23 2.27 2.32directinvestmentstock(%)

Source: Economist Intelligence Unit.

23

Afocuson“South-South”relations,aspartofageneralpolicyoftradediversification,isperhapsoneofthebiggestchangesinBraziliantradepolicyunderPresidentLula.Chinahasbecomeitslargestexportandimportpartner,andtheshareoftradewiththerestofLatinAmerica,otherAsiancountries,theMiddleEastandAfricahasalsoincreased.

Butcompetingeffectivelyabroadalsorequireswiderbrandrecognition.AnelitegroupofBrazil’sinternationalplayershavealreadyachievedthisrecognition.AswellasVale,bignamesrangefromthefashionablesandalsofHavaianastoaircraftsofEmbraer.State-ownedoilgroup,Petrobras,andmeatpackersJBSandMarfrighavelaunchedaggressiveacquisitionsintheUS.AccordingtoFundaçãoDomCabralbusinessschool,JBSisnowthemostinternationalBraziliancompany,withfour-fifthsofitssalesabroad.

Other,lesser-knowngroupsarealsomakingheadway,suchasGerdau,asteelmaker,andNatura,acosmeticsmanufacturer.Theworld’sbankingsectorwillsoonhearmoreofstate-ownedBancodoBrasilandItaúUnibanco,bothofwhichareplanningsignificantinternationalexpansion.AtypicaljourneyofcorporateexpansionbynewcompaniesisbeingtakenbyTotus,asoftwarecompanythattargetssmallandmedium-sizedbusinesses.Havingemergedstrongerfromfierceconsolidationinitsdomesticmarket,whereithadbuiltastrongbrand,itisnowlookingtoexpandelsewhereinLatinAmerica,andwillgofurtherafieldintime.Theglobalfinancialcrisismayhavedelayedsomeforeignventures,butstrongdomesticgrowth,healthyprofits,andlowerassetspricesabroadmeanthatforeignmarketsarebeckoning.

ThedevelopmentofBrazil’sagriculturesectorinparticularhasprovidedfertilegroundfortwo-wayinternationalexpansion.Whiletheworld’sleadingfoodgroupsareplantingrootsinthecountryinanticipationof40%growthinthesectoroverthecomingdecade,accordingtoajointUNandOECDreport,innovationsinagronomyhavebeenapassportforBrazilianstoenternewmarkets,particularlyinAfrica.

“WhathasbeenachievedintheBraziliancerradoisapplicabletotheAfricansavannah,”saysEliseuAlves,aformerpresidentofEmbrapa,astateagronomyagency.Thesolutiontoglobalfoodsecurityis“creatingtechnologyandinvestinginresearch”,hesays.BrazilianscientistsfromthestateofMinasGeraisarealsovisitingAngolaandMozambique,twoPortuguese-speakingcountries,tosupporttechnologydevelopment.EmbrapaopenedaregionalbaseinGhanain2008,andBNDESisfinancingBrazil-basedcompaniestoexporttractorsandothermachinerytoAfrica.

Brand�new

Butbeyondthecharmedcircleandthedynamicnewcomers,BrazilianbrandsstilllacktheinternationaldrawoftheirWesterncounterparts,thoughitssizeabledomesticmarketmitigatessomeoftheurgencyofoverseasexpansion.Thisisreflectedinoursurvey,inwhich84%ofrespondentssaythatBrazilianbrandnamesareeithernotwellrecognisedornothighlyregardedabroad.

Only3%ofUS-basedrespondentsthinkthatBrazilianbrandsarebothrecognisedandhighlyregarded.However,theperceptionofBrazilianbrandsisdifferentamongChina-basedexecutives,withalmostonequarterofthoserespondents(24%)declaringawarmattitudetoBrazilianproducts.

ThismightbewhyBraziliancompaniesfeeltheyhavemoreofanadvantage(oratleastlessofadisadvantage)whenoperatinginotheremergingmarketssuchasChina.Andexecutivesareclearlyalerttothistrend.Chinaisexpectedtobecomea“primarytradingpartnerwithBrazilinthenextthreeyears”,accordingto63%ofrespondents,comparedwith51%whopointtotheUSand49%toLatinAmerica.Similarly,Braziliancompaniesseeopportunitiesforacquisitionsinotheremergingmarkets,with66%pointingtointerestinfirmselsewhereonthecontinent,comparedwith43%focusingonUScompanies,and31%lookingtoChina.

24

China-Brazil�trade:�A�raw�deal

ThespectaculargrowthofSino-BraziliantradeinrecentyearsisoneoftheclearestindicatorsofBrazil’ssuccessintappingintothedynamisimofemergingAsia.Itisnothardtoseewhy.China’sinsatiabledemandforrawmaterialsismatchedbyBrazil’swillingnessandabilitytosupplythem.

CommoditiesdominatesalestoChina,ofwhichironoreandsoyabeanscomprisedtwothirdsofthetotal.AstheglobalcommoditiesboominthelatterpartofthedecadesentpricesofBrazil’smainexportproductsrocketing,bilateraltradewithChinahasleaptbymorethan50%since2007,topping$36bninboth2008and2009,andprotectingBrazil’stradefromtheworstoftheglobalfinancialturmoil.ChinabecameBrazil’smaintradingpartner,overtakingtheUS(importsofwhichfromBrazilplummetedby43%in2009)andArgentina.Allthewhile,importsofChinesemanufacturedgoodsdeclinedby20%,resultinginabilateraltradesurplusforBrazilof$4.3bn.

Sowhat’snottolikeabouttherelationship,fromBrazil’sperspective?ForsomeBrazilianmanufacturerswithglobalambitions,thestoryisaboutmorethanthecommoditytrade–andforthemitisnotalwaysahappyone.Brazilhasfoundithardtoexportvalue-addedproductstoChina.Embraer,anaircraftmanufacturer,setupitsjointventurewithaChinesestate-ownedcompanysevenyearsago–arequirementforaccessingthemarket–openingaplantinHarbin,inChina’sNorthEast.Sofar,70aircrafthavebeenproducedforChineseclientsand30morearetobedeliveredshortly(including25modelsimportedfromBrazil).

TheChineseauthorities,however,announcedthattheChineseaircraftindustrywouldstartmanufacturingitsownregionaljetswithoutthehelpofEmbraer.ItwasadifficultsituationfortheBrazilianfirm,whicharguesthatitsChineseplantonlyhasenoughworktolastuntilthestartof2011.IthasaskedtheauthoritiesforalicencetomanufactureitslargerEmbraer190locally,andannouncedthatitwassettingupamaintenancecentreinBeijing.“ThecreationofEmbraerChinaTechnicalServicesshowsourlong-termcommitmentandconfidenceinthegrowingChineseaviationmarket,”saysGuanDongyuan,presidentofEmbraer’sChinesesubsidiary.Nevertheless,thefutureofEmbraer’smanufacturingactivitiesinChinamaynowdependonpoliticalanddiplomaticarrangementstosmooththewayforhighervalueinvestments.

The�other�side�of�the�coin

WhileEmbraerpondersitsfutureinChina,thelatterhasunveiledsomeofitsownambitiousplansforBrazil:

E ChinaPetroleumCorporation(Sinopec)hassignalleditsintentiontograntnewloanstoPetrobras,theBrazilianoilcompany,towhichitlent$10bnlastyearinreturnforaguaranteedoilsupply.SinopecmayalsobuystakesintwoPetrobrasoilfieldsinnorthernBrazilandarefineryinRiodeJaneiro(Comperj).Co-operationintransportandfertilisersarealsobeingconsidered.

E WuhanIronandSteelCorporation(Wisco)intendstosetupa$5bnsteelplantnearRiodeJaneirointhenewAçuport,currentlybeingbuiltbyEBX,aholdingcompanyownedbyEikeBatista,alocalbillionaire.Thenewportandplantarescheduledtoopenby2013.Wiscowilltakea70%stakeinthenewplant,whichwillhaveannualcapacityof5mtonnesofsteel.TheChinesegovernmentsaysitwilleventuallyimportsteel(ratherthanironore)fromBrazil.

E Wiscoinvested$354minMMX,aRiodeJaneiromininggroupownedbyMrBatista,earlierthisyear.TwoothermineshavealsobeensoldbyVotorantimandItaminastoChinesecompanies.

E TheChineseDevelopmentBankintendstogranta$1bnloantoOi,theBraziliantelecommunicationscompany,tobuyChineseequipment.

25

Which�markets�will�become�the�primary�trading�partners�with�Brazil�in�the�next�three�years?

(%ofrespondents)

Source: Economist Intelligence Unit.

Where�do�you�envision�an�increase�in�acquisitions�by�Brazilian�companies�in�the�next�three�years?

(%ofrespondents)

Source: Economist Intelligence Unit.

Other Latin America.

The US.

Western Europe.

Central/Eastern Europe.

China.

India.

Rest of Asia.

Middle-East.

Africa.

Other, please specify.

0 10 20 30 40 50 60 70 80 90 100

49%

51%

22%

10%

12%

11%

12%

25%

63%

1%

Other Latin America.

The US.

Western Europe.

Central/Eastern Europe.

China.

India.

Rest of Asia.

Middle-East.

Africa.

Other, please specify.

0 10 20 30 40 50 60 70 80 90 100

66%

43%

23%

14%

21%

9%

16%

15%

31%

3%

ThatBraziliancompaniesareeyeingtheChinesemarketis,inonesense,onlytobeexpected.Companiesgowherethereisgrowth.Butonanotherlevel,thisrepresentsamajorshiftinthebalanceofeconomicpower.Emergingmarketcompanies,products,managersandinnovationsmayfindmoreincommonwithoneanotherthanmerelyadoptingthebusinessnormsandideasthatemanatefromtheUS,EuropeorJapan.

Ofcourseotheremergingmarketsdonotalwaysmakeperfectallies:companieslikeEmbraerhaveexperiencedtheclassicdilemmaofWesterninvestorsinChina,forcedintoalocaljointventurethatputsatrisktheirintellectualproperty.Yet,asglobalisationresumesitsonwardmarchfollowingtheupheavalsoftheeconomicdownturn,aneweraofglobalrelationshipsmaybecharacterisedmorebyabattleforscarceresources,state-ledinvestmentstrategies,andaflairfordealinginopaquebusinessenvironments,thanthroughthemarket-ledorthodoxiesofthepast.AndthesetrendswouldappeartoplaytoBrazil’sownstrengthsandtraditions.

26

Conclusion:Thebeginningofthefuture

Braziltodayseemsbetterplacedthanevertodisposeofitsfrustrating,ifclichéd,moniker“thecountryofthefuture”.Adecadeofmacroeconomicprudencehasgiventheeconomyasturdyplatformforinvestment,growthandforeignexpansion,andbusinesseshavefactoredthischangeintotheirlong-termstrategies.Importantly,executivesaresanguineaboutthe2010presidentialelectionandtheendoftheLulaera,assuming,astheydo,thatadecadeofmacroeconomicstabilitywillsimplybemaintained.ButBrazilisnotquitethereyet.Insomerespects,enlightenedeconomicpolicyistheeasypartoftransition.

Asthisreporthasshown,apooreducationsystemwillleavethecountryshortofskillsformanyyearstocome;andfillingpotholedroads,buildingraillinksandlayingbroadbandcablecantakeadecadeormore.Italsotakes

alongtimeforcompaniestobuildupabrandthatissufficientlywellknowntoopenforeigndoors.SalestoChinamaybebooming,butBrazilhasyettomovebeyondtherelativelyeasytaskofsupplyingcommoditiestoacustomerthatisdesperatetobuy.

Nevertheless,avirtuouscircleisturning.Soundpoliciesandagrowingdomesticmarkethaveattractedforeignmoney,know-how,newskillsandtechnologies,andunleashedtheconsiderablepent-upenergyoflocalbusinessbothathomeandabroad.This,inturn,willhelptofundinvestmentintoeducationandinfrastructure,whichwillattractmoreinvestmentandsustainablegrowth.That,atleast,isthetheory,andonBrazil’scurrenttrajectorythereisnoreasontothinkitcannotbeachieved.Itwilltakemanyyears,butifrecentsuccessesareanyguide,theprizewillbeworththeeffort.

27

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