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InterviewBrazil: Risks and Opportunities

An interview with Alexandre Barros, President of Early Warning (a political-risk firm based in Brazil) and President of Brazil Business Forum, a forumfor senior-level managers doing business in Brazil

Roy Nelson

he opening of the Brazilian economy in the 1990s has created enormous oppor-tunities for business. One of the last Latin American countries to privatize itslarge state-owned industries, Brazil, under President Fernando HenriqueCardoso (re-elected for a second four-year term in 1998), has continued a pro-cess of trade liberalization and privatization that has attracted billions of dollarsin foreign investment every year.

However, doing business in Brazil can be risky. Cardoso’s Real Plan(1994–1999) gave Brazil a new currency (the real), fixed it at 1:1 parity with thedollar, and called for spending cuts to bring Brazil’s budget deficit under con-trol. Initially, the plan was very successful: it reduced Brazil’s outrageously highrate of inflation from 2500% a year to less than 10%, and the stable currencyattracted even more foreign investment. However, given the fragmented natureof political parties in Brazil’s Congress, reducing the budget deficit proved to bea difficult task—which made investors nervous. When massive currency devalua-tions in Asia and Russia made foreign investors even more skittish about the sta-bility of Brazil’s own currency in late 1998, portfolio capital fledBrazil—provoking an almost 50% devaluation of the real in January 1999.

Since then, Brazil’s economy has experienced a recovery. Its huge market of 160million people—by far the largest in Latin America (and, in GDP terms, theeighth largest in the world)—remains very attractive to foreign investors.

Roy Nelson is Associate Professor of International Studies at Thunderbird, The AmericanGraduate School of International Management, in Glendale, AZ.

Thunderbird International Business Review, Vol. 42(6) 703–706 • November–December 2000

© 2000 John Wiley & Sons, Inc.

Thunderbird International Business Review interviewed Dr.Alexandre Barros, a renowned business consultant and an expert onpolitical risk in Brazil, about Brazil’s future prospects and how to besuccessful doing business in Brazil.

As President of Early Warning, a well-known political-risk firm basedin Brasília, Dr. Barros has many years of experience advising execu-tives planning to do business in Brazil. Early Warning works for sev-eral Fortune 500 and Brazilian companies, helping them tounderstand Brazil, to establish themselves in the country, to developgovernment relations strategies, and to assess markets in Brazil and inother Mercosul countries.

Dr. Barros is also President of the Brazil Business Forum, a group ofsenior executives of companies doing business in and with Brazil thatmeets regularly to discuss and share experiences about economics,politics, and business strategies. He is a featured speaker at worldwideconferences on Latin America for business executives sponsored byThe Economist. He also is quoted frequently by the internationalmedia—The Financial Times, The New York Times, The ChristianScience Monitor, Bloomberg, Latin Trade, Latin Finance, CNN, andPBS among others—on issues related to investment and evaluation ofthe political-business climate in Brazil.

Dr. Barros holds a Master’s Degree and a Ph.D. in Political Sciencefrom the University of Chicago. He has taught at several Brazilianand U.S. universities. He is a member of the Advisory Board of theInstitute of Brazilian Business and Public Management Issues atGeorge Washington University, where he is also a Visiting Lecturer.

TIBR: How is the Brazilian economy doing now?

DR. BARROS: The latest figures on GDP growth for 1999 werejust released today. In 1999, the economy grew at .82%. This is alow rate of growth, but much better than expected [given lastyear’s financial crisis]. This is restoring some degree of consumerand business confidence in Brazil. That will be an important factorinfluencing Brazil’s business and economic performance in 2000.

TIBR: What has been the recent performance of foreign multina-tional corporations operating in Brazil?

DR. BARROS: First, most traditional multinationals, such asIBM or Proctor & Gamble, have been in Brazil for a very longtime, 50 years or more. Most of them have made a lot of moneyover that period. Of course, sometimes profits in Brazil can oscil-

Roy Nelson

704 Thunderbird International Business Review • November–December 2000

late widely and companies may not make any money for a yearbecause of this oscillation in the business environment. However,if you change your time horizon to five years, let us say, instead ofthe next quarter or even the next year, chances are that you willmake money. These more traditional multinationals that havebeen in the country for a long time are very happy in Brazil.There are very few cases of companies leaving Brazil after beingthere for some time, because, over the long run, they were prof-itable. One example of a company that left recently is Sears—butthey did not leave because of specific problems in Brazil, butbecause of an internal worldwide reorganization.

The trouble, however, is that many of the companies that aregoing to Brazil now are either medium-sized companies or start-ups that do not have a long-term experience with Brazil and donot understand that they need to have a longer time horizon. Themanagement of these companies back in the US tends to be veryjittery, not realizing—as does the old guard of companies thathave been in the country for decades—that oscillations in theeconomy are absolutely normal and part of the game. One chal-lenge for the local management of these companies is to convincethe management back at headquarters that, despite these oscilla-tions, Brazil is a market that still turns out to be very profitable inthe medium or long run.

I will share an anecdote with you. I was talking recently with agroup of executives doing business in Brazil that meets on a regu-lar basis. One executive, who had arrived to Brazil just recently,was whining month after month that he couldn’t make money inBrazil, that things were bad, that the system was unstable, and onand on. After the third or fourth month, one of his peers turnedto him said, “You should resign and go home, because you don’tunderstand how the system works here. We (the rest of the group)are all here, and we are making money.” He had a point. IBM, forexample, has been in Brazil since 1917, and they do not regret ita bit. Of course, they had lows and highs during that time; it is justthat they cycles were longer than the usual cycles in the US.

TIBR: Can you tell us some of the mistakes that foreign companiesoften make in Brazil?

DR. BARROS: Since São Paulo is the biggest and the best knowncity in Brazil, there is a tendency for multinational corporations toinvest there, disregarding the transaction costs of entering andestablishing themselves in a city that is absolutely overcrowded.Some companies are having a better experience going to otherregions—the South, West, or Midwest of Brazil—that are muchbetter markets and much more convenient from a logistical andbusiness point of view. Dell Computer Corporation is one exampleof a company that decided to locate its new plant outside of SãoPaulo—it went to Rio Grande do Sul [Brazil’s southernmost state].

Another company that is thriving in Rio Grande do Sul is MarcoPolo. This is a Brazilian multinational company, a manufacturer of

Brazil: Risks and Opportunities

705Thunderbird International Business Review • November–December 2000

These more tra-ditional multina-tionals that have

been in thecountry for along time arevery happy in

Brazil.

buses, which also has plants in Argentina and Mexico. It’s a high-ly successful, efficient company, recently written up by Forbesmagazine as one the 100 best small international companies.There’s a funny story about Marco Polo that shows somethingabout how efficient and well-run it is: its plants have a remarkablereputation for cleanliness. When Paulo Bellini, the company pres-ident, told the visiting Forbes reporter and photographer aboutthis while they were touring the plant in Rio Grande do Sul, theychallenged him to sit down right on the plant floor in his nice suitand tie. He promptly did so, resulting in an unusual photographto accompany the Forbes article!

TIBR: You are based in Brasília, Brazil’s national capital. Do youhave any special tips for executives arriving from the US aboutdoing business in Brazil who might need to deal with the Braziliangovernment at the federal level?

DR. BARROS: The most important thing to understand is thatmost of what goes on in business and politics in Brazil is very sim-ilar to what takes place in the US. A friend of mine is married toan American political scientist, a well-known expert on the USCongress. They visited me recently in Brasília, and although myfriend’s husband spoke no Portuguese, he said that he would liketo visit the Brazilian National Congress. After a day there, hecame back and said, “Except for the shapes of the buildings andthe way people look, it’s exactly the same as the US Congress. Icould understand everything that was going on—the negotia-tions, the political deals being made—even without understand-ing a single word of Portuguese.”

TIBR: From a political perspective, how do you see the futureprospects for business in Brazil?

DR. BARROS: The current government has privatized a lot inBrazil, and is likely to continue to do so. Deregulation has notgone far, but there has been some progress.

From now until the next presidential elections in 2002, no greatgovernment initiatives are to be expected, but there won’t be anyreversals either. As for the future government—the next Presidentwill take office on January 1st, 2003—the perspectives are for thecontinuation of current market-oriented policies. Early Warning,the company that I run, is preparing an evaluation of all the pos-sible candidates and brokers for the 2002 election. Our goal is tohelp guide executives and company strategic planners understandthe future prospects for business in Brazil, regardless of who winsthe election.

For additional information, Early Warning can be located on the Web at www.eaw.com.br. Dr. Barros’email address is alex@eaw.com.br and his telephone number in Brazil is 011-55-61-245-4795.

Roy Nelson

706 Thunderbird International Business Review • November–December 2000

From now untilthe next presi-dential electionsin 2002, no greatgovernment ini-tiatives are to beexpected, butthere won’t beany reversalseither.