Brazil on the move

October 2010

Flown on a regional airline recently in the United States or Europe? It’s likely you were on an Embraer aircraft—designed and built in Brazil. Grilled chicken on the Fourth of July? There’s a good chance the poultry was Pilgrim’s Pride brand, now majority-owned by JBS, the Brazilian meat processor. Have a Budweiser at that barbecue? These days, that’s a taste of Brazil too. The iconic American beer brand belongs to Anheuser-Busch InBev, the $37 billion Belgian-headquartered company, most of whose top management team hails from Brazil.

Brazil is a global player to be reckoned with. Once known for samba and soccer, the country is now the land of surprising and substantial commercial and financial opportunity. It offers a rare amalgam of political stability, economic diversity and dynamism, fiscal austerity and conformity with the cadence of Western business.

To be sure, there are concerns about the economy overheating, especially with gross domestic product on track to expand by more than 6 percent this year. Still, some economists say the country could sustain 4.5 percent annual growth without inflationary pressure for much of the next decade.

For businesses and investors worldwide, Brazil is providing more and more ways to tap huge and rapidly expanding consumer markets, put capital to work, harness the energies and intellect of its growing professional class, find new suppliers, and forge new partnerships in an increasingly diversified economy. Some leading multinationals clearly already understand the nation’s potential: Brazil is the second-largest market for cosmetics leader Avon Products and the third-largest for consumer goods giant Unilever.

Brazil is also coming into its own on the world political stage. Now the world’s eighth-largest economy, the nation is seeking a permanent seat on the United Nations Security Council. It sends regular trade missions abroad and has trade support centers as far afield as Poland and the Arabian Gulf. It has been central to a peace-keeping mission in Haiti, among many other global initiatives. Meanwhile, Brazil boasts that it has greater individual freedom than China, less sectarian volatility than India, and almost none of the potential for political unrest or natural disasters that overshadow those nations.

Reality trumps perception
But it wasn’t that long ago that Brazil was known derisively as “the country of the future—and always will be.” In the 1980s and into the 1990s, the country labored under massive foreign debt, public borrowing was used to finance growth, and annual inflation remained high, peaking at 2,477 percent in 1993. Also, Brazil has attracted worldwide notoriety for its favelas, the grim shantytowns adjacent to its largest cities that have become symbols of the chasm separating the country’s haves and have-nots. And although Brazil’s adult illiteracy rate as computed by the UN has plummeted from 25 percent in 1980, it was still 10 percent as recently as 2007.

Infrastructure is also inadequate to properly support Brazil’s breakneck growth rates. Despite the flurry of construction nationwide—most of it related to home building, some geared to hosting the World Cup soccer tournament in 2014 and the Summer Olympics in 2016—much remains to be done to upgrade the physical infrastructure and promote digital inclusion, notably in the new centers of development further west and north in the nation’s interior.

Brazil still has low densities of road and rail links—0.2 kilometer of roads per square kilometer compared with nearly twice that density in China, for instance. And although high-speed Internet service is widely available, it is not yet easily affordable for Brazil’s burgeoning middle class, though presumably, as incomes continue to rise, more and more people will have the means to sign up.

Brazil faces institutional challenges as well. Both the World Economic Forum’s latest Global Competitiveness Report and The Heritage Foundation’s 2010 Index of Economic Freedom point to onerous regulation, rigid labor markets, an ineffective and inefficient public sector, and broad mistrust of politicians. While INSEAD, in the latest edition of its Global Innovation Index, praises Brazil’s entrepreneurial spirit as one of the highest in the world (one adult out of eight is creating a business), the WEF gives Brazil a low score in terms of the numbers of procedures and time needed to form a startup.

A turnaround story
Yet for all its problems, Brazil is a turnaround story on a grand scale. Certainly the country, like many in Latin America, has benefited from a run-up in the prices of commodities such as iron ore—largely the effect of China’s appetite for raw materials. But the nation’s positioning is also the product of more than 15 years of fiscal discipline and pro-growth macroeconomic policy.

Beginning in 2003, the government of the new president, Luiz Inácio Lula da Silva, extended Cardoso’s reforms, helping toaccelerate exports and pushing the trade surplus to more than $40 billion by 2007.The transformation of the trade account has helped eradicate Brazil’s long-time need to issue debt to finance growth. Although Brazil was buffeted by the recent global recession, it has fared far better than many other nations. By the end of this year, its debt-to-GDP ratio is expected to have declined modestly to around 41 percent, compared with 54 percent for the United States and a whopping 78 percent for the United Kingdom.

Brazil’s economic vigor has given the federal government the means and the freedom to spend on much-needed infrastructure and social programs. Although federal spending on infrastructure is just 2 percent of GDP—compared with about 16 percent in China—the activities are extensive. PAC 1—the first phase of the national accelerated growth program—has distributed funds for oil extraction, electricity generation and logistics. PAC 2, which was announced about the time that the 2010 presidential election race began, will work to catch up on delayed investments from PAC 1 and boost spending on initiatives such as the My House, My Life affordable housing program.

Supersized consumer markets
Economic growth has given rise to a new middle class—a demographic that already comprises half of the country’s population. Between 2003 and 2008, 32 million people joined this group.

These individuals and families differ from their equivalents in China and India in their concentration: More than 84 percent of Brazil’s population is clustered in urban areas. What they all share is a chance for upward mobility, spurred by stable macroeconomic fundamentals, the expansion of the Bolsa Família (the federal social safety net program that began to help millions of families in 2003) and falling unemployment.

The new middle class represents Brazil’s economic engine, powering demand not just for housing stock but for an array of consumer goods and services. Middle-class family income now averages $9,200, versus an average across all classes of $15,500 a year, and is rising steadily. These new consumers also make up the country’s current and future workforce, filling the openings for bank tellers, lab technicians and other service economy jobs created by the expanding economy and providing the manpower to run factories and oil rigs. This demographic also constitutes a vast pool of voters whose ballots matter and who will want more say in their nation’s future.

On the digital front, Brazil is trying to quickly move up the technology ladder. There were 184 million cell phones in use in May 2010 — which means a majority of the population is now mobile. The number of personal computers leaped from 10 million in 2000 to more than 60 million in 2009; about 32 percent of the middle class owns a computer at home. And although the country is the fifth largest in Internet connections in the world, high-speed connections are rarer because of the high price of access and the absence of service in remote locations. However, the expansion of mobile broadband services is on the horizon thanks to the national plan to offer broadband access at rates substantially below current prices. This web-enabled landscape will present many opportunities for such digital services as m-payments, personal productivity enhancers, mobile advertising and entertainment such as online games, music and news.

Follow the (new) money
Brazil’s potential has not gone unnoticed abroad. Foreign direct investment is pouring in from corporations and investment funds, accelerating government spending and private investment alike. FDI grew 35 percent annually between 2003 and 2008. After a decline in 2009, inward investment is flowing again this year and is projected to reach pre-crisis levels of $40 billion in 2011, with more and more money earmarked for activities that will serve Brazil’s new middle class—retail, logistics, software, financial services, housing construction and infrastructure.

Consider three recent examples. State Grid Corp. of China, that country’s largest electrical utility, recently spent $1.7 billion to buy seven Brazilian electricity transmission companies. Energy conglomerate Shell International Petroleum has signed a non-binding agreement with Cosan, a top Brazilian producer of ethanol, sugar and electric energy, to create one of the world’s largest biofuels companies; the joint venture is projected to have revenues between $12 billion and $21 billion a year.

Billionaire Chicago real estate entrepreneur Sam Zell has already injected more than $500 million in a number of Brazilian companies that specialize in property and infrastructure. He has also announced plans for more investments in construction projects that will help Brazil prepare to host the World Cup and the Olympics. Meanwhile, the housing sector continues to hum: In 2010, two of the country’s biggest homebuilders, PDG Realty and Agre Empreendimentos Imobiliarios, merged, and six of Brazil’s 13 share offerings in the first months of 2010 were made by real estate companies. House prices are skyrocketing, thanks to easier access to credit and rising incomes.

In the financial sector, Brazil is becoming more attractive for global private equity and venture capital funds. With several huge public offerings on the Bovespa, Brazil’s stock exchange, in the last two years, the funds have more opportunities to cash out. (Among the higher-profile investments: US venture firm Weston Presidio helped capitalize Azul Linhas Aéreas Brasileiras, the budget carrier launched in 2008 by David Neeleman, Brazil-born founder of JetBlueAirways.) Also, in 2009, several new local venture funds were created in Brazil to invest in infrastructure, real estate, agribusiness and clean energy.

At the same time, Brazil’s business sector is generating big FDI outflows. Energy colossus Petrobras, which is 68 percent privately owned, is an enormous influence by itself. By 2014, the company is set to invest nearly $200 billion—with $12 billion in oil exploration, refining and distribution worldwide, from Turkey and China to Senegal and the United States. And a host of Brazil’s private-sector businesses—from meat processor JBS to mining giant Vale—are understood to be lining up acquisition targets around the world.

Brazil’s rapid rise from inflation-dogged underdeveloped economy drowning in debt to new world power has been astonishing. Two parts fiscal discipline, one part export-led growth and one part rich natural resources, the nation’s economic flywheel is spinning at top speed.

Of course, there are still plenty of potential brakes. The more the economy’s annualized growth rate nudges 6 percent, the greater the fears of inflation. Additionally, government spending as a proportion of GDP remains high, and the current account deficit is expected to increase as the trade surplus shrinks (with slowly recovering exports and quickly rising imports) and profit repatriations rise. Moreover, currency appreciation due to high inflow of dollars with increased resource exports may hinder competitiveness of the local industry in favor of imports. For the most part, though, the prognosis for the Southern Hemisphere’s superpower is very good. Few believe the incoming administration will veer from the policies of the Cardoso and da Silva governments. And with resources to spare, Brazil, an IMF creditor since 2009, is not about to become a debtor nation again.

For executives in the rest of the world, the signals are all too clear. They have a choice about whether their businesses get involved in Brazil, and they would be unwise to ignore the abundant opportunities there. But they may not have a choice in whether Brazil soon gets involved in their businesses.

Sidebar 1
Meet Brazil’s new corporate dynamos

• JBS. The company is now the world’s largest beef processor and exporter. It has annual revenues of $30 billion, a market capitalization of $11.8 billion and a presence in more than 110 countries. Acquisitions have been integral to growth: In the last 15 years, JBS has made more than 30 acquisitions. One of its most significant purchases: its 2009 majority stake in US-based Pilgrim’s Pride.

• Cosan. Cosan is Brazil’s top sugarcane processor. In early 2010, the company signed a non-binding agreement with energy giant Shell International Petroleum to form a joint venture that would create one of the world’s largest biofuels companies, projected to be a $12 billion to $21 billion enterprise. If trade barriers are lifted in the United States, Europe and Japan, Brazilian ethanol may soon be sold in gas stations worldwide.

• Itaú Unibanco. Now Brazil’s second-largest bank, as measured by assets, Itaú Unibanco is one of the 20 largest in the world, based on market capitalization. Relatively low use of financial services in Brazil presents the bank with vast growth opportunities in areas ranging from savings accounts and credit-card operations to insurance products and 401(k)-type retirement savings programs.

• TAM Linhas Aéreas. Brazil’s No. 1 domestic airline is also the world’s 19th-largest carrier. Global events being held in Brazil—such as soccer’s 2014 World Cup and the 2016 Summer Olympic Games—will help boost leisure travel in a country where business travelers account for most passenger air miles. TAM is currently in conversation with another regional carrier to merge operations.

• WEG. Latin America’s largest manufacturer of electrical motors is quickly expanding its global presence, spurred by growth in demand for equipment for energy transmission, generation and distribution. At the end of 2009, WEG had nine plants in Brazil and six overseas. In May and June of this year, the company made three acquisitions in sectors including electronic sensors for industrial automation.

Sidebar 2
New sources of supply
China’s history of purchases of Brazilian iron ore amply demonstrate Brazil’s potential as a supplier of raw materials. But they don’t tell nearly half the tale—of the country’s increasing ability to supply items like food, beverages, minerals and even oil. Self-sufficient since 2006, Brazil will reach the status of medium-sized oil exporter once pre-salt wells start to be operational.

Brazil’s agricultural productivity has surged: Grain production increased by 142 percent between 1990 and 2008, but the acreage used to grow that grain rose by just 26 percent in that time. And the country’s minerals exports say little about the sheer diversity of materials, components, subassemblies and finished goods the country supplies as well.

One sector stands out: ethanol made from abundant sugarcane. More than four-fifths of new cars in Brazil run on ethanol or an ethanol-gasoline mix, and the country’s sugarcane-based fuel is much cheaper to make than the US corn-based variety—one reason Brazil is the world’s top ethanol exporter. But the ethanol itself is only part of the biofuels export potential; Brazil also has biofuels know-how for sale.

Sidebar 3
Crucible of new ideas
Brazil’s business sector has attracted attention for what Accenture calls its “super-agile” management models. Today, business schools such as IMD and Wharton regularly feature Brazilian case studies. “Brazilians are known for their ability to manage complex situations,” said Mauro Guillén, strategic management professor at Wharton, following a field trip a few years ago to study Brazil’s financial systems.

A recent academic study indicates that Brazilian multinationals such as Vale and Embraer excel because they demonstrate unusual organizational flexibility, for example, permitting and even incentivizing subsidiaries to be unusually independent. Another winning Brazilian management characteristic identified by the researchers: “active waiting”—that is, constantly monitoring conditions and getting ready to give immediate answers, as opposed to the traditional approach of focusing on short-term planning and intuition.

Brazil has also blazed trails in financial services. Years of hyperinflation compelled its banks to invest heavily to accelerate transaction times. Today, checks clear in one or two days, and direct debit accounts further streamline processing. The World Bank has praised Brazil’s “efficient, highly automated payment system.” Cash machines in Brazil can offer more than 500 types of service, including bill payment, movement between funds and opening savings accounts.

The nation is also creating new centers of knowledge. Petrobras and the Federal University of Rio de Janeiro are developing a giant global research center for the oil sector. The technology park, which is expected to employ up to 5,000 researchers by 2014 at Fundão Island in Rio, is designed to bring together leading oil-exploration companies to develop the technologies needed worldwide to access undersea oil reserves.

Embrapa, the nation’s agricultural research center, has collaborated with agrichemicals company BASF to create herbicide-tolerant soybeans—the first genetically modified crop developed in Brazil. And Brazilian petrochemicals giant Braskem is blazing trails in bioplastics—in this case, plastics made from sugarcane ethanol. The company, which aims to be one of the world’s 10 largest petro-chemicals companies a decade from now, is building a giant plant, due to open next year, to produce so-called green plastics. Food packaging company Tetra Pak International, part of Swiss conglomerate Tetra Leval, is set to be a customer. The bioplastics market has tremendous potential. For example, the Coca-Cola Co. expects all of the plastic bottles it ships in 2020 to be made from bioplastics.

For further reading
“Gearing up for the two-speed global recovery,” Outlook, October 2010
“Game over?” Outlook, June 2010

About the authors
Roger Ingold, chairman of the Latin American Geographic Council for Accenture, is the company’s county managing director for Brazil. Mr. Ingold, who began his career at Accenture as an intern in 1981, specializes in the retail and food distribution industries and has extensive experience in sales strategy, supply chain and operations. Mr. Ingold is based in São Paulo.

Marcelo Gil de Souza is the global head of Accenture’s Corporate Strategy and Growth Strategy groups. Mr. Souza, who is based in São Paulo, has worked with clients in areas including corporate governance, M&A, post-merger integration, corporate strategy and operational excellence.

São Paulo-based Accenture manager Sabine Wimber contributed to this article.

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