Strategies for Success: Doing Business in Brazil Today

STRATEGIES FOR SUCCESS:

DOING BUSINESS IN BRAZIL TODAY

Gabrielle Trebat, McLarty Associates

Cornell Club, NYCSeptember 20, 2012

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Brazil Political Scenario

Nearly 30 political parties, govern in fragile coalition Weak and unwieldy Congress, heavy use of Presidential

Decrees Dilma with nearly 80% approval

October 2012 midterms Lula looms – 2014

Corruption still a factor Mensalão impact

Active, but not overly sophisticated, media Practical populism = Dilma Desire to be global stakeholder

Must succeed with social development goals, Games, pre-salt

3Rise of the Middle Class - class C expected to reach 113 million in 2014

Opportunities in renewable energy, Oil & Gas - Pre-salt exploration 11th ANP round approved by President Rousseff and announced –May 2013 Pre-salt bid round – November 2013

Agribusiness Belt boom

IT and Digital Inclusion

Rio 2016 Olympics: RJ State estimates 2011-2016 investments to reach US$50 bn through PPPs

Rail/Road/Port concessions - $66 billion package announced in August BNDES to provide funding for 80% of concessions

Next round of airport privatizations – 3Q 2012

State/Municipal level projects Recife, Curitiba and Maringa (Parana) success stories

Market Opportunities

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Assessing the Business Environment:

Focus on Industrial Policy Concerns with deindustrialization, competitiveness

Strengthening of Brazilian Real China competition Rising labor costs Global slowdown Desire to bolster industrial and human capacity

Buy Brazil 2010 “Buy Brazil” policy - 25% price benefit in government procurement 2011 Plano Brasil Maior “Greater Brazil Plan” aimed at supporting local

industry, trade-related measures 2012 New Tariffs on 100 products, IT Maior

Local content requirements 65% local content requirements in oil & gas Brazil seeks the best technology that is “Made in Brasil” Job creation the goal, but want tech transfer Need for partnerships/joint ventures with local companies

Brazil’s relationship with foreign investment today….

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“We are not

buyers, we are

partners.”

Brazil sees itself as a potential platform

for exports to the

region and globally.

Brazil seeks

cooperation in areas

where they do not have expertise.

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Talent, TaxII. Opportunities for Technical Partnerships Urgent need to improve STEM higher education levels

Science Without Borders program to fund 100k Brazilian students seeking advanced degrees in STEM fields at U.S. universities. Early commitment to fund students and/or provide internships received from Boeing, Ch2MHill, Praxair, GE, Varian and Amgen among others

“Hire Brazilian” quota requirements - and lengthy visa process for bringing in highly skilled foreign talent - exacerbates talent shortage and introduces element of unpredictability in project planning

III. Onerous Tax Regime Highly complex and burdensome; highest amongst Latin American nations for

income, corporate and VATs While corporate tax rate at 34% is comparable to developed countries, the lack of

tax consolidation gives rise to differing – and competing – levels of tax requirements at federal, state, and municipal levels. Foments “fiscal wars” among states vying for investment (i.e. ICMS and “guerras fiscais”)

Receita Federal (Brazilian IRS) resistant to simplifying tax code for fear of losing much-needed revenue to fund pension system, social programs, infrastructure projects

Note: the U.S. has no bilateral tax treaty (BTT) with Brazil Rousseff Administration more focused on tax reductions than reform....

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Assessing the Business Environment: Infrastructure

IV. InfrastructureInfrastructure bottlenecks, inefficiencies hamper growth….

And contribute to logistics costs reaching 12-15% of GDP in Brazil, compared to 5% average in countries like USA and Germany

Only 6% of Brazil’s roadways are paved, compared to 54% in China and 80% in Russia

….while demand builds Rise of class C has increased demand for cars and household products,

overwhelming capacity of roads to deliver the goods and warehouses to supply them

Rising number of commodity exports snarling traffic in booming agribusiness belt

Number of passengers using Brazilian airports rose 75% since 2007

But every challenge presents an opportunity…. In August, President Rousseff announced a $66bn concession package for

rails, roads, and ports to be financed by BNDES. Additional package for airports and additional ports expected in September. While good news, be aware that….

Delays can be expected due to environmental licensing process, internal auditing procedures

State bureaucracies could slow execution of project

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Trade FacilitationV. Trade FacilitationProgress in recent years…. Remessa Expressa Green Lane Pilot Project Viracopos-Miami US-Brazil Commercial Dialogue Brazil-US Business Council Customs Modernization Working Group: Adoption of universal risk management procedures, more consistent

enforcement of taxes and duties

Trusted Shipper Program – Authorized Economic Operator

Upgrade Airport Cargo Infrastructure – insufficient personnel, poor physical infrastructure

Reduction of 60% flat import tariff on express imports, raise stringent value limits on express shipments. No duties or taxes or formal documentation for shipments valued at less than $200.

Facilitated customs treatment of critical industrial imports through automatic concession of import licenses

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Key to Success in Brazil Consider partnerships/joint ventures with Brazilian firms

Merck forged a partnership in 2012 with Brazilian drugmaker Supera Farma Laboratorios to jointly market 30 products.

Ch2M Hill and Metodo Engenharia form a partnership in 2010 to develop projects in the oil & gas sector

Consider acquisition of a Brazilian companies China’s Lenovo purchased last week Brazilian electronics

manufacturer CCE for R$300 million as part of its strategy to become Brazil's top manufacturer of personal computers and unseat Brazilian-owned Positivo

Offer technology transfer, technical training, and/or local R&D activity to win procurement bid

France and Brazil signed a tech transfer accord in 2009 to build four conventional subs and one nuclear sub with DCNS SA and Odebrecht

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Key to Success in Brazil Image matters - have an active government relations presence

Increasingly, Brasilia is where decisions are made that create market opportunities, impact investment trajectories, or otherwise alter the business environment

President Rousseff has prioritized a closer working relationship between Brasilia and the business community (e.g. CEO competitiveness “kitchen cabinet”)

Leverage industry associations They carry clout/have access with government officials and offer

cover for conveying key messages without appearing to cater to parochial interests

Focus on the second tier firms The top 5-10 Brazilian firms in your sector don’t necessarily need US

Partners; the next tier do Top Brazilian firms are interested in partnering in the U.S. and

elsewhere beyond Brazil

Remember the states States and municipalities have money and greater flexibility for doing

deals than the federal government

THANK YOU!

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