Brazil: A Tough Nut to Crack

Comm update_29 Oct

New entrants to Brazil are regularly bamboozled by the country’s administrative and tax systems. In order to capitalise on the growth opportunities of the world’s seventh largest economy, there are two golden rules: do your homework so you’re not caught out by the bureaucracy and take the time to get the right local management team in place.

Andrew Heath, President of Energy at Rolls-Royce, says: “Some of the challenges include the tax structure in Brazil – import/export is quite complex – and [there’s] quite a heavy social cost in terms of employment… On those topics people need to make sure they get really good advice in terms of how best to structure themselves and the sort of activities they should look at in-country.

“That certainly would be at the forefront of our mind. Rolls-Royce has been in Brazil for over 50 years so we have a fairly good knowledge of the country, but even so we have to take good advice in terms of making sure that we structure things in a way that we don’t suddenly fall foul of the tax system, because you actually pay import/export duties between states in Brazil as well. It’s not straightforward.”

Pankaj Ghemawat, Criticaleye Thought Leader and Anselmo Rubiralta Professor of Global Strategy at IESE Business School, says: “I remember working with one multinational, which is a people-intensive business, and they thought they knew what they were doing, so they gave their Brazilian employees the standard 13th month bonus.

“Under Brazilian law, that was seen as improper, so they effectively had to give a 14th month [bonus] as well. That’s part of the reason – not the only one – why this particular multinational, even before the current meltdown, had pulled back a bit from its very aggressive expansion plans in Brazil.”

Music company EMI has certainly had its ups and downs in the country, with an accounting fraud case back in 2006 and, more recently, the decision by Brazil’s anti-trust regulator to freeze the takeover of the company by Universal, even though the deal has been approved in both Europe and the US.

Nick Wilkins, Global Head of Manufacturing and Supply Chain at EMI, understandably emphasises that “getting good trustworthy managers in place that know both the market and the business environment is absolutely essential” if a company is going to navigate the business environment successfully.

A similar point is made by Bryan Marcus, Former Regional Head of Latin America for Volkswagen Financial Services: “The issue is always trying to find somebody that can put [across] the local perspective and also understands the corporate or the global priorities… So it’s not just about having local people who understand the local perspective, culture and challenges.”

Oliver Engelsdorf, Head of the International Desk for Multinational Business Development at Santander UK Corporate & Commercial, states quite simply that a business cannot go into Brazil without good lawyers and accountants. “There is too much bureaucracy and tax issues that you need to be aware of and trust me, you will need them, sooner or later,” he warns. “So it’s better to be well-advised from the beginning, and go [holding] the hand of someone that knows a little bit about it.”

Going for growth

Provided you’re aware of the realities, there’s no denying that Brazil does have its attractions. Ian Stuart, Chairman of Aspen Pumps and former President of the Latin American division for Black & Decker, says: “If you’ve got the right solutions and products there’s a big market there. Even though it’s not growing rapidly right now as an economy, it’s definitely growing in terms of its need for more value-added products.”

Andrew says: “It’s blessed with a wealth of natural resources, clearly a lot of oil offshore, and it leads the world in terms of deep offshore development of oil fields. They’ve got rich hydroelectric potential, which they’ve been using effectively for many years… [My] view of the country is that, with a continuingly stable political system, it is going to be one of the growth regions of the world for sure.”

Rolls-Royce is in the process of building a brand new facility to do assembly and testing work in Brazil and is also setting up a supply chain to support it. “We’ve been pleasantly surprised,” says Andrew.  “The important thing is to not come in with a western… view of the world in terms of specs and standards.”

Bryan says: “There are short-term challenges and there are some political issues which I think still need to be addressed and resolved… Brazil has got to be a long-term investment. You’ve got to have a high level of patience and a longer-term investment horizon than maybe for some of the other developing countries where there may be some low hanging fruit.

“The effort needed to set yourself up effectively in Brazil is quite high… It’s not so much a capitalist market as people think; I think the opportunity is the scale and the very large number of middle class and potential middle-class customers, but you’re into a five to ten-year return cycle, I would say, rather than three to five which is maybe some people’s expectation.”

Like each of the BRICs, success doesn’t come cheaply for businesses and assumptions are dangerous. The country may be getting the World Cup and the Olympics but beyond the samba fanfare and marketing hoopla it’s a country with serious socio-economic problems and an infrastructure sorely in need of significant investment.

The red-tape can be dealt with, but as ever the fundamental issue is to find staff that grasp the local and corporate culture. Maria Tereza Leme Fleury, Criticaleye Thought Leader and Dean of Fundação Getulio Vargas (FGV) business school in Brazil, says: “The multinationals need to acclimatise [and] adapt. If they try to transfer their own HR and management practice with no adaptation they will face problems. It’s the same when Brazilian multinationals go abroad and try to manage the employees the way they manage in Brazil.”

Andrew says: “The only thing we’ve found is that at senior staff and management levels, certainly in the oil and gas industry, you pay quite a sizeable premium because if you want people with experience then there’s definitely a shortage of supply… therefore it’s very much a sellers’ market, if you like, so the wages are quite high.”

If in-roads are to be made, it’s a case of having that local talent (ex-pats will only take you so far) and to have developed the right relationships with individuals that understand the governmental system (not to be confused with bribery). “Only local people are really going to be able to do that for you,” says Bryan.

I hope to see you soon.

Matthew

https://twitter.com/criticaleyeuk

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