Doing Business in Brazil
Market Entry Strategy
The Federal Republic of Brazil is Latin America's biggest economy and is the fifth largest country in the world in terms of land mass and population with about 193 million people. It is the 6th largest economy in the world. Bolstered by strong domestic demand and a growing middle class, Brazil weathered the economic downturn better than most major economies and grew 7.5% last year, compared to an estimated 2.3% growth in the G7 countries and 2.8% in the United States. During the past decade, the country maintained sound macroeconomic policies to control inflation without sacrificing economic growth. This kept the inflation rate at 5.9% in 2010, and unemployment at 7.1%. Interest rates, though high compared to the rest of the world, remained historically low at the Central Bank rate of 10.75%. In 2010, the U.S. was Brazil’s largest import supplier followed by China, Argentina, Germany, and South Korea. The year 2010 ended with the U.S. holding a positive trade balance with U.S. merchandise exports to Brazil at US$ 35 billion, and imports from Brazil at US$ 24 billion.
In 2010, Fitch gave Brazil an investment-grade rating which brought it in line with rankings from Standard & Poor’s and Moody’s Investors Service. In 2010, foreign reserves hit a record level at US$ 287.8 billion. Brazil’s currency, the real, rose 34% against the dollar during the year.
Brazil has a large and diversified economy that offers U.S. companies many opportunities to export their goods and services, and U.S. exports are increasing rapidly. That said, and despite noteworthy signs of improvements, there are a number of challenges in the Brazilian market, including uneven income distribution, poor public education, significant imbalance of market concentration, and an informal economy that hinders tax collection and keeps economic growth from reaching its full potential. These factors create a complex business environment with obstacles for U.S. exporters. Doing business in Brazil requires intimate knowledge of the local environment, including both the explicit as well as implicit costs of doing business (referred to as the “Custo Brasil”). Such costs are often related to distribution, government procedures, employee benefits, environmental laws, and a complex tax structure. Logistics pose a particular challenge, given the fragmented nature of distribution channels. Besides facing tariff barriers, U.S. companies will find a complex customs system, and an overloaded legal system with a lengthy process for enforcing IPR and commercial law. Heavy taxes increase consumer prices up to 100%, while bureaucratic procedures and onerous product licensing also raise costs. The World Bank ranks Brazil 127 out of 183 economies in the world in terms of ease of doing business.
There are few, if any, sectors in Brazil that do not have excellent short term opportunities. Certain sectors of the Brazilian market have experienced higher than average growth, such as air transportation, telecom, oil and gas, and mining. Brazil will spend billions in infrastructure development of its roads, railroads, ports, and airports as well as in stadiums as it prepares for the World Cup in 2014 and the Olympics in 2016. Other promising areas for U.S. exports and investment include the following: agriculture, agricultural equipment, building and construction, electrical power, safety and security devices, environmental technologies, nuclear power, retail and transportation.
The Brazilian national oil company Petrobras' expansion may represent the largest global business opportunity in the oil & gas sector between the years 2011-20. The offshore pre-salt oil deposits discovered in 2006 and 2007 are estimated to exceed 60 billion barrels in probable or recoverable reserves, and could place Brazil among the world’s top ten oil-producing countries. Petrobras anticipates that it will invest $224 billion in exploration and development between 2011 and 2015.
Brazil is targeting nuclear energy as an area for expansion in order to diversify its energy matrix and keep up with increased demand in a growing economy. The The Brazilian government intends to open a competitive bidding process in mid-to-late 2011 to construct four 1000MV nuclear reactors. This area offers substantial opportunity for government cooperation and commercial sales for U.S. companies.
Brazil is one of the largest IT markets within the emerging economies. IT end-user spending in Brazil is expected to grow to $134 billion in 2014. The largest share of spending will be on telecom equipment, representing 72% of the market, followed by IT services at 13.3%, and computing hardware at 11.9%.
In the years leading up to the 2016 Olympic Games in Rio de Janeiro, Brazil will host several international sporting events, including the 2011 World Military Games, the 2011-2012 Pan-American Maccabi Games, the 2013 soccer Confederations Cup, and the 2014 soccer World Cup. The Government of Brazil expects to invest $106 billion in the preparations for these events. These investments, which will include outlays for infrastructure, construction, transportation systems, port improvements, public security, and airport infrastructure upgrades, will present significant commercial opportunities for U.S. companies. Most of the major infrastructure upgrades will be carried out through Public-Private Partnerships under Brazil’s Growth Acceleration Program.
Market Entry Strategy
Brazil’s business culture is largely based upon personal relationships. Companies will need a strong presence and must invest time in developing relationships in Brazil. The U.S. Commercial Service encourages U.S. companies to visit Brazil to meet one-on-one with potential partners. One of the best ways to enter the Brazilian market is by attending a local trade show or using the U.S. Commercial Service’s Gold Key Service (GKS). The U.S. Commercial Service can provide business counseling or arrange meetings with potential buyers through a GKS or during a trade show. U.S. companies have found it essential to work through a qualified agent or distributor when entering the Brazilian market. Some firms establish an office or joint venture in Brazil. Further discussion of these alternatives can be found in the “Marketing Products & Services” chapter. It is extremely difficult for U.S. companies to get involved in public sector procurement without a local Brazilian partner.