Doing Business in Emerging Markets As concern spreads around the world about the global recession, Brazil continues to be held up as one of the few countries to offer the prospect of economic growth over the next few years.
To be sure, as the first quarter of 2008 came to an end, it was clear that Brazil had been hit harder by the financial crisis than many had expected. But even as forecasts for growth this year have sunk towards 1 per cent, the country’s government continues to insist the crisis will be short and shallow compared with the rest of the world.
Whatever the depth and duration of the recession, anyone thinking of setting up a business in Brazil will be more concerned about these macro-economic issues than the micro-economic difficulties that have acted as deterrents in the past. One factor working in Brazil’s favour is the devaluation of the currency since the middle of last year. “With the real at R$2.30 to R$2.40 to the dollar, things are totally different from when it was R$1.60 to the dollar,” says James Sinclair of CFS Partners, a São Paulo firm that advises companies on how to enter the Latin American market. “Everything is much cheaper, independent of the fact that asset prices have come down. So there’s been a double whammy.”
Even before the financial crisis broke last year, Latin America was clearly divided into two camps. One, consisting of Brazil, Chile, Peru and Colombia, has tended to pursue market-friendly policies in an environment of economic and regulatory stability. The other, led by Venezuela but also including Argentina, Bolivia and Ecuador, has taken a more populist and heterodox line. Such differences have been exacerbated over the past few months.
While Brazil’s response to the global recession has been to insist on the need for better regulation and for measures to fight protectionism, Venezuela’s anti-western rhetoric has risen to a frenzy as falling oil prices have undermined President Hugo Chávez’s 21st-century socialism. Venezuela’s recent round of nationalisations and expropriations has made the country even less friendly than before to foreign investment.
Yet even in market-friendly Brazil, the global recession has hit with unexpected force. Industrial production in January, for example, slumped by an extraordinary 17 per cent year-on-year, leading many economists to forecast zero growth or worse this year.
Nevertheless, Mr Sinclair remains upbeat about the prospects for Brazilian industry, easily the most diverse and mature in the region. He expects even the automotive sector, which saw production fall almost by half at the end of 2008, to rebound over the medium term. “People are not going to stop buying cars or eating food,” he says.
So, while there is likely to be little deal activity for at least the first half of this year, investors will be looking for buying opportunities in key sectors such as pulp and paper, services and agriculture, especially those sectors in the soya complex, including poultry, where Brazil has developed a powerful competitive edge in recent years.
Anybody thinking of setting up in Brazil before international financial markets return to something like normal is likely to need their own capital to do so. But Brazilian companies are traditionally cash rich, so merger and acquisition activity is unlikely to come to a full stop.
And foreign companies are still arriving in Brazil. Those that do so must, as in the past, be ready to deal with the cultural differences that have caused trouble for many investors, including corruption.
But the biggest difficulty for many new arrivals is the mass of local bureaucracy. Brazil fares badly in the World Bank’s annual Doing Business surveys. This year it ranked 125th out of 181 countries surveyed, scoring particularly poorly for the complexity of its tax system and the difficulty of opening and closing a company.
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Case study: M&C Saatchi
M&C Saatchi, the advertising agency formed by brothers Maurice and Charles Saatchi, made the decision to invest in Brazil last May, before the global financial crisis had really taken hold, writes Jonathan Wheatley.
“By December, we really knew it was upon us,” says Geoffrey Hamilton-Jones, the agency’s first head for Latin America, whose first job is to get the business running in Brazil. “That affected our investment plans – not so much the capital but our monthly expenditure. I and the local partners agreed to cut back on salaries in order to make it happen.”
In spite of such initial paring back, Mr Hamilton-Jones is confident that the decision to invest in Brazil was the right one. “The huge pros are the size of Brazil’s population and its growing middle class, and the purchasing power of that middle class,” he says. “Tens of millions of people have become consumers over the past few years.”
The cons, he says, are mostly to do with Brazil’s different way of doing business. “There is more bureaucracy [than in the UK], things take longer, there are more documents and forms to fill in. It takes about 45 days just to register a company – in the UK, you can do that in a day with a call to a lawyer.”
Mr Hamilton-Jones was brought up in Brazil and has spent part of his career in the country, where he was a regional director for Ogilvy, another advertising agency. Is having somebody like him important for new entrants? “It is really fundamental,” he says. “The days when you could fly in expatriates who didn’t even speak the language are gone.”
He says this is particularly true in advertising. Brazil, he points out, is the 10th biggest advertising market in the world and its advertising industry is among the most creative and effective in the world. “This is a highly mature market,” he says. “What we had to do was seize the possibility and de-risk our investment. The way to do that is to have somebody in charge who can straddle both sides of the Atlantic.”
And how does he feel about setting up business in the middle of a crisis? “It’s daunting,” he admits. “But we have a view that the time to steal market share is at moments of crisis.”
