Arrivals and departures
Foreigners are investing in Brazil, Brazilian companies are going shopping abroad
TRADING with Brazilians has not always been easy. Jean Lery, who visited the country in the 1550s, wrote an account of the trading practices of the Ouetaca people, who liked to exchange goods by placing them on a rock 200 paces away and then retreating. The trading partner did the same, and the dance was repeated as each group got what it wanted. “As soon as each one has returned with his object of exchange, and gone past the boundaries of the place where he had first come to present himself,” wrote Mr Lery, “the truce is broken, and it is then a question of which one can catch the other and take back from him what he was carrying away.”
That would have rung a bell with some of Brazil’s foreign investors in more recent times, from Daniel K. Ludwig, who repeated Henry Ford’s jungle folly a few decades later, to the Japanese banks that tried to enter the market, to US Steel, which discovered Carajás, the world’s largest iron-ore deposit, before being forced into a joint venture with a government company and then selling out of a mine that is still going strong 30 years later. Lots of other foreign investors have done well, however, and Brazil is enjoying a new wave of trust and optimism as the world pours in money (see chart 3). It has become the second-largest destination for FDI flows into developing countries after China.
Foreign investment in Brazil has a long history. British investors built railways at the end of the 19th century to get commodities to ships and then to market. GE first entered this emerging market in 1919. Its local CEO, João Geraldo Ferreira, likes to point out that GE’s light bulbs illuminated Rio’s famous statue of Christ the Redeemer when it was put up in the 1930s. A wave of foreign investment arrived in the 1950s, when China and India were closed and the Korean peninsula was at war. The car companies that have been in Brazil for a while, such as Fiat, GM and Volkswagen, have done particularly well recently: for the past two years Brazil has been the world’s fastest-growing car market.
Earlier this year the Brazilian and Chinese governments announced that China Development Bank and Sinopec, a Chinese oil company, will lend Brazil’s Petrobras, a state-controlled but publicly traded oil company, $10 billion in return for up to 200,000 barrels a day of crude oil from the country’s new oil fields for ten years. Given China’s hunger for commodities and Brazil’s openness to investment, more of this sort of thing is expected.
Investments in Brazil that have failed tend to have one feature in common. Foreign companies arrive in Brazil full of optimism, pay too much for a local firm and then leave when things turn sour, often selling the same company back to a Brazilian firm for a small fraction of what they gave for it. One example is Molson, a Canadian beer company that bought Kaiser, a Brazilian brand, in hopes of refreshing Brazil’s hordes of beer drinkers (though the company ended up selling to a Mexican firm rather than a Brazilian one). Goldman Sachs, the investment bank that invented the term “BRICs”, has been in and out of Brazil a couple of times. UBS bought Pactual, a Brazilian investment bank, before selling it back to André Esteves, a former boss of the bank, earlier this year.
Let’s do the jeitinho
Now that Brazil has become more predictable, fewer foreign investors will fall into this particular trap, but there are others. Because of the unsatisfactory legal system, commercial disputes with other companies are best avoided. This makes personal ties especially important. And once the boss’s children are safely married to the offspring of the firm’s business partners, any company wanting to succeed in Brazil will still have to learn the art of the jeitinho—a Brazilian knack for getting around obstacles to doing business which would make European or American compliance departments shudder.
Even as foreigners have been piling into Brazil, a number of Brazilian firms have been entering markets overseas. For the first time Brazil has a crop of companies that can be described as multinationals. Some of them are already well known outside Brazil: Petrobras; Vale, one of the world’s largest mining companies; and Embraer, the world’s third-largest maker of passenger jets.
Others may be familiar only to those who follow these sectors closely: Gerdau and CSN, two steelmakers; Marco Polo, a bus builder; Perdigão and Sadia (soon to merge into Brasil Foods) and JBS-Friboi, all food companies; WEG, which makes electrical components; Odebrecht and Camargo Corrêa, two construction firms; Natura, a cosmetics-maker; Votorantim, an industrial conglomerate; and Coteminas, a textile firm.
In the most recent list of 100 companies from emerging markets that are evolving into multinationals compiled by the Boston Consulting Group, 14 are based in Brazil. At the last count, the Fundação Dom Cabral, a business school, reckoned there were more than 40 large Brazilian firms undertaking value-adding activities in different parts of the world. Many of these companies began their expansion into foreign markets decades ago. Most turned first to markets in neighbouring countries that were fairly familiar. Their main motive seems to have been to hedge against Brazil’s ups and downs, rather than excitement at the potential for growth beyond their borders.
The latest wave of expansion is different: both more ambitious in geographic terms (Vale alone has a presence on five continents) and more self-confident. Most of the companies concerned feel that, much like Brazil’s banks, they have survived and prospered through difficult decades in a harsh business environment and are ready to operate in risky markets.
Iron rations at CarajásSome of the success stories have benefited from privatisation, or at least part-privatisation. One of the puzzles about Brazil is why politicians should feel unable to talk about privatisation despite so many successes. In the most recent presidential election, in 2006, Lula accused his main rival, Geraldo Alckmin, of wanting to privatise anything that whirred or beeped, and Mr Alckmin promised that he would never sell off anything.
A private treasure
Embraer is a good example of what privatisation can achieve. Like many of Brazil’s industrial giants, it was created by the government. In a joint venture with Italy’s Alenia Aermacchi that gave Brazil access to jet technology for the first time, it produced the AMX fighter jet in the 1980s. But by the 1990s the company was struggling, producing models that nobody wanted to buy. Since privatisation in December 1994 Embraer has turned itself into the world’s biggest manufacturer of mid-range passenger jets. In the company’s factory in São Jose dos Campos, where sheets of aluminium are fed into one warehouse and 100-seater aircraft come out of another some months later, planes are waiting for delivery to commercial airlines in China, India, Poland and Britain. Some 96% of the company’s revenue now comes from exports.
Although Brazil’s main domestic carriers use aircraft built by Boeing and Airbus, Embraer’s machines have proved popular with American carriers for short-haul flights—so much so that the company is probably more exposed to the fluctuations of America’s economy than of Brazil’s. It also has a good business making military planes and private jets and even produces a small propeller plane for crop-spraying, the Ipanema, that runs on ethanol.
CSN, a large steelmaker, was founded by the Brazilian government in 1941, privatised in the early 1990s and has flourished since. Petrobras has also done well since part of its stock was floated. But perhaps the best example of privatisation and international expansion is Vale, which started off private but was nationalised during the second world war to help America’s war effort by supplying iron ore.
It took its first steps abroad in the 1980s and 1990s before being privatised in 1997 (though as with Embraer, the Brazilian government still holds a golden share that would probably prevent it from being taken over). At the beginning of this decade Vale was a medium-sized mining company with a strong iron-ore business in Brazil and some interests in forestry and other bits and pieces. Now it is one of the world’s four biggest mining companies.
Reuters
Aircraft-maker to the world
Thanks to the commodities boom, Vale would have grown almost whatever it did. But it is doubtful whether it would have come so far, so fast, had it remained in public hands. Under Roger Agnelli, who had previously been an investment banker, Vale has sold off its peripheral businesses and is now concentrating on metals, with a sideline in electricity generation and, in Brazil, railways. Vale’s $19 billion acquisition of Inco, a large nickel producer based in Canada, allows the company to provide all the raw materials that steelmakers need. In 2005 Vale was able to raise prices for its iron ore by 71.5% in tough negotiations. It is hard to imagine the old state mining company pulling that off.
If Brazil’s current government seems hostile to the notion that privatisation tends to improve companies, it does like the idea of having a number of national champions succeeding abroad. BNDES has backed up the government’s rhetorical support by lending $8 billion so far this year to help the expansion of Brazilian multinationals. This is a big change from 15 years ago. Carlos Arruda of the Fundação Dom Cabral recalls that shortly after he began compiling an economic-competitiveness survey for the World Economic Forum in 1996, he received a letter from a government minister informing him that it was not in the government’s interest to have Brazilian companies expand abroad: capital was scarce and jobs had to be created at home. This view was reinforced by laws that made it impossible to send profits from foreign subsidiaries back to Brazil or to recognise losses made abroad in company accounts.
This change in attitude has helped, but Brazilian multinationals are not immune to the kind of problems that have sometimes caught out foreign investors in Brazil. Petrobras has had some of its Bolivian assets nationalised by that country’s president, Evo Morales. Odebrecht has had a similar experience in Ecuador. These, however, are relatively trivial compared with Embraer’s current difficulties in China. The company opened a factory in Harbin in 2002 where it has a joint venture with the snazzily named China Aviation Industry Corporation II (the only way of gaining access to this big new market). Embraer had planned to make only older models in China for fear of losing control of its intellectual property. But the Chinese company is insisting that Embraer produce its newest models there, and there is now a chance that Embraer will withdraw from making aircraft in China altogether.
No doubt many of Brazil’s new multinationals will encounter similar problems as they venture abroad. But even if they do, companies that are essentially commodity producers, consumers or traders (which make up a majority of the new multinationals) can rest assured that their built-in comparative advantage is unlikely to be eclipsed soon.
From The Economist - Printed Edition - Nov 12th 2009
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