Download The Brazilian Capital Goods Market: Recent

 The Brazilian Capital Goods Market:
Recent Development and Future Prospects
By
Mark S. Langevin, Ph.D.
Director, BrazilWorks
April 2013
B r a z i l W o r k s 1 7 1 8 M S t r e e t , N . W . # 3 5 6 W a s h i n g t o n , D . C . 2 0 0 3 6 U S A T e l . 2 0 2 -­‐ 7 4 4 -­‐ 0 0 7 2 b r a z i l w o r k s @ g m a i l . c o m w w w . b r a z i l w o r k s . c o m C o p y r i g h t @ B r a z i l W o r k s 2 0 1 3 2 The Brazilian Capital Goods Market:
Recent Development and Future Prospects
Brazil is undergoing a rapid transformation from inward oriented national development to a fully globalized political economy whose government is quickly learning how to craft public policies to guarantee economic stability, growth, and an ever increasing list of private sector opportunities. Brazil still faces significant challenges, including stagflation (slow growth with inflation), but the current governing coalition is committed to a sustainable set of heterodox measures to further liberalize the economy while providing significant public investment, especially in energy and infrastructure, to insure continued growth in the coming years. This favorable scenario provides ample opportunities for United States headquartered capital goods manufacturers to increase exports to Brazil, increase investments in Brazilian manufacturing, and deepen and develop strategic partnerships with Brazilian firms and producer associations. These opportunities come with significant challenges; therefore U.S. firms and investors must carefully identify and assess an expanding list of opportunities as well as a resilient set of institutional obstacles, weighing present market conditions with sensible forecasts of future possibilities. Brazilian Political Economy 101 Brazil’s political economy is unique and framed by a long history of state led, developmentalist policies aimed at industrializing the national economy and protecting key national private interests against foreign competition. This history is now less relevant. During the past decade or more, successive Brazilian governments have launched efforts to bend the national economy toward an outward, increasingly export focused one that promises to leverage the nation’s considerable comparable advantages to strengthen state controlled enterprises such as Petrobras while also encouraging the increased competitiveness of the private sector. While this trend is evident, it may not be presently relevant to every business and industry, especially for U.S. exporters of goods already manufactured in Brazil. The current government of President Dilma Rousseff continues to push this trend forward with her Plano Brasil Maior or Bigger Brazil Plan. Launched in 2011, this economic development and stimulus plan provides a package of policies and programs designed to strengthen the industrial sector, drive technological innovation, and increase exports. The plan seeks to increase investments from 18.4% to 22.4% of the Gross Domestic Product (GDP); increase private sector research and development expenditures from 0.59 to 0.90% of GDP; increase the number of technically trained workers and technology based small enterprises; increase the number of families with access to broadband internet services from 13.8 million to 40 million; diversify and increase international trade, especially petroleum derivatives and petrochemical products, and increase the production of capital goods and technology based goods and services. Although Brazil has recently experienced slow growth, in part a result of the sluggish economies of the United States and the European Union, the current government is taking targeted measures, through public investment, lowered taxation and electricity prices, and market liberalization in some key sectors of the capital goods marketplace, to reboot the economy and return to a scenario of robust growth of 4% or more annually. Expect the capital goods marketplace, both national production and imports, to play a critical role in determining whether Brazil can get back to a future of high growth under economic stability. 3 Getting Brazil Back to the Future “Brazilians prefer to talk about their country’s promising future, grandeza. Getting to this future is a constant test for Brazil and the periodic downfall of presidents and governments for nearly two centuries. Luis Inácio Lula da Silva, president of Brazil since 2003 [Lula served two terms and then handed over the office to his Chief of Staff, Dilma Rousseff, who assumed office in January of 2010), has passed this fundamental test by convincing most Brazilians that progress should be expected and greatness can be achieved. Lula’s alchemy is both a tempered reduction of sensible public policies forged from the trials and errors of the past coupled together with a relentless, heterodox brew of programs crafted to reach the poorest Brazilians, improve the competitive advantages of Brazilian companies, both private and state owned, and lift the country to the heights of international leadership.”1 The key to former President Lula’s public policy orientation, one now refined by his chosen successor, Dilma Rousseff, is expansionary policies that mix significant public investment, largely through the Banco Nacional de Desenvolvimento or BNDES, with efforts to strengthen the private sector and especially those firms producing for the global markets, such as Embraer-­‐the aviation company and Braskem-­‐the petrochemical firm as examples. This increasingly outward oriented development strategy has returned Brazil to robust annual growth rates, with the exception of the 2009 recession induced by the global financial crisis and the slowing down of economic activity in 2011 and 2012 due in large measure to a lagging industrial sector. Given President Dilma’s Plano Brasil Maior and its targeted efforts to reboot the national economy and increase the competitiveness of domestic industry, growth is widely forecasted to return to an annual rate of 4% by the end of 2013. Figure One: Annual Rates of Gross Domestic Product Growth, Wage Growth, Retail Sales Growth, and Inflation 14 12 10 6 Annual GDP Growth National Sales 4 In5lation 8 2 0 2010 2011 2012 Source: Ministério de Fazenda (2013) and Economic Commission for Latin America and the Caribbean (ECLAC), Brazil. 2012:2. 1
Langevin, Mark S. “Lula's Alchemy: Getting Brazil Back to the Future.” Published by Modern Latin America Companion Website Editors, Thomas Skidmore, Peter Smith, and James Green, Seventh Edition, Oxford University Press (2010:1). 4 Sustainable Economic Fundamentals Brazil’s recent growth and economic development rests on sustainable economic fundamentals established by the Real Plan in 1994 and continued under every administration since. Figure One reports several key indicators for the period of 2010 to 2012 when the Brazilian economy bounced back from the global downturn in 2010 and then slid into a slow growth pattern thereafter. Although economic activity has slowed in the past two years, it is expected to reach the global economy growth rate of 3.5% in 2013 and possibly exceed it in 2014.2 National retail sales continue to boom, reaching 12% growth in 2010 and staying above 6% in the past two years. This indicator reveals that Brazil’s responsible, supervised expansion of credit to working people coupled with real wage growth serves to fuel an expansion of domestic economic activity under a disciplined inflation targeting regime. Taken together, these indicators reflect the Brazilian government’s concerted efforts to counter the recessions in Europe and slow growth in the United States, two critical markets for the nation’s exports. “So far the recovery of the Brazilian economy has been weak. However, in recent months some positive developments became visible. Firstly, after four quarters of contraction, in q-­‐o-­‐q terms investment grew by 0.5% in the fourth quarter of 2012. Meanwhile, the PMI for manufacturing was above 50 points in for the fifth month in a row in February 2013. Furthermore, monetary and fiscal stimulus implemented in 2012 and infrastructure and the 2014 football WC programs may boost investment in 2013. As a result, we expect growth to come in between 2% and 4%. However, growth in 2013 might be affected by problems in the energy sector.” Economic Update for Brazil, Rabobank March 11, 2013 Figure One also reports Brazil’s successful campaign to tame inflation despite booming retail sales and real wage growth. At the heart of Brazil’s determination to retain sound economic fundamentals is the Central Bank’s administration of inflation targeting.3 Since 2002, inflation has been reduced from 17 to 5.5%; and the Central Bank’s inflation targets have been achieved for ten consecutive years. Despite Brazil’s remarkable 2010 recovery from its 2009 recession, with annual growth reaching 7.5%, inflation remained at or below 6 percent. This inflation-­‐targeting regime has forged high confidence in the country’s economic stability and monetary policy. Lastly, Figure One reports real wage growth for the period, revealing that while the Custo Brasil continues to plague competiveness, wage growth remains sustainable and associated with GDP and productivity growth. These indicators draw a partial picture of an expanding, sustainable national economy now recognized by productive investors around the world. Regardless of the country’s evident obstacles that challenge profitability (described in the next section), foreign firms continue to bet on Brazil, investing $48.5 billion (USD) in 2010, $66.7 in 2011 and $65.3 in 2012 to make the country one of the top recipients of foreign direct investment (FDI) among emerging markets and bringing its FDI to GDP ratio above the OECD average of 2.5%. Moreover, in 2012 the A.T. Kearney Foreign Direct Investment (FDI) Confidence Index placed Brazil in third place only behind China and India, and just above the U.S. in fourth place.4 2
Ministerio de Fazenda, Republica Federativa do Brasil. 2013. Banco Central do Brasil. Inflation Targeting. Accessed on March 28, 2013 at: http://www.bcb.gov.br/?inflation. 4
A.T. Kearney Foreign Direct Investment (FDI) Confidence Index, Accessed on March 28, 2013 at: http://www.atkearney.com/gbpc/foreign-­‐direct-­‐investment-­‐confidence-­‐index. The Foreign Direct Investment Confidence Index® is a 3
5 Growth with stability has also served to reverse the net external debt picture, from a deficit of $164 billion (USD) in 2002 to a surplus of $83 billion in 2012, as well as the net public debt, from 60% of GDP in 2002 to 35% by 2012.5 In large measure, these indicators are expressions of Brazil’s rising international trade profile and foreign direct investment which together fuel growth, create positive commercial account balances, and have quickly ramped up international monetary reserves from $50 billion (USD) in 2002 to $379 billion by 2012.6 The 2012 commercial account did produce the smallest surplus since 2002 at $2.25 billion (USD); a clear reflection of the difficult challenges presented by slow growth in the U.S. and the double dip recession in many European countries. Yet, the lesson is learned; Brazil is doubling efforts to diversify exports and work toward achieving greater global competitiveness within the domestic industrial sector. These efforts are focused on reducing the “Custo Brasil,” or Brazil Cost, to improve profitability and encourage innovation. Overcoming the “Custo Brasil” “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. 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”).” U.S. Commercial Service Most observers agree that Brazil’s private sector must invest more in research and development to increase competitiveness, but that the government must lead the way toward reducing the “Custo Brasil,” a complex of tax, labor, and other regulatory obligations and non-­‐tariff barriers that may impede foreign direct investment and undermine competiveness and profitability. Table One summarizes the distinct components of the Brazil Cost and reports their indexed values as a component of Total Net Sales Revenue and in comparison with Germany. Accordingly, the same manufactured good costs 36 percent more to produce and deliver in Brazil than Germany; a result of the additional expenses related to the Brazil Cost. Half of the cost accrues from basic inputs needed for manufacturing and whose prices also reflect the accumulated, cascading expenses associated with the Brazil Cost, whether produced domestically or imported. Table One: Measuring the Brazil Cost in Total Net Sales Revenue in the Manufacturing Sector (as an index, Germany = 100 & Brazil = 136) Cost Indexed Increase in Cost Basic Inputs 18.57 Cash Flow Management 7.95 Unrecoverable Taxes 2.98 Labor and Social Security Contributions 2.84 Logistics 1.90 Infrastructure 1.16 Energy 0.51 Red Tape 0.36 Indexed Total 36.27 Source: ABIMAQ. A Competitividade da Indústria de Transformação e de Bens de Capital: Uma Análise do Período 2000-­‐2011.” April 2012. regular survey of global executives conducted by A.T. Kearney. The Index provides a unique look at the present and future prospects for international investment flows. Companies participating in the survey account for more than $2 trillion in annual global revenue. 5
Tombini, Alexandre-­‐Governor of Central Bank of Brazil. “Brazil Economic Overview.” New York. February 2013. 6
Ibid. 6 The Custo Brasil is also reflected in the World Bank’s Doing Business index. In 2012, Brazil ranked 130 out of 185 countries in the ease of doing business with comparable scores across a wide variety of business related variables. The World Economic Forum’s 2012-­‐2013 Global Competitiveness Report also confirms the argument that Brazil’s business climate is as challenging as it is promising. The WEF scored Brazil as improving, but with considerable obstacles, including trust in politicians, wasteful government spending, low government efficiency, inadequate transport infrastructure, and the poor quality of education. Therefore, Brazil’s promising internal markets and export potential must be weighed against the current obstacles toward implementing a profitable business model that successfully navigates the “Brazil Cost.” th
Entering the top 50, Brazil goes up five positions to attain 48th place on the back of a relative improvement in its macroeconomic condition—despite its still-­‐high inflation rate of nearly 7 percent—and the rise in the use of ICT (54th). Overall, Brazil’s fairly sophisticated business community (33rd) enjoys the benefits of one of the world’s largest internal markets (7th), which allows for important economies of scale and continues to have fairly easy access to financing (40th) for its investment projects. Notwithstanding these strengths, the country also faces important challenges. Trust in politicians remains low (121st), as does government efficiency (111th) because of excessive government regulation (144th) and wasteful spending (135th). The quality of transport infrastructure (79th) remains an unaddressed long-­‐standing challenge and the quality of education (116th) does not seem to m atch the increasing need for a skilled labor force. Moreover, despite increasing efforts to facilitate entrepreneurship, especially for small companies, the procedures and time to start a business remain among the highest in the sample (130th and 139th, respectively) and taxation is perceived to be too high and to have distortionary effects (144th). World Economic Forum, Global Competitiveness Report 2012-­‐2013, Country Highlights Report. 2012:11. Under President Dilma, the Brazilian government continues to take modest, incremental measures to lower the costs of doing business in Brazil. In September 2012 the President announced a series of new policies intent on lowering the costs of electricity to Brazilian industry, a move that challenged the power generation sector, but was well received among most national industry leaders.7 Second, the Brazilian agency that sets and monitors import tariff policy, the Câmara de Comércio Exterior (CAMEX), announced a new “ex-­‐
tarifário” policy of tariff reductions for a long list of capital goods and intermediate industrial goods needed to insure productive investment in the energy and infrastructure areas while furthering the cause of innovation and technology acquisition as envisioned by the Plano Maior Brasil. Such measures are insufficient to resolve all of the obstacles that continue to discourage investors and entrepreneurs, but they demonstrate increasing resolve to reduce the Brazil Cost over the long run and with a distinct focus on the capital goods and energy industries. Brazil’s GMCI ranking has dropped since 2010, falling from fifth to eighth in current manufacturing competitiveness. Unlike South Korea and Taiwan, however, executives surveyed expect the manufacturing environment in Brazil to improve quickly and felt the country would become the world’s third most competitive nation over the next five years. Deloitte 2013 Global Manufacturing Competitiveness Index. Supplental Country Analysis of Top Ten Nations, Brazil. 2012. 7
Langevin, Mark S. “Dilma’s Government Takes Decisive Action to Fuel Economic Growth.” BrazilWorks. January 24, 2013 and available at: http://www.brazil-­‐works.com/dilmas-­‐government-­‐takes-­‐decisive-­‐action-­‐to-­‐fuel-­‐economic-­‐growth/. 7 Recent Development of the Brazilian Capital Goods Industry “The new industrial, technological and foreign trade policy introduced in President Luiz Inácio Lula da Silva’s second term (2007-­‐2010) and officially announced in May 2008 as the Production Development Policy (PDP) is much further reaching and more ambitious than its predecessor. To promote technological training, encourage innovation and stimulate exports, the PDP provides fiscal, tax and credit incentives to 24 sectors deemed to be of high priority. Despite its apparent sectorial focus, the new policy has been designed from a systemic perspective and the intention is to use target setting and government follow-­‐up to ensure that the industries thus encouraged create positive externalities for the economic system as a whole. In the PDP, the capital goods industry is 8
once again identified as a priority recipient of public-­‐sector incentives to enhance the competitiveness of the Brazilian economy.” For decades Brazilian development policy has focused on the capital goods industry, understanding this sector as the lynchpin to sustainable economic growth and the tallest obstacle to reaching grandeza. Since the election of President Lula in 2002, the Brazilian federal government and several state governments9 have increasingly adopted targeted policies to provide credit, fiscal incentives, and publically financed research and development activities to a considerable list of capital goods industries. According to Nassif (2008), former President Lula’s efforts, and the same can be said for current President Dilma’s Plano Brasil Maior, comprise the following objectives: •
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stimulate private-­‐sector research and development; improve efficiency to take greater advantage of economies of scale; finance investment for sectorial expansion, modernization and restructuring; coordinate foreign investment so that more technology is transferred and spread to Brazilian producers and production chains. The current implementation of the Plano Brasil Maior features a long list of measures to protect national industry against imports by temporarily targeting payroll deduction relief, providing limited fiscal relief, stimulating and directing government procurement of domestically produced goods, accelerating depreciation of new capital and equipment, lowered tariffs on certain used capital and equipment, lowered tariffs on capital and equipment not currently produced in Brazil, raising tariffs on selected imports of finished goods, and generous government financing of new capital and equipment through BNDES.10 These policies and programs serve to defend and strengthen Brazilian industry in this challenging juncture of slow growth and unfavorable exchange rates, but they also seek to reverse a longer trend of falling competitiveness within the national capital goods industry, a trend that has 8
André Nassif. “The Structure and Competitiveness of the Brazilian Capital Goods Industry.” Cepal Review. Vol. 96, December 2008:242. 9
For example, see the Rio Grande do Sul state government’s industrial policy for capital goods, “Bens de Capital – Máquinas,Equipamentos e Implementos Agrícolas e Industriais 2012/2014.” 2012. 10
Ministério de Desenvolvimento, Indústria, e Comércio Exterior. “Competitividade Exportadora Plano Brasil MaiorL Inovar para competir. Competir para crescer.” Powerpoint presentation. Brasilia. November 1, 2012. 8 accelerated since the 2008 global economic crisis and produced a $17.8 billion (USD) trade deficit in capital goods during 2011.11 This is Brazil’s largest capital goods trade deficit and comprises 41.7 percent of the industrial sector’s overall trade deficit in 2011. According to the Brazilian Association of Industrial Equipment and Machine Producers (ABIMAQ), industrial sector competiveness fell to 92.9 (Base Index 2000=100) by 2011 while for capital goods the index fell to 91.7.12 Under the Plano Brasil Maior this trend is likely to continue in the short term, providing ample export opportunities for U.S. capital goods manufacturers, but this may not hold true in the long run should Brazil increase its industrial competitiveness. Figure Two reports the annual totals for Industrial Goods and Industrial-­‐Capital Goods Imports from 2000 to 2010, revealing the increasing penetration of imported industrial goods. Imported capital goods have also increased since 2006, rising to $25 billion USD by 2010. Under the Plano Brazil Maior, imports of capital goods for industrial and energy production will continue to grow over the next decade. Figure Two: Industrial Goods and Capital Goods-­‐Industrial Imports by Year (reported in Billions of USD) 250 200 Industrial Imports 150 Industrial-­‐Capital Goods Imports 100 50 0 2000 2001 2002 2004 2005 2006 2007 2008 2009 2010 2011 Source: ABIMAQ. A Competitividade da Indústria de Transformação e de Bens de Capital: Uma Análise do Período 2000-­‐2011.” April 2012. Table Two reports the growth of selected capital goods imports from January 2012 to January 2013 as well as forecasted annual increases in national demand for the period of 2011 to 2015. Overall, demand and imports continue to grow at significant levels. Demand for machinery for consumer goods is expected to flatten after a rapid rise in imports during the past year. Demand and imports of agricultural machinery continue to mount in tandem with Brazil’s ever increasing production and export of commodities. Markets for components for capital goods as well as machinery for infrastructure/basic industrial activities continue to promise growth in demand and imports. Despite the recent fall in imports of logistics/construction and industrial machinery for the national market, these markets show strong growth potential over the long run. 11
ABIMAQ. A Competitividade da Indústria de Transformação e de Bens de Capital: Uma Análise do Período 2000-­‐2011.” April 2012. Ibid. 12
9 Table Two: Annual Growth of Selected Capital Goods Imports, January 2012 to 2013, and Forecasted Demand Type of Industrial Good Percent Annual Growth, 2012 to 2013 Percent Annual Growth in Forecasted Demand, 2011 to 2015 Machinery for Consumer Goods 17.4 -­‐3.0 Agricultural Machinery 14.5 13.7 Capital Good Components 11.3 8.7 Infrastructure and Basic Industry 6.6 10.0 Logistics and Construction -­‐8.4 13.5 Industrial Machinery -­‐17.0 15.7 Source: ABIMAQ. “Indústria Brasileira de Bens de Capital Mecânicos: indicadores conjunturais.” Janeiro 2013 and DCEE/ABIMAQ. Table three reports the values of U.S. exports of selected capital goods to Brazil from 2007 to 2012 as well as the relative growth from 2005 to 2012. The Agriculture and Construction equipment markets lead among those reported, with joint trade volume of over $2.26 billion USD in 2012 and growth of 109.4% since 2005. The automotive sector, including engines-­‐turbines-­‐power transmission equipment, shows the largest growth of 353.2% and is second behind Agriculture and Construction machinery in trade volume with nearly $1.2 billion USD in 2012. Exports of general purpose machinery reached nearly $1.5 billion USD in 2012 with 270.4% growth during the pas seven years. Industrial and metalworking machinery also posted modest growth rates during this period. Table Three: U.S. Exports of Selected Capital Goods to Brazil, 2007 to 2012, in Millions of USD and Relative Growth from 2005 to 2012 Export Category 2007 2008 2009 2010 2011 2012 Growth between 2005 and 2012 2,260 109.4% 3331-­‐-­‐AG & 1,637 1,790 1,607 1,836 2,344 CONSTRUCTION & MACHINERY 3339-­‐-­‐OTHER GENERAL 611 1,063 840 1,448 1,699 1,489, 270.4% PURPOSE MACHINERY 3336-­‐-­‐ENGINES, TURBINES 475 816 575 729 1,033 1,194 353.2% & POWER TRANSMSN EQUIP 3332-­‐-­‐INDUSTRIAL 224 283 183 310 275 288 56.7% MACHINERY 3335-­‐-­‐METALWORKING 164 222 169 194 275 216 97.1% MACHINERY 3334-­‐-­‐HVAC & 140 158 118 182 203 196 154.2% COMMERCIAL REFRIGERATION EQUIPMENT 3333-­‐-­‐COMMERCIAL & 192 283 203 188 190 181 16.4% SERVICE INDUSTRY MACHINERY Source: TradeStats Express. The Office of Trade and Industry Information, Manufacturing and Services, International Trade Administration, U.S. Department of Commerce. 2013. 10 Process Equipment: Market Structure and Trends 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, telecoms, oil and gas, and mining. Under the second phase of the Growth Acceleration Program (PAC II), the Government of Brazil will spend R$955 billion (the equivalent of around US$470 billion) in development of the country’s energy generation and distribution system, roads, railroads, ports, and airports as well as 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 agriculture, agricultural equipment, building and construction, aerospace and aviation, electrical power, safety and security devices, environmental technologies, retail, and transportation. U.S. Commercial Service Brazil’s process equipment and machinery market follows an overall national trend of modest, but sustainable growth during the coming years with an expanding national consumer market and significant government supports to achieve greater international competitiveness among the country’s capital goods manufacturers. This growth is the result of continued public and private investment in both infrastructure and energy, the growing retail marketplace for both durables and non-­‐durables, and the national industrial sector’s continued investment in innovation and productivity despite disappointing results in the past two years. According to the Central Bank, from October, 2010 to October of 2011 Brazil imported $46.8 billion USD in capital goods, and increase of 20.4% over the prior year. By October, 2012 Brazil had imported some $59.3 billion USD over the prior year to achieve a 5.2% annual rate of growth in capital goods imports. These increases are led by the continued growth of the automotive industry, oil and gas production along with energy infrastructure investments, and the agricultural and construction equipment and machinery sectors. According to Otto Nogami, Economic Advisor to the Brazilian Association of Importers of Industrial Equipment and Machinery (ABIMEI), if trends continue as they have in the past 13 years; for each one percent increase in GDP the country will increase capital goods imports by 0.81%.13 The market structure for process equipment and machinery is diversified and growing, largely as a result of Brazil’s mounting investments in the production of agricultural commodities and food products; retail wage goods such as personal care and cosmetics; pharmaceuticals, minerals and ores, transportation fuels and petrochemicals, and the rapid expansion of electricity generation and transmission along with concerted efforts to defend and further modernize a range of national industries. This diversified structure couple to growing markets for equipment and machinery for a wide spectrum of industrial activities, will likely offer U.S. producers of process related capital goods a robust market of some $6-­‐8 billion USD per year with modest annual growth rates; larger market opportunities depend on greater success of the Plano Brasil Maior. Such growth in the process equipment and machinery market will likely be driven by many of Brazil’s leading sectors, including: Agricultural Equipment Top U.S. export prospects in this sector include sophisticated, state-­‐of-­‐the-­‐art machinery with higher efficiency levels including the following: post-­‐harvest machinery, including field refrigeration units/storage for tropical fruits; fruit, grain, seed and vegetable cleaning, sorting and grading machinery; GPS and precision agriculture devices; and poultry equipment. 13 Nogami, Otto. Extracted from the Folha de São Paulo by Pinho News and accessed on March 28, 2013 at: http://www.pinho.com.br/blog/2012/11/08/setor-­‐de-­‐importacao-­‐de-­‐maquinas-­‐preve-­‐retomada-­‐no-­‐proximo-­‐ano/. 11 Personal Care, Fragrances and Cosmetics (CT&F) Brazilian firms hold distinct competitive advantages that place the country in a prominent position in the global CT&F marketplace, and its national consumer market is ranked third in the world and first in perfumes and fragrances, according to the Brazilian Association of the Cosmetic Toiletry and Fragrance Industry. However, the national industry will require greater productivity, innovation, and capital goods to preserve competitive advantages and seek new export opportunities in the coming decade. Pharmaceuticals The Brazilian pharmaceutical industry is comprised of 380 local and 20 international companies established in the country. This industry represented total market value of approximately US$ 25 billion in 2011, with an estimated 15% growth for 2012. Brazil is also among the five largest pharmaceutical markets in the world in terms of unit sales, and the eighth largest in market size. The national market will continue to growth, but national production will need to increase productivity to keep pace with growing finished product imports and to take advantage of new export opportunities. Power Generation and Renewable Energy Production In the power generation subsector, best sales opportunities include the supply of control and supervision equipment, rectifiers, converters, inverters, heat recovery steam generators and condensers, power generation sets, heat exchangers, gas and steam turbines and parts, and wind power turbines above 1.5 MW. Solar energy related equipment can also offer longer-­‐term opportunities in Brazil, including liquid pumps for photovoltaic generation, air cooling systems, photovoltaic panels, and solar inverters and batteries. The participation of foreign equipment suppliers has increased over the past year and is projected to remain steady over the next years if the Brazilian Real currency remains strong in relationship to the U.S. dollar. ABINEE reports that the local industry is concerned because foreign suppliers have been actively supplying equipment and services for important projects, such as the Rio Madeira power generation plant and the Tucurui-­‐Manaus transmission line. On the other hand, the strongest competition for US suppliers of GTD equipment originates from locally established large multinationals (e.g. ABB, Siemens, Areva, Toshiba, etc.). Mining Brazil has a very limited market for turnkey machinery in general, as a large number of leading multinational manufacturers have their own factories in country, with many of them even exporting their products made in Brazil. These companies provide excellent opportunities for U.S. manufacturers of hundreds of parts and components for most types of mining equipment, such as earth-­‐moving machines, belt conveyors, crushers and grinding equipment, laboratory instruments, drill bits and geological survey. Products (or components) that are not made in Brazil are the ones with the best prospects. Petrobras: Petroleum, Petrochemicals, and Biofuels Petrobras is Brazil’s largest company. In January 2011, PFC Energy, a U.S. energy research firm, ranked Petrobras as the third largest energy company in the world. In 2011, Petrobras recorded a net income of R$33.3 billion (or US$20.1 billion). Net revenue in 2011 reached a total of R$242.2 billion (or US$145.9 billion), 21% above 2010 primarily due to the increase in oil and gas production in Brazil (2%), the increase in international oil price, higher domestic diesel price, and higher sales volume. Petrobras’ investments in 2011 reached R$84.7 billion, which represent a 10.7% increase in spending from the same period in 2010. Between 2011 and 2015, Petrobras will spend US$224.7 billion (or approximately US$44.8 billion/year). About 95 percent (US$213.5 billion) of that total spending will be invested in projects in Brazil. 12 The company’s oil production is projected to reach 3.9 million bpd by 2015, and 4.9 million bpd by 2020. The E&P segment will command the highest level of spending with approximately US$127.5 billion to be invested through 2015. Furthermore, investments in the refining, transportation (pipelines, oil and gas terminals, etc.), and oil byproducts are estimated at US$70.6 billion. The plan is to increase refining capacity in line with the expected demand for oil products in the domestic market, which is projected to grow at an annual rate of between 3.8% and 4.5% per year through 2020. As a result, US$35.4 billion (50.1%) will be invested in expanding and modernizing refining capacity. Operational improvements, fleet expansion and logistics will receive US$17.6 billion in investments during that 5-­‐year period. The company also plans to devote US$13.2 billion in the gas & power segment. The petrochemical segment will receive investments of US$3.8 billion, and the biofuels segment will absorb US$4.1 billion of investments, with US$1.9 billion of that total invested in ethanol production. Petrobras’ investment plan through 2020 is ambitious and a major stimulus to the domestic economy while offering considerable opportunities for a range of capital goods, components, and engineering services. Moreover, while Petrobras leads the list of national firms, its investments and production are accompanied by a host of emerging, smaller national firms and foreign oil and gas companies seeking to expand their presence in Brazil’s booming petroleum and petrochemical sectors. Tariff Trends In addition to these leading industries for U.S. export opportunities, the Câmara de Comércio Exterior (CAMEX) began its administration of the new “ex-­‐tarifário” policy of tariff reductions on a number of consumer durables, intermediate industrial goods, and capital goods related components, reducing the average import duty from 14 to 2%.14 This most recent cut in tariffs, brings the number of goods, including capital goods and intermediate industrial items, to 2,134 across a range of sectors, including oil and gas (31.7%), automotive (19.9%), automotive components (11.4%), railway transportation (8.9%), and mining (8.6%) as well as telecommunications and food processing. The goods benefitting from the ex-­‐tariff policy are imported from the United States (44.8%), Germany (10.9%), and Italy (7.6%).15 Several of these tariff reductions are targeted to benefit a specific set of industries and firms, including: an automobile assembly line in Rezende, Rio de Janeiro; a tire plant in Rio de Janeiro; a fertilizer plant in Três Lagoas, Mato Grosso, and the expansion of the city of São Paulo’s metro system. Nearly all of these tariff reductions have come at the request of Brazilian importers and firms seeking to reduce production costs, restructure production, and take advantage of the policies and programs associated with the Plano Brasil Maior. These reductions may not offer an immediate opportunity to U.S. process equipment producers who are not currently active in the Brazilian capital goods or component markets, but they do invite the possibility of identifying local firms and prospective partners interested in taking advantage of the many fiscal and financial incentives for scaling up, restructuring, and acquiring greater technology for their manufacturing enterprises. Given so many incentives for Brazilian firms to achieve greater productivity, U.S. firms should effectively research the growing list of national firms and industries to assess opportunities, understand obstacles, and prospect strategic partners in order to develop a business model that works in Brazil over the long run. 14
“Resolução Camex no 79, de 01/11/2012.” Câmara de Comércio Exterior (CAMEX). 2012 CAMEX. “Camex reduz Imposto de Importação de 330 itens para incentivar investimentos.” November 10, 2012 and accessed at: http://www.mdic.gov.br/sitio/interna/noticia.php?area=1&noticia=11924. 15
13 BrazilWorks provides consulting services to Brazilian and United States based private sector enterprises, civil society organizations, and policymakers interested in Brazilian markets, investment opportunities, public policies and regulations, the national political economy, and international commercial relations. BrazilWorks specializes in agriculture, climate change, energy, healthcare, development and regulatory policy, and international commercial and investment negotiations. Mark S. Langevin, Ph.D. Is the Director of BrazilWorks. Interested in doing business in Brazil? Read BrazilWorks’ Top Recommendations here. Communication Services •
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Translations and Interpreting Business/Organizational Communications Grant and Proposal Writing Research and Report Writing Representation and Negotiations Information and Analysis •
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Agricultural Development Biofuels Healthcare and Medical Sciences Oil and Gas Sustainable Development Taxation B r a z i l W o r k s 1 7 1 8 M S t r e e t , N . W . # 3 5 6 W a s h i n g t o n , D . C . 2 0 0 3 6 U S A T e l . 2 0 2 -­‐ 7 4 4 -­‐ 0 0 7 2 b r a z i l w o r k s @ g m a i l . c o m w w w . b r a z i l -­‐ w o r k s . c o m Considering Brazil: Opportunities and Obstacles Brazil might be for beginners, but it is increasingly becoming an economy for all. The country’s growing economy and increasingly prosperous population provide attractive opportunities for investors and entrepreneurs, but it is the governing coalition’s commitment to development that may both fuel and frustrate U.S. process equipment manufacturers eager to take advantage of the growing markets and hurdle the measurable obstacles. Brazil’s future growth, its acquisition of greater technology, and ability to innovate its own leading edge technologies and industries will demand an ever increasing number of conveyors, coolers, dryers, evaporators, feeders, mixers, blenders, screens, separators, and other process related equipment. Moreover, Brazilian firms are quickly becoming important clients for consulting services in the areas of industrial engineering, process testing and quality control, and training of a youthful, but under-­‐prepared workforce. The question is whether U.S. producers of these capital goods and related services can take advantage of Brazil’s complex marketplace and regulatory framework to develop a profitable business model. Brazil is expensive and immediately frustrating; from the Brazil Cost to the price of a hotel room in greater Belo Horizonte. To adequately understand all the laws and regulations, many law firms in São Paulo will seek fees for services that may surpass what you may find in Chicago or Houston, in part due to the exchange rate and in part due to the spiking demand for legal and consulting services designed for newcomers, foreigners, and those eager to bet on Brazil’s future. Adopt prudence, exert caution, and plan a long-­‐term strategy for making Brazil work for your enterprise. Strategic planning to overcome the Brazil Cost, aggressive and comprehensive due diligence, and savvy partnership prospecting can save you time and money. Brazil is not for everybody, but for those who want to grow, it is now a compelling destination. Prepared by Mark S. Langevin, Ph.D. Director, BrazilWorks April 2013