Other News & Events

Article on the Council’s Brazil Fora from NZTE’s Export News, 2 December 2009

The Brazil Business Forum held in Auckland on 17 November 2009 coincided with an article in The Economist, which suggested within the next 14 years Brazil’s economy will overtake those of Britain and France to become the world’s fifth largest.

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Brazil takes off

Nov 12th 2009
 From The Economist print edition

Now the risk for Latin America’s big success
story is hubris

Rex Features

WHEN, back in 2003, economists at Goldman Sachs bracketed Brazil with Russia, India and China as the economies that would come to dominate the world, there was much sniping about the B in the BRIC acronym. Brazil? A country with a growth rate as skimpy as its swimsuits, prey to any financial crisis that was around, a place of chronic political instability, whose infinite capacity to squander its obvious potential was as legendary as its talent for football and carnivals, did not seem to belong with those emerging titans.
Now that scepticism looks misplaced. China may be leading the world economy out of recession but Brazil is also on a roll. It did not avoid the downturn, but was among the last in and the first out. Its economy is growing again at an annualised rate of 5%. It should pick up more speed over the next few years as big new deep-sea oilfields come on stream, and as Asian countries still hunger for food and minerals from Brazil’s vast and bountiful land. Forecasts vary, but sometime in the decade after 2014—rather sooner than Goldman Sachs envisaged—Brazil is likely to become the world’s fifth-largest economy, overtaking Britain and France. By 2025 São Paulo will be its fifth-wealthiest city, according to PwC, a consultancy.
And, in some ways, Brazil outclasses the other BRICs. Unlike China, it is a democracy. Unlike India, it has no insurgents, no ethnic and religious conflicts nor hostile neighbours. Unlike Russia, it exports more than oil and arms, and treats foreign investors with respect. Under the presidency of Luiz Inácio Lula da Silva, a former trade-union leader born in poverty, its government has moved to reduce the searing inequalities that have long disfigured it. Indeed, when it comes to smart social policy and boosting consumption at home, the developing world has much more to learn from Brazil than from China. In short, Brazil suddenly seems to have made an entrance onto the world stage. Its arrival was symbolically marked last month by the award of the 2016 Olympics to Rio de Janeiro; two years earlier, Brazil will host football’s World Cup.

At last, economic sense

In fact, Brazil’s emergence has been steady, not sudden. The first steps were taken in the 1990s when, having exhausted all other options, it settled on a sensible set of economic policies. Inflation was tamed, and spendthrift local and federal governments were required by law to rein in their debts. The Central Bank was granted autonomy, charged with keeping inflation low and ensuring that banks eschew the adventurism that has damaged Britain and America. The economy was thrown open to foreign trade and investment, and many state industries were privatised.
All this helped spawn a troupe of new and ambitious Brazilian multinationals (see our special report). Some are formerly state-owned companies that are flourishing as a result of being allowed to operate at arm’s length from the government. That goes for the national oil company, Petrobras, for Vale, a mining giant, and Embraer, an aircraft-maker. Others are private firms, like Gerdau, a steelmaker, or JBS, soon to be the world’s biggest meat producer. Below them stands a new cohort of nimble entrepreneurs, battle-hardened by that bad old past. Foreign investment is pouring in, attracted by a market boosted by falling poverty and a swelling lower-middle class. The country has established some strong political institutions. A free and vigorous press uncovers corruption—though there is plenty of it, and it mostly goes unpunished.
Just as it would be a mistake to underestimate the new Brazil, so it would be to gloss over its weaknesses. Some of these are depressingly familiar. Government spending is growing faster than the economy as a whole, but both private and public sectors still invest too little, planting a question-mark over those rosy growth forecasts. Too much public money is going on the wrong things. The federal government’s payroll has increased by 13% since September 2008. Social-security and pension spending rose by 7% over the same period although the population is relatively young. Despite recent improvements, education and infrastructure still lag behind China’s or South Korea’s (as a big power cut this week reminded Brazilians). In some parts of Brazil, violent crime is still rampant.

National champions and national handicaps

There are new problems on the horizon, just beyond those oil platforms offshore. The real has gained almost 50% against the dollar since early December. That boosts Brazilians’ living standards by making imports cheaper. But it makes life hard for exporters. The government last month imposed a tax on short-term capital inflows. But that is unlikely to stop the currency’s appreciation, especially once the oil starts pumping.
Lula’s instinctive response to this dilemma is industrial policy. The government will require oil-industry supplies—from pipes to ships—to be produced locally. It is bossing Vale into building a big new steelworks. It is true that public policy helped to create Brazil’s industrial base. But privatisation and openness whipped this into shape. Meanwhile, the government is doing nothing to dismantle many of the obstacles to doing business—notably the baroque rules on everything from paying taxes to employing people. Dilma Rousseff, Lula’s candidate in next October’s presidential election, insists that no reform of the archaic labour law is needed (see article).
And perhaps that is the biggest danger facing Brazil: hubris. Lula is right to say that his country deserves respect, just as he deserves much of the adulation he enjoys. But he has also been a lucky president, reaping the rewards of the commodity boom and operating from the solid platform for growth erected by his predecessor, Fernando Henrique Cardoso. Maintaining Brazil’s improved performance in a world suffering harder times means that Lula’s successor will have to tackle some of the problems that he has felt able to ignore. So the outcome of the election may determine the speed with which Brazil advances in the post-Lula era. Nevertheless, the country’s course seems to be set. Its take-off is all the more admirable because it has been achieved through reform and democratic consensus-building. If only China could say the same.

Breaking into Brazil

To break into the Brazilian market, a bit of flexibility is necessary

FRIDAY, NOVEMBER 27 2009 || BUSINESS TRAVEL || BY LESLEY SPRINGALL, THE INDEPENDENT

Having a poker face isn’t a skill often required for breaking into new export markets. But for Hamish Wiig, South American business development manager for global radio solutions company Tait Radio Communications, it was his ability to play a cool hand that sent Tait’s Brazilian export receipts soaring from $200,000 a year to $30 million in less than four years.

Wiig’s opportunity to break the Brazilian market came just four years ago in a head-to-head face-off with Tait’s biggest competitor, United States multinational Motorola. Wiig’s team of two – himself and a local distributor colleague – were pitted against Motorola’s team of 10 in a Dutch auction, where competitor companies are made to openly deal against each other in front of the customer.

“We basically had to eyeball Motorola and square off in a battle of wills. We just watched the prices go down and down and down. It was a real game of poker. And they were really feeling the heat. People were sweating,” recalls Wiig. Motorola’s team, including its lawyers, left the room three times to make urgent calls to head office. Wiig just hoped Tait’s senior management would understand. They did.

“We had to crack the market, so it was win at all costs. In the end Motorola couldn’t handle it.” Motorola left the building and Tait landed its first big Brazilian digital radio contract – with the Sao Paulo police force. More importantly, says Wiig, Tait got its first major referee in Brazil.

Since that first deal, several others have followed, including more with the Sao Paulo state civil police. In May this year, Tait announced it was now supplying more than 2265 trunked P25 radios, complete with special encryption technology to the state’s police force. The company now employs two dedicated salespeople in Brazil focused on public safety, police, utilities and transport markets.

Tait has been in Brazil for more than 20 years, but nearly all its growth has come in the last four, after deciding to focus on the US$1.6 trillion market. There used to be just two people servicing the entire continent, says Wiig. But with Brazil’s reforms in the 1990s, its population of nearly 200 million people and its growth, the world’s eighth largest economy was an obvious market choice, he says.

“Sao Paulo has more than 20 million people, and it’s just one of 27 states in Brazil. That gives you an understanding of the size of the opportunity.” But Brazil is not an easy place to do business – there are “loads and loads of barriers”, says Wiig, and understanding how to overcome them is crucial if you want to make good money.

The major problem is bureaucracy. As well as the complicated state and federal tax structure, there are tariffs on most goods and mountains of paperwork for everything.

Being an electronics company, Tait has to ensure all its products comply with Brazil’s standards. It still has several products going through the standard registration process a year after starting, says Wiig. “We’ve got one guy spending 20 hours a week solely on this. So it does chew up resources. It takes time and a bit of an attitude.”

And if a company wants to take part in a tender, even as part of a Brazilian-led consortium, it has to prove it has the right qualifications. So everything takes a long time.

Then there’s the language barrier – Brazilians speak Portuguese – and the cultural differences.

Of all the Latin American countries, Brazil is probably the most Latin, says Fergus McLean, executive director of New Zealand’s Latin American Business Council. “So rules and regulations are flexibly interpreted.”

Establishing trust is everything in Brazil, says Wiig, which means spending a lot of time on general chit chat before engaging in business. “New Zealanders tend to get straight to the point. Brazil is not so structured. You have to live with that. You have to have patience.”

Jessica Acherboim, New Zealand Trade & Enterprise’s regional manager for Brazil, says it can take a long time for Brazilians to follow up on business matters. And Kiwi companies need to be cautious when weighing up whether they’ve been successful or not, she says. “Brazilians may not wish to offend you by being blunt and telling you they don’t want your product.”

Having good partners in Brazil is vital, says Wiig. But Tait had to kiss quite a few frogs before finding its three princes.

And even when you find good local partners, it’s still important to have direct contact with your customers, he says.

“It adds such an important level of confidence and trust. It’s all about creating credibility in their minds and enhancing our brand strength along with our local dealer.”

But that relationship-building comes at a price: last year alone Wiig made eight trips to Brazil, each about two weeks. That’s a four-month annual commitment to the market.

By 2015, Brazil is expected to become one of the top five economies in the world. A much-quoted 2001 Goldman Sachs report, credited for driving a lot of the country’s recent growth, groups Brazil with Russia, India and China as the BRIC economies.

By 2050, these BRICs could eclipse the total economic power of today’s richest countries, the global investment bank said. Everyone agrees the opportunities are immense, but so is the competition, warns Acherboim. “If you can’t show a difference, you will struggle to succeed.” 

But if you can, says Wiig, why go anywhere else?

Much-hyped Brazil finally delivers the goods

Nevil Gibson | Wednesday November 18 2009 - 07:29am

After decades of being pitched as the world’s “shows most promise” country, Brazil is at last fulfilling its potential.

The good news story has been delivered at a business forum in Auckland, which fortuitously coincides with the super power in the making it this week to the cover story in the Economist – "Brazil takes off."

Brazil is just one of five countries capable of super power status – a population above 100 million, a land mass of two million square kilometres and nominal GDP over $US600 billion (the others are the US, China, Russia and India).

Speakers from Brazil at the AUT-hosted forum emphasised how their country had survived the global recession with its financial system intact and had one of the world’s rosiest outlooks – growth of 5% forecast in 2010, the world’s largest area of land available for farming, a growing middle class and business confidence at an all-time high.

Alexandre Pundek, a top economist in the central bank, ran through the figures showing how Brazil had developed quickly since implementing Rogernomics-style reforms in the 1990s – deregulation, privatisation, fiscal responsibility, inflation targeting and opening the doors to foreign investment.

The country’s natural resources are well known – one of the world’s biggest agricultural economies, a booming minerals sector, some of the world’s largest oil and gas reserves, and electricity generated from 85% renewable resources.

Another key element in Brazil’s success is political stability, always a bugbear in the country’s past, and rising real wages that have pushed a majority of the population into the middle class.

Mario Marconini, a senior official in the Federation of Industries for the state of Sao Paulo, put the private sector’s view, with the positives far outweighing the negatives.

The latter were mainly in the poor infrastructure, which is now being tackled in earnest after 20 years of neglect; Brazil’s low level of integration in the world economy; and the need for more liberalisation in the business environment.

Des O’Shea, Auckland-based chief executive of smart phone training company Mobile Mentor, was enthusiastic about his five-year foray into Brazil.

Out of the company’s 100,000 clients who have taken its courses, half have been in Brazil, where its subsidiary employs 75 staff in six cities.

“We raised capital faster, cleaner and better than anywhere in the world,” O’Shea enthused. He was worried by Brazil’s reputation for corruption and red tape.

The latter was real enough – “We nearly gave up, it was so bad, but it was worth it.”

But corruption was not an issue and the capital raising was easy – “We did the deal on a handshake, had the money in 10 days. The paperwork took a year.”

Mr O'Shea was also impressed with the work attitude: customer service was high and, best of all, succeeding in such a market gave enhanced credibility for future international moves, such as the company’s new venture in China.

New Items from NZTE’s
Latest Weekly News Bulletin

Import duties to be reduced in Mexico

MEXICO CITY: The Mexican government’s plan to reduce import duties on a range of raw materials and manufactured goods now affects 76 percent of the iron industry, 49 percent of the chemical industry and 57 percent of rubber producers.

From 2009 to 2013, the plan is to gradually reduce or eliminate import duties on 80 percent of 8,373 Harmonised System (HS) codes for countries that do not have a free trade agreement with Mexico, including New Zealand.

These HS codes are mainly in industrial sectors, and while they do not impact agriculture, they do include automotive products, shoes and textiles, amongst other products.

Source: COMCE and Reforma newspaper www.reforma.com

Uruguayan economy exiting recession

Activity indicators suggest that nine months of economic contraction in Uruguay have come to an end. Although the fall from peak to trough was sharp, Uruguay’s recession has been moderate by regional standards.

Large neighbouring economies such as Brazil, Colombia and Chile are recovering too, and there are indications that the output rebound is not simply a question of restocking but of firmer demand.

Industrial sales by volume grew 1 percent month-on-month and 1.1 percent year-on-year in May, and the industrial production monthly growth rate was 3.2 percent in June. Domestic demand has been supported by an 8.6 percent rise in real wages in the 12 months to June and increased public spending.

Although the Economist Intelligence Unit believes the Uruguayan economy has now turned the corner, the rebound will not be vigorous. The Economist expected growth to pick up slowly over the third and fourth quarters, but not enough to prevent the economy from contracting slightly in annual terms this year, by 0.2 percent.

Source: The Economist Intelligence Unit

Article by One of Our Members Comparing Legal Practices in Chile, New York and NZ

(with thanks to “NZ Lawyer” magazine).

The legal world in Chile, New York,
and New Zealand

By Silvana Schenone, senior associate, Minter Ellison Rudd Watts

IF THE recently announced trade talks result in the USA joining the Trans-Pacific Strategic Economic Partnership Agreement (formerly called the P4), I will have the unusual distinction of having practised in three of the five member countries: Chile, USA (New York), and New Zealand.

I am a Chilean lawyer, but I have also worked at Sullivan & Cromwell in New York, after completing my LLM at Harvard, and a year ago I came to New Zealand with my Kiwi husband and joined Minter Ellison Rudd Watts in Auckland.

My friends here have been asking me, given I have been doing basically the same type of corporate finance transactions in each place, how legal practice compares in Auckland, New York, and Santiago.

The most obvious difference is that the deals in New York used to be (and I use the past tense here because of the current market conditions!) much bigger than either Auckland or Santiago; for example, I once had a partner apologising for leaving me to do a US$100 million deal on my own, saying we needed to do the deal for relationship reasons, but it was too small to command partner attention. I could not imagine that occurring in either Santiago or Auckland!

But having said that, the deals in New Zealand and Chile can be just as demanding as New York, sometimes more so, despite their smaller size. Clients are very concerned about cost and efficiency, whereas in New York, because the fee is a much smaller percentage of the total deal size, cost does not often seem to be a major issue.

A difference which also probably has its origin in the business cultures is that in New Zealand – and to a lesser extent, New York – there is much more flexibility in relation to documentation and transaction settlements, for example, the ease with which lawyers give and accept undertakings from each other, and the willingness to accept an exchange of signed documents by email. By contrast, in Chile, like other Latin American countries, there is a very heavy reliance on legal formalities, such as having an independent notary publicly witness the execution of documentation, and an unwillingness of parties to close before they each physically hold an original, fully executed document. Even though the Chilean legal system has been heavily influenced by US jurisprudence in recent years, it has inherited from its Spanish forebears, and retains, a lack of trust in informal arrangements. Put it this way: in Latin America, even the directors of a company need a specially written and formally granted power of attorney to act on behalf of the company they lead.

Another area where Chile is different to both Auckland and New York is that clients seldom choose lawyers based on a tender or beauty parade process. This also applies to business partners. Having a personal relationship is much more important in Chilean business, and that extends to lawyers where a client is most likely to choose based on a partner in a firm having been a classmate at university or perhaps being a relative. That does not mean that the client is any less demanding, but they are more comfortable working with people they know well and with whom they have a wider relationship. That is, I guess, a reflection of latin versus anglo culture. In the Latin world, the words “conflict of interest” have limited relevance.

But in the end, despite the fact that the New Zealand and US legal systems are common law systems, with ultimately an English heritage, compared to Chile’s ultimately Napoleonic code origins, I find New Zealand has more in common with Chile than one might expect, and the differences are sometimes overstated. This is in part because both are smaller trading nations whose commercial legal environments are heavily influenced by international, particularly US-oriented, transactions and law reform. North American statutes have been the model for both countries’ companies, securities, and competition laws, for example, and financing documentation in both places draws heavily on English and New York precedents and practice.

The difference, which I miss, is that we Latin Americans have not yet taught the Anglos to be comfortable receiving a hug or kiss on the cheek at the end of a business meeting!

Silvana Schenone leads Minter Ellison Rudd Watts Latin American practice. See her profile at http://www.minterellison.co.nz/index.php/ps_pagename/personprofile/pi_peopleid/127.