British business in Brazil

Brazil is the world’s fifth most populous country, with a growing middle class, a stable government and world-class companies looking for foreign partners. We meet British entrepreneurs operating in Latin America’s largest economy.

Ten years ago, Mark Greaves, managing director of Cheshire-based Flowcrete, entered the Brazilian market via a local partner to install its heavy-duty floors in the sprawling industrial hub of São Paulo, home to some 20 million people.

It hasn’t been easy, but Flowcrete now generates around US$100 million (£50.6 million) a year in worldwide revenues, with $2 million coming from its Brazilian operation. Although the company’s Brazilian unit only recently started to make a profit, Greaves plans to pump up to $1 million into its factory and add sales staff in the next two years to win new projects outside São Paulo. The company has bought out its local partner and Greaves sees the country as an important part of the business’ future.

Brazil is providing rich pickings for a variety of companies. Welsh business Newport Networks offers local telcos and service providers specialist VoIP (internet telephony) solutions. Although Brazil’s telcos invested heavily in traditional fixed-line telecoms infrastructure, Newport Networks’ head of sales, Mark Purdom, says they haven’t spent as much as their counterparts in Europe on the likes of 3G and VoIP. ‘They’re now in a position to take advantage of next-generation technology,’ he adds.

Newport Networks is using a handful of partners to target telecoms giants such as Oi, Telefônica and Brasil Telecom as well as smaller operators. ‘We aim to have three or four customers in place by the end of 2008,’ says Purdom confidently.

Wealth of opportunities for mid-sized companies entering Brazil

Brazil has a population of 186 million and is the ninth-largest economy in the world. Unlike China, it enjoys booming exports in commodities such as oil and metals, and is the world’s number one exporter of agricultural products such as coffee, sugar and beef, as well as the second-largest exporter of soybeans.

Despite a series of recent political scandals, President Luiz Inácio ‘Lula’ da Silva’s popularity is at 70 per cent. He was quick to take the credit for rating agency Standard & Poor’s long-awaited investment rating. S&P’s “BBB-” grade allows many major US and European pension funds to begin investing in Brazil.

The country’s GDP remains on track to grow five per cent this year. Foreign direct investment was $34 billion last year, with British investments accounting for $1 billion.

Ivan Clark, a partner at PricewaterhouseCoopers and former president of the British Chamber of Commerce in Brazil, says a wealth of opportunities exist across a broad range of sectors for mid-sized companies entering Brazil. Clark sees good prospects across industry, agriculture and mining as well as Western consumer goods, as the middle class grows. ‘Mid-sized British companies would benefit from being here,’ he states.

Brazil’s business barriers

Nevertheless, beyond the images of Rio de Janeiro’s sun-drenched beaches and prosperous middle class, Brazil undoubtedly has a reputation for being a difficult, complex country – and British entrepreneurs aren’t always ready for the challenges.

Scotsman Graham Wallis, founder of market research company Datamark, has spent 30 years in Brazil. He says many British business chiefs make the mistake of going on trade missions, sinking a few gin and tonics and then going home starry-eyed. ‘They often haven’t prepared well,’ Wallis states.

Clark observes that US investors seem to come in with a clear objective and are better prepared than their UK counterparts. ‘It is vital to do your homework,’ he adds.

Nigel Morris, executive director of the British Chamber of Commerce in São Paulo, sees opportunities for UK companies but counsels that the first step is to get a local partner or adviser. According to Morris, companies shouldn’t choose the first business partner who comes along. Instead, they need to carry out thorough research to ensure that their business objectives are aligned. Companies need to test potential partners, visit them and build personal relationships, he says.

Slow going

Whatever the route they take, British entrepreneurs are likely to be surprised by the red tape. Bureaucracy ‘is a real nightmare’, says Greaves, who recalls that even opening a bank account was difficult. In fact, he’s found that both China and India were more straightforward in the early days.

Most companies also grumble about taxes and duties. Export manager Veronica Dawson of Wrexham-based surface solutions specialists Conren complains that on certain products such as chemicals, the import duty can add up to 70 per cent on costs. ‘Import tax is one of the biggest hurdles and doesn’t make it easy to compete with local companies,’ she says.

Greaves confirms that getting products in and out of the country is hard. For $100 of products, Flowcrete pays around $58 of tax, whereas in China the company pays virtually nothing. Clark explains that the overall tax system is very complex. ‘If you don’t have the right adviser you can get into a lot of trouble,’ he warns.

British companies also complain about old-fashioned, restrictive labour regulations. Hiring and firing can be expensive with a legal system that favours the employee, while the law can require employers to double the basic salary to pay for social security and benefits.

Even if you get the right employee at the right price, Andrew Morgan, a founder of London-based logistics consultancy Supply Chain Europe, says that loyalty can be lacking. ‘The Brazilian associates we hired to train in the UK quickly moved on when other opportunities arose,’ he recalls.

Going for goal

Still, despite the difficulties, checking out the opportunities in Brazil could be one of the best commercial moves a mid-sized British company could make.

Wallis says that although São Paulo is the main business centre and easiest place to operate, manufacturers could also consider setting up in the south of Brazil. For instance, he recommends the capital of Paraná state, Curitiba, a modern city with excellent transport and infrastructure. The city is already the home of HSBC’s head office in Brazil.

Clark says that Brazilian companies have been growing quickly and many are flush with cash. He recalls that last year over 60 new companies undertook IPOs on the São Paulo stock exchange, or Bovespa, raising some $33 billion. Many of these companies would like foreign partners, Clark says. ‘There are fantastic opportunities,’ he concludes.

Also see Doing Business in Brazil which presents a set of useful web resources for companies interested in seeking opportunities in the country.

GrowthBusiness’ series of articles on doing business in emerging markets also cover Russia, China and India, including practical advice and revealing insights from entrepreneurs who have grown their businesses by tapping into the explosive growth of these countries.

Marc Barber

Marc Barber

Marc was editor of GrowthBusiness from 2006 to 2010. He specialised in writing about entrepreneurs, private equity and venture capital, mid-market M&A, small caps and high-growth businesses.

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