Brazil unbound how investors see brazil and brazil sees the world

Brazil
unbound
How investors see Brazil
and Brazil sees the world

inco-operationwith


2


Contents
Foreword

4

Executive Summary

5

Introduction

6

Part one: Cornerstones of success

9

Part two: Social and intellectual capital
I. Talent and education
II. Innovation in thinking and action 

III. Brazilians abroad

15
15
19
22

Conclusion: The beginning of the future 

26

About this report
Brazil unbound: How investors see Brazil and Brazil sees the world is
an HSBC report produced in co-operation with the Economist Intelligence
Unit. The report draws on in-depth interviews with country experts and
analysts, Economist Intelligence Unit forecasts, and a survey of executives
in 536 companies across 18 industries, during April-May 2010. Around
one third of survey respondents were based in Brazil and a further 11%
in Latin America; 20% were based in Asia-Pacific, 15% in North America,
and 12% in Western Europe.
Over two-fifths (41%) of companies had annual global revenues of $500m
or less, and 22% had annual revenues above $10bn. In terms of seniority,
58% of respondents were C-suite or board members.

3


Foreword
Brazil’s economic resilience over recent years has captured the
world’s attention. All eyes have been on its growth, as it distanced

itself from the political and economic uncertainty of the 1980s.
With growth set to continue, it has been forecast that by 2025 Brazil will become the world’s fifth largest economy,
overtaking Britain and France, while São Paulo will rank higher than Paris and Shanghai as the world’s sixth wealthiest city.
In 2010, HSBC celebrates the vibrancy and excitement of modern Brazil with a series of international events and activities
across ten markets from the UK and Brazil to North America, South Africa, the Middle East and China. This programme
of activity is centred around our sponsorship of Festival Brazil, a four-month summer celebration of the country’s cultural
offerings at London’s Southbank Centre.
Working in 88 countries, we see the understanding of different cultures as an essential part of building international
relationships and business expertise. As part of our global Cultural Exchange programme, Festival Brazil provides insight
into one of the world’s most prominent economies.
Bringing together the views and opinions of the global business community, this Economist Intelligence Unit report
identifies and explores the challenges that now face this dynamic country. I hope that, whether you are already
experienced in working with Brazil or are just starting to explore its opportunities, this report will prove valuable to
your business.

Zarir J Cama
Group Manager, Group Management Office,
HSBC Holdings plc

4


Executive summary
Brazil has never been so popular among investors as it is now. Interest has risen steadily over the past 15 years as the
country has managed to overcome one political, macroeconomic and business challenge after another. Privatisation,
liberalisation, a new stable currency, the smooth handover of political power, to name but a few achievements, coupled
with a boom in global demand for Brazil’s copious supplies of commodities, have boosted foreign currency earnings and
fired up consumer spending. Brazil has been transformed from “country of tomorrow” to “once-in-a-lifetime opportunity”.
The transition is, of course, far from over: education, bureaucracy, corruption, infrastructure and fractious politics, to list just
a few deep-seated problems, will take years to address. But its new-found economic and political stability – which helped

the economy withstand recent global financial shocks – allows policymakers to make a serious start on addressing these
issues. Moreover, the country’s natural riches in agriculture and mining – and potentially offshore oil too – will, if used wisely,
provide the cash needed for vital investments for years to come.
This report, based on interviews and a survey of 536 senior executives
worldwide, largely endorses the general optimism about Brazil’s
prospects. Part one of the report sets Brazil’s recent transition into its
political, macroeconomic and industry context. Part two focuses on
three essential areas of the business operating environment: the market
for talent; the state of innovation; and the dilemmas facing Brazilian
companies as they expand abroad. Some of the key conclusions of this
report and the main challenges facing Brazil include the following:
Poor infrastructure takes a heavy toll on business.
Although something of a truism, the parlous state of the infrastructure
tops the list of obstacles faced by investors in Brazil. In our survey,
nearly one half of respondents (49%) point to “low standard or costly
infrastructure” as the main operating obstacle. In spite of some
improvement in logistics, freight depends on costly road haulage; there
are few railroads; the potential for waterways remains largely unexplored;
and ports and airports are congested. These conditions can add one
quarter or more to the cost of getting goods to market, say investors.
Logistics experts call for better co-ordination between different layers of
government and the private sector.
Weaknesses in the education system impair the supply of 
relevant workplace skills.
While many of the graduates of Brazil’s universities are viewed as
top class, there are too few of them. Poor teaching and resourcing in
secondary education means that school leavers are among the world’s
least educated. Companies find they must fill the skills gaps themselves
with their own training. At least one third of investors surveyed say
skills shortages represent one of the biggest operating problems, with

almost one half (47%) of US-based companies reporting this as their
greatest challenge. Educationalists call for a more relevant curriculum,
better teacher training, and a shift in state funding from tertiary to
secondary education.
Investors praise the abilities of their Brazilian managers.
Education standards may be higher in most parts of Asia, but, say
investors, the quality of management is “probably worse in China and
India”. Indeed, Brazilian managers are deemed to be on a par with their
peers in developed markets, and superior to those from other emerging
markets, according to 42% of survey respondents. In particular, investors
laud the flexibility and maturity of their Brazilian staff, a facet that may
derive from learning to cope with economic upheaval. However, this
flexibility does not translate adequately into innovation.
Brazil lags in innovation; investors could help more.
Brazil scores poorly on most innovation rankings, and deeper analysis
suggests that even the meagre investments into innovation could

produce better results. Some 57% of surveyed executives do not have
a dedicated R&D facility, or even plan to have one in the short term in
Brazil. Over one half of respondents (51%) say that, at present, less than
10% of products and services sold by their companies have actually
been developed there, and at least one quarter of respondents expect
no progress on that score over the next three years. Yet almost half
(49%) of survey respondents describe the capacity of Brazilian-based
businesses to integrate the latest international technology into their
operations as either “very good” or “excellent”, and only 6% say it is
“poor”. This indicates that better education, improved infrastructure,
greater investment in R&D and closer relations between companies
and universities would have a disproportionately positive impact on
innovation. That said, business has broken new ground in environmental

and agricultural technologies, which are being exported worldwide.
Co-operation with universities works well.
One way to promote innovation is through business co-operation with
academic institutions. Experience seems relatively limited, but positive.
Of survey respondents whose Brazil-based operations already work with
local universities, 60% say the relationship has been “positive” and 12%
“very positive”, compared with less than one quarter (23%) who say
that such co-operation “failed to live up to expectations” or was “very
unsuccessful” (5%). Brazilian-based companies would appear to get
the rough end of such deals (or perhaps are too optimistic about their
potential), as almost one third (32%) report that such co-operation
“failed to live up to expectations”.
Brazil focuses on “South-South” trade relations, especially 
with China.
As part of a general policy of trade diversification, one of the biggest
changes in Brazilian trade policy under President Lula has been the
expansion of trade and investment with China. China has become Brazil’s
largest export and import partner, and provides investment and finance
to secure supplies of key minerals. Brazil has also expanded its share of
trade with the rest of Latin America, other Asian countries, the Middle
East and Africa, especially in agriculture.
Brazilian firms still suffer from poor brand recognition abroad.
Beyond the charmed circle of a few high-profile companies, Brazilian
brands still lack the global draw of their Western counterparts. This is
reflected in our survey, in which 84% of respondents say that Brazilian
brand names are not well recognised or not highly regarded abroad.
Only 3% of US-based respondents believe that Brazilian brands are both
recognised and highly regarded. However, the perception of Brazilian
brands changes somewhat among China-based executives, with almost
one quarter of those respondents (24%) giving a warm reception to

Brazilian products.

5


Introduction
Brazil is in fashion. Hosting the football World Cup in 2014
and the Summer Olympics in 2016 would seem a fitting
cap to the momentous economic changes witnessed over
the previous two decades. While such mega events can
strain a country’s budget and test its infrastructure, sending
lesser hosts into a spiral of debt, Brazil’s leaders will see
it as global recognition of the country’s importance in the
world; a powerful signal that Brazil’s domestic concerns
matter beyond its borders; that its companies are a force
to reckon with abroad; and that its talents are the envy of
the world.
Such sentiments, if not new, are certainly more realistic
today than at any point in the country’s recent history.
Once known for its severe stop-go economic cycles, the
memory of hyperinflation in the late 1980s and the 2002
IMF bail-out is receding fast. Investor queasiness over
the election in 2002 of the left-wing President Luiz Inácio
Lula da Silva (“Lula”), whose two terms end this year, has
proven misplaced. Brazil’s economy rode the global financial
crisis, suffering only a brief and shallow dip. The economy
is poised to expand by nearly 8% this year. And today’s
policymakers angst less about financial turmoil and more
about who and how to access newly discovered deepwater
oil reserves, developing a foreign policy doctrine that

reflects global ambitions, and turning domestic enterprises
into world beaters.
For investors, Brazil’s glass is now “half full”. With 192
million consumers, it is Latin America’s largest market, the
world’s fifth-most populous country and the eighth-largest
economy. When asked about Brazil’s image in the

6

world, respondents to the Economist Intelligence Unit’s
survey prefer to point to the “B” in BRICs (the oddball
category of fast-growing emerging giants comprising
Brazil, Russia, India and China) rather than to the
country’s long-standing structural deficiencies. More
executives see Brazil primarily as “a young, fast-growing
market opportunity on a par with China, India or Russia”
(49%) – although Chinese companies were far less
favourably disposed to such a comparison – and as “an
emerging player on the international stage” (40%), than
as “a market with high potential but held back its poor
business environment” (31%) or even “a supplier of
key commodities” (20%). Despite the fact that income
distribution remains among the most skewed in the world
– recent improvements aside – social inequalities and
traditional stereotypes linked to culture and sport were
cited respectively by only 13% and 9% of respondents.
Overall, what do you consider to be the main image
today of Brazil in the world?
(% of respondents)
A young, fast-growing market opportunity on

a par with China, India or Russia.

49%

An emerging player on the
international stage.

40%

A market with high potential but held back its
poor business environment.

31%

A supplier of key commodities
to the world.

20%

Principally known for extremes of wealth and
poverty.

13%

Retains its stereotypical image associated
with culture and sport.

9%

0

Source: Economist Intelligence Unit.

10

20

30

40

50

60

70

80

90

100


In some respects, this new prominence should come as no
surprise. Along with South Africa and India, Brazil has been
a leading light in the G20 (group of 20 leading economies).
During the global economic crisis, the G20 superseded the
G8 as the main platform for global governance, according
large developing nations such as Brazil a greater voice

at a time when the setting of global rules is dominating
headlines. And it hasn’t escaped investors that emerging
markets have generally come through the financial crisis
in better shape than have developed markets. There
is also plenty of commercial substance behind Brazil’s
new popularity among investors. The consolidation of
macroeconomic stability in the past decade has meant
that the country’s large internal market potential is finally
being realised. Brazil’s young and sizeable population and
its burgeoning middle class are both by far the most
attractive features of the country, according to 58% of
executives surveyed. By contrast, such factors as its
abundant natural resources, political stability and cheap
labour force – often features of primarily export-driven
economies – were far less regarded.

much lower than it should be because of a failure to
address structural reform. Swathes of its workforce are
poorly educated; innovation is stunted; infrastructure unfit
for purpose; and its companies’ brands, having focussed
on home advantage are, with notable exceptions, little
known abroad.
This report is divided into two parts. Part one looks at
the political, macroeconomic, industry and infrastructure
foundations that have enabled the country to soar ahead.
Part two draws on the views of business executives both
in the country and worldwide and identifies three key
aspects of business on which Brazil’s future depends:
its development of skills, its capacity to innovate, and
the country’s role in the world – and evaluates why the

optimism is justified.

Judged by its history, therefore, Brazil has done well; judged
by today’s competition, however, the country still has much
ground to make up. Although GDP growth this year is
expected to approach Asian rates, such rates are far from
sustainable given infrastructure deficiencies. Since GDP per
head is significantly higher than in China – and especially
India – comparisons to Asian rates of growth are not entirely
appropriate; even so, Brazil’s potential sustainable growth is

7


The Brazilian National Congress 
Designed by the world famous architect Oscar Niemeyer

8


Part one: Cornerstones of
success
Maintaining political consensus
Brazil’s new-found political stability has provided a sturdy
base for expansion. National elections no longer pose
any threat of a radical shift in macroeconomic policy
orientation. The country’s voters will elect a new president
in October 2010, after the two-term limit of Luiz Inácio Lula
da Silva (known as “Lula”) expires, as well as voting in
state governors and a new Congress. Few commentators

harbour serious worries about the main candidates and
their policies. Power has alternated since 1995 between
two main parties: Lula’s Partido dos Trabalhadores (PT,
or Workers’ Party); and the centrist Partido da Social
Democracia Brasileira (PSDB – or social democrats). Both
broadly agree to continue or defend the successful policies
of the past fifteen years.
Lula’s shift to the economic policy centre ground ahead of
the 2002 elections has broadened cross-party consensus in
favour of disciplined monetary and fiscal policies. This has
underpinned a more stable macroeconomic environment,
enabling domestic and foreign investors to lengthen their
planning horizons. The consolidation of greater political
stability also comes as a welcome relief for a population
which following the end of military rule in 1985 has seen
wild political swings and a host of ill-fated economic plans
aimed at promoting growth and quashing hyperinflation.
For all the corruption in Brazil’s political system, especially
in the parliament, the country has demonstrated its political
maturity. The outgoing President Lula took over the
reins from Fernando Henrique Cardoso in 2003 relatively
smoothly, despite being in the midst of a full-blown
economic crisis of confidence. He ends his second term
with unprecedented popularity ratings above 80% (thanks
in large part to successive increases in the minimum wage
and social policies that has lifted some 12 million families
out of poverty). Yet he has resisted the temptation to
change a constitution that forbids him a third term. Instead,
he has promoted a relatively uncharismatic former civil chief
of staff and energy and mines minister, Dilma Rousseff, to

defend his legacy.
This legacy is not simply one of implementing free-market
ideas. The state remains firmly entrenched in the running
of the economy, despite many unhappy experiences
of “economic miracles” gone sour from hyperinflation
and foreign debt default. Ms Rousseff, and the PSDB
challenger, José Serra, also advocate a state-led
development strategy to a greater or lesser degree.
The failures of free market models exposed by the

global financial crisis vindicated several of Brazil’s statist
policies. The state development bank, Banco Nacional de
Desenvolvimento Econômico e Social (BNDES), played a
major role in supporting credit at a time when private banks
around the world were retrenching sharply.
The difference seems to be that a decade of responsible
debt management, floating exchange rates and inflation
targeting – introduced at the behest of the IMF in the wake
of the upheavals caused by the 1997-98 Asian and Russian
crisis – remain sacrosanct. These policy anchors were vital
in enabling Brazil in 2008 to withstand (to the surprise of
many) a series of external economic shocks that in the
past would have triggered major instability. Although some
large companies, such as Aracruz, a pulp and paper group,
suffered from poor derivatives deals, the country’s conservatively-managed banks were not exposed to the risky
assets that felled counterparts in the US and Europe. A
$30bn swap deal with the Federal Reserve Board (the US
central bank) increased trust in the Brazilian banking sector
and underpinned strong growth of deposits in recent years.
Indeed, during the global financial crisis, many Brazilians

overseas switched their assets out of US banks to Brazilian
banks, as they were perceived to be safer.
Notwithstanding all these positive political developments,
Brazil’s political environment remains a drag on
implementing reforms needed to sustain more dynamic
GDP growth. Although four parties typically account for
around 70% of seats in the chamber of deputies and
over half those in the senate, a total of 18 political parties
are represented in Congress and governing coalitions
are typically unwieldy affairs. On account of the lax rules
governing party allegiances, congressional representatives
tend to be extremely provincial, showing greater loyalty
to interest groups than to either party or policy. Moreover,
the president is critically dependent on the support of
state governors, who typically have considerable influence
over their states’ delegations in Congress. Switching party
allegiances in pursuit of career advancement is common
among politicians and contributes to the fractious nature of
the political system.
A new economic era
Brazil’s is a diversified economy with strong corporate and
financial sectors, a low external debt burden and highly
diversified export industries and markets. These factors
put Brazil in a position to emerge relatively quickly from the
global downturn. The country’s recession was brief and
shallow: the economy contracted by a mere 0.2% in 2009 –
with the help of some credit expansion, and some support
from the government’s flagship infrastructure development
programme, the Programa de Aceleração do Crescimento
(PAC), growth acceleration programme launched in

early 2007. In contrast to Russia, seen by many as the

9


more promising BRIC economy, Brazil responded to the
downturn by letting its currency depreciate, conserving its
forex reserves. Moreover, Brazil has, since 2008, become a
net foreign creditor as foreign debt shrank and international
reserves soared, prompting all three main credit rating
agencies to give the country an investment grade rating.
The Economist Intelligence Unit expects Brazil’s economy
to shoot ahead, by 7.8%, in 2010 – a fitting end to
President Lula’s second four-year term that has seen annual
average economic growth of 4.7% (compared to average
annual growth of 2.5% in the previous 25 years). Yet, the
macroeconomic outlook is far from risk-free. A double-dip
global downturn may yet hit Brazil on the rebound, and
fiscal and current-account deficits could all too easily
re-open. Although the budget deficit is relatively small
for a G20 country, at 3.3% of GDP in the 12 months to
end-May 2010, this may not last. Indeed, arguably, creative
accounting has played a part in keeping the primary budget
on target, and opacity in itself can jeopardise confidence if
the positive mood ever shifts.

Moreover, high public spending imposes a huge burden on
monetary policy to keep inflation tamed. The benchmark
Selic interest rate at over 10% is one of the highest in
the world, and market rates are far higher. By Brazilian

standards, interest rates are historically low, but given the
still-large public-debt financing requirements, the latter is
also crowding out private borrowing.
The current account could also deteriorate rapidly. Six
consecutive years of surplus ended in 2008. Last year,
the deficit amounted to 1.5% of GDP, and the Economist
Intelligence Unit forecasts a deficit of 2.7% in 2010.
Officials hope that the local currency, the Real, will devalue
accordingly, but this readjustment may not be smooth,
especially in a difficult external financing environment.



Forecast summary
(% unless otherwise indicated)


2008a

2009a

2010b

2011b

Real GDP growth

5.1

-0.2a

7.8

4.5

Consumer price inflation (av)

5.7

4.9

5.4

4.6

Money market interest rate (av) d

12.4

10.1c

10.3

11.5

Exports of goods fob (US$ bn)

197.9

153.0

178.2

194.3

Imports of goods fob (US$ bn)

-173.1

-127.7

-171.7

-200.9

Current-account balance (% of GDP)

-1.7

-1.5a

-2.7

-3.3

External debt (year-end; US$ bn)

253.4c

279.8c

307.0

318.5

Exchange rate R:US$ (av)

1.83

2.00

1.80

1.86

a – Actual.
b – Economist Intelligence Unit forecasts.
c – Economist Intelligence Unit estimates.
d – Selic overnight rate.
Source: Economist Intelligence Unit.

10


Natural advantages: Land and energy
Improvements in the policy mix have allowed public and
private investors to focus on developing the country’s
industrial and natural resource base. Brazil boasts the most
diversified economy in Latin America with export industries
ranging from petrochemicals to aeronautics. Manufactured

exports have, in fact, declined from almost 60% of total
export earnings in 2000 to 40% in 2010, but overall
earnings virtually tripled in this period thanks to extensive
and efficient exploitation of bountiful natural assets and high
commodity prices.
Brazil is finally being recognised as an agriculture
superpower. The commodities boom that peaked in 2008,
coupled with seemingly insatiable demand from China, has
powered Brazil’s commodities exports, which account for
some 43% of total foreign sales. It is the world’s largest
exporter of orange juice, coffee, sugar, beef and poultry
meat. Agronomists have developed new species to boost
productivity in less fertile areas, including almost 100 new
species of soya beans per year. Its grain and leguminous
harvest increased from 100m tonnes in 2003 to 134m
tonnes in 2009.
The explosion of demand enabled powerful local
multinationals to emerge, although smaller family-owned
farms have found it hard to integrate into this booming
market economy. Meanwhile, global commodity trading
groups such as Cargill and Bunge, long present in
Brazil, have linked a productive agricultural base into a
sophisticated food and drinks industry. Unilever and Coca
Cola, for example, have seen solid growth in Brazil and
driven much of the sector’s consolidation. Local groups in
processed meat products, such as JBS S.A and Marfrig,
have also prospered, while others, such as Sadia and
Perdigão, have merged after the former got burnt by
derivatives contracts.
Deeper underground lie other sources of rich foreign

currency earnings, including huge reserves of iron ore in the
mining province of Carajás in the northern Amazon region
and the south-eastern state of Minas Gerais. Although
the sector was opened up to foreign competition in 1995,
Brazil’s privatised mining group, Vale, the world’s largest
iron ore exporter, continues to dominate. It expects to boost
its iron ore output by 50% to 450m tonnes by 2014. The
company also acquired Inco of Canada in 2006 – with its
large reserves of nickel – diversified into copper, expanded
in Africa, and is now operating in five continents.
The list of Brazil’s other mineral riches is also notable:
the world’s number three bauxite producer; the world’s
sixth-largest reserves of uranium; the largest producer of
niobium; and significant resources of manganese, copper,
tin and gold.

Likewise, Brazil’s energy profile, in many respects, leads the
world. Around 80% of the country’s electricity comes from
hydro-electric plants, accounting for some 45% of energy
consumption in 2009, and continues to attract investors in
new dams in the Amazon. Petroleum derivatives accounted
for 39% of total energy consumption, natural gas for 8%,
coal for 5%, and nuclear for 1%.
While green energy sources have helped to wean
the economy off imported oil, and improved Brazil’s
environmental credentials (the adverse impact of
dam-building aside), the country’s recent discovery of huge
oil reserves below the deep waters off its southern coast
will eventually shift the energy balance, making Brazil a
major oil exporter over the longer term. The country also

produces industrial quantities of biofuels such as sugarcane
ethanol used in cars. In 2008, domestic sales of ethanol
exceeded, for the first time, the sale of petrol. Petrobras,
the state oil giant, is also investing in biofuels (biodiesel
and sugarcane ethanol via a joint venture with Tereos
International, a subsidiary of the French co-operative.
The introduction in 2003 of flex-fuel car engines has
encouraged a partial renewal of the passenger-car fleet; in
2009, 88% of new sales were flex-fuel vehicles. Flex-fuel
cars can run both on petrol and sugarcane ethanol, allowing
drivers to choose the cheapest option. These developments
have gone hand in hand with a local car industry that has
held up well in the global crisis, thanks in large part to
tax breaks and a good supply of credit, helping to make
Brazil the world’s the sixth-largest manufacturer and
fourth-largest and fastest-growing market for light vehicles.
Shaky infrastructure
Car makers may rejoice, but it is the millions of drivers
that have to negotiate the dangerously unpaved roads that
prevail everywhere except the main routes – and even
many of these are potholed or need resurfacing. Poor
infrastructure is one major reason that Brazil scores low in
the Economist Intelligence Unit’s business environment
rankings (based on 12 key business operating criteria),
which places Brazil 40th out of 82 countries despite
the expectation of some mild improvements in coming
years. The World Bank Doing Business report and other
international rankings tell a similar story. High and complex
taxation, excessive bureaucracy, complex customs rules,
corruption, a sluggish judiciary, and rigid labour markets are

further legitimate investor grievances.
But ask local businessmen with international ambitions
about their greatest concern, and the parlous state of
the infrastructure will almost certainly top the list. In our
survey, nearly one half of respondents (49%) point to
“low standard or costly infrastructure including telephones,
transport networks and utilities” as the main operational

11


obstacle, far more than selected corruption, poor
governance (34%) or skills shortages (32%), the state of
transport infrastructure is particularly dire. In spite of some
improvement in logistics, freight depends on costly road
haulage; there are few railroads; the potential for waterways
remains largely unexplored; and ports and airports are
congested. This can add one quarter or more to the cost of
getting goods to market, say investors.

The fragmented nature of transportation is even more
apparent in rail transport. The country’s 30,000-km rail
network has grown by 20% since it was privatised and
upgraded in the late 1990s. But despite government
efforts to get more freight on trains, it remains
underused (with rare exceptions such as lines operated
by iron ore exporters) accounting for only 25% of total
freight movement.

Which of the following operational obstacles 

present the greatest challenges to your business
operations in Brazil?

Meanwhile, Brazil’s great potential for river transport
remains largely unexploited. Waterways currently account
for only 13% of haulage, even though Brazil has a 48,000
km network of navigable rivers.

(% of respondents)
Low standard or costly infrastructure including,
telephones, transport networks, utilities.

The logistical nightmare does not end when goods
finally get to ports for export. Although ports such as at
Santos near São Paulo, which handles around one quarter
of the country’s foreign trade, have undergone some
modernisation over the past 15 years, they are congested
and expensive, especially at harvest times when trucks
laden with grain arrive for loading. It is a similar story with
the country’s main airports, the result of soaring demand,
and will surely become an important issue to be resolved
before the flood of visitors pours in for the football World
Cup and Olympics.

49%

Failure to honour contracts, bribery, corruption,
weak corporate governance.

34%

Lack of key skills including management.

32%
24%

Poor quality control.
Rising wages/low productivity.

21%

Underdeveloped retail and distribution systems.

20%
17%

Credit risk.
Availability of credit.

15%
14%

Difficult relations with organised labour.

9%

Saturated markets.
0

10

20

30

40

50

60

70

80

90

100

Source: Economist Intelligence Unit.

Investing in infrastructure has been at the heart of President
Lula’s growth programme (the so-called PAC, launched in
2007), but progress has been limited. Fewer than half of the
targets for 2010 have been met (with much of the proposed
financing going to first-time home owners, rather than into
physical infrastructure). High public spending commitments
are crowding out the paltry 1% of GDP that is proposed
for investment in infrastructure, while limited private sector
investment in transport will not make up the shortfall.

Little more than 10% of Brazil’s road network is paved,
and even these are poorly maintained. The exceptions
are the main toll roads managed by private operators
since the late 1990s, such as the main São Paulo-Rio de
Janeiro motorway. As well as growing car usage (with
25m vehicles now on the roads) more than 60% of cargo
transportation is by truck, even though this method is slow
and costly. Many fleets comprise owner drivers with ageing
vehicles, and this makes it hard for a company to develop
an overarching view of its logistics needs. According to
Andrew Morgan, founding chairman of Supply Chain
Europe, which is involved with freight logistics in Brazil’s
food industry, drivers are more worried about “fiscal
compliance” – that is, filling out the right tax invoice – than
whether the goods arrive on time.

12

Aside from the need for continuing investment, Mr
Morgan sees problems in the lack of a big picture. Freight
operators all along the supply chain tend to see “low
cost” as the key performance indicator. No-one takes a
strategic view of transport which would end up saving
money. He believes that if logistics operators focused at
each stage on time rather than cost, this would produce
the greatest efficiencies. The problem is that no-one takes
“end-to-end” responsibility for the whole logistics journey.
And this extends to the final export destination. He cites
an example of one company’s grain exports to Russia that
ran into trouble because the Brazilian logistics manager was

unaware of the different rail container sizes used in Russia.
Ultimately, the solution lies in better collaboration
between private sector operators and the state at various
levels. Where there is a big player, like Vale, it is possible
to negotiate with the state over transport needs and
investment. In a fragmented market, such as the food
industry, substantial effort is required to get the right
people around the table to discuss priorities, investment
and responsibilities.
Consume now, pay later
Once seen as ‘Americans without credit’, Brazilians are
starting to enjoy the rush of debt-induced purchasing
power. As access to credit has improved, and shops have
facilitated even relatively small purchases such as shoes
with installment-payments, household consumption
has boomed. Despite difficulties of getting goods to


shops, Brazil’s tantalising market of 192 million, youthful
consumers is simply too mouth-watering a prospect to
bypass. The eventual control of inflation in the mid-1990s
and the success of the new stable currency, the Real, set
the stage for a consumer boom. Falling unemployment,
now at 7.5% in major urban centres, real income gains and
credit expansion have pushed up disposable incomes and
made ordinary Brazilians feel a little richer.
Some 20 million Brazilians over the past six years have been
reclassified out of poverty, according to Marcelo Neri, a
social researcher from the Fundação Getúlio Vargas (FGV),
a Rio de Janeiro think tank and business school. Over one

half of all households in large urban centres are middle
class, up from 42% in 2004, according to the FGV. Never
great savers (given the legacy of hyperinflation), Brazilians
are now able to borrow to finance the good life, with credit
rising from 25% of GDP in 2005 to 45% of GDP today,
pouring further fuel on consumer fires.
This has generated rapacious demand for cars, personal
computers, TV sets and mobile phones. Following the 1998
privatisation of the telecoms industry the sale of mobile
phones rose spectacularly, overtaking the number of fixed
lines in 2003, and reaching 184 million in mid-2010.
Large retailing groups have also thrived. Foreign chains such
as Carrefour (France), and Wal-Mart (US) have diversified
into non-food and wholesale activities. Pão de Açucar
(controlled by Casino, a French retailer) recently agreed
to buy two local non-food outlets, Ponto Frio and Casas
Bahia, in order to increase its exposure to electronic goods
demand and the lower-income market segment.

With appetites for consumer goods now thoroughly
whetted, households are setting their sights on the bigger
prize of home ownership. The mortgage market, which
was almost non-existent in the 1990s, has started showing
signs of life, although it remains in its infancy. Equivalent to
only 1.3% of GDP at end-2005, it increased to 2.1% of GDP
at end-2008, and with public financing for social housing,
and a government pledge to finance at least 1 million
homes for the poor and the middle class, the mortgage
stock has risen in absolute terms, though is still only around
3% of GDP, indicating huge scope for growth.

Time and demographics are on Brazil’s side, at least over
the medium term. The share of the population aged 14 or
under is around 28%, and this age group will still comprise
at least one in five Brazilians for another 20 years. But
ageing will set in thereafter: the country’s birth rate has
declined from 2.39 per woman in 2000 to an expected 1.76
in 2010, according to Instituto Brasileiro de Geografia e
Estatística (IBGE). It forecasts that the rate will stabilise at
around 1.5 by the 2020s. But for the next decade, at least,
the country can count on a robust working-age population
to pay taxes and pension contributions (assuming growth in
the formal sector), in marked contrast to many developed
economies. It is the nurturing of this younger generation,
its education, training, jobs and skills, that holds the key to
Brazil’s long-term growth and prosperity, as Part Two of this
report explores.

Brazil: Population, income and market size


2005a

2006a

2007a

2008a

2009b

2010c

2011c

2012c

2013c

2014c

Population (m)

184.2

186.8

189.3

191.9

194.4

196.8

199.3

201.6

204.0

206.6

2,088.9 2,198.2 2,317.9

GDP (US$ bn at
881.8
market exchange rates)

1,088.9 1,366.3 1,637.9

1,573.4

1,927.6

2,021.7

Private consumption
(US$ bn)

531.5

656.6

818.4

988.0

987.4

1,194.0

1,253.1 1,299.8 1,370.5 1,442.3

Private consumption
per head (US$)

2,890

3,520

4,320

5,150

5,080

6,070

6,290

6,450

6,720

GDP per head
(US$ at PPP)

8,610

9,110b

9,800b 10,390b 10,360

11,150

11,660

12,260

12,990 13,760

Personal disposable
income (US$ bn)

543.3

674.2b

841.7b 1,016.3b 1,127.6

1,270.8

1,252.8 1,240.3

1,240.5 1,256.9

5.7b

6.2b

-0.7

-1.8

-0.5

Growth of real
2.5b
disposable income (%)

7.1b

15.5

0.2

6,980

0.7

Source: Economist Intelligence Unit.

13


TheFederalUniversityofParana,Curitiba.
TheoldestuniversityinBrazil,foundedin1912.

14

Parttwo:Socialand
intellectualcapital
I.Talentandeducation
Thelearningcurve
Thirtyyearsago,BrazilandSouthKoreahadsimilarlevels
ofGDPpercapita–todaytheAsiantigerisoverthree
timesricher(inPPPterms).Onemajorreasonforthis
divergencehasbeenalackofinvestmentineducation.In
Brazil,thesystem’sfailingsarehavingdirectconsequences
forthequalityoftheworkforce.In2008,some20%
oftheworking-agepopulationcouldnotread,writeor
understandbasictext,aslightimprovementonthe25%
leveloffunctionalilliteracyrecordedfiveyearsearlier.The
qualityofeducationforthemajorityofthecountry’schildren
andteenagers–thatis,thosewhocannotaffordaprivate
education–remainsparticularlyinadequate,heldbackby
poorteachertraining,shortcomingsinphysicalinfrastructure
includingalackofnurseries,andstill-hightruancyrates.
Onlyonehalfofthecountry’schildrencompletesecondary
education,thesecondworstdrop-outrateintheworld,
aheadonlyofMozambique,accordingtoAlbertoRodriguez,
aWorldBankeducationspecialist.
Thesystemcanboastafewsuccesses.Almostallchildren
agedbetween7and14attendedschoolin2008,according
toofficialfigures.Theaveragenumberofyearsofformal
educationintheworking-agepopulationhasalsorisenover
thepast20yearsfrom5.2yearsto7.1yearsin2008.Butthis
levelisstillshortofthe10yearsrecommendedbyUnesco
andachievedbyneighbouringChile,PeruandArgentina.

Therearealsobigregionaldisparities.Themoredeveloped
southandsouth-easthave7.5and7.7years,respectively;
thepoorernorth-eastaverages5.9years.Althoughyounger
peopletendtohavehadmoreyearsinschoolthantheir
parents,theyarestillillpreparedforthemodernjobmarket.
InOECD-runtestsacross57countriesin2006,Brazilian
15-year-oldsranked53rdinmathematics,52ndinsciences
and48thinreading.
Partoftheproblemisthestructureoftheeducationsystem.
Ahighlydecentralisedmish-mash,responsibilitiesarespread
overnumeroustiersofgovernment.Thefederalgovernment
spendssome3%ofitsbudgetoneducation,butitis
thepublicsectorschoolsrunbystatesandmunicipalities
thatmanagemuchofit.Thesysteminvolves200,000
educationalunits,50millionpupils,and3million,often
underperforming,civilservantsandmanagers,accordingto
JoãoBatistaAraújoeOliveira,aformerWorldBankofficial.
Teachersarealsooftenpartoftheproblemratherthanthe
solution.Reportsofwasteinschoolsarerife–computers
leftintheirboxesbecauseteachersdon’tknowhowtouse

themforexample.“Theycantalkabout[childdevelopment
psychologist]Piagetbuttheycannotorganiseaclassroom.
Theyjustdon’tknowthepractice,”saysMrRodriguez.He
estimatestheannualcosttotheeducationsystemandthe
widereconomyofsucheducationalshortcomingsataround
$600m.AsPauloRenatoSouza,aformereducationminister,
notes:“Weneedpupilsactuallytolearnsomething.”
Averageyearsofformaleducationbygender,age
groups,2008(inyears)

20-24 25-29 30-39 40-49 50-59 >60

Men

9.1

8.8

7.7

7.3

6.2

4.3

Women

9.8

9.5

8.5

7.7

6.3

3.9

Total

9.4

9.2

8.1

7.5

6.3

4.1

Source: IBGE.

Educationallevelachievedinworking-agepopulation
(25-64agegroup):
Basiceducation:63%
Secondaryeducation:27%
Highereducation:10%
Source: IBGE.

Companiesstepin
CompaniesinBraziloftenfindthatiftheywanttheskills
theyneed,theyhavetofilltheyawninggapleftbythe
country’sscrappyeducationsystemthemselves.Muchof
thetrainingtakesplaceafterrecruitsarehired,butsome

initiativestrytogetinearlier.Followinghisretirementas
presidentofPhilipsLatinAmerica,MarcosMagalhães,for
example,launchedtheInstitutodeCo-Responsabilidadepela
Educação,aninitiativetoraiseeducationstandardsinhis
homestateofPernambuco,inthenorth-east.Suchprivate
effortsarespreading,andcarrythesimpleobjective:tomake
theclassroomwork,andtrytocatchupwithcompetitors,
especiallyinAsia.
Theideafollowssimilar,successfulinitiativesinSouthKorea
andEurope.ButinBrazil,theymerelyscratchthesurface.
Meanwhile,governmenteducationbodies
insist,rightlyinmanyinstances,thatmoneyforeducationbe
spentonteachertrainingandpartnershipswith
state-runschools.
Thesedilemmasexistatpost-secondaryeducationtoo.
AnEconomistIntelligenceUnitreportonpost-secondary
educationinBrazilconcluded:“Ratherthanoperating
educationalinstitutions,theprivatesectorshouldworkin
public-privatepartnershipsrelatedtoeducation,sharebest
practicesofchangemanagement,providefinancialsupport
forprogrammestoenhanceteacherqualification,andshare
newtechnologysolutions.”

15


Every bit helps, it seems. “You cannot lose the opportunity
to set up a link between the corporate world and the
university,” says Mr Gutierrez, CEO of Intrabase, a local
marketing company. He adds that companies can spur

post-secondary institutions to explore real-world situations
by encouraging employee participation in educational
programmes and offering students hands-on experience
through internships and work-study programmes.
Creaming off
While the mass of under-educated Brazilians languish, the
story at the top of the pyramid is of intensifying competition
for managerial skills. Much of the quality talent that
enters the workforce comes from several well-respected
universities and business schools in Brazil, many of which
are ranked as the best in Latin America, according to a 2009
comparative survey by Heidrick & Struggles, a recruitment
firm. Students from leading (usually state-run) universities
in Brazil are rated highly by foreign multinationals.
In addition, business schools are catering for a new crop
of professional managers. Some of the more promising
students attend leading foreign business schools, but
increasingly home-grown institutions such as the highly
regarded Insper and IBMEC have emerged and been
successful. Others though have attracted criticisms for
lacking relevant “people-related” training that is increasingly
required by international management.
Although deemed highly creative, Brazilian staff are often
seen as lacking initiative. According to Sergio Averbach,
president of the South America division of Korn Ferry,
an executive search company, the success of Brazilian
managers internationally is more “due to their outstanding
influence and leadership skills, than to the ability to create
the new and the different.”
With rapid economic expansion and rising foreign

investment, demand for the right skills has simply
intensified. “Board members often tell me they are having
trouble hiring people from CEO to factory staff,” says Mr
Averbach. “I recently received 10 presidents of construction
companies. There is simply not enough labour force to
meet the needs at all levels in Brazil.”
Companies have few problems with those who are
qualified – there just aren’t enough of them. AES, a US
electricity company that has invested some $6bn in Brazil
since 1997 and plans to double in size within five years,
typically suffers a shortage of electricians and mechanics.
“Quality is not a constraining factor, but the volumes are
not there,” notes Andrew Vesey, AES president for Latin
America and Africa. The company has to invest in training
its own workforce to meet its needs.

16

Getting foreigners to fill the gap can also be frustrating.
Alistair Cox, CEO of Hay Group, a consultancy, says that
India provides a valuable example to follow: Brazil needs
to invest in information technology and attract the talent
currently working outside Brazil.
All these issues become starkly apparent from the
Economist Intelligence Unit’s own survey. The lack of key
skills is the biggest operating challenge faced by nearly
one third of survey respondents – and as much as 47% of
US-based companies – on a par with corruption and not
far behind the problems of poor infrastructure. Notable
deficiencies among staff include language skills (43%

report shortfalls there) and science knowledge (34%).
Still, over one half of respondents also say that the
Brazilian workforce matches their needs, with engineering
companies being among the more satisfied (although it is
worth noting too that the US Chamber of Commerce in
São Paulo recently found that 41% of its members were
unhappy with the quality of engineers, describing their
training as “totally inadequate”).
In which of the following areas of education or skills
relevant to your business do you believe the Brazilian
labour market satisfies your needs or falls short?
(% of respondents)
Basic literacy or numeracy

13%

Secondary education

11%

Tertiary education

11%

Languages

70%
68%

21%

54%

9%

IT

17%

35%

48%

16%

43%
62%

Science 10%

23%

56%

34%

Engineering

18%

61%

20%

Mobility

20%

59%

21%

Work ethic

16%

Soft skills (ie, problem solving,
cultural sensitivity, etc)

61%

23%

0

10

23%

58%

20

30

Exceeds needs

40

50

19%

60

Matched needs

70

80

90

100

Falls short

Source: Economist Intelligence Unit.

Brazilian managers also appear to lack international

experience and multicultural awareness, when compared
with their peers in developed markets. But local managers
do excel in creativity and innovation. Management
experience, finance and marketing are also highly rated.


How would you rate, relative to management in
developed markets, the skills and knowledge of
Brazilian managers in the following areas?

b)developed markets?
(% of respondents)

(% of respondents)
12%

Management experience.

35%

5%

International experience

Finance.

28%

16%

30%

10
Very high 1

30

14%

38%

13%

3%

13%

3%

31%

40

2

50

60

3

70

80

4

31%

Generally inferior.

90

0

3%

38%

32%

20

2%
5%

16%

36%
21%

0

23%
43%

51%

About the same.

3%

13%

34%

30%

10%

Creativity/Innovation.

41%

1%
5%

14%

42%

36%

8%

Marketing.

26%

32%

10%

Strategic thinking.

13%

40%

7%

Multicultural awareness (languages,
knowledge of foreign cultures, etc).

39%

24%

9%

People management.
Relevant technical skills

19%

Generally superior.

2%

100

Very low 5

Source: Economist Intelligence Unit.

Overall, Brazilian managers are deemed to be on a par
with developed market peers, and superior to those from
other emerging markets, according to 42% of respondents.
Education standards may be higher in most parts of Asia
than in Brazil, but the quality of management is “probably
worse in China and India”, says Eduardo Wanick, president
of DuPont Latin America.

10

20

30

40

50

60

70

80

90

100

Source: Economist Intelligence Unit.

The sky’s the limit
At the very top, there seems to be no shortage of role
models to inspire the most ambitious Brazilian executives.
Several Brazilian-born business leaders have risen to
global prominence in recent years. Carlos Brito, the CEO
of ABInbev, started his career with the Brazilian brewer
Ambev (which later merged with Interbrew and Anheuser
Busch). Alain Belda and Brazilian-born Carlos Ghosn have
enjoyed high-flying careers at Alcoa and Renault-Nissan,
respectively. André Esteves now heads BTG, an aggressive
emerging market investment bank. What, some argue, may
be holding back the next generation of business leaders is
the ability to think innovatively.

How would you rate the quality of Brazilian managers

compared with those in:
a) other emerging markets?
(% of respondents)

42%

Generally superior.

50%

About the same.
8%

Generally inferior.
0

10

20

30

40

50

60

70

80

90

100

Source: Economist Intelligence Unit.

17


Business education – not just for the boardroom
The size of Brazil’s market for business education is around $1bn, according to VanDyck Silveira, director of
business development at Duke Corporate Education. Petrobras, the state oil group, for example, is spending an
estimated $150m per year on training. Companies are increasingly taking on the burden of improving employee
skills that should have been covered within the education system.
Mr Silveira, one of several executives who took over and restructured the business school IBMEC in 1998, sees
a particular need for the soft skills of management – communication, giving feedback, “co-creating” and so on.
But he also believes that the highly flexible approach of his Brazilian students makes them well placed to benefit.
Unlike many other nationalities, “they don’t freeze when their mistakes are pointed out”. Feedback is taken
constructively and at face value, he says.
Duke CE’s courses are rare in a country where MBAs are focused on academic research rather than the needs
of companies. But while dealing with some of the most motivated and employable talent he sees much deeper
problems in Brazil’s education system - namely the failure of secondary schools to prepare students for the
world of work.
The elite are already well catered for, he believes, having attended expensive secondary schools where teaching
is rigorous and includes a strong dose of science and mathematics. These students are at a big advantage when
getting into the highly competitive and high-quality state universities.
The rest have a poor grounding in science, mathematics and computer science. They may have had classes in
15th century Portuguese literature, but they have not been trained to think rigorously or analyse data, remarks

Mr Silveira. This deprives potential employers of a corps of competent middle management and technical staff.
“There is a big disconnect between high school and university,” he notes. Many of the private colleges they go
on to are merely “diploma mills”.
Mr Silveira has seen the problem first hand, and has even had to alter the syllabus at IBMEC to get weaker
state school candidates up to scratch. Positive discrimination can help, but it tends to lower the overall quality of
graduates, and requires higher education institutes to teach basic, grade 1 skills or else see students fall behind.
The problem stems from the quality of teaching in what amounts to “a pact of mediocrity”. To paraphrase an
old Soviet-era joke about bosses and workers: “they pretend to teach us, and we pretend to learn.” Secondary
school teachers do not have to be accredited with a formal qualification. They may be able to run a classroom,
but they barely know the subjects they are supposed to be teaching.
A question of class
Mr Silveira argues for reform in three areas to meet Brazil’s future business needs. First, address the mismatch
between what business needs from school leavers and what the bureaucrats in the education ministries put on
the syllabuses. He wants officials to “create a learning architecture” that educates for life, from top management
to the shop floor.
Second, shift funding away from the top universities towards primary and secondary education. This means
ensuring proper training and qualifications for teachers, and greater transparency about which are the high- and
low-performing schools. While around 7% of the government budget goes to education generally, the vast
majority of this is spent on higher education.
Related to this is a third issue – the need to be more equitable, so that those who are most able to pay, and who
dominate higher education (and who will earn most in their future careers), are not funded by poorer taxpayers
who benefit least from the education system. With only around 1 in 5 school leavers going to college, this seems
not only unfair but also grossly inefficient.
Business should be less worried about the quality coming out of the top of the education system and focus on
the mid-ranking school leavers, who are needed to provide the nation’s middle management, technicians and
engineers, but find themselves struggling through, and too often dropping out of, secondary education.

18

II. Innovation in thinking and action

Which of the following technological factors most
impact your firm’s ability to innovate in Brazil?

A certain mindset

(% of respondents)

While Brazilian industry can boast several centres of
excellence—notably energy, aerospace and agribusiness—
education deficiencies hold back innovation in the wider
economy. David Neeleman, the São Paulo-born CEO of
Azul airlines (and founder of the low-cost JetBlue airline
in the US), observes a culture of deference among his
Brazilian staff. Flight attendants are happy to read the
company manual, but few actually raise issues during
meetings or try to improve processes. “Innovation starts
when people are able to speak their mind,” he says. He is
not the only investor to draw such conclusions.
But others would disagree with this assessment. Many
investors regard their Brazilian staff to be “flexible and
adaptable”, quite probably because they have had to deal
with a succession of economic crises that taught them how
to succeed in the midst of instability, say investors. “There
is a tolerance for ambiguity that is much stronger in Brazil
than in other countries,” says KornFerry’s Mr Averbach. The
Brazilian executive “has in his DNA the ability to change
direction with greater ease than in any other region in the
world”. But research conducted with Insead business

school suggests that Brazilian managers are less able when
it comes to “creating the new and the different”.
Whichever view one takes, Brazil cannot deny its poor
record of innovation. “Everybody agrees that innovation is
important but people do not necessarily behave that way,”
says Mr Wanick from DuPont. Brazil accounts for some
3.5% of world GDP at purchasing power parity (PPP), but
only 0.2% of world patents originate from this market. By
contrast, 28% of patents are registered in the US.
An Economist Intelligence Unit innovation model that
measures countries according to both their readiness and
success in innovation ranks Brazil 52nd out of 82 countries,
and notes that the country is likely to slip further down the
rankings in coming years. More interestingly, the model
shows that its ranking of the factors that contribute to
innovation (for example, the number of science graduates,
education levels, the business environment, R&D spending,
broadband penetration, etc), although in itself low, is
still higher than the measure for innovation successes
(measured by the number of patents filed globally). This
suggests that not only is Brazil insufficiently innovative
compared with its peers, but that it is also inefficient
with its resources, by failing to translate investments into
practical innovation.

Technical skills of the workforce.

46%

Availability of scientists and engineers.

41%

Total spending on R&D in the country.

33%

Availability of university graduates.

30%

Spending on R&D by the private sector.

28%

Quality of IT and communications infrastructure.

28%

Spending on R&D by the public sector (government).

23%

Broadband penetration.

13%

0

10

20

30

40

50

60

70

80

90

100

Source: Economist Intelligence Unit.

Whether this is the result of a lack of inventiveness or
systemic failures in the business environment is hard to
gauge, but Brazil’s weedy performance comes through
in the views and experiences of companies surveyed.
“Innovations that are developed locally are not frequent,”
laments Mr Wanick. Some 57% of surveyed executives
say that they do not have a dedicated R&D facility, or even
plan to have one in the short term in Brazil, although the
likes of IBM and General Electric have recently announced

decisions to establish their own research centres in Brazil.
Over one half of respondents (51%) say that, at present,
less than 10% of products and services sold by their
companies have actually been developed in Brazil, and at
least one quarter of respondents expect no progress over
the three years. Moreover, only 29% expect to develop half
of their products and services in Brazil, and that figure rises
to 38% in three years’ time.
Yet conditions for innovation on the shop-floor are more
promising; when focusing more on the human factors,
Brazilian-based companies are seen as well able to integrate
the latest international technology into their operations, with
almost one half (49%) of survey respondents describing
this capacity as “very good” or “excellent”, and only 6%
saying it is “poor”.

19


What proportion of the products and services sold by
your company in Brazil was developed 
in Brazil?
a) in the past three years
(% of respondents)

Greenfield thinking

51%

0-10%

21%

11-50%
13%

51-90%

16%

91-100%
0

10

20

30

40

50

60

70

80

90

100

Source: Economist Intelligence Unit.

b)in the next three years?
(% of respondents)
26%

0-10%

36%

11-50%
23%

51-90%

0

10

20

30

40

50

60

70

80

90

100

Source: Economist Intelligence Unit.

 ase study 
C
DuPont: Middle class army
DuPont has recently launched its version of ‘the people’s’
bullet-proof vehicle in Brazil based on a light and affordable
armouring concept. The new product, named Armura,
offers protection against 97% of firearms in circulation
in Brazil, according to DuPont, at a much reduced cost
($10,000 instead of $30,000 or more). The armour is also
much lighter (less than 100 kg against more than 200 kg for
regular armour).
The project was developed entirely in Latin America,
mostly in Brazil, says Eduardo Wanick, president of DuPont
Latin America. The concept is appealing to a growing
middle-class population that lives in a state of constant
insecurity, especially in urban centres (“40,000 murders a
year is like a small war,” says Mr Wanick – not to mention
carjackings and other forms of attack).
In order to put its product on the market, DuPont

provides complete prefab kits (its own products are called
SentryGlas and Devlar) to authorised car dealers. Five

20

One vital area of innovation where Brazil excels is in the
development of green technologies. Despite international
criticism over Amazon deforestation (and worries over
potential new oil wealth), Brazil boasts some impressive
green credentials. Electricity needs are largely met
through hydro power, and the country has experimented
successfully in biofuels such as sugarcane ethanol. Local
manufacturers and suppliers such as Magneti Marelli
developed a “flex-fuel” engine in the 1990s, allowing cars
to run on either petrol or ethanol, or a combination of the
two. Such models now account for more than 90% of new
vehicles in the fast-growing automotive market (see Part
one). Brazil-based companies are also involved in research
on a second generation of biofuels (such as cellulose),
although the performance of biodiesel has proved less
convincing. Local firms, such as Braskem, are also breaking
new ground in green plastics (see case study below).
 ase study
C
Braskem: A future in green plastics

15%

91-100%

models are currently available, from General Motors,
Toyota, Mitsubishi, Honda and Hyundai. “The potential is
huge,” says Mr Wanick, although he declines to provide
hard numbers. Brazil is the largest market in the region for
armoured vehicles; but there is plenty more demand for
Armura in the rest of Latin America and further afield.

Braskem, the petrochemical unit of Odebrecht, a major
industrial conglomerate, hit headlines when it announced
the development of so-called “green plastics”. Brazil’s
President Lula promoted the company’s technology on a
visit to Europe, unveiling a prototype of the “green car of
the future” which included Braskem’s innovative material.
The new sugarcane-derived polyethylene, which avoids
the use of naphta, will be produced on an industrial scale
by the beginning of 2011. The product will cost around
20% more than an equivalent non-green product, says the
company, but the innovation is viewed as a breakthrough in
the search for renewable alternatives to oil-derived plastics.
The plastic was developed from sugarcane ethanol by
Braskem’s research and development centre in southern
Brazil in partnership with Japan-based Toyota Tsusho.
In addition, Braskem is working with Novozymes, a
Danish-based biotechnology company, in a research
project to produce a sugarcane-derived polypropylene.
The company has capitalised on Brazil’s experience in ethanol,
which is already widely used as biofuel in the car industry.
Braskem’s ethanol is supplied by ETH Bio-Energia, also a unit
of Odebrecht. The new R500m green plastics plant, which
is being set up in Triunfo, southern Brazil, will have an annual

capacity of 200,000 tonnes, according to Braskem.


Green plastic resins are expected to find an eager market
among manufacturers of packaging, automotive, cosmetics
and personal hygiene products. Braskem has already
secured contracts with Tetra Pak and the Japanese
Shiseido cosmetics firm. One quarter of its initial production
will be exported to Asia. Meanwhile, Natura, a leading
Brazilian cosmetics company, is already advertising that
it will use Braskem’s green plastics as part of its
sustainability policy.
Braskem currently employs around 200 researchers, and
has filed 250 patents in Brazil, Europe and the US. Luiz de
Mendonça, Braskem’s vice-president, says that 20% of
the company’s sales come from products launched in the
past three years.
Both its industrial sites in Triunfo and in Camaçari, near the
north-eastern city of Salvador, host innovation centres (pilot
plants and laboratories). Braskem also has a PVC research
centre in São Paulo and partnerships with academic
institutes and universities at home and abroad, such as
with Gainesville’s University of Florida, the University
of Massachusetts and the Dutch Polymer institutes. Its
investments so far suggest that the company
9% may well fulfil
a long-stated aspiration to be a world leader in biopolymers.
Back to school
One way to promote innovation is through business
co-operation with universities and academic institutes.

The evidence to date seems reasonably positive. Of survey
respondents whose Brazil-based operations already work
with local universities, 60% say the relationship has been

 ase study 
C
SAP Labs: Software in Brazil
SAP, a global software giant, launched a new programme
in 2009 that involves universities in its innovation process
from its Brazilian base, in São Leopoldo in southern Brazil.
It set up its research laboratory within the local Unisinos
University, which recently launched new courses (IT and
English, and renewable energy sources) as a result of
SAP’s engagement. Groups of between 10 to 20 selected
students from various universities follow a two-year
programme at SAP, which focused on topics relevant to
Brazil’s future needs. These include:
EE e-health (such as electronic data management of health
records to ease the exchange of information along the health
chain, from local doctors to hospitals and chemists, as well
as integration among hospitals);
EE e-energy (efficient resource management);



“positive” and 12% “very positive”, compared with less
than one quarter (23%) who say that such co-operation
“failed to live up with their expectations” or was “very
unsuccessful” (5%). Brazilian-based companies would
appear to get the rough end of the deal (or are perhaps

too optimistic), as almost one third (32%) report that such
co-operation “failed to live up to expectations”.

How would you characterise co-operation
between your Brazilian operations and local
universities/academic institutes?
(% of respondents)
12%

Very positive

60%

Positive
Failed to live up to
expectations

23%
5%

Very unsuccessful
0

10

20

30

40

50

60

70

80

90

100

Source: Economist Intelligence Unit.

Examples of success include the local subsidiary of General
Motors which hosts a research and development centre
that works closely with São Paulo University’s engineering
school. Vale, the mining company, has also invested time
and energy to influence the curriculum of universities so
they train engineers in mining, railway and port logistics.

EE infrastructure and mobility (Brazil has a series of challenges
ahead of the 2014 football World Cup and the 2016 Summer
Olympics in Rio de Janeiro);
EE risk management and safety (sharing information among
various agencies and victims of accidents and natural
disasters); and
EE supporting small and micro businesses through the
development of dedicated software.

Local issues “will influence the software that we will be
developing,” says Erwin Rezelman, president of SAP
Labs. The industrial standard may still come from the US
or China, but “re-engineering may come out of Brazil,” he
says. Moreover, in some IT sectors where Brazil is most
advanced, such as e-banking, “maybe the standard should
come out of Brazil”. Mr Rezelman says research modelling
is due to start at the end of 2010 and the whole process is
expected to take up to five years.

21


III. Brazilians abroad
Making a name for themselves
Brazil’s voice on the world stage is being heard more
loudly and more often nowadays. While relations with the
US remain strong, Brazil is shifting focus to other Latin
American countries, China and Africa. It has raised its
profile with more military spending (albeit from a miniscule
base), a strategic defence agreement with France, following
military procurement contracts, and diplomatic forays into
the Middle East.
But it is Brazil’s appeal to foreign investors and the recent
boldness of its own companies abroad that is giving
substance to its global ambitions. Most of the world’s
100 largest multinational companies are operating in the
country: annual foreign direct investment (FDI) inflows
grew from a mere $10bn in 1996 to peak at $45bn in 2008,

before falling back to $26bn in 2009, pushing total FDI stock
to $320bn, and making Brazil the second-largest emerging
market recipient of FDI, after China. While traditionally FDI
has come from the US and Europe, especially Spain, new
players from Mexico, Colombia and Chile, are showing
interest too.
Perhaps more remarkable than the inrush of FDI, are the
international acquisitions and investment being made by
Brazilian multinationals – something that was not always
encouraged by past governments. The purchase by
Vale of Inco in 2006, for example, sent outbound direct
investment that year soaring to over $28bn (although it
has subsequently fallen back substantially). Such ventures
have been propelled in part by cheap financing from the
state-owned development bank BNDES, which invested
over $5bn in the past five years to help Brazilian companies
expand abroad. A relatively strong currency has also helped.

Foreign direct investment

2005a 2006a
Foreign direct investment (US$ bn)

2007a 2008a

2009a

2010b

2011b

2012b

2013b

2014b

Inward direct
investment

15.1

18.8

34.6

45.1

25.9

30.0

35.0

40.0

42.0

45.0

Inward direct
investment (% of GDP)

1.7

1.7

2.5

2.8

1.6

1.6

1.7

1.9

1.9

1.9

Inward direct
investment (% of gross
fixed investment)

10.7

10.5

14.5

14.7

9.9

8.5

8.9

9.5

9.0

8.8

Outward direct
investment

-2.5

-28.2

-7.1

-20.5

10.1

-6.0

-5.0

-5.5

-6.1

-6.7

Net foreign direct
investment

12.6

-9.4

27.5

24.6

36.0

24.0

30.0

34.5

36.0

38.3

Stock of foreign direct
investment

195.6

214.3

248.9

294.0

319.9

349.9

384.9

424.9

466.9

511.9

Stock of foreign direct
investment per head
(US$)

1,062

1,148

1,315

1,532

1,646

1,778

1,932

2,108

2,289

2,478

Stock of foreign direct
investment (% of GDP)

22.2

19.7

18.2

17.9

20.3

18.2

19.0

20.3

21.2

22.1

Share of world inward
1.59
direct investment flows (%)

1.51

1.79

3.00

2.89

2.77

2.89

2.94

2.77

2.92

Share of world inward
direct investment stock (%)

1.82c

1.69c

2.04c

2.08c

2.12

2.18

2.23

2.27

2.32

Source: Economist Intelligence Unit.

22

2.04


A focus on “South-South” relations, as part of a general
policy of trade diversification, is perhaps one of the biggest
changes in Brazilian trade policy under President Lula. China
has become its largest export and import partner, and the
share of trade with the rest of Latin America, other Asian
countries, the Middle East and Africa has also increased.
But competing effectively abroad also requires wider brand
recognition. An elite group of Brazil’s international players
have already achieved this recognition. As well as Vale, big
names range from the fashionable sandals of Havaianas to
aircrafts of Embraer. State-owned oil group, Petrobras, and
meat packers JBS and Marfrig have launched aggressive
acquisitions in the US. According to Fundação Dom Cabral
business school, JBS is now the most international Brazilian
company, with four-fifths of its sales abroad.
Other, lesser-known groups are also making headway,
such as Gerdau, a steel maker, and Natura, a cosmetics
manufacturer. The world’s banking sector will soon hear
more of state-owned Banco do Brasil and Itaú Unibanco,
both of which are planning significant international
expansion. A typical journey of corporate expansion by new
companies is being taken by Totus, a software company
that targets small and medium-sized businesses. Having
emerged stronger from fierce consolidation in its domestic
market, where it had built a strong brand, it is now looking
to expand elsewhere in Latin America, and will go further
afield in time. The global financial crisis may have delayed

some foreign ventures, but strong domestic growth,
healthy profits, and lower assets prices abroad mean that
foreign markets are beckoning.
The development of Brazil’s agriculture sector in particular
has provided fertile ground for two-way international
expansion. While the world’s leading food groups are
planting roots in the country in anticipation of 40% growth
in the sector over the coming decade, according to a joint
UN and OECD report, innovations in agronomy have been
a passport for Brazilians to enter new markets, particularly
in Africa.

“What has been achieved in the Brazilian cerrado is
applicable to the African savannah,” says Eliseu Alves, a
former president of Embrapa, a state agronomy agency.
The solution to global food security is “creating technology
and investing in research”, he says. Brazilian scientists
from the state of Minas Gerais are also visiting Angola
and Mozambique, two Portuguese-speaking countries,
to support technology development. Embrapa opened a
regional base in Ghana in 2008, and BNDES is financing
Brazil-based companies to export tractors and other
machinery to Africa.
Brand new
But beyond the charmed circle and the dynamic
newcomers, Brazilian brands still lack the international
draw of their Western counterparts, though its sizeable
domestic market mitigates some of the urgency of
overseas expansion. This is reflected in our survey, in which
84% of respondents say that Brazilian brand names are

either not well recognised or not highly regarded abroad.
Only 3% of US-based respondents think that Brazilian
brands are both recognised and highly regarded.
However, the perception of Brazilian brands is different
among China-based executives, with almost one quarter
of those respondents (24%) declaring a warm attitude to
Brazilian products.
This might be why Brazilian companies feel they have
more of an advantage (or at least less of a disadvantage)
when operating in other emerging markets such as China.
And executives are clearly alert to this trend. China is
expected to become a “primary trading partner with Brazil
in the next three years”, according to 63% of respondents,
compared with 51% who point to the US and 49% to Latin
America. Similarly, Brazilian companies see opportunities
for acquisitions in other emerging markets, with 66%
pointing to interest in firms elsewhere on the continent,
compared with 43% focusing on US companies, and
31% looking to China.

23


China-Brazil trade: A raw deal
The spectacular growth of Sino-Brazilian trade in recent years is one of the clearest indicators of Brazil’s success in
tapping into the dynamisim of emerging Asia. It is not hard to see why. China’s insatiable demand for raw materials is
matched by Brazil’s willingness and ability to supply them.
Commodities dominate sales to China, of which iron ore and soya beans comprised two thirds of the total. As the
global commodities boom in the latter part of the decade sent prices of Brazil’s main export products rocketing,
bilateral trade with China has leapt by more than 50% since 2007, topping $36bn in both 2008 and 2009, and

protecting Brazil’s trade from the worst of the global financial turmoil. China became Brazil’s main trading partner,
overtaking the US (imports of which from Brazil plummeted by 43% in 2009) and Argentina. All the while, imports of
Chinese manufactured goods declined by 20%, resulting in a bilateral trade surplus for Brazil of $4.3bn.
So what’s not to like about the relationship, from Brazil’s perspective? For some Brazilian manufacturers with global
ambitions, the story is about more than the commodity trade – and for them it is not always a happy one. Brazil has
found it hard to export value-added products to China. Embraer, an aircraft manufacturer, set up its joint venture
with a Chinese state-owned company seven years ago – a requirement for accessing the market – opening a plant
in Harbin, in China’s North East. So far, 70 aircraft have been produced for Chinese clients and 30 more are to be
delivered shortly (including 25 models imported from Brazil).
The Chinese authorities, however, announced that the Chinese aircraft industry would start manufacturing its
own regional jets without the help of Embraer. It was a difficult situation for the Brazilian firm, which argues that
its Chinese plant only has enough work to last until the start of 2011. It has asked the authorities for a licence to
manufacture its larger Embraer 190 locally, and announced that it was setting up a maintenance centre in Beijing.
“The creation of Embraer China Technical Services shows our long-term commitment and confidence in the growing
Chinese aviation market,” says Guan Dongyuan, president of Embraer’s Chinese subsidiary. Nevertheless, the future
of Embraer’s manufacturing activities in China may now depend on political and diplomatic arrangements to smooth
the way for higher value investments.
The other side of the coin
While Embraer ponders its future in China, the latter has unveiled some of its own ambitious plans for Brazil:
EE China Petroleum Corporation (Sinopec) has signalled its intention to grant new loans to Petrobras, the Brazilian oil
company, to which it lent $10bn last year in return for a guaranteed oil supply. Sinopec may also buy stakes in two
Petrobras oilfields in northern Brazil and a refinery in Rio de Janeiro (Comperj). Co-operation in transport and fertilisers
are also being considered.
EE Wuhan Iron and Steel Corporation (Wisco) intends to set up a $5bn steel plant near Rio de Janeiro in the new Açu port,
currently being built by EBX, a holding company owned by Eike Batista, a local billionaire. The new port and plant are
scheduled to open by 2013. Wisco will take a 70% stake in the new plant, which will have annual capacity of 5m
tonnes of steel. The Chinese government says it will eventually import steel (rather than iron ore) from Brazil.
EE Wisco invested $354m in MMX, a Rio de Janeiro mining group owned by Mr Batista, earlier this year. Two other
mines have also been sold by Votorantim and Itaminas to Chinese companies.
EE The Chinese Development Bank intends to grant a $1bn loan to Oi, the Brazilian telecommunications company, to

buy Chinese equipment.

24


Which markets will become the primary trading
partners with Brazil in the next three years?

Where do you envision an increase in acquisitions by
Brazilian companies in the next three years?

(% of respondents)

(% of respondents)

Other Latin America.

Other Latin America.

49%

The US.

The US.

51%

Western Europe.
10%

63%

12%

Middle-East.

11%

0

10

India.

15%

Rest of Asia.

16%
9%
21%

Africa.

1%

Other, please specify.

31%

Middle-East.

12%

Africa.

14%

China.

25%

Rest of Asia.

23%

Central/Eastern Europe.

China.
India.

43%

Western Europe.

22%

Central/Eastern Europe.

66%

3%

Other, please specify.
20

Source: Economist Intelligence Unit.

30

40

50

60

70

80

90

100

0

10

20

30

40

50

60

70

80

90

100

Source: Economist Intelligence Unit.

That Brazilian companies are eyeing the Chinese market is, in one sense, only to be expected. Companies go where
there is growth. But on another level, this represents a major shift in the balance of economic power. Emerging market
companies, products, managers and innovations may find more in common with one another than merely adopting the
business norms and ideas that emanate from the US, Europe or Japan.
Of course other emerging markets do not always make perfect allies: companies like Embraer have experienced the
classic dilemma of Western investors in China, forced into a local joint venture that puts at risk their intellectual property.
Yet, as globalisation resumes its onward march following the upheavals of the economic downturn, a new era of global
relationships may be characterised more by a battle for scarce resources, state-led investment strategies, and a flair for
dealing in opaque business environments, than through the market-led orthodoxies of the past. And these trends would
appear to play to Brazil’s own strengths and traditions.

25