doing business in brazil - deloitte

7/27/2019 Doing Business in Brazil - Deloitte

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Competitive BrazilChallenges and strategies forthe manufacturing industry


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The statistics mentioned in this book reflect the latest available information at the closing of this publication. The disclosure ofdata by the press or any other market sources updating the statistics exposed herein does not annul the informative purpose of

this material, which is to analyze the changes and essential trends established and developed throughout the years, despite one-off changes or shortterm economic and business cycles.

The contents of articles written by the guest authors in this collection do not necessarily reflect the opinion of Deloitte.

All rights reserved to Deloitte. No parts of this book may be reproduced, including citations of information, except if priorauthorization from Deloitte and guest authors, upon request, is granted in writing and commitment to source credit is binding.

Affiliated to the BrazilianAssociation for BusinessCommunication (ABERJE)

Contact for readers: [email protected]

About Deloitte

Deloitte provides services in audit, consulting, tax avisory, corporate finance, outsourcing, to clients spanningmultiple industries. With a global network of member firms in more than 150 countries, Deloitte bringsworld class capabilities and deep local expertise to help clients succeed the best performance, wherever theyoperate. Deloittes 186,000 professionals are committed to becoming the standard of excellence and they areunified by a collaborative culture that fosters integrity, outstanding value to markets and clients, commitmentto each other, and strength from diversity. Deloitte has been in Brazil since 1911. Nowadays, the Firm is oneof the market leaders and its over 4,500 professionals are recognized by integrity, competence and capabilityto turn their knowledge out in the best solutions for their clients. Deloittes operations cover throughout theBrazilian territory, with offices in So Paulo, Belo Horizonte, Braslia, Campinas, Curitiba, Fortaleza, Joinville,Porto Alegre, Rio de Janeiro, Recife and Salvador.

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2012 Deloitte Touche Tohmatsu. All rights reserved.

Project direction

Jos Othon Tavares de Almeida

Editorial board

Juarez Lopes de ArajoAltair RossatoHeloisa Helena MontesJos Othon Tavares de Almeida

Editorial coordinationRenato de Souza (Mtb 26.563)

Edition

Julio Meneghini (Mtb 52.308)

Editorial production

Sthefani Tironi (Mtb 43.533)

Graphic production and

image selection

Elisa PaulilloOtavio Sarsano

Production supportEster RossiKarina Sousa

Li Ying Yu

Promotion support

Andrea BragaDbora Costa

Nadia Ikeda

Further economics information

Fernando RuizGiovanni CordeiroGabriel Nickolas Cazotto

Proofreading

Miriam Moreira SoaresSonia Hagemann

English version

Unitrad Profissionais em traduo

Layout

Mare Magnum

Photographs

Walter Craveiro(project official photographer)Bruno Carvalho (Eduardo Raffaini)Izilda Frana (Pedro Suarez)Rgis Filho (Carlos Fadigas)

Collaboration (pictures)

FiatMonsanto

Press

Intergraf Ind. Grfica Ltda.

Print run

2,500 copies in Portuguese version

500 copies in English version

Collaborating companies and entities

Alstom BrazilBASFBraskemCNICummins BrazilDowEcoverdiFiat/ChryslerGM BrazilICC BrazilJactoMonsanto BrazilPositivoRhodiaSanofi Group Brazil


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The manufacturing industry in Brazil attracts both companies and investors

from all over the world, particularly at this historical time of our development.

More than ever, our country is a market of great opportunities. No

multinational industry today can afford to ignore Brazil in its strategies of

growth for the next years.

Nevertheless, domestic industry experiences today a series of major

challenges as a result of both foreign competition and historical internal

restraints. Deloitte believes that to meet these challenges, it is necessary to

understand them deeply.

This collection of articles organized with contributions from some of the

main executives in this market offers us a panoramic view of these exciting,

stimulating and complex times we are experiencing, and that helps us to build

new paths.

Starting its second century of operation in Brazil in 2012, Deloitte has

a privileged vision to help business leaders define the most appropriate

strategies to compete and prosper in the country.

We wish everyone an enjoyable read.

Juarez Lopes de Arajo

President of Deloitte Brazil

New paths for nationalindustry

Domesticindustryexperiences

today a seriesof majorchallengesas a result ofboth foreigncompetition andhistorical internalrestraints.

Deloitte believesthat to meet thesechallenges, it isnecessaryto understandthem deeply.


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Guest authors

Jos OthonTavares de

AlmeidaDeloitte leaderin Brazil formanufacturingindustry

Andr DiasPresident ofMonsanto Brazil

Deloitte local and global leadership

Craig GiffiConsumerand industrialproducts leader,DeloitteUnited States(Deloitte LLP)

Andr Luis Rodrigues

Former Chief FinancialOfficer (CFO) of Rhodiaand presently FinancialOfficer of JHSF

Alfred Hackenberger

President of BASF

for South America

Carlos Fadigas

President ofBraskem

Cledorvino BeliniPresident of the Fiat/Chrysler Group for LatinAmerica

Hlio BruckRotenberg

CEO of PositivoInformtica

Heraldo Marchezini

General director of

Sanofi Group Brazil

Jos Augusto Coelho

FernandesExecutive directorof the NationalConfederation ofIndustry (CNI)

Joe Vitale

Globalautomotivesector leader,Deloitte ToucheTohmatsuLimited (DTTL)


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Eduardo TavaresRaffaini

Deloitte leader inBrazil for miningsegment

Luc BurtonFormer Chief FinancialOfficer (CFO) of AlstomBrazil and presentlyFinancial Officer ofPuma Energy

Luiz Eduardo Taliberti

CEO of theEcoverdi Group

Marcos daCunha Ribeiro

Administrative directorof the Jacto Group

Sandra Mariani

Former CFO ofGM Brazil

Tadashi Yamashita

Latin America

treasury director forCummins Brazil

Pedro SuarezPresident of Dow forLatin America

Marcelo Drgg

Barreto ViannaVice president ofthe InternationalChamber ofCommerce (ICC Brazil)

Douglas NogueiraLopes

Partner of DeloitteBrazils Tax area

Deloitte industry and business expertise


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For agreater BrazilOvercoming the current challenges of the manufacturing

industry in the country will require a broad pact of allmarket agents. Initiatives such as the Bigger Brazil Plansignal some alternatives and invite us to buildjoint solutions to benefit our competitiveness, withinnovation and sustainability.

The manufacturingindustrys current agenda

in Brazil reflects

opportunities that result

from the special position

the country has been gaining in the

international scenario. With one of the

largest and most dynamic domestic

markets in the world, with solid economic

fundamentals and a perspective of

sustainable long-term expansion, it would

be natural for Brazil to become one of the

most important destinations attracting

investment from multinational companies

in the most diverse industries.

At the same time, however, our ever

increasing intense connection with an

economy that has reached unprecedented

levels of globalization also has its

troublesome side, which presents a

number of large challenges for local

production activities. Recent sluggishnessin the more mature economies and the

rise of other emerging nations intensify

the competition Brazilian companies face,

making their operation within and outside

our market difficult. In addition, we are

facing dilemmas that are now common

to almost all countries, such as relative

deceleration of industrial production, a

reduced share of total generated wealth

and, even, the risk of deindustrialization in

important sectors.

Neither can we forget the historical

obstacles that harm operation of national

industry, such as the Brazil Cost,

infrastructure deficiencies and low-skilled

labor. Our industrys current challenges

lead to a simple question: how do we

ensure conditions so that it can be

competitive and sustainable in the new

global reality?

Introduction


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ByJos Othon

Tavares de

Almeida

Deloitte leader

in Brazil for

manufacturing

industry

Times of great challenges usually awakenthe Brazilian peoples creativity and

determination. This, more than ever, is a

time to rethink models, reinvent practices

and, primarily, for private initiative, the

government and all of civil society to unite

to promote the development of industry.

All market agents need to unite around

this pact.

TheBigger Brazil Plan (PBM in

Portuguese), instituted by the federal

government in 2011 and expanded in

2012 with the objective of stimulating

the economy and, in particular, national

industry, is one of the initiatives that

today try to express the changes needed

for the resumption of growth in the

productive sectors. The participation

of private initiative in the program, by

means of representatives of the so-called

Competitiveness Councils, legitimates its

purpose and offers the business communityanother way to position itself to face a

situation that seriously affects its business.

With the motto innovate to compete;

compete to grow, the PBM, to the

extent it is supported by modern Brazilian

corporate leadership, has full conditions to

generate practical results to benefit its own

development.

Therefore, it is evident that to meet the

complexity of our challenges, Brazil needs

structural reforms in the most diverse fields.

Tax exemptions, foreign trade stimulus,

expansion of corporate credit, trade

protection measures and incentives for

significant sectors are some of the timely

measures established by the PBM that

need to be incorporated into the essence

of a national development strategy. Today,

Brazil has the responsibility to preserve

and promote one of its most significant


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8

Colonial BrazilThe Portuguese

metropolis used

to prohibit the

establishment of

factories in the

territory from

1500 to 1822.

economic frontiers: one of the largest

and most diversified industrial parks in

the world.

In the same way, it is up to the business

community to continue its efforts to adopt

better business practices and continuously

foster innovation, within a social and

economic environment increasingly based

on the values of sustainability of the

planet, its relations with society and the

business itself.

The collection of articles Competitive

Brazil Challenges and strategies for the

manufacturing industry has the merit ofcomprehensively addressing a broad set

of issues that characterize the dynamics of

productive activity in the country. Deloitte,

which with its clients daily builds solutions

to address the challenges presented here,

had the honor to put together in this book

End of the19thcenturyIndustrial

development begins

in Brazil, with coffee

growers starting to

invest part of their

profits to create

factories of textiles,

footwear and other

manufactured goods.

The decades ofthe 1930s and1940sIndustrialization

gains strength

during the Getlio

Vargas presidency,

with protectionist

measures, infrastructure

investments and

regulation of the

labor market.

Periods and moments that mark the

history of productive activity in Brazil

1956-1960The president

Juscelino Kubitschek

opens the

economy to foreign

capital, attracting

multinational

companies, and

establishes measures

to support local

industry.

1962Electrobras is created

during the Joo

Goulart presidency,

supporting the

generation and

distribution of

electric power that

significantly benefits

some industrial

sectors.

1969Embraer is created,

raising the global

status of Brazilian

industry. Its first

challenge was line

production of the

Bandeirante airplane.

A development

Our industrys currentchallenges lead toa simple question:how do we ensureconditions so that itcan be competitive andsustainable in the new

global reality?


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Sources: The National Confederation of Industry (CNI) and Deloitte (consolidation of public information)

1939Brazilian industry

benefits from the

Second World

War. With the fall

in imports, local

development

accelerates.

1942The Vale do Rio Doce

company is founded.

By the end of the

decade it would be

responsible for 80%

of Brazilian iron ore

exports.

1946The National

Steel Company is

created, significantly

increasing steel

production which

would support

development of

several industrial

segments in Brazil.

1952The National Bank

of Economic and

Social Development

(BNDES) is created,

supporting the

financing of

industrial enterprises.

1953Petrobras is created,

driving segments

connected to

production of goods

derived from oil.

1975The government

creates the Pro-

Alcohol program to

reduce dependency

on imported oil,

forcing industry to

adapt some of its

models to the new

fuel.

The decade ofthe 1980sHigh inflation

and successive

failed economic

plans make Brazil

unattractive. A

decade largely

lost for industrial

development.

The decade ofthe 1990sThe Real Plan is

implemented and

economic stability

again makes

Brazil credible to

foreign investors

and multinational

companies.

The decade ofthe 2000sThe entry of less

privileged classes into

the consumer market

changes the country,

while international

competition

increases in industry.

2011/2012The Bigger Brazil

Plan is launched,

bringing new

perspectives for a

national industry

trying to improve its

competitiveness.

trajectory


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a group of exceptional business leaders and

experts around the major issues that impact

Brazilian industry today.

The articles presented in this publication are

grouped around two large areas: the first,emphasizes competitiveness, examining the

countrys historical dilemmas and current

The collection of articles Competitive Brazil Challenges and strategies for the manufacturing

industry has the merit of comprehensivelyaddressing a broad set of issues that characterize thedynamics of productive activity in the country.

opportunities; and the second, addresses

the issues of innovation and sustainability,

taking into account the role of industry

in the construction of new development

models. From the views expressed here,

the reader can tap into reflections at thehighest level to help in developing strategies

to benefit Brazilian industry.


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The challenges faced by global manufacturers have no

boundaries. Global economic uncertainty has become the new

normal. Resource scarcity, new patterns of consumption, climate

change, new patterns of mobility, and the convergence of new

technologies are among the global megatrends reshaping theglobal manufacturing industry landscape.

These megatrends and challenges at the same time also provide

opportunities for manufacturers. Staying competitive is about

not being afraid to reinvent your company to adapt to new

situations. Leading manufacturers achieve profitable growth by

driving excellence in areas such as product development. They

also harness the power of collaborative innovation and master

the art of managing the complexities of their global value chain.

We hope that you enjoy this special collection of articlesorganized by Deloitte. The articles offer valuable insights on

what it takes to compete in Brazil and how manufacturers can

be successful in an ever-evolving global landscape.

Tim Hanley

Global Leader, Manufacturing

Deloitte Touche Tohmatsu Limited (DTTL)

Competing inan evolvinglandscape


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Contents

16 Brazil in the new world order

With a privileged position in the

global scenario, Brazil should

focus development on three

pillars: infrastructure, education

and innovation

Joe Vitale and Craig Giffi

20 New times and old

challenges

Opportunities and dilemmas in

a country increasingly attractive

to multinational companies

Andr Luis Rodrigues

26 Infrastructure for greater

growth

The need to resume

investments and face

the Brazil CostLuc Burton

28 In the eye of the

multinationals

The third wave of foreign

investment in national industry

Tadashi Yamashita

32 Together for change

The importance of discussing

our competitiveness in a

country that has becomeexpensive

Alfred Hackenberger

36 Facing the Chinese model

The need to more broadly

understand Chinese companies

business model

Jos Augusto Coelho Fernandes

42 Our challenges in theIT chain

Lessons of the Brazilian

PC industry and the battle for

fair competition within the

country itself

Hlio Bruck Rotenberg

46 A stronger link in the

entire chain

How mining and steel can,

together, face their own

challenges and broaden

their role in the countrys

development even more

Eduardo Tavares Raffaini

50 The country of the present

An attractive domestic market

and the challenge to conquer

strategic sectors abroad are

included in the agenda of the

national automotive industry

Cledorvino Belini

54 The rise of automobiles

Standing out in the global

scenario, the great challengeof the sector in Brazil is now

operational costs

Sandra Mariani

58 Challenges in tax controls

The importance of good

tax practices for industrial

competitiveness

Douglas Nogueira Lopes

Chapter 1The journey to competitivenessHow to face the countrys historical dilemmas andtake advantage of current opportunities


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64 Limits and expectations

New needs awaken a

transformation in the essence

of industry in the world

Luiz Eduardo Taliberti

68 Produce and conserve more

Technology as a fundamental

ally in the search for efficiency

and sustainable practicesAndr Dias

72 Part of the solution

Innovation and collaboration

as determinants of sustainable

development of business

Carlos Fadigas

76 The role of lifes industry

Dialogue with stakeholdersand the strengthening of

corporative responsibility

as essential for social and

economic growth

Heraldo Marchezini

80 The chemistry of innovation

The importance of the chemical

industry for innovation and

progress based on principles of

sustainability

Pedro Suarez

84 Construction of a new future

Adoption of innovative and

sustainable practices toinfluence operational and

strategic business models

Marcos da Cunha Ribeiro

90 Sustainability and social

responsibility

New challenges in

managing the integration of

organizational systems in search

of industrial competitiveness

Marcelo Drgg Barreto Vianna

Chapter 2For an innovative and sustainable futureThe role of the industry in a new model of development


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Brazil Cost Infrastructure Multinational presence Manpower qualification Foreign competition Impacts of China Internationalization

Bigger Brazil Plan Cost management Tax management Basic industry


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The journey to competitivenessHow to face the countrys historicaldilemmas and take advantage

of current opportunities

Chapter 1


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16

Brazil in the new

world orderAs a rising competitor, the country today hasa strong position in the global scenario. To

achieve its competitive potential viable in thenew world order of the industry, Brazil needs tobroaden its focus on the development of physicalinfrastructure and education, in addition toencouraging innovation.

For several years, Deloitte hascollaborated with a number

of organizations committed to

manufacturing competitiveness

at both a country and

international level. This past year, Deloitte

served as Project Advisor to the World

Economic Forum (the Forum) on a Future

of Manufacturing project chartered

to generate insights and a platform for

informed dialogue between senior business

leaders and policymakers about the pivotal

drivers of change in the industry, today and

in the future. Following the anticipated

release of the Future of Manufacturing

report in April 2012, the Forum with

Deloitte will embark on the next phase of

research on the topic of Manufacturing

for Growth. The project is expected to

provide CEO insights on how manufacturers

are driving economic growth worldwide.

Highlighting some of the perspectives from

these projects, this article provides a brieflook at Brazils potential in a new world

order of manufacturing competitiveness.

The manufacturing industry plays a vital role

in the economic health of every country

and has become increasingly more dynamic

and competitive globally. As a resource

rich nation with an attractive market for

investment, Brazil has an opportunity

to significantly increase its global

manufacturing competitiveness by focusing

efforts on developing the nations physical

infrastructure and education system.

Despite slowing growth figures, Brazil is

seen as a strong competitor globally and

is in a great position to create sustainable

growth and prosperity.

Manufacturing as a multiplier

The recent global economic downturn

revealed the true value of the


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manufacturing sector in preserving andimproving prosperity, supporting Gross

Domestic Product (GDP) growth, and

raising the standard of living. A globally

competitive manufacturing industry

can serve as a multiplier. It can create

economic sustainability, fuel a countrys

innovation, encourage more domestic and

foreign direct investments (FDI) and most

importantly, create jobs.

Understanding the breadth of todays

manufacturing industry and its multiplier

effect on the domestic economy is

essential. The multiplier effect not only

creates jobs within the sector, but also

creates jobs in areas such as financial

services, infrastructure development

and maintenance, customer support,

logistics, information systems, education

and training, research and development,

healthcare, and real estate.1

In turn, this

drives the growth in demand for highlyskilled workers and scientists, which

underscores the importance of a strong

education system. With manufacturing

having the capability to create a positive

cycle of prosperity for a country, it is

important to understand the factors that

enable the industry to remain competitive

and thrive.

Top drivers associated with competitive

manufacturing and deemed critical to

a nations competitive position include

labor and the availability of skilled talent,

access to materials amid growing resource

scarcity, energy and sustainability, the

ability to innovate at an accelerated

pace, and effective public policy that

enables economic development around

these factors. Out of all these factors,

talent-driven innovation is viewed as the

most important driver of competitiveness

By

Joe Vitale

Global automotive

sector leader,

Deloitte Touche

Tohmatsu Limited

(DTTL)Craig Giffi

Consumer and

industrial products

leader, Deloitte

United States

(Deloitte LLP)


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Brazils manufacturing competitivenessThree factors are likely to influence Brazils manufacturing industry competitiveness over the next several years 1:

Physical infrastructure: the productivity of an industry in any country is directly related to the quality of its physicalinfrastructure for commerce. Reliable and efficient physical infrastructure such as roads, ports, electricity grids, and

telecommunication networks play a vital role in logistics, moving raw materials and finished products on time and withminimum costs. Investing in effective infrastructure is essential. As host to the World Cup in 2014 and the Olympics in 2016,

Brazil is expected to improve infrastructure and bring in foreign investment, which will likely also have a positive influence onimproving the countrys manufacturing industry and competitive position.

Talent: the need to rapidly innovate and develop new products and processes has led to a growing skills gap. Shortages inskilled production jobs are taking their toll on manufacturers ability to expand operations, drive innovation, and improve

productivity.3In order for Brazil to sustain its competitive position and create a positive cycle of prosperity, the country will beas challenged as other nations to be a global leader in attracting, developing and retaining top science and engineering talentto drive world-class innovation, research and development, and close the skills gap.

Energy costs: clean, reliable energy directly influences production costs and is an increasingly important factor in

determining global manufacturing competitiveness. Fortunately, Brazil is one of the few countries with a sufficientlylarge natural resource base coupled with a relatively advanced research infrastructure. This places the country ina unique position to capture more profitable stages of the value chain through alternative energies that are

ecologically sustainable.

and is top-of-mind with manufacturing

executives across the world.1

Talent-driven innovation comprises

both the quality and availability of

a countrys brain trust. This includes

its skilled workers, such as scientists,

researchers, engineers, and teachers,

who collectively have the capacity to

continuously innovate and, simultaneously,

improve production efficiency. Talent

has been described as both the key

differentiator of a countrys competitive

edge in the 20thcentury and the most

critical determinant of success in

the 21stcentury.2

Competitive position

Brazil continues to be viewed by

manufacturing executives as a rising

contender in the global manufacturing

competitiveness race. Not unexpectedly,

Asian giants like China, India, and

the Republic of Korea are projected

to dominate the scene over the next

few years, out-positioning dominant


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manufacturing super powers of the late

20thcentury the United States (U.S.),

Japan, and Germany.

In order to remain competitive, Brazil will

need to carefully navigate its position

on foreign trade, exchange controls,

and investments. Brazils pursuit of an

industrialization policy centered on replacing

imported manufactured products with

domestically produced goods has yielded

a highly diversified manufacturing sector.1

Although export promotion remains a

policy priority, the current account deficit

is expected to rise to an annual average

of 4.0 percent in 2012 to 2016 as importgrowth exceeds that of exports.4Concerns

over a surge of Chinese imports has

already led to some non-tariff barriers and

protectionist measures particularly in the

automotive and light manufacturing sectors.

With tax incentives for foreign and

domestic investors, Brazil proves to

be an attractive market for companies

considering the country as an export

base. Many manufacturers have already

announced plans to expand operations,

including Asian manufacturing newcomers

who are installing facilities and/or

distribution network channels in Brazil.

An increase in foreign direct investment

will likely create greater domestic

competition and encourage government

policy modifications to positively influence

the state of Brazils manufacturing

competitiveness.

The global manufacturing landscape

continues to evolve and with this

comes a shift in the drivers that enable

manufacturers and nations to remain

globally competitive. In less than a

decade, a new world order for

manufacturing competitiveness has

emerged. Countries are placing greater

emphasis on creating manufacturing-

based economies that produce

higher-value jobs, leveraging the

multiplier effect, and rapidly growing

their economic middle classes.3As a rising

global contender, Brazil has several

factors that support a strong

manufacturing competitive position.

Building on the nations strengths while

continuing to focus on developing

physical infrastructure and education will

enable Brazil to sustain manufacturing

competitiveness and prosperity.

As a resource rich nation with anattractive market for investment,

Brazil has an opportunity tosignificantly increase its globalmanufacturing competitiveness byfocusing efforts on developing thenations physical infrastructure andeducation system.

1Global Manufacturing

Competitiveness

Index (Deloitte Touche

Tohmatsu Limited and

the U.S. Council on

Competitiveness, June

2010)

2Ignite 2.0: Voices of

American University

Presidents and

National Lab Directors

on Manufacturing

Competitiveness

(Deloitte Touche

Tohmatsu Limited and

the U.S. Council on

Competitiveness, July

2011)

3Boiling point?

The skills gap in U.S.

manufacturing (Deloitte

United States Deloitte

Consulting LLP and the

Manufacturing Institute,

October 2011)

4Economist Intelligence

Unit (www.eiu.com)


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Since the term emergingcountry was defined, it has

been associated with the word

opportunity. It wasnt long

before a new acronym, BRIC1,

was created to designate the main players

included in the group at the beginning:

Brazil, Russia, India and China. Any novelty

is bound to draw attention. From that

point on, many companies and investors

started a new adventure towards a future

of enormous possibilities offered by each of

these economies.

After working for a multinational operating

in Brazil for 93 years, it was not difficult

to sell our country during this exhilarating

time. No one remembers any longer some

words of the past that posed true ordeals

for both Brazilian executives and foreign

entrepreneurs, such as hyperinflation or

lost decade.

New times and

old challengesBrazil offers great opportunities to

multinational corporations today. Predictability,social mobility and cultural qualities justifythe attractiveness. Some dilemmas, however, ifnot faced in time, may puzzle those that see usfrom outside.

The prognosis that this nation wouldsomeday be successful has proven true.

The feeling that the right time and moment

have arrived is a fact. Certainly, some

investors on other continents regret not

having believed that the prophecy would

come true, since even with difficulties and

complexities in the business environment,

our future is quite different from the past.

Multinational strategies

Why Brazil should have already been, and

today is and will definitely continue to

be strategic for foreign multinationals?

Being the sixth economy in the world, in

and of itself, already makes this a country

that deserves to be included, in a detailed

way, in any strategic plan of successful

enterprises. A new rhythm has started

some years ago and we have perhaps

arrived at the best economic moment of

our history.


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21

ByAndr Luis

Rodrigues

Former Chief

Financial Officer

(CFO) of Rhodia

(until April, 2012)

and presently

Financial Officer of

JHSF

We have slept long and have just woken upto a gigantic social mobility and a powerful

market, which each year places millions of

people at dynamic levels of consumption,

soon to change classes and eager for

goods and services, from food and home

appliances, to cars and real estate. With

that thus creating a virtuous cycle, with

acceleration of formal employment,

reduction of unemployment and healthy

credit expansion.

When comparing the Brazilian reality to

other emergent countries with the same

potential, we may, in some cases, fall

behind with regard to growth rate, but

we definitely have significant qualities that

position us in a particular way and which

significantly favor us at the time investment

decisions are made. We have a cultural

affinity with most developed countries,

a well-established democracy and

continually evolving governmental andadministrative institutions.

After many attempts translated into

reforms, our locomotive was put on track

and advances broadly with well-defined

macroeconomic fundamentals. Predictability

has become part of our environment. All

this allied with a pragmatic, well regulated,

sophisticated and resilient financial

and bank system. For those watching

from outside, we have become a sound

and reliable country, most significantly

demonstrated by the positive way we coped

with the recent world economic turbulence,

coming out of it stronger and as a country

more attractive to investors.

Privileged qualities

Our economy is well diversified

and developed: agriculture, mining,

manufacturing, services and a large

1In 2011, the acronym

was changed to BRICS

with the entry of South

Africa into the group


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22

industrial base. Brazil produces all that

emerging nations need to grow. With the

exportation of these products and the

possibility to import what, in most of cases,

the developed countries produce at low

prices, our trade balance is attractive.

Our supply chain is also very privileged,

due to our massive energy reserves,

particularly those from renewable

sources and minerals. We are practically

self-sufficient in oil and world leaders

in the development and production of

biofuels. That is, sustainable development

is a priority for any serious company and,

in Brazil, we have countless conditions todevelop these opportunities.

Equally, a multinational company is also

attracted by the cultural qualities of our

people. Brazilians have a strong enterprising

spirit, are creative and skilled at working in

teams key components for innovation.

They are open minded and can rapidly

make changes, precisely correcting course

when necessary, besides being strong as a

result of the mixture of races and cultures,

which creates an environment of respect for

opinions, religions and beliefs.

In a country where it is possible to find

the main global business megatrends,

it is also possible to try all the growth

processes: organic, given our economys

growth rate; through innovation, given

the rich raw materials base and trained

teams; and through acquisitions, due to


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23

After many attempts, translated into reforms,our locomotive was put on track and advances

broadly with well-defined macroeconomicfundamentals. Predictability has become partof our environment. All this, allied with apragmatic, well regulated, sophisticated andresilient financial and bank system.

the varied conditions for consolidation

of some sectors and other opportunities.The exploitation of oil in the pre-salt

layer, the World Cup in 2014, the Rio de

Janeiro Olympic Games in 2016, as well

as important energy generation projects,

already represent billions in investment and

ensure continuity in the development of

our economy.

To compete head-to-head

Since there is no easy competition, we

face some challenges that may reduce our

speed and raise some questions for those

looking from outside. Our infrastructure,

in some cases, is somewhat precarious,

with a high number of blackouts in some

regions, conservation of public highways

far below that of private ones, airports

that cannot handle the increasing number

of passengers, and an incipient metro

and railroad network, when compared to

developed countries.

In the education field, we are unable to

cover the demand for professionals thatthe expanding economy requires. Our

education level is still lower than that of

the majority of the emerging competition

and, even with advancement in some

of the rankings, we graduate doctors at

a rate five times lower than developed

countries, and we are still in the 24th

position in volume of patents registered,

according to the most recent findings

available on these topics.

Actions are being taken and the solutions

will come with time. Consequently, more

companies will be attracted by these

opportunities. What may really dissuade

foreign companies are the factors that place

us in a difficult competitive situation. We

came in at a poor 53rdin the ranking of 142

countries released by the World Economic

Forum in 2011. What is remarkable is

the excessive bureaucracy in our business


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24

21.323.1 23.6

27.229.4

32.7

41.3 41.8 41.245.3

Credit volume

(% of Gross Domestic Product GDP)

Sources: Research Deloitte (based on data from the Brazilian Institute of Geography and Statistics IBGEand the Central Bank of Brazil BC)

* Data related to the metropolitan areas of Salvador, Recife, Belo Horizonte, Rio de Janeiro, Porto Alegreand So Paulo

Optimism justified by numbers

Brazil is regarded as serious and reliable as a result of the countrys recent

economic and social evolution

10.5 10.9

9.6

8.3 8.47.4

6.8 6.8

5.3 5.2

Unemployment rate*(In %)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Nominal average income*

(In R$)

874 862 9081,011 1,086

1,1621,282 1,344

1,5151,623

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011


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25

Actions are beingtaken and the solutions

will come with time.Consequently, morecompanies will beattracted by theseopportunities. Whatmay really dissuadeforeign companies arethe factors that place

us in a difficultcompetitive situation.

environment, an inefficient and complex

system, with close to one hundred taxes,

resulting in a very high tax proportion

in relation to company profits. The two

issues make it difficult for private initiative

to decide to play a role in solving these

dilemmas.

We cannot miss the opportunity available

at this time. To ensure a successful future,

it is now time to have a State program

addressed to the bottlenecks that

undermine our competitiveness, having in

mind that, if with so many difficulties we

were able to attract the largest companies

in the world, with implementation of thereforms already understood as necessary,

Brazil would soon occupy a better position

among the largest world economies.


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26

Infrastructure for

greater growth

To realize its potential for economicexpansion, the country needs to confrontits Brazil Cost and invest stronglyin infrastructure, ensuring the globalcompetitiveness of its domestic industry.

The last 60 years of Alstomsand Brazils shared history

are witness to a stable

and mutually beneficial

collaboration. Alstom has

been active and continues to be in

all the large Brazilian projects, bringing

the country innovative and cutting-edge

technology in the energy and transportation

sectors. Its financial partners French

and those of other countries contribute

equally to make a large number of these

projects possible. During this process,

Alstom has learned much from its activity

in Brazil and has a clear vision of what the

country strategically represents today.

Brazil is an important country today

whose weight should grow. This trend is

strengthened by the growth potential of the

so-called emerging countries. In addition,

due to its cultural characteristics openness

to new initiatives, a dynamics of sustainableimplementation and creativity Brazil

should increasingly confirm its role as a

laboratory of good practices, whether of

a technical or managerial nature.

The countrys growth path is wide and

the infrastructure area is one of the

great drivers of this expansion. We

are experiencing a decisive moment in

this environment and the investment

possibilities are limitless. The infrastructure

bottlenecks must be overcome so that we

can reach all the potential of a country of

continental dimensions. The economy is

growing and Brazil is becoming a power of

the 21stcentury, attracting direct investment

and intensifying local sales.

Invest to compete

This picture is only clouded by the Brazil

Cost, this set of obstacles of a fiscal, legal,


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27

financial and logistic nature that underminesthe competitiveness of Brazilian companies,

as well as, certainly, the competitiveness of

the entire domestic market in relation to the

ability of importers and exporters to deal

with international competition.

Therefore, even more investment in local

industry is needed in order to create

significant turnover in the domestic

economy. It is important to recognize that

attracting new technologies or importing

solutions is not enough. Increasing

investment is needed to generate jobs,

income and demand.

We have a wealth of natural resources

and growing manpower. With the correct

public and private initiatives it is possible to

guarantee the high expectations placed on

us, and infrastructure is an essential aspect

of the development of all this potential.

ByLuc Burton

Former Chief

Financial Officer

(CFO) of Alstom

Brazil and presently

Financial Officer of

Puma Energy

Investment lower than growth

Returning to the 1970s levels of investment in infrastructure isessential to lowering the Brazil Cost for companies that operate in

the country.

0

1

2

3

4

5

6

1970 1980 1990

Water and sanitation

Telecommunications

Transportation

Electricity

Investments in large areas of infrastructure made in

recent decades (% of GDP)

Sources: consolidated using numbers from the World Bank, the Institute of AppliedEconomic Research (IPEA) and the National Bank of Social and Economic Develop-ment (BNDES)

2000


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28

In the eye of the

multinationalsThe growth of direct foreign investmententering Brazil shows its significance in

the revenues generated by subsidiariesestablished in the country. In its third majorwave of attracting international capital at themoment, the country should make efforts togradually reduce the Brazil Cost.

The first wave of foreigninvestment in Brazil occurred

during President Juscelino

Kubitscheks Financial

Plan in the second half of

the 1950s, led primarily by companies

in the automotive sector. At the time,

multinational subsidiaries established in

Brazil represented little in the global sales

and profits of their companies.

Cummins, the largest independent

manufacturer of diesel engines in the world,

entered the country at that time through

an independent distributor. The first factory

was launched in 1971 attracted by the low-

cost labor and abundance of raw material.

Its production was directed basically to the

foreign market. It was during the 1980s

that the companys business took form,

driven by tax incentives such as the Befiex

Program through which export companies

were immediately credited 14% of theirtransactions value. It was an incentive that

could not be passed up. With it, Brazil

significantly raised its exports, contributing

to the trade balance.

The end of the Befiex Program in 1989

caused companies to turn back to the

domestic market, gradually reducing exports

and increasing domestic sales. In the first

years of the 1990s, despite the opening

of markets by the Collor administration,

foreign capital continued to arrive as

Foreign Direct Investment (FDI), however, at

a historical average of around US$ 2 billion

per year (current value), according to

Brazilian Central Bank sources..

Many foreign companies were hesitant to

making large investments in the country,

mainly as a result of the high inflation

level, which reached 3% per day at the


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29

time. The inflationary environment andthe exchange rate volatility kept many

businessmen and financial executives

up at night, spending hours on end

reasoning on how to explain their effects

on the subsidiaries results. Many of them

prepared feasibility studies to decide

whether to stay in the country. It was then

that multinationals started to invest heavily

in systems of total quality, employing

tools unknown at the time in the country,

such as Kaizen, the Total Quality System,

and the Failure Model and Effect Analysis

(FMEA), among others.

The second wave of foreign investments,

from my perspective, occurred at the end

of the 1990s, more precisely in 1997, with

Foreign Direct Investment (FDI) reaching

US$ 18.9 billion. With the maxi-devaluation

of the real during this period, foreign

investments surpassed US$ 30 billion.

By Tadashi

Yamashita

Latin America

treasury director for

Cummins Brazil

With a devalued exchange rate, therewas an opportunity to raise international

capital to increase investments in Brazil.

Privatization of companies in the energy

and telecommunications sectors also

attracted new interest. However, although

the exchange rate favored investment,

uncertainties caused at the time by the

2002 presidential election ended up driving

away foreign investors and significantly

reducing FDI from 2001 on.

With the continuation of the prior

administrations economic policy and

the promotion of political stability by

president Luiz Incio Lula da Silva, foreign

multinationals and investors saw that the

new administration was not the threat that

had been imagined before the elections and

they resumed investment in the country.

Starting in 2004, multinational companies

also began to consolidate their operations


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30

in Brazil. Many of them made the country

their regional headquarters for Latin

America.

Modern practices

In addition to these facts, still at the

end of the 1990s, many multinational

companies brought their model of quality

management, known as Six Sigma, to

Brazil. Its concept is the reduction of

variations in the process, increasing

productivity and raising companies

profits. All the companies that adopted

the model were successful, both in the

international and domestic environments.

Another important fact worth mentioning

is that the products manufactured in

Brazil started to strictly follow the

international quality standards practiced

by their parent companies. In addition,

the companies modernized their industrial

parks, globalizing products and using

cutting-edge technology. With the

globalization of products, the Brazilian

subsidiaries were able to supply foreign

customers, particularly in the case

of production stoppages of units in

other countries.

Given that Brazil has great mineral reservesand suppliers of primary products, the

majority of multinational companies make

the country an important base for supply

of raw materials. Many of them continue

to invest heavily and open new factories

throughout the country. Chinese, Korean

and North American companies, particularly

in the automotive and construction

machinery sectors, are arriving and

establishing new factories, mainly because

of the 2014 World Cup and the 2016

Olympic Games, events that are attracting

the third wave of productive capital.

US$ 66.6 billion were invested in Brazil in

2011 alone (see chart on page 31).

The revenues of subsidiaries established

in the country are significant today in the

global context of multinationals. In the case

of Cummins, for instance, sales outside the

United States have already reached 60%.

It is now up to theBrazilian governmentto do its part, bymaintaining politicaland economic stabilityand gradually reducing

the Brazil Costand the level ofbureaucracy, in additionto continuing to makeimportant investmentsin the educational areato prepare professional

and skilled manpower.


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31

The Brazilian subsidiary now represents

around 10% of global sales, compared

to 4% at the beginning of the 1990s,

contributing significantly to the process of

exponential growth of the company. The

subsidiary that once exported almost its

total production is today focused on the

domestic market.

Its now up to the Brazilian government

to do its part, by maintaining political

and economic stability and gradually

reducing the Brazil Cost and the level

of bureaucracy, in addition to continuing

to make important investments in the

educational area to prepare professional

and skilled manpower, already scarce in our

country. It is also up to the government to

maintain the balance between domestic

production and the foreign sector and

avoid any surprises in the conduct of

economic policy. With all these ingredients,

Brazil, together with the other simmering

emerging economies, will continue to

be seen by multinational companies as a

strategic and important country.

Brazil, destination of the world

Evolution of the flow of Foreign Direct Investment (FDI) in Brazil

(In US$ billions)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

32.8

22.5

16.6

10.1

18.115.1

18.8

45.1

25.9

48.4

66.6

Political andeconomic stabilityfavoring theattraction of FDI

Effect ofthe global

crisis

Historicalrecord

Source: Research Deloitte (based on Central Bank of Brazil data)

34.6


36/104

32

Together for

changeToday Brazil presents opportunities for localand foreign companies, but it has becomean expensive country. The solution requires

initiatives like the Competitiveness Council,part of the Bigger Brazil Plan, whichenables the discussion and developmentof material actions to deal with loss ofcompetitiveness in the industrial sector.

Close to fifty years ago, a BASFprofessional in Germany

came to Brazil to help select

a site for construction of

a plant in Guaratinguet

(SP) still our largest industrial complex

in the country. Upon his return to Europe,

he noted: Brazil is and will continue to be

the country of the future. Today, however,

I must correct this: Brazil is already the

country of the present.

This observation is not just the view of

a foreigner seeing the wealth of natural

resources and enterprising people. One can

say Brazil is one of the main global markets

based on the positive results of recent

decades. The nation is experiencing an

auspicious moment. It attained economic

stability and is a power in agribusiness the

second largest exporter of grains after only

the United States with the potential to

expand its agricultural production withoutdamaging the environment, thanks to

the technology applied and the natural

resources available.

In recent years it has also seen rapid

growth in the mobility of the social

classes, increasing the number of

consumers with considerable purchasing

power. Over the last 20 years, it

has further benefitted from another

competitive advantage: the demographic

bonus the country already has, and

should continue to have over the next

two decades, two workers for each

retiree or child. This provides a favorable

environment for economic development.

This scenario provides opportunities for

both domestic and foreign companies. The

country is considered one of the levers of

the emerging markets, which are showing


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33

greater growth than the developednations. In 2020, the emerging countries

will be responsible for more than a third

of the global Gross Domestic Product and

will contribute with close to 60% of all

global chemical production. In Brazil, data

released by the Brazilian Chemical Industry

Association (ABIQUIM) indicate that market

growth in 2011 was close to 10%.

The chemical industry will play a particularly

important role in market growth by driving

innovation and contributing to sustainability

in aspects related to natural resources, the

environment, the climate, the area of food

and nutrition and the quality of life.

In this context, BASF has defined seven

strategic sectors in which it intends

to contribute with solutions, helping

the country capture value from the

opportunities linked to global megatrends:

transportation, construction, consumergoods, health and nutrition, electronics,

agriculture, energy and natural resources.

A more expensive country

The promising portrait for the next years,

however, is compromised by the structural

challenges that over many decades

have been slowing the full development

of Brazilian industry, undermining the

competitiveness of domestic production

and threatening the sustainable growth of

the economy.

The high tax load that burdens the

purchase of machinery and equipment

and the contracting of engineering

services has been a constant inhibitor of

productive investments. The tax incentives

granted by the government are almost

always short-term and they deter broader

planning by businessmen. The high social

By Alfred

Hackenberger

President of BASF

for South America


38/104

34

Stimulus tocompetitiveness

With the Bigger Brazil Plan, started in

2011 and expected to run through 2014,the federal government intends to promotemeasures that bring more efficiency to theproductive environment of the country.

In the first half of 2012, a new packageof goals and measures was announced to

achieve the program objectives.

Goals

Encourage public and private investment;

Increase competitiveness in Brazilianindustry through productivity and

innovation;

Reduce tax, economic and financial costs.

Measures

Exchange rate: continuity of timely actions

on the exchange rate;

Taxing: a continuous process of relaxation;

Production: promote domestic

production;

Development: foreign trade financing;

Trade protection: respond to internationalcompetition;

Technological: incentives to theinformation and communications industry;

Credit: Investment Support Program (PSI

in Portuguese);

Automotive: expand procurementof domestic components and ensure

investment in research and development(R&D).

Source: Research Deloitte (from consolidation ofpublic data of April 5, 2012)


39/104

35

The chemical industry will play aparticularly important role in market growthby driving innovation and contributing to

sustainability in aspects related to naturalresources, the environment, the climate,the area of food and nutrition and thequality of life.

to more openly and constructively discuss

the problems that affect each segment.

In the chemicals area, we expect that

critical questions, as the cost of raw

materials and energy, will be raised

and addressed, in addition to effective

and ongoing support for research and

development (R&D). Bringing academia,

the government and industry together

is an initiative essential for improving

Brazilian competitiveness.

We are optimistic that this joining of

forces will result in effective changes and

concrete actions to confront the loss of

competitiveness in the industrial sector.

And, the confidence of entrepreneurs

and investors under a sustainable Bigger

Brazil scenario will result in even more

investment, compatible with the countrys

potential, ensuring that this prosperity will

be maintained today and always.

charges, that burden production, and the

precarious logistical structure, that makesexports difficult, are other obstacles to

development. Energy costs are the fourth

highest in the world, seriously harming

some industrial sectors, such as chemicals.

Brazil has become expensive, very

expensive.

Faced with these and other factors, it is

not surprising that the Brazilian industrial

GDP has shown only modest growth

the worst result among the BRICS. Some

analysts have already begun talking

about a process of deindustrialization. It

is necessary to reverse the situation. We

believe that the Competitiveness Council,

which is part of the Bigger Brazil Plan

(see chart on page 34) and whose purpose

is to analyze the factors affecting the

efficiency of Brazilian industry and propose

measures to counteract them, will allow

the government, workers and businessmen


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36

Facing the

Chinese modelTo deal with the challenges presented by the Asiangiant, Brazilian industry needs a strategy on two

levels: that of the country and that of companies.Understanding the government policies is notenough. It is necessary to understand theChinese company, its business model and theprocess of globalizing its production chains.

The emergence of Chinapresents new challenges

for Brazilian industry and

the country as a whole.

The oriental megapowers

process of growth and diversification

of its industrial production has brought

opportunities and, on a larger scale,

challenges for practically all elements of

Brazils productive sectors, which have seen

their positions in the foreign and domestic

markets affected.

Brazils ability to deal with the challenges

presented by China requires strategy changes

on two levels: that of companies and that

of the country. Research by the National

Confederation of Industry (CNI) has monitored

Chinas impact on Brazilian companies and

how the local industry has reacted (see chart

on page 40). In general, the conclusions

of this research show that the companies

that intend to survive these generalizedimpacts have to evaluate their weaknesses

and strengths with regard to Chinese

competition. This requires identification

of competitive advantages, both in their

operation as well as in relation to the

institutional and market environments in

which they operate, including an evaluation

of where China closes or opens possibilities

for insertion in global production chains.

For formation of a strategy, it is important

to understand the connections between

insertion patterns in global chains,

engineering and business models.

The risk of focusing all our attention to the

Brazil Cost issue and unfair competition

lies in that we can lose sight of the size of

the challenges that must be faced.

The case of the United States is illustrative.

There are many explanations for North


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37

American loss of manufacturingleadership in many industries, but the

fact is that some countries now have

more efficient production. This can be

objectively verified: the number of hours

to produce a product, the number of

years to move from the research phase to

production and the accuracy of machinery,

for example.

The lessons of demobilization of

manufacturing in the United States

and of manufacturing growth in

other countries relates to productivity,

innovation and the understanding of

the involvement of different industries in

global production chains. This agenda

will determine Brazils ability to develop

its new industrial base. The center of

reaction policy is in the companies.

It is their reaction that will, in fact,

provide support.

Understanding local companiesTo understand China, it is important

to understand its companies business

model and how they integrate with global

production chains. They take advantage

of the fragmentation of production

on a global scale, stimulated by gains

in economies of scale and helped by

the development of the container in

transporting cargos and its corresponding

logistics infrastructure, as well as by

the significant drop in the cost of data

transmission networks and by industrial

policies consistent with this environment

of fragmented production.

China was a major beneficiary of the

process of globalization that occurred

at the end of the 20thcentury and start

of the 21st. The ability to connect to this

new environment explains one important

source of its growth and its transformation

By Jos Augusto

Coelho Fernandes

Executive Director

of the National

Confederation of

Industry (CNI)


42/104

38

rapidly into new niches after having a

clear vision of the profitability of the

original invention.1

Beyond the public policies

China as an industrial platform benefits

from a geographic advantage: its location

in an area favored by a network of superports that connect different countries

Japan, South Korea, Malaysia, Singapore

and Thailand, among others in a strong

productive integration of a wide base of

suppliers located in the various markets of

the region. This productive base, a true

industrial ecosystem, has also developed

an extraordinary capacity to produce

with flexibility and reconfigure processes

to supply large quantities and a varied

mix of products.

The key issue is that, to build a Brazilian

industrial strategy with respect to China,

the understanding of its public policies

is not enough. The starting point for

developing a long-lasting strategy is to

understand the Chinese company,

its business model and the evolution

of the process of globalization of

production chains.

in the center of the production networks

of practically all industrial sectors.

As it captures portions of the

fragmentation of production on a global

scale, China is gaining basic advantages

associated with economies of scale

and of scope, and learning born fromspecialization. These economies lead to a

system that operates with margins much

lower than those of more vertical industrial

systems. This is the primary source of

Chinese competitiveness.

Specialization strengthens this movement

by encouraging focus, efficiency and the

development of specific knowledge, more

difficult to achieve in less specialized

industrial structures. In one of their books,

the authors Dan Breznitz and Michael

Murphree, academics from the Georgia

Institute of Technology, synthesize the

Chinese model: Chinas capacity for

innovation is not only in the process (or

increase) of innovation, but also in the

organization of production, manufacturing

techniques, technologies, delivery, design

and in the second innovation cycle. This

structure allows China to move more

The risk of looking only for the problemsof Brazil Cost and unfair competition is to lose

perspective on the scale of the challenges that mustbe faced.


43/104

39

Production chains are not static. They

evolve due to changes in relative prices,

technological transformations, logistics,

evaluations of risk, the profile of demand,

societal values such as sustainability and

management models.

Production chains may be entering a new

phase: from a focus on uniting multiple

links of low cost to one of shorter chains

structured in regional manufacturing

networks. If this trend continues, the

chances increase for Brazil to capture

manufacturing opportunities. This potential

will be greater and better if the country

is prepared to offer efficient logistics,adequate communication systems, and

business models open to integration and

information sharing. No less important,

to create a point-to-point strategy, the

existence of innovative manufacturing

companies with the ability to adapt will

always be essential in our country.

Strategic initiatives

In structuring a strategy for Brazilian

industry to adapt to the impacts generated

by China, the company is the starting point.

However, there is a set of equally important

actions that require joint public and

private action. To better position national

manufacturing with respect to the Chinese

model:

Increase the competitiveness of

companies in the country: regardless

of the scenario, Brazil needs to raise its

competitiveness. China increases the

sense of urgency. Brazil today has an

economy of high costs: taxation, logistics,

infrastructure, wages, energy and credit.

And all within an environment with an

overvalued exchange rate.

Strengthen the opening of the Chinese

market:through its tariff schedule and

non-tariff barriers, China makes import of

Brazilian industrial products difficult. Brazil

should have a strategy and action plan to

deal with those problems identified. This

is particularly important for agribusiness

products, for which Brazil has clear

competitive advantages. The action

developed in favor of pork is an example

of initiative that should be repeated.Consolidate the strategy for natural

resource intensive products: Brazil

needs to build a strategy that exploits

Chinas dependency on natural products

in order to maximize the benefits of

this relationship. This approach involves

actions in infrastructure, logistics and

research and development (R&D).

Educate the market to identify niches

and opportunities: the size of the

Chinese market and its developmentperspectives require systematic

work of prospecting, identification

of opportunities and business

promotion actions.

Consider the opportunities for

integrating with value chains: in

fragmented chains, Brazil needs to

identify the links in which the country

can sustain competitive positions by

means of economies of scope and scale,

1Run of the Red Queen:

government, innovation,

globalization, and

economic growth in

China


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40

and the ability to innovate. Multinational

companies have taken steps to avoid

concentrating their inputs and raw

materials in a few suppliers due to the

risk of being without supplies in the event

of natural disasters or political crises.

This strategy represents an opportunity

for Brazilian companies to capture

investment and integrate with global

production chains. In other cases, due

to Chinas high level of competitiveness,

the best strategy for Brazil is to maintain

competitiveness by integrating with parts

of the Chinese supply value chain.

This is a step that is being taken by

several Brazilian companies, both in

connection with importation and

investment in China.

Facilitate the structural

transformation of Brazilian industry:

China and Asia as a whole impose

structural modifications on Brazilian

industry. The critical question iswhether the country has the capacity to

develop new sectors and products that

take advantage of good competitive

conditions and meet the challenges

of change, both global and of its

industries. The size of the Brazilian

market and its area of influence, as

well as the opportunities related to

pre-salt, renewable energy, products

derived from ethanol and exploitation of

biodiversity are vectors of this process of

transformation.

Attract Chinese direct investment:

China has become an important global

investor. It is up to Brazil to develop

strategies to capture Chinese Foreign

Direct Investment (FDI). One area

has become especially promising:

infrastructure. Funds recently created

for the sector, currently in the regulation

phase, should be a powerful instrument

Action and reaction

How China impacts Brazilian industry and how it positions itself

Research conducted by the National Confederation of Industry (CNI) on

the impact of the Chinese competition model on Brazilian companiespoints to a number of findings:

Competition from Chinese products in the domestic market

affects one in every four industrial companies and the exposureto competition increases in accordance with the size of the

organization;

The intensity of the competition varies by industry those mostaffected are electronic and communication material, textiles, hospital

and precision equipment, footwear and machinery and equipment;

Competition with the Chinese is even more intense in the

international market than it is in the domestic market;

The number of companies that import raw material, final products ormachinery and equipment has increased over time.

In reviewing Brazilian companies strategies to deal with thiscompetition, the following patterns of reaction stand out:

Half of the companies have already developed a strategy to deal withthe competition (the rate varies in accordance with the size of theorganization);

The main actions involve investment in the quality and/or design ofproducts and reduction of costs and/or gains in productivity;

The portion of large companies that already have theirown production facilities in China is 10%, concentrated infour industries: automotive vehicles, machinery and equipment,

electrical machinery and materials and electronic andcommunication material.


45/104

41

for achieving this objective. Note that

Chinese investment has increased in

Brazil and, more recently, it has alsobegun competing in the manufacturing

industry.

Develop a trade strategy focused on

the interests of industry: one of the

paths toward confronting the Chinese

challenge is to develop a network of

trade agreements in markets significant

for Brazilian industry. Free trade

agreements result in the establishment

of preferences. To the extent that

Brazil can succeed in developing these

agreements and China has difficulty

doing so, our competitive capacity

increases. For Brazil, it is especially

important to maintain preferential

margins in the Americas, where Mexico

is the primary priority, and consolidate

the penetration of Africa.

Coordinate international actions:

undervaluation of the Chinese currency

and the problems associated with Chinas

trade and industrial policy considering

its conformance with the World

Trade Organization (WTO) , dependon coordinated actions in international

forums.

Strengthen the trade protection

system: it should be ready to use the

mechanisms provided for by the WTO

efficiently, competently and in a timely

manner.

Monitor Chinas economic evolution:

Brazilian corporate and public policies

in relation to China cannot be based

on ignorance. Monitoring is important

to identify how China will adapt to

the challenges of strengthening its

domestic economy and increasing its

role in the international financial system.

The probable increase in domestic

consumption, the process of capital

liberalization and appreciation of the

yuan, the evolution of domestic

costs and industrial policies deserve

special attention.

The lessons of demobilization of manufacturing inthe United States and of manufacturing growth in

other countries relates to productivity, innovationand the understanding of the involvement ofdifferent industries in global production chains.This agenda will determine Brazils ability todevelop its new industrial base.


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Our challenges

in the IT chainThe success of the Brazilian PC industry, withthe introduction of good public policies, has been

supporting the growth of the official market.To ensure the ability to compete with largeinternational groups, Brazil will now need increasedsurveillance to prevent unfair competition and toenforce clear rules to be applied to all.

The Brazilian personalcomputer industry can be

considered a success case

for the introduction of public

policies focused on economic

and social development. The framework

of incentives for personal computer (PC)

production encompasses not only local

manufacture of computers but also the

development of a chain of inputs, such as

motherboards, monitors, memory and hard

disks, in addition to investments in research

and development, nationally.

Consequently, the information technology

sector generates jobs and fosters

researches, creating a virtuous cycle for

the country in terms of income

and technology. Above all, the

Brazilian model is fair, since it grants

similar incentives to all manufactures,

independently of their origins. This is

the reason why practically all significantmultinational groups have a Brazilian

production, providing consumers with

access to a large range of brands.

The success of the Brazilian model has

contributed to the growth of the official

market in recent years. Before 2005,

approximately 80% of the PCs sold in the

country were offered by the so called

grey market (those with some level

of illegality in their chain). Currently, it

is the official market that accounts for

close to 80% of the amount sold in

Brazil, according to International Data

Corporation (IDC). In an increasing

legalized manner, the Brazilian market

has been expanding at a rapid pace,

surpassing more mature economies such

as those of the United Kingdom and

Japan, to become the third largest global

market for PCs. This is an irrefutable proof


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that the local production model does notpose any obstacle to market development.

The international competition

One of the consequences of the successful

development of the domestic market

is that the good opportunities have

encouraged multinationals both North

American and Asian companies to

increase their focus on our territory in

recent years. As a result, the increased

competition in Brazil has changed

the industrys levels of profitability,

contributing to a convergence with levels

close to those realized by developed

countries. Although accelerated by

the weak demand in the more mature

economies, it can be understood as a

natural process.

The episodes of unfair competition related

to imported notebooks, a recurrent

problem in the country, are worrisome.Large volumes of PCs manufactures in

Asia have entered the local market at quite

reduced prices. This process has occurred

with signs of under invoicing, since there is

a tax burden of over 40% over imports of

this kind, which theoretically would

be sufficient to make the entry of finished

computers into Brazil inviable.

Deficiencies in our customs inspection

system have allowed such imports,

harming the domestic industry as a

whole. The impacts have continued to the

present, even after the implementation

of inspection improvements by the

government, since it is hard for computer

prices to return to their previous level

after having been strongly reduced in the

market. The lesson serves as a warning

to the government, that it should ensure

equal competitive conditions in the official

computer industry.

By Hlio Bruck

Rotenberg

CEO of Positivo

Informtica


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Besides greater market oversight efforts,

another point that deserves attention

from development policymakers is the

exemption of taxes on revenue (PIS)

and contributions for social security

funding (COFINS) levied on imported PCs.

It does not make sense to maintain

such a benefit to foreign manufactures

when we have already developed a local

industry with production capacity well

matched to demand. This would

not be protectionism, given the

increasing participation of foreign

companies with local production in the

Brazilian PC market.

Market data support this thesis. Presently,

the sales ranking of the five largest

manufacturers already includes four

multinational groups. Two years ago,

Brazilian companies dominated this list.

Positivo Informtica is the only domestic

manufacturer that has maintained a solid

position in the Brazilian market, a sales

leader for the past six years according to

International Data Corporation (IDC).

It is possible to operate in this market and

compete with large international groups.

Our leadership in the market evidences

that, a natural consequence of a formula

that generates value for customers, nimble

management, and a rigorous search for

competitive costs. It is fundamental to

have clear rules applied to all to enable

the Brazilian market to maintain its growth

trajectory, contributing to the technological

development of the country.

Above all, the Brazilianmodel is fair, since itgrants similar incentivesto all manufactures,independently oftheir origins. Thisis the reason whypractically all significantmultinational groups

have a Brazilianproduction.


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It is fundamental to have clear rules applied toall to enable the Brazilian market to maintain its

growth trajectory, contributing to the technologicaldevelopment of the country.


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A stronger link in

the entire chainAs essential bases of the manufacturing

industry chain, mining and steel can, together,starting with more cooperative actionsbetween them, better meet their ownchallenges and expand their role in the countrysdevelopment even more.

The mining and steelsectors are at the

base that supports the

industrial development

of the country. By

understanding the challenges that both

currently face and evaluating the ways

to meet them, in reality we are actually

discussing ways to expand

competitiveness in all sectors of the

manufacturing industry. And this is exactly

what we need at this time.

In analyzing the proximity and

interconnection between these two

sectors, greater collaboration between

their respective agents can be seen as

a trend, both emerging and necessary.

In spite of the numerous challenges

the mining sector faces new sources

of financing, increased costs and

competition for resources from the energy

and infrastructure sectors and in thesteel sector always looking for ways

to protect itself from commodity price

volatility, starting, for example, with hedge

operations by participating directly in

financing the mining sector , there is still

room to make progress in the two areas.

The growing number of joint ventures

between companies in the two sectors to

optimize their operations already shows

this movement of greater cooperation,

which can only grow.

Volatility and other issues

In mining, the main issues that affect

the sector should continue practically

unchanged over the next years. However,

from a macroeconomic and geopolitical

viewpoint, it becomes clear that the

difficulties that plague the industry

are rapidly reaching an extreme and

unprecedented level.


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By Eduardo

Tavares Raffaini

Deloitte leader in

Brazil for min

doing business in brazil - deloitte

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