While nearly all of the world’s largest 500 companies are in Brazil, it’s well known that Brazil’s business environment is exceedingly complex.
Large corporations can do business in Brazil in part because they can afford to hire those knowledgeable on the intricacies (both legal and otherwise) of doing business in Brazil.
At the other end of the spectrum, small foreign companies often express an interest in the Brazilian market but are soon put off by the costs of overcoming the myriad bureaucratic and cultural difficulties.
Between the multinationals and the small companies, there is a large segment of mid size companies. What about them? Certainly, they have interest and the need for expanding their markets and sales but still they are usually at a loss as to how and where to start. Moreover, companies that were attracted to Brazil by positive reports in business and financial publications five or more years ago are now put off by reports showing the economy has soured.
Brazil’s size, its hosting mega-events such as world cup soccer and the Olympics, its international reputation for beautiful women, carnaval, music and sexy charm, make the country an exotic attraction. But how does this actually transform into business, particularly for mid-sized company?
At first glance, some companies are tempted to push into the market. The Internet is the typical starting place for companies that want to explore and certainly there is a lot of information available, too much in fact. Even the experienced can easily get lost and bogged down. So basically, the slog is too long and too hard given the perception and the availability of friendlier markets elsewhere. Thus, pushing into the Brazilian market is probably the wrong tactic.
On the other hand, some mid size companies feel a need or are pulled to be in Brazil. Companies or individuals are open and ready for their product. UBER and Netflix, while not exactly midsized, have essentially been pulled in due to the size and the “open space” in the market. Midsized companies that see demand for their products through international inquiries and demands indicating “critical mass” should consider making the investment. However, all companies need to go into the market with eyes wide open and with triple the preparation required for markets with better functioning institutions and less corruption.
There is a lot of chatter now that Brazilian companies are attractive because of the recession and the strong dollar. However, in considering a green field investment, an acquisition or a joint venture, the foreign entity needs to recognize that Brazil only works for companies that are in for the long term. The rest is pure speculation and foreign speculators will almost always be at a tremendous disadvantage in dealing with well-informed locals. A favorable exchange rate can be an illusion. A foreign company putting money in will also have to look at taking funds out and in this case the exchange is working in reverse.
Aside from the need to hedge on foreign exchange, all companies must also face the complexities of the labor system, the many rules and regulations for set up and operation, an ever changing and burdensome tax structure plus the possibility of ever present government audits by a myriad of agencies, not just the tax authorities. Speaking of taxes, Brazil’s tax burden is basically equivalent to that of the Scandinavian countries but without the same return in services such as infrastructure, education, health and security. So the country is a challenge. Better valuations may prove attractive but represent only one aspect of the entry and on-going operating cost.
Nevertheless, Brazil has tremendous opportunities in many fields including traditional industries. The market is there, the middle class has expanded with a desire for all things new, the economy is large and dynamic and profit margins can be very high once a company is established. However, profits will only come after hard work and a big down payment of “skin in the game” and by the time they are realized, the exchange rate could certainly be different. So again, Brazil is a long term play.