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Brazil: Companies urged to look outside urban centers
Development Business / September 30, 1997

By Larry Luxner

BALTIMORE -- Multinational firms trying to crack the Brazilian market would do well to have their executives spend an hour or two with Americo Tadeu.

As deputy senior commercial officer at the U.S. Embassy in Brasilia, Tadeu probably knows more about the dos and don'ts of investing than any other foreign bureaucrat stationed in Brazil. It is Tadeu's responsibility to oversee four U.S. Commercial Service (USCS) offices -- in Sao Paulo, Brasilia, Belo Horizonte and Recife -- and to sponsor trade exhibitions, organize trade missions and prepare market research reports.

At a recent business conference at Baltimore's World Trade Center Institute, Tadeu says most newcomers to the Latin market have no idea of Brazil's sheer size and economic potential.

"I categorize Brazil as five major countries within a continent, and with an economy of $916 billion," he told his audience. "It is the China of South America. Compared to its South American neighbors, Brazil stands alone."

Tadeu says President Fernando Henrique Cardoso's "Real Plan" -- which links Brazil's currency to the dollar -- has helped give the country a measure of economic stability not seen in decades. Inflation has dropped from 50% a month in July 1994, when the plan was introduced, to 0.09% in July 1997. Brazil's Gross Domestic Product now stands at $760 billion, while direct foreign investment in 1996 came to nearly $7 billion, and is expected to top $10 billion this year. Brazil's GDP will likely hit $1 trillion before the year 2000.

"It's a whole new era. As a foreigner, I sense dynamism and expectation," said Tadeu, who's been based in Brasilia since September 1995. "Over the last two years, we've seen a trade surplus with Brazil. The single reason for that is, as the economy opens up, tariffs are going down, releasing pent-up consumer demand. People who were never able to buy meat, refrigerators, radios or televisions are now doing so. Lower classes now have the disposable income."

He told his business audience that in 1996, about 40% of U.S. exports to Brazil were in the form of capital goods. "That's good for machine-part manufacturers. Brazilian companes are retooling, not only for local consumption, but also for exports," he said. "As a developing country, Brazil can go through very quick fluctuations. Cardoso's No. 1 concern is how to maintain the confidence of investors like you."

Tadeu advises prospective investors not to overlook Brazil's huge urban market outside Sao Paulo and Rio de Janeiro, the country's two largest cities.

"The Rio-Sao Paulo corridor is becoming saturated. The excitement and allure is no longer there," he said. "We're looking for newer partners and newer clients. Our plan is to focus on secondary markets. South of Sao Paulo, there are three very progressive states with which we've entered into [marketing] agreements" covering such cities as Porto Alegre, Florianopolis and Curitiba.

"A foreigner doesn't think of going to Porto Alegre at first glance. But you don't have go to Rio or Sao Paulo to do business with Brazil, just as you don't have to go to New York or Washington to do business in the United States."

Indeed, the so-called ABCD cities of Sao Paulo province -- Santo Andre, Sao Bernardo, Sao Caetano and Diadema, along with Maua, Ribeirao Pires and Rio Grande da Serra -- now constitute Brazil's third-largest consumer market, after Sao Paulo itself and Rio de Janeiro.

A recent study by Target Marketing, a Sao Paulo consulting firm, shows that the city of Sao Paulo accounts for 13.26% of Brazil's $476 million consumer market, while the ABCD's share of that pie has grown 9% since 1989 to 2.52%. This comes despite recent moves by several Brazilian firms to slash costs by transferring their factories to the interior of Sao Paulo state, or to northeastern Brazil, in search of tax incentives and cheaper labor.

The study also shows that Porto Alegre enjoys Brazil's highest per-capita consumption ($6,792), compared to $6,185 for Sao Paulo, $5,745 for Rio de Janeiro and $5,424 for the ABCD region. Nevertheless, between 1990 and the first half of 1997, the ABCD cities' per-capita income rose 343%, faster than any other region of Brazil -- a growth fueled largely by investments in the automotive industry and related sectors.

"For those of you who've done business in other countries, we find doing business with Brazilians is much easier," said Tadeu, a Connecticut native who speaks Spanish and Portuguese fluently. "The bad news is, that's offset by government regulations and the so-called Brazil cost. When a foreigner is looking to invest in Brazil, he's looking at other countries as well. Costs in Brazil are generally higher. We've seen some very positive changes in the last couple of years, but there are still some barriers to trade."

Asked about corruption, Tadeu says it exists, but more on on the bidding side -- particularly by European competitors -- rather than on the part of government officials

He adds that "we've been impressed with the Brazilian Ministry of Communications, which made sure there was no corruption or perception of conflict of interest" in the recent awarding of a $2.5 billion license to Atlanta-based BellSouth International to operate a cellular network in the Sao Paulo metropolitan area.

According to Tadeu, the key sectors for investment in Brazil are telecommunications, energy, transportation, construction, mining and the environment. In telecom alone, some $76 billion worth of investment is planned between now and 2003. Likewise, some $21 billion will be invested in urban construction projects over the next three years, as office buildings, upscale residential complexes, hospitals and shopping malls sprout up from Brasilia to Belo Horizonte.

"After many years of slowdown caused by economic recession and high inflation, urban development projects are enjoying a comeback in Brazil," says USCS. "A considerable number of office buildings have been completed since mid-1995, and a significant number are under construction. A healthy level of shopping malls, residential complexes, hotels, resorts, theme parks and health-care facilities are expected to be launched in the next few years."

In particular demand is quality office space in Sao Paulo, where only 2% of the six million square meters of usable floor space is considered top-of-the-line; the rest is too old to support computers, air-conditioning and other modern conveniences. Another growth area is shopping malls. Brazil already has 128 major malls, 800 smaller ones and many others under construction. One recent study suggests the market has room for another 100 malls.

Major infrastructure projects include the $4 billion Brazil-Bolivia gas pipeline, the $793 million environmental cleanup of Guanabara Bay and the $1.2 billion SIVAM Amazon surveillance project recently awarded to Raytheon.

"All the infrastructure projects built in the 1950s, 60s and early 70s now need to be modernized," said Tadeu. "We project $54 billion will be spent in 1997-98 on ports, railways, shipbuilding and sanitation. There's steady growth in the construction sector, where 85% of all procurement is done by the government.

Infraero, Brazil's state-owned airport management agency, says $2.9 billion will be spent between now and 2000 to expand and modernize Brazilian airport facilities. During 1997 alone, Infraero expects investments of $560 million, of which $120 million will come from private investors and $70 million in partnership with other government agencies.

Infraero plans revenues of $1.35 billion this year, thanks to passenger traffic of 50.2 million (up 20% from 1995) and cargo volume of 1.28 million tons (up 8%). Specific projects include $30 million to complete a new cargo terminal at Rio de Janeiro's Galeao International Airport; $170 million to set up a second passenger terminal at Galeao, and $300 million for a third passenger terminal at Sao Paulo's Guarulhos International Airport.

Meanwhile, Brazilian power utility Eletrobras will finish 23 major projects between now and 2006, reports Gazeta Mercantil. The projects will add 8,740 megawatts to Brazil's current installed capacity, and will require $8.9 billion of investments. This includes the 4,125-megawatt expansion of Tucurui, to be finished by December 2003 at a cost of $1.2 billion.

"If these projects are too big for your firm," he says, "there are a slew of smaller projects we can help you with." Many of these are outlined in the just-released 1998 Brazil Country Commercial Guide, which contains an analysis of projects in 30 leading industrial and service sectors.

Among some of Tadeu's tips:

* Sao Paulo and Rio are very saturated, well-developed markets. Doing business outside of there might be easier if you're just getting started.

* Letters of credit are expensive, but we recommend them. That's the safest way of doing any type of business.

* Don't do anything you wouldn't feel safe doing. Don't fall into traps.

* Forget doing business in Brazil from mid-December until after Carnaval (late February). It's vacation time.

The U.S. Commercial Service can be reached at: Embaixada Americana, Av. das Nacoes, Quadra 801, Lote 3, 70403-900 Brasilia, D.F., Brazil; by telephone at +55 61 321-7272, extension 2122; by fax at +55 61 225-3981, or by e-mail at ATadeu@doc.gov.

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