How to set up a business in Brazil

 

As the leaders of the BRICS nations convene for their 10th annual summit, Brazil is looking to remind the world of its potential after emerging from a long recession and a shocking case of political corruption. For UK firms willing to play the long game, our experts say, the opportunities here could be golden

Rush hour in São Paulo, the most populous city in Brazil, is not for the faint-hearted.

When commuters finish work in this dizzying megalopolis of 21 million people, they’ll often sit in traffic jams stretching for 90 miles, their homeward journeys lasting four hours or more.

A fortunate few have it easier. Using the Voom “Uber for helicopters” app, they can summon a chopper to whisk them away from the nearest skyscraper helipad.

Peering up at the helicopters ferrying the city’s super-rich through the haze of smog, it’s easy to imagine that the past six years haven’t happened.

Back in 2012, Brazil was the darling of the BRICS club of five big emerging markets. It had recently overtaken the UK as the world’s sixth-largest economy, poverty was falling and the forthcoming Fifa World Cup (2014) and Olympic Games (2016) were set to showcase the nation’s stature as a globally important player.

And then it all went wrong. In 2013 the spiralling costs of staging the World Cup and a popular campaign for cheaper public transport by the Free Fare Movement sparked street demonstrations in many cities. Several of these turned violent, with allegations of police brutality spawning further protests.

In the summer of 2014 the country entered a two-year recession. This was accompanied by a political crisis that would see one former president jailed for corruption and another impeached. Unemployment, poverty and street crime soared, while an outbreak of Zika fever became an epidemic in 2015. To top it all, a general strike paralysed the country on 28 April 2017.

As for the sporting fiestas, Brazil’s 7-1 World Cup shellacking by Germany – a shock that this football-mad nation will never forget – was emblematic of the spreading malaise.

The cost of hosting the Olympics bankrupted the state of Rio de Janeiro, where several purpose-built venues have fallen into disuse. At this year’s Rio Carnival – usually a caipirinha-fuelled celebration – one samba school danced on a Frankenstein-themed float while singing a song describing Brazil as a “monster”.

Yet, as representatives of the BRICS convened at the end of July in Johannesburg for their 10th annual summit – to discuss issues including sustainable development, energy security and how to combat cyber- crime and money-laundering – Brazil’s delegation had reason to be upbeat.

“While the average Brazilian isn’t seeing much improvement in their personal circumstances, at a corporate level there’s lots of M&A activity with international investors, particularly China,” explains Philip Gray, director of the Brazil Business Hub, which helps UK firms seeking to make inroads. “The oil price is recovering, fintech is doing well here and consumers are starting to spend again.”

One of these international investors is Jaguar Land Rover, which in 2016 opened a £240m factory in Itatiaia, 100 miles north-west of Rio. It has been joined in Brazil by McLaren, which plans to open a showroom in São Paulo by the end of this year.

Shell is investing heavily in Brazil’s oil sector, while Amazon has been looking at leasing warehouse space near São Paulo with a view to gaining a foothold in the world’s fifth-most populous nation.

“Everybody is interested in a country of 200 million people,” says Gabriela Castro-Fontoura, director of Sunny Sky Solutions, which helps British firms expand into Latin America. “It’s impossible not to be.”

How to set up a business in Brazil

Encouraging signs

The potential of Brazil’s e-commerce market and the growing demand for luxury cars hints at the purchasing power of its consumers, 35 million of whom have joined the middle classes over the past 15 years, thanks in no small part to the policies of Luiz Inácio Lula da Silva (known simply by Brazilians as Lula), its centre-left president in 2003-11.

They’re splurging on healthcare too. Last year Gloucester-based firm Prima Dental opened its first foreign manufacturing facility in the southern city of Londrina, hoping to penetrate one of the world’s fastest-growing dental markets.

“The ability of Brazilians to pay for more than basic pain relief has been a big driver of our business here,” says Prima Dental’s MD, Richard Muller. “Brazilians are very aware of their own appearance, so they want to take care of their teeth.”

Indeed, there’s a strong cultural pressure on Brazilians to look good. Plastic surgery is big business here, while UK fashion labels such as Burberry are also doing well.

“All of the top brands are in Brazil – they have to be,” Castro-Fontoura says. “While only a tiny percentage of people are super-rich, bear in mind the sheer size of Brazil’s population.”

But the wealthiest people tend to “go abroad to buy luxury brands, as it’s cheaper”, according to Rafael dos Santos, the Brazilian founder and MD of High Profile Club, a London-based marketing agency with a presence in São Paulo. He points out that “a bottle of perfume can triple its price in Brazil” as a result of the country’s punitively high import tariffs.

One way of sidestepping such barriers is to manufacture in Brazil, as Prima Dental has done. Other British companies – Britvic, for instance – have gone further by acquiring local firms.

Mercosur, the trade bloc that also includes Argentina, Paraguay and Uruguay, offers a potential alternative gateway for UK firms. Boris Johnson’s trip to South America in May showed the UK’s desire for a free-trade agreement (the then foreign secretary skipped Brazil, but Jeremy Hunt will have no excuses once he acquires the “Brexit plane” that his predecessor called for).

Yet we shouldn’t hold our breath, given that the EU is still trying to nail down a deal with Mercosur after 19 years of stop-start talks.

Despite this, there’s much about Brazil to interest British firms right now. Imports from the UK fare better here than those from other nations: in recession-hit 2015, the overall value of imports fell by 14.3 per cent, but those from the UK fell by only five per cent.

Why? Perhaps it’s down to a sense of gratitude that’s endured since Charles Miller brought o jogo bonito (the beautiful game) to Brazil in 1894, when he returned to his home in São Paulo from boarding school in Southampton with two footballs and the laws of the game in his suitcase.

“If there is no domestic competition for your product in Brazil, it’s a relatively level playing field,” notes Gray, who advises interested firms to use the ex-tarifário scheme, which offers temporary relief on duties for “products without equivalents”.

To deal with Brazil’s labyrinthine bureaucracy – the average manufacturer here spends 2,000 hours a year preparing its tax return – and the need to visit many times to build relationships, British firms must be ready to play the long game. As Castro-Fontoura warns: “You need to have a five- to 10-year plan. You won’t achieve much of a return on your investment inside five years.”

Ellis Patents, a firm based in Rillington, North Yorkshire, has been exporting cable cleats to Brazilian oil and gas firms since 2009 – one of an estimated 200 British suppliers to this market alone. Its sales director, Tony Conroy, stresses the importance of “finding the right local distributor. We always invest heavily in researching potential partners and travelling to interview them.”

How to set up a business in Brazil

Overdue dilligence

Finding a reliable partner is indeed vital – Brazil ranked 96th out of 180 countries on Transparency International’s 2017 corruption perceptions index. Muller says that he averted “a very expensive mistake” for Prima Dental when he looked deeper into the affairs of one contact he’d made.

The political corruption scandal, meanwhile, hit the country hard. When police started to investigate a case of money-laundering at a gangster-run car wash in 2014, they didn’t expect to find that executives at state-run oil company Petrobras were taking bribes from a cartel of firms to overcharge on contracts.

It emerged that £1.5bn of this lucre had found its way into the ruling Workers’ Party, led at the time by Lula’s colleague and successor as president, Dilma Rousseff.

As a result of the investigation, known as Operation Car Wash, more than a quarter of Brazil’s National Congress have faced accusations of criminality. In 2016 Rousseff, who’d chaired Petrobras in 2003-10, was impeached and last year Lula started a 12-year prison sentence.

The case has given many Brazilians a deep mistrust of large organisations. “In this environment British firms have to be seen to be beneficial to Brazil, both economically and socially, to gain acceptance. They also have to be clear that corruption is intolerable,” says Gray, who advises drafting a strict anti-bribery policy to share with local partners.

One man has pledged to drain the swamp in Brasilia: Jair Bolsonaro. The far-right candidate is the bookies’ favourite to win October’s presidential election. He has spoken admiringly of the harsh military dictatorship that ruled in 1964-85 and made provocative remarks about women and ethnic minorities, earning himself the sobriquet Trump of the Tropics. Like the US president, he’s also no fan of foreign inward investment, particularly if it’s from China.

Despite the political uncertainty, there will still be plenty of opportunities for foreign firms as the economy gradually recovers, particularly in infrastructure projects aimed at stimulating growth. São Paulo, whose economy is larger than that of Argentina, is “the most sensible place to put your feet on the ground and set up an office”, according to Gray. “The largest potential customers are here, along with all the financial facilities.”

Meanwhile, an electronics manufacturing centre has arisen in the middle of the Amazon rainforest at Manaus. The city’s status as a free-trade zone and its generous tax incentives have already attracted the likes of Microsoft, Samsung and Sony.

Oil firms hoping to tap reserves off Brazil’s southern coast are advised to set up in Rio, while fresh water represents another big opportunity – Brazil has already invested £6.7bn in making sanitation services available to all by 2033.

“If you need scale, Brazil is the one. If you have patience, there’s no reason why you can’t do it. But you can’t rush Brazil,” Castro-Fontoura stresses.

Gray concurs. “Brazil isn’t the place to make a quick buck,” he says. “But it is the place to make lots of slower bucks.”

 

Kindly supplied by Brazil Business Hub

Originally published in the Institute of Directors magazine,  July/August 2018