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Faced with the downturn in the northern hemisphere, companies "turn down" |
| 29 / 4 / 2010 |
The strength of the Brazilian domestic market improves performance of multinationals, both big and small, in various sectors, overwriting the effect of stagnation and decline of North American and European economies.
Nestle (Brazil: 10%, Europe: 1,2%, Américas, -4,8%), AB Inbev (Brazil: 9,9%, Worldwide: -0,8%) and Portugal Telecom (Brazil: 18%, Portugal: -3,4%) are just some of the companies that are reaping rewards from growing investments in South America, especially of those in Brazil.
Since opening its economy in 1990, Brazil has grown in leaps and bounds, bringing down inflation from an average of 700% during 1985 - 1989 to a forecasted rate of around 5% for 2010 and this after successfully keeping it below 10% since 2003. It has also acquired an investment grade credit rating and has foreign reserves in excess of $230 billion as on the 16th November 2009. Along with that there have been many economic reforms that brought stability to the 8th largest economy in the world.
In this article we want to give an overview of some of the best industries in Brazil and what possible opportunities it holds for the companies and investors that are struggling in their own home markets as a result of the economic downturn.
Oil & Gas
With the pre-salt reserves standing between 50 and 80 billion barrels and global demand for oil said to reach its highest level since 2007, this is one of the key industries for Brazil as well as potential investors.
Petrobras, the national oil company of Brazil and the world’s 4th largest oil producer has a capital spending plan of nearly $175 billion for the next five years, meaning a vast number of joint ventures, construction projects and latest technology imports that can give a hefty boost to oil ventures.
Infrastructure
Between US$ 16 billion and US$ 48 billion of investment is needed to improve Brazil's infrastructure in preparation for the 2014 World Cup, according to a report by UK Trade and Investment (UKTI). With 12 cities hosting the World Cup, it gives ample room for international companies to bring their expertise or for the investor looking to buy shares in the listed construction companies, as most of these cities will need totally new or upgraded transportation systems, airports and stadiums. In addition to that, around US$ 15 billion will be invested in Rio alone, ahead of the 2016 Olympic Games.
Automotive
One of the few countries in the world that showed an increase in this sector in 2009 and that of 11,4%. Currently thirteen companies assemble vehicles in Brazil, one of the largest numbers in any country. Four long-established companies--Volkswagen (VW), General Motors (GM), Ford and Fiat--are now responsible for 77% of total production, compared with the 85% share they had in 2000. This year has also seen the first time that Fiat has sold more units in Brazil (737 000) then in Italy (722 000) and the top four are planning to invest about $15 billion in the next few years. The increase in spending power of the Brazilian middle class, political incentives (tax breaks) and big Biofuel industry (majority of the cars can use both alcohol and petrol) should also assist in increasing sales in the coming years.
Agriculture
Brazil is known as the leading exporter of beef, soybeans, poultry, hogs, coffee, orange juice, sugar, tropical fruits and ethanol from sugar cane and with Government’s budget for this sector increasing to $6.4 billion, one can expect a strong increase in production in this sector. The budget figure represents growth of 44% over the $ 4.5 billion budget of 2003, demonstrating the strong growth within this sector. The activities that will receive the largest part of the funds are financing, investment, research and public stocks. The sector currently contributes more than 30% of the country’s export and employs more than 35% of the total labor force, making this a key sector of the Brazilian economy.
In the Ethanol industry, global players like Shell and Cosan have put forward plans for a joint venture in Brazil, to the value of around $12 billion, for the production of ethanol, sugar and power, and the supply, distribution and retail of transportation fuels, which gives one a good idea of the prospects for this industry. Also, from January 2007 to June 2009, Brazil has received more than $3.5 billion in foreign direct investment for production of oil products and biofuels, of which 90% have gone directly to the ethanol industry.
Finance and Banking
Banks in Latin America withstood the crisis and the downturn like few others in the global financial system – giving much needed stability and security for the international investor. They financed loan growth with domestic sources of funding, such as deposits, and avoided many of the financial instruments that proved toxic in the developed world. Lessons learned from several past crises had also resulted in a healthy combination of well-capitalized banks and strict financial regulations and supervision.
In 2009, 31 Brazilian companies were listed in the Forbes Global 2000 list - an annual ranking of the top 2000 public companies in the world by Forbes magazine. Out of these 31, there were 4 banks in the Brazilian top 6, demonstrating just how strong this sector is. Most Latin American as well as Brazilian banks has an estimated double-digit loan growth this year as well as low levels of bad loans and strong profitability, making it an attractive sector for international investors.
Who should turn south?
Apart from the industries demonstrated above, Brazil also has higher than average forecasted growth in the technology, consumer goods and health sectors, giving the strategic planning departments of many international firms or the management team of small/medium firms some good food for thought and a viable market in which they can find profits during and after the downturn.
The Brazilian market offers opportunities for big, medium and small companies. However, those who don’t have a specific international department dedicated to gather and analyze data from abroad are advised to seek local assistance and guidance, so as to avoid cultural misunderstandings, unrealistic expectations over time and to better budget for what can turn out to become their most profitable subsidiary.
Written by Werner Trieloff
Werner runs the International Desk at UHY Moreira Auditores – A service specifically created to assist foreign companies entering and prospering in the Brazilian market. www.uhymoreira.com.br
Article published in Corporate Intl (March / April 2010)
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