SPECIAL REPORT
Companies encouraged to find niche opportunities,
local partners
By KATHLYN HORIBE
November 16, 2009
Doing business in Brazil requires local partners who understand the country’s culture and bureaucracy. That was one of the main messages delivered at a seminar on Brazil-Canada trade hosted earlier this year by the Quebec chapter of I.E.Canada in collaboration with the Brazil-Canada Chamber of Commerce.
“You need partners and introductions to them,” said Johane Séguin of Export Development Canada. “Do your homework. There’s lots to gain.” Ms. Séguin is senior advisor, Latin America, at EDC, which provides Canadian exporters with financing, insurance and bonding services as well as foreign market expertise.
“Local presence is essential,” said David Verbiwski, former consul of the Consulate General of Canada in São Paulo. “You can’t do it without a local partner. It takes people stopping by to see your customers on a regular basis and speaking to them in their own language. Executives (from head office) should also get down there at least once a year to visit customers. Business is built not only on quality and price but also on relationships.”
Over the years, SNC-Lavalin learned the importance of local representation. Though the engineering and construction company has operated in Latin America since the 1970s and had a minor presence in Brazil starting in 1996, Feroz Ashraf said, “We tried to do business in Brazil. But because we were not present locally, we were just not able to penetrate.
“With the support of the Consulate General of Canada, we were able to gather some information, do some work and build from there,” said the company’s senior vice-president, global mining and metallurgy. In 2007, SNC-Lavalin acquired Brazil’s largest engineering firm in the mining sector.
EDC has been gung-ho on Brazil since 2000 when the Crown corporation opened representation in São Paulo. Four years later, a second permanent representative was added in Rio de Janeiro. Of EDC’s top 10 markets, Brazil is number two after the United States, followed by Japan and China. In 2008, EDC business volume in support of 268 businesses exceeded $3 billion, a 100-per-cent increase over 2007.
“Canadian investment in Brazil is more than twice as large as Canadian investment in India and China combined,” Mr. Verbiwski said. “This is something that a lot of people don’t realize. They think that India and China must be the main target areas.” Canadian investment in Brazil totals $8.8 billion.
The consulate’s Canadian Trade Commissioner Service, which has six offices in Brazil, helps Canadian companies penetrate the Brazilian market. Each office specializes in an industrial sector. “We’re willing to help find qualified local representatives, help you understand the taxation system and import regulations, learn where your markets lie and target customers,” Mr. Verbiwski said. “But we can’t help you get visas or book hotel rooms – as ridiculous as that sounds people do ask.”
According to EDC, more than 400 Canadian companies operate in Brazil in sectors such as energy, infrastructure, information technologies and mining. “There’s a great demand for environmental industries,” Ms. Séguin said.
Among business drivers for Canadian companies in Brazil, she mentioned niche opportunities that match Canadian capabilities, a better investment climate, developed capital markets and well-established local engineering and Canadian companies such as Brascan, Hatch and Husky. Other firms operating there include BrazAlta, Brookfield, CAE, Zenon, Geosoft and Kinross.
Growth market for Canadian exports
The visits to Brazil this year by Governor General Michaëlle Jean, Foreign Affairs Minister Lawrence Cannon and International Trade Minister Stockwell Day indicate the importance the government is putting on the relationship with Brazil, Mr. Verbiwski said.
Canada specializes in exports in the high-tech and natural resources sectors. Key exports to Brazil include fertilizers, mineral fuels and oils, salt, sulphur, cement, machinery, paper and paperboard. In 2008, Canadian exports to Brazil totalled $2.6 billion, a 70-per-cent increase over the previous year.
Opportunities for Canadian players abound in Latin America’s largest economy of about 190 million people. Take petroleum production, for example. To meet anticipated demand, Brazil’s production by 2025, according to EDC, will total approximately 4 million barrels per day. This amount of production will require more than 14 million kilometres of pipeline, resulting in expected investments of US$100 billion from 2008 to 2013.
“Brazil is all about mining, all about oil and gas,” Mr. Ashraf said. “It’s about agrifoods, infrastructure, the environment and protection of local economies. We’re working on three potash projects. Brazil offers tremendous opportunities for a company of our size.”
Concentrating mainly on mining and metallurgy with a small interest in oil and gas, SNC-Lavalin has $20 billion worth of capital expenditures in Brazil and has formed collaborative relationships with multinational companies such as Petrobras and Vale. The latter, a nickel producer that is the world’s second largest mining company, was once predominantly a Brazilian firm.
“Today, Vale is acquiring companies internationally like Inco,” Mr. Ashraf said. “Brazilian companies are becoming international and international companies are getting established in Brazil.”
Mr. Verbiwski said the most significant achievement was the bilateral science and technology agreement signed in November 2008 between Canada and Brazil.
“This agreement brings with it some dedicated funding from Canada – $1.5 million over two years – to help finance joint innovation projects between Canadian and Brazilian researchers and companies,” he said.
The Brazilian Ambassador to Canada mentioned the agreement in his remarks as well as his visit to Saskatchewan’s Canadian Light Source, which is Canada’s national synchrotron research facility.
“The agreement opened up a market that’s very important for us that can be exported to Saskatchewan,” said Paulo Cordeiro de Andrade Pinto, “and this in the middle of maybe the largest economic crisis that all the countries face.”
Another significant achievement was the signing by all members, including Brazil, of the Organisation for Economic Co-operation and Development agreement on aircraft financing. “The financing and sale of Embraer and Bombardier aircraft was one of the thorns in the Brazil-Canada relationship,” Mr. Verbiwski said. “In 2007, this agreement set a level playing field.”
The largest Brazilian export to Canada in 2007 at 22 per cent was the Air Canada purchase of 44 Embraer aircraft. “They’ve all been delivered,” Mr. Verbiwski said. Therefore, the 2008 stat for aircraft was expected to go down to about 1 per cent.
Another achievement that can’t be ignored, he added, is the investment in Inco, which has mines and refineries in Thompson, Man., and Sudbury and Port Colborne, Ont., and a $2.9-billion development agreement with Newfoundland and Labrador to extract nickel-copper-cobalt deposits.
“Before Vale purchased Inco, Brazilian investment in Canada was more than twice as large as Chinese and Indian investment in Canada combined,” Mr. Verbiwski said. “It’s now about three times that figure.” Brazil is the fourth largest foreign investor in Canada.
Resilient economy
Growth forecasts for Brazil, the world’s 10th largest economy, range between 2 and 5 per cent in 2009, Ambassador de Andrade Pinto said. According to Reuters, Brazil emerged in the second quarter from “a short-lived six-month recession” due to strong consumer demand and government spending.
“Brazil has got good resiliency,” Mr. Ashraf said. “In fact, Vale announced that instead of spending $20 billion next year, they’re going to spend $14 billion. Likewise, Petrobras is cutting some investments but they’re still in the billions of dollars.”
Though Ambassador de Andrade Pinto admitted that Brazil has “a lot of misery, poverty and a huge need for better management,” important economic reforms have been made over the past few years and Brazilians are now benefiting from newfound stability and growth. “There’s been a huge amount of wealth creation,” he said.
In a July report, Peter Hall, EDC’s vice-president and chief economist, indicated that a once volatile Brazil is now better managed economically due to substantial reduction in public debt, introduction of stimulus measures and the almost negligible involvement of Brazilian banks in U.S. sub-prime mortgages.
“We have an internal market,” Ambassador de Andrade Pinto said, “that is eager to buy the very basic items that North Americans take for granted, such as more energy efficient refrigerators.” In his hometown, state and city governments are replacing outmoded refrigerators with more efficient ones.
“Brazil is an important market for the future,” said Mary Anderson, president of both I.E.Canada and the Brazil-Canada Chamber of Commerce, which has approximately 200 companies in Canada and Brazil as members. “It’s a powerhouse, an economy that is the engine of South America. Canada and Brazil have so much in common as they trade similar products.”
Quebec accounts for 48 per cent of Canada’s total bilateral trade, followed by Ontario at 30 per cent, dropping to 8 per cent for British Columbia and 5 per cent each for Alberta and Saskatchewan.
Like the Consulate General of Canada, the province of Quebec has an office in São Paulo. “We work very closely together,” Mr. Verbiwski said. “We’re constantly exchanging information and co-operating on different projects.”
Challenges and opportunities
Despite the opportunities, doing business in Brazil does have its challenges.
“Every time I think I’ve understood the taxation implications, there’s a change,” Mr. Ashraf said. “But don’t let that be a deterrent and don’t get discouraged about administrative requirements. They might take a long time but the process works. There are also infrastructure constraints. But we look at that as an opportunity because at some point in time the infrastructure will need to adapt and grow to the requirements.”
“The country is becoming more protective with higher local content requirements,” Ms. Séguin said. Other challenges include heavy regulatory tax burdens, no trade agreement or infrastructure investment, complicated labour laws, unclear regulations in key sectors and a complex government bureaucracy.
“Business timelines can be long,” Mr. Verbiwski admitted. “It’s not fast to do business in Brazil and, yes, it’s complicated. But once you’re in, it’s not that hard anymore and you have the largest economy in Latin America at your fingertips. It’s a one-stop deal compared to going to five or 10 other markets, each with their own individual complications, in order to achieve the same business volume.”
Other challenges to Canada-Brazil trade, Ms. Anderson said, include language and cultural differences – Portuguese is spoken by more than half of South America – complex business practices and trade links that are not as well developed as, for example, between the U.S. and Canada. “There’s also a lack of knowledge about the opportunities,” she said.
To fill that void, a web portal, www.brazcan.org, was developed by I.E.Canada and BCCC with input from government and business focus groups located in different parts of Canada. “The information-rich website was based on research findings that people like to get information via the Internet,” said Ms. Anderson, who provided an overview of the site’s features.
“EDC, working in partnership with the Canadian government and the private sector, is fully committed to Brazil,” Ms. Séguin said. “We have been successful in Latin America by being committed over the long term and by listening to both domestic and foreign customers.”
Future trends, she said, indicate that foreign direct investment into export-oriented industries will likely favour steel, wood products or agriculture industries because of Brazil’s advantage in these sub-sectors.
The automotive sector is also expected to attract increased foreign direct investment, Ms. Séguin said. “It’s important to note that the Brazilian government was already strongly focused on infrastructure spending even prior to the financial crisis, which has only served to underscore its commitment.”
Future initiatives for the consulate, in co-operation with the Chamber of Commerce in São Paulo, include establishing more working groups, such as the one on information and communications technologies, which brings together Canadian and Brazilian experts. Another one was recently established for the mining sector and one for the investment sector was scheduled to be set up. “It’s like a support group,” Mr. Verbiwski said. “They discuss how to solve problems, coach each other and speakers are brought in.”
“Brazil is a land of opportunity,” Mr. Ashraf said. “Take your time, do your homework, be local and try and find a niche market. Understand Brazilian ways. Manage the currency risk through hedging and learn to talk about Brazilian soccer.”