Brazils Infrastructure Sector - Case Study Example

MARKET ANALYSIS OF BRAZIL al Affiliation) Introduction The board of directors chose Brazil as their new market. This choice is due to various factors in different aspect of the business environment. This paper critically analyses the Brazilian market on aspects such as: its local business environment; the market opportunities; market entry strategies; market challenges; the country’s political and economic environment; trade regulations, customs and standards; and the investment climate (Brazil, 2015). Brazil is the largest economy in South America. It covers an area of approximately 3300000 square miles. This massive area makes it to border ten countries while still managing to have 4700 miles coastline. The countries large population of 203 million people makes it the sixth most populous country beside it being the fifth largest country in the world. The country’s economic growth is promising as it has an average annual growth of 2.5% for the past five years. The country is projected to be among the top consumer markets in the world. It ranks higher than some developed economies such as France and United Kingdom. The high economic performance indicates that the country has high consumer potential. This fact makes the country very attractive to foreign investors (“Focus Economics | Economic Forecasts from the Worlds Leading Economists”). The nation tries its level best to maintain macroeconomic policies that promote economic growth while controlling inflation. In 2014, the country had a drop in unemployment rate from 6% in 2013 to the current 4.9%. This was despite the inflation rate maintaining a constant figure of 6.8%. The economies wages rise on a steady rate as interests also rise. Brazil imports a large volume of goods from the United States of America and Europe. The country averagely imports goods worth $245 billion from these destinations. The country also exports goods in large quantities to various destinations all round the world. Brazil’s social and cultural practices The country has one of the most diverse and varied cultures in the world. The main reason for this is the historical Trans-Atlantic Slave Trade, which brought many African immigrants in the region. Many years of colonization by the Portuguese contributed to the intermarriage between the Europeans and the African immigrants (“Brazil.org.za”). Both the African immigrants and the European settlers brought their local cultures, customs and ideas to Brazil. All these varied cultural influences have made the modern Brazilian culture very complex and unique. The country’s population is constituted with various ethnic groups who have their origins from different regions in the world (Waibel, 1950). Approximately half of the population is comprised of whites that include the Portuguese, Polish and Italians. About 40% of the population is constituted of a mixture black and white people while the remaining 10% is comprised of black people. This is fact is meanly due to the intense Portuguese occupation many years ago (“Everyculture.com”). Majority of the country’s locals practice Christianity with 80% being Roman Catholics. The Brazilian families are usually large and extended families. The country has different social classes, which are separated by money and skin tone. Majority of the black skinned citizens are in the lower income tax bracket. Brazilian nationals are very friendly people; they usually want to know more about the people they engage business with before they deal with them. Foreign investors should learn from these diverse cultures to be at a better position when penetrating in the Brazilian market (Heritage.org, 2015). Market Opportunities Brazil’s infrastructure sector is promising. A recent study reveals that the economy estimates 850 billion dollars in investments from 2013 through 2017. A large portion of this amount will be allocated to the energy and infrastructure sectors, which will foresee the development of ports, railways, airports and roads. The country’s construction sector is currently experiencing vast growth. Most of its major towns and cities are experiencing construction boom due to the construction of sports stadiums and hotels in preparation to the 2014 Soccer World Cup. The government of Brazil estimates that the investment in infrastructure, transport, construction and other major sectors will reach an US$60 billion between the year 2011 and 2016. A mix of Private and Public partnerships will do majority of these investments (“Australianbusiness.com.au”). The hosting of the Olympic games in South America gave rise to many business opportunities for foreign companies to invest in Brazil. Some of the major projects undergoing include strategic upgrades at seaports, transit build-out, airport modernization and water sanitation. The government of Brazil initiates plans to accelerate economic growth. These plans involve the initiation of programs that involve infrastructure investments in energy, logistics, and urban mobility infrastructure. Other promising sectors for foreign companies’ investments and exports in Brazil include: oil and gas; building and construction; safety and security devices; sporting goods; retail and transportation; agricultural equipment; aerospace and aviation; IT, environmental technologies and medical equipment (Lynn & Wang, 2010). The expansion plans of Brazilian’s national oil company create the largest business opportunity in the oil sector worldwide. This will last at least up to 2020 before other competing countries such as Nigeria catch up with them. Despite the local content requirements and industry contacts imposed by the government on the oil company, the Company still manages to import foreign goods and services to in a bid speed up their projects. The supply of foreign goods and services supplement the limited domestic supplies. Brazil’s relations with other countries Brazil enjoys active relations with many countries both neighbouring and distant ones. The country has several partnerships with different countries. These partnerships assist the country in tackling trending global issues affect many developing economies. Brazil’s relations are enhanced by multilateral cooperation’s as well as people-to-people initiatives. The country has a long history of incorporating their education programs with those of foreign countries. This enables the country to create new opportunities for research partnerships and new academic areas. This system of education ensures the Brazilian education level is at par with international standards (Ebers et al., 2008). The country’s education level equips its locals with a wide range of international languages such as Spanish, English and France at their disposals. This facilitates easy interaction of the country with the rest of the world hence promoting better relations. The country combats discrimination based on any fact, be it gender, age, race, religion, or ethnicity. The country works hand in hand with world organizations and other countries to launch campaigns against forced labour and exploitative child labour. The country also advances gender equity and promotes enforcement of human rights. Trade Regulations, Standards and Customs in Brazil Brazil imposes import tariffs in various ways. Brazil levies fees and taxes on their imports at the clearance process in the customs (Anon). The country charges taxes on three accounts: Service and Merchandise Circulation Tax; Industrialized Product Tax and; Import duties. Other smaller fees and taxes are charged on these imports. These taxes are computed in a cumulative basis. There is exemption of import tariffs in some goods and services from neighbouring countries such as Paraguay, Argentina and Uruguay. This is because these countries are members of the Southern Common Market partners. Entering into the Brazilian market will be highly advantageous, as it will enhance the company to export its product and services to these neighbouring countries with much ease (Haller, 1982). The Brazilian government has put in place a computerized information system that facilitates the clearance of imports at the customs. This Foreign Trade Integrated System has enhanced the amount of paperwork necessary to import goods and services in Brazil. This works positively in encouraging many firms to enter this market due to the ease of clearance at the customs. The Brazilian import duty ranges from 10% to 35%. These rates are very fair in comparisons with similar markets in the region such as Argentina and Paraguay. The Brazilian tax authorities levy federal tax on both domestic and manufactured commodities. This is done through an Industrialized Product Tax. This tax is charged on goods at the point manufacturing or processing in domestic goods and at the point of clearance in foreign commodities. In a move to promote domestic manufactures and producers, the government lowers the rates it taxes on local commodities than the rate it charges on imported products. While lowering the rate to support local firms the firms takes consideration not to lower them too much to discourage fair competition. The government imposes the Industrialized Product Tax system rate by evaluating the extent of importance in which these products would be to the end Brazilian user. The Brazilian government also levies Merchandise and Service Circulation Tax on both imports and domestic products. This tax on importation is not necessarily a cost or burden to the importer since because the importer is usually credited the amount of money taxed at the customs. The burden of this tax is usually passed to the end user who has to pay the amount. The Merchandise and Services Circulation tax is a form of value added tax in that it is charged on the taxes a company collects on the sales of products and services minus the taxes the company pays on purchasing raw materials (Export.gov). This form of tax is levied to both domestic and foreign transactions. This tax rate in this form of taxation varies from state to state. The positive thing to potential investors in this new market is that this tax is not charged on goods of some key sectors of the economy such as oil, mining and energy. Majority of the Brazilian exports are also exempt from this tax. It is highly advisable that new investors in the market target the areas that are tax exempted. Trade Barriers Brazil ranks top in the list of countries that put many trade barriers in their market. The country puts many foreign investors at a disadvantage when they compete with the domestic firms. These trade barriers include; high and unpredictable tax burdens, uncertain custom system and an overburdened legal system. There are the major hurdles that foreign investors have to overcome in order to do business in Brazil (Bmfbovespa.com.br). These stringent rules and regulations give foreign companies a challenging time especially the ones in regulated industries such as those who manufacture and retail health and safety products. In a bid to safeguard local producers and manufactures, the Brazilian government increases the trade barriers by increasing import tariffs, and the local requirements for conducting business in Brazil. These tough trade barriers leave foreign investors with no option, but to form partnerships with the domestic firms to penetrate the Brazilian market (Tmf-group.com). Marking and Labelling Requirements Brazil has strict rules concerning the standard of products and services that are present in its market. The country ensures production and supply of only high quality products. Brazil has a customer protection code that requires manufactures to put product labelling that provide the customer with clear and easily understandable information about the product’s composition, quality, price, quantity, guarantee, origin, shelf life and the risks or side effects associated with the consumption of these products. Foreign products are required to have a Portuguese translation in their product labelling information (Tradingeconomics.com). The country also prohibits importation of certain products and services into its market. It would be very important for foreign investors and companies to know the allowed products and services into the Brazilian market to have smooth entrance into it. The country prohibits importation of almost all used consumer goods. The same case applies to use capital goods with the exception of locally produced goods. The country considers remanufactured as used goods. The discouragement of importation of used goods targets at promoting the manufacturing and producing sectors. This creates opportunities for both domestic and foreign firms to explore the demand of these products in the market (Real Challenges in Brazil, 2012). Investment Climate Brazil initiates various programs to encourage foreign direct investment. The country is among the largest destination for most foreign direct investments. Brazil receives half of the foreign direct investments that come to invest in South America. A large number of foreign investors constitute companies from United States of America, Europe and Asia. Despite the country complex tax system in Brazil, many regulatory requirements and legal content, the country is very friendly country. It offers a friendly environment to foreign investments from all parts around the world. The country is portrayed as friendly since in most cases these impediments apply to all companies without discriminating between domestic and foreign firms. The government of Brazil tries its level best not to create distinction between national and foreign capital when it comes to direct investments. Despite the country performing having poor economic performance in the year 2013 by getting a small gross domestic product of only 2.5%, its current market trends portray much hope and expectation in the future improvement of the economy. The better future economic performance is supported by the rising global demands of the country’s exports, its strong local demand, an ever growing middle class, advancement of the offshore oil reserves and the anticipated infrastructure investments (Zervos, 2004). Despite the country being open to foreign direct investment in its economy, it restricts the ownership of some sectors by the foreigners. These sectors include media, aviation and insurance. They restrict these foreign ownerships through strict laws that automatically lock out investors. Though the country is working on a bill to allow ownership of the domestic airline companies by foreigners up to a maximum of 50%, it still restricted to a maximum of 21%. Foreign Insurance companies that have interests to enter the Brazilian market can only do so by being a subsidiary of a domestic firm, entering into a joint venture or collaborating with a local firm. The Brazilian insurance market is open to all levels of competition. The insurance sector is a vibrant area in the country’s economy. Majority of the country’s locals realize the importance of the insurance system, which leads to a rise in the demand for insurance services is high within the region. Brazil’s restriction of ownership by foreign investors is in a move to protect the country’s rich culture. The country formulates laws that ensure that the rich Brazilian culture is preserved and passed from one generation to the next. The laws ensure that despite the television radio markets incorporate satellite and cable technologies, at least one third of the content aired is Brazilian. It would be highly advisable for foreign investors who want to penetrate in this sector in the new market to invest in domestic television materials. Brazil has massive areas of land, which can be used productively by foreign investors to enhance the country’s economic growth. A major setback to the foreign direct investments is that the country has rules that restrict agricultural ownership by foreigners. The laws allow only ownership of up to a maximum of 25% of the total land that the municipal owns. These ownership laws of land include both ownership of land acquired through buying and leasing. These laws restrict domination by foreigners further by prohibiting ownership of more than 10% of the total land owned by a municipal by any two foreign companies or national from the same country. For a foreign company, a foreigner or a Brazilian company with majority foreign shareholders willing to purchase large plot of land in the country, it will need congressional approval. These approvals are done through the processing of bills (Pavcnik, 2003). In a bid to enhance the infrastructure development in the country, Brazil has opened participation by foreigners in this sector. The country pursues a 250 billion US dollar logistics investment program to bring managerial expertise and private capital, which facilitates the development of the nation’s infrastructure through projects in airports, ports, energy, road and urban mobility. The auction criteria of these projects are designed in such a way that they attract foreign investors. All trade barriers in this sector are removed to allow ease of entry by foreign investors. This sector is opened to all foreign airport operators. The process of bidding in this sector is non-discriminatory, without any political interference and transparent. Brazil supports a mix of local producers and foreign investors in its market to facilitate investment and enhance growth. Market Entry Strategy The strong business culture and the economic growth that Brazil experiences is mainly as a result of the good relations it maintains with its business partners from all round the world. In a move for foreign investors to enter the Brazilian market, it is advisable that they create good friendly ties with the Brazilian government to ease business relationships in the region that has many opportunities. It is advisable for foreign companies to meet face to face with the domestic companies in Brazil when entering into partnerships, which facilitates the entrance into the Brazilian market. These meetings will facilitate the mutual understanding of the cooperation, which carries their operations in different geographical locations under different jurisdiction. The partnership will come up with a system that incorporates these differences between the companies. It is extremely difficult for a foreign company to acquire a public tender in Brazil without either a joint venture or a partnership agreement with a local company. It is essential for foreign investors to use a qualified representative when carrying their operations in this new market to portray a good picture right from the beginning. This will give these companies a competitive advantage over their competitors that are known to have various challenges (Miamire.com). Although there is a possibility of foreign investors and companies investing and distributing their products and services directly in the Brazilian market, it is advantageous to use a local agent or a representative. The selection of an agent or a distributor needs careful consideration due to the regional economic disparities that exists between different states. Other issues that need consideration include difference in infrastructure and inter-state and taxation rules it is strongly recommended that foreign investors should consult the Brazilian legal representatives before entering into any written agreements with its representatives or distributors. This will ensure that the written contracts abide with all the laws necessary for such a contract. Failure to comply with these laws and regulations would lead to these contracts considered as invalid. The legal bodies in Brazil will not enforce the invalid contracts. Consulting with legal representatives will enable the foreign investors to abide by the country’s laws, protect trademarks, limit liabilities, define warranty terms and ensure better payments. Clauses concerning exclusivity, service and support duties, promotional duties and localization and performance targets may be included within these agreements (Murray, 2015). The major options in investing in Brazil include either acquiring an entity or setting up a new company in the country. In recent times, setting up a new company in the country has become much easier for foreign investors. The Ministry of Industry, Development and Foreign Trade in Brazil has initiated many processes that simplify the establishing of new companies by foreign investors in the country. The country’s authority now avails more conveniently and at a timely basis, necessary permits and licenses needed to start new companies and begin their operations. The Brazilian Central Bank monitors the acquisition of domestic companies by foreign investors. This is in a bid to protect the liquidation of these companies. Liquidation of these companies would heavily affect different groups in the society. These groups include stakeholders such as suppliers, customers, debtors, employees and shareholders. The Brazilian authorities require that foreign investors register their capital with the country’s Central Bank. This is done so to avoid foreign exchange losses and problems that are associated with profit remittance and capital repatriation. A foreign investor can enter the Brazilian market through direct marketing. Brazil has a large demand for consumer goods and services due to the large population. The country is the leading base for direct marketing of consumer commodities within the region. Many of the country’s locals appreciate this system of marketing that is mainly carried though online services. Joint Ventures are the most convenient ways to enter the Brazilian market. They are very essential especially in heavy regulated sectors such as the energy and telecommunications industries. Under the countries regulations, these joint ventures are established to a form that is similar to that of limited partnerships and cooperation. Challenges Faced in the Brazilian Market Despite Brazil being a large and diversified which offers many opportunities to foreign investors it have several challenges. The companies that enter these markets should be prepared to incur high costs relating to environmental procedures, government procedures, distribution, employee benefits and a complex tax system (Bacchus, 2015). The countries lack of sufficient infrastructure pose a major challenge to foreign companies who intend to penetrate into the market. The other challenge that the market experiences is the imports tariffs that foreign companies suffer from in addition to the heavy tax burden they have (Pearson, 2014). Conclusion Despite the fact that Brazil is among the largest consumer of foreign goods and services from foreign countries, winning contracts in the country can be a tussle for foreign investors unless they form partnerships with domestic companies. The country has very many opportunities that foreign investors can take advantage by entering in its market. Lastly, foreign companies should be careful to choose which sector they enter into in this market since some sectors have many barriers. References Anon, 2015. [online] Available at: http://export.gov/Brazil/static/CC_BR_DoingBusiness_CCG_PDF_Chap5_TradeRegulations_Latest_eg_br_034997.pdf [Accessed 22 Apr. 2015]. Australianbusiness.com.au, 2015. Brazil: land of opportunities. [online] Available at: http://www.australianbusiness.com.au/international-trade/export-markets/latin-america/brazil--land-of-opportunities.aspx [Accessed 22 Apr. 2015]. Bacchus, R. 2015. Challenges of Doing Business with Brazil. [online] Rosalienebacchus.com. Available at: http://www.rosalienebacchus.com/articles/ChallengesOfDoingBusinessWithBrazil_100509.html [Accessed 22 Apr. 2015]. Bmfbovespa.com.br, 2015. Regulation in Brazil | BM&FBOVESPA. 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