Brazil: Too big to ignore

Miami, Fla *  When JM&A Group went scouting for its first market outside the U.S. borders, the South Florida company didn’t take an easy route. JM&A settled on Brazil, a market rich in potential for the company’s automobile financial products, but with high barriers to entry and a habit of falling short of expectations. Touted two years ago as one of the most promising of the BRIC group of emerging economies, Brazil suffered a breakdown last year, with GDP growth of less than 1%, inflation creeping up to 5.71% and government interventions, such as taxes on foreign investment, setting international business markets on edge.

Photo: Christian Adams

But on the anniversary of  JM&A’s first year of operations in Brazil, president Forrest Heathcott called the foreign venture “a great success.”  Now selling its extended warranties and maintenance products in 30 auto dealerships, with plans to be in 100 by the end of the year, Heathcott said the company, part of the JM Family Enterprises group of companies, is bullish on Brazil.  Attracted by Brazil’s massive — and growing — consumer class, JM&A found a market primed and ready for the sort of financial products and services it sells. Despite interest rates on new car loans in the range of 16% to 18%, new car sales rose more than 5% in Brazil in 2012, reaching nearly four million.

More than 60% of Brazil’s GDP is driven by consumption. Its rising middle class, around 100 million in population, is showing a level of sophistication — and comfort with credit — in its demand for services and products that is more commonly found in mature markets, not emerging ones. In addition to that mass-market potential, U.S. companies are also looking to the opportunities fueled by Brazil’s deep well of natural resources and an infrastructure boom as the country prepares to host the World Cup in 2014 and the Olympics in 2016.

“Nothing is slowing us down other than our own reluctance over growing too fast,” Heathcott told a Miami audience of business executives at the HSBC Global Connections “Doing Business in Brazil” event. Heathcott was a participant on an expert panel on Brazil, which also included Juliano Corsetti, vice president, head of Latin American Desk, Commercial Banking Division for HSBC Bank; Robert Macaulay, attorney, Carlton Fields; Ken Roberts, founder World City; and Quinn Smith, an arbitration and international litigation lawyer at Gomm & Smith, P.A. Miami was the first stop for the HSBC-sponsored Doing Business in Brazil event series, which is also being held in San Jose, Calif.  on March 19, Seattle on March 20, and Los Angeles on March 21.

With the sub-theme of the event Brazil: Too big to ignore, the panelists discussed both the potential and the pitfalls of the market, touching on topics from growth prospects, to bureaucracy, labor issues and currency matters.

In the Miami region of course, Brazil has always loomed large. The Latin American behemoth is the No. 1 trading partner with South Florida, and has been for some time. Of the 1,000 multinationals in the Miami area doing business with Latin America, a number are setting up separate Brazil operations just to focus on that single market, said Ken Roberts of World City, which compiles local and international trade data. “One of dangers when focusing on Brazil is they forget the rest of Latin America,” Roberts said.

That’s partly because of size, and partly complexity. Brazilian bureaucracy, for example, is well-documented. It can take 2,600 man hours a year to file business taxes, eight years to obtain a patent. “If you are going into Brazil with a new product, get the process started sooner rather than later,” cautioned Robert Macaulay, with Carlton Fields. He advises businesses doing deals in Brazil to always include an arbitration clause in contracts. “You don’t want to be litigating in Brazilian courts,” he said.

On the other hand, he said big improvements have been made in the area of intellectual property rights, bribery and corruption, and also in the level of support services available to foreign businesses. “There are lots of people there – lawyers, bankers, consultants – who know how to get things done.”

Labor issues can be a challenge for foreign companies in Brazil. While there is a good supply of well-trained talent in some industries (banking, for example, thanks to Brazil’s experience with financial crises such as hyperinflation) in others, such as infrastructure building, there is a shortage of trained workers. U.S. businesses also need to be prepared for aggressive, pro-worker labor laws.

Quinn Smith said he advises companies considering operations in Brazil to not hire locally right away. To get around labor laws that could prevent a company from firing or laying off workers, he suggested hiring contractors or consultants instead, and keeping some functions home in the United States. For example, non-critical operations such as back-office accounting could be run from afar.

Political risk for foreign businesses seems to come with the territory in Latin America. Brazil’s centrist policies of the past decade — respecting both financial markets and social programs — are credited with helping its rise to one of the world’s economic powerhouses and a magnet for foreign businesses. Recent interventions, such as raising tariffs and taxing capital inflows or deflating the value of the Brazilian real, have some wondering if the country is reverting to old ways.

HSBC’s Julio Corsetti, a Brazilian native who now lives in New York City and heads up the bank’s Latin American Desk, has a more positive outlook. “The message of the government is they have the ability and tools and will intervene if necessary,” he said. “But the focus is on growth and stability.” Lowering interest rates, for example, is a means to halt inflation, while taxing foreign direct investment is an attempt to stem the flow of speculative money coming into the country and creating bubbles. Corsetti said there isn’t much room for the Brazilian real to devaluate much further.

As the panelists discussed, many of Brazil’s current challenges are temporary and short term. Businesses looking at Brazil need to take a longer view as the country’s massive middle class fully emerges and its economy realizes its potential. With the World Cup to come in 2014, and the Olympics in 2016, we haven’t seen anything yet.