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This article originally appeared

in the October 2010 issue of

The journal of
high-performance business

Emerging Markets

Brazil on the move


By Roger Ingold and Marcelo Gil de Souza

 nce known for samba and soccer, Brazil today is a global


O
player to be reckoned with—a rare amalgam of political
stability, economic diversity and dynamism, fiscal prudence
and conformity with the cadence of Western business.
Flown on a regional airline recently world’s eighth-largest economy, the
in the United States or Europe? It’s nation is seeking a permanent seat on
likely you were on an Embraer air- the United Nations Security Council.
craft—designed and built in Brazil. It sends regular trade missions abroad
Grilled chicken on the Fourth of and has trade support centers as far
July? There’s a good chance the afield as Poland and the Arabian Gulf.
poultry was Pilgrim’s Pride brand, It has been central to a peace-keeping
now majority-owned by JBS, the mission in Haiti, among many other
Brazilian meat processor. Have a global initiatives. Meanwhile, Brazil
Budweiser at that barbecue? These boasts that it has greater individual
days, that’s a taste of Brazil too. The freedom than China, less sectarian
iconic American beer brand belongs volatility than India, and almost none
to Anheuser-Busch InBev, the $37 of the potential for political unrest
billion Belgian-headquartered com- or natural disasters that overshadow
pany, most of whose top manage- those nations.
ment team hails from Brazil.
Reality trumps perception
Brazil is a global player to be reck- But it wasn’t that long ago that Brazil
oned with. Once known for samba was known derisively as “the country
and soccer, the country is now the of the future—and always will be.”
land of surprising and substantial In the 1980s and into the 1990s, the
commercial and financial oppor- country labored under massive for-
tunity. It offers a rare amalgam of eign debt, public borrowing was used
political stability, economic diver- to finance growth, and annual infla-
sity and dynamism, fiscal austerity tion remained high, peaking at 2,477
and conformity with the cadence of percent in 1993. Also, Brazil has
Western business. attracted worldwide notoriety for
its favelas, the grim shantytowns
To be sure, there are concerns about adjacent to its largest cities that
the economy overheating, especially have become symbols of the chasm
with gross domestic product on track separating the country’s haves and
to expand by more than 6 percent have-nots. And although Brazil’s
this year. Still, some economists say adult illiteracy rate as computed
the country could sustain 4.5 percent by the UN has plummeted from
annual growth without inflationary 25 percent in 1980, it was still 10
pressure for much of the next decade. percent as recently as 2007.

For businesses and investors world- Infrastructure is also inadequate to


wide, Brazil is providing more and properly support Brazil’s breakneck
more ways to tap huge and rapidly growth rates. Despite the flurry of
expanding consumer markets, put construction nationwide—most of
capital to work, harness the energies it related to home building, some
and intellect of its growing profes- geared to hosting the World Cup
sional class, find new suppliers, soccer tournament in 2014 and
and forge new partnerships in an the Summer Olympics in 2016—much
increasingly diversified economy. remains to be done to upgrade the
Some leading multinationals clearly physical infrastructure and promote
already understand the nation’s po- digital inclusion, notably in the
tential: Brazil is the second-largest new centers of development fur-
market for cosmetics leader Avon ther west and north in the nation’s
Products and the third-largest for interior.
consumer goods giant Unilever.
Brazil still has low densities of road
2
Outlook 2010
Brazil is also coming into its own and rail links—0.2 kilometer of roads
Number 3 on the world political stage. Now the per square kilometer compared
The demographic bonus
Brazil is at the beginning of a cycle in which both children and the elderly—segments that make important
demands on a country's resources while tending not to be productive in GDP terms—will make up a small
proportion of the country’s total population.
Children (percent of total population)
Elderly (percent of total population)

45%

40

35
Beginning of demographic bonus
30

25

20

15

10
Ending of demographic bonus
5
0
1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

2019

2022

2025

2028

2031

2034

2037

2040

2043

2046

2049
Source: IBGE

with nearly twice that density in A turnaround story


China, for instance. And although Yet for all its problems, Brazil is
high-speed Internet service is widely a turnaround story on a grand scale.
available, it is not yet easily afford- Certainly the country, like many
able for Brazil’s burgeoning middle in Latin America, has benefited
class, though presumably, as incomes from a run-up in the prices of
continue to rise, more and more people commodities such as iron ore—
will have the means to sign up. largely the effect of China’s ap-
petite for raw materials. But the
Brazil faces institutional challenges nation’s positioning is also the
as well. Both the World Economic product of more than 15 years of
Forum’s latest Global Competitiveness fiscal discipline and pro-growth
Report and The Heritage Foundation’s macroeconomic policy.
2010 Index of Economic Freedom
point to onerous regulation, rigid By the late 1990s, the government of
labor markets, an ineffective and President Fernando Henrique Cardoso
inefficient public sector, and broad was coming to grips with Brazil’s fiscal
mistrust of politicians. While challenges. The measures were tough
INSEAD, in the latest edition of its but effective: Although unemploy-
Global Innovation Index, praises ment rose and public debt soared, the
Brazil’s entrepreneurial spirit as one Cardoso administration tamed hyper-
of the highest in the world (one adult inflation, stabilized the currency and
out of eight is creating a business), laid the groundwork for a balanced
the WEF gives Brazil a low score in economy. By the early part of the
3
Outlook 2010
terms of the numbers of procedures new century, the country had moved
Number 3 and time needed to form a startup. from a trade deficit to a surplus.
Rise of the middle class
Between 2000 and 2010, there were significant changes in Brazil. The middle class jumped from a little more than one-third
of the population to almost half. Average income in PPP terms increased by about 50 percent. The buying power increase
promoted widespread access to capital goods and services.

2000 2010

Population data Population 170 million 193 million

Middle class 36% 49%

Income Annual GDP PPP per capita Current international $ 7,203 Current international $ 11,066

Minimum monthly salary R$ 151 R$ 510

Shopping cart Overview Staples and basic discretionary Staples basket expansion
Discretionary focus in electronics, vehicles,
beauty, travel and service

Staples Basic basket with additional categories Basic basket expansion with focus
such as yogurt and chicken on functional items, frozen foods and
prepared meals

Discretionary Mobile phones, television, refrigerators Entry-level vehicles, LCD televisions,


entertainment/travel, laptops, beauty products

Financing Overview Low access to credit, high interest Stable economic growth, accessible rates
rates and uncertainty about economy and easy access to credit

Access Mobile phones 22 million 180 million (as of April 2010)

Computers 10 million 60 million

Beginning in 2003, the government spending on infrastructure is just


of the new president, Luiz Inácio 2 percent of GDP—compared with
Lula da Silva, extended Cardoso’s about 16 percent in China—the
reforms, helping to accelerate exports activities are extensive. PAC 1—
and pushing the trade surplus to the first phase of the national
more than $40 billion by 2007. The accelerated growth program—has
transformation of the trade account distributed funds for oil extrac-
has helped eradicate Brazil’s long- tion, electricity generation and
time need to issue debt to finance logistics. PAC 2, which was an-
growth. Although Brazil was buffeted nounced about the time that the
by the recent global recession, it 2010 presidential election race
has fared far better than many other began, will work to catch up on
nations. By the end of this year, delayed investments from PAC 1
its debt-to-GDP ratio is expected to and boost spending on initiatives
have declined modestly to around such as the My House, My Life
41 percent, compared with 54 percent affordable housing program.
for the United States and a whopping
78 percent for the United Kingdom. Supersized consumer markets
Economic growth has given rise to
Brazil’s economic vigor has given a new middle class—a demographic
the federal government the means that already comprises half of the
and the freedom to spend on country’s population. Between
4
Outlook 2010
much-needed infrastructure and 2003 and 2008, 32 million people
Number 3 social programs. Although federal joined this group.
These individuals and families differ al computers leaped from 10 million
from their equivalents in China and in 2000 to more than 60 million in
India in their concentration: More 2009; about 32 percent of the middle
than 84 percent of Brazil’s population class owns a computer at home. And
is clustered in urban areas. What although the country is the fifth
they all share is a chance for upward largest in Internet connections in
mobility, spurred by stable mac- the world, high-speed connections
roeconomic fundamentals, the are rarer because of the high price
expansion of the Bolsa Família (the of access and the absence of ser-
federal social safety net program that vice in remote locations. However,
began to help millions of families in the expansion of mobile broadband
2003) and falling unemployment. services is on the horizon thanks to
the national plan to offer broadband
The new middle class represents access at rates substantially below
Brazil’s economic engine, powering current prices. This web-enabled
Brazil’s economic vigor demand not just for housing stock landscape will present many oppor-
but for an array of consumer goods tunities for such digital services as
has given the federal and services. Middle-class family m-payments, personal productivity
income now averages $9,200, versus enhancers, mobile advertising and
government the means an average across all classes of entertainment such as online games,
and the freedom to $15,500 a year, and is rising steadily. music and news.
These new consumers also make up
spend on much-needed the country’s current and future Follow the (new) money
infrastructure and workforce, filling the openings for
bank tellers, lab technicians and
Brazil’s potential has not gone
unnoticed abroad. Foreign direct
social programs. other service economy jobs created investment is pouring in from
by the expanding economy and corporations and investment funds,
providing the manpower to run accelerating government spending
factories and oil rigs. This demo- and private investment alike. FDI
graphic also constitutes a vast pool grew 35 percent annually between
of voters whose ballots matter and 2003 and 2008. After a decline in
who will want more say in their 2009, inward investment is flowing
nation’s future. again this year and is projected to
reach pre-crisis levels of $40 billion
As family incomes have risen, so in 2011, with more and more money
has discretionary income; over the earmarked for activities that will
last decade, the gap between mini- serve Brazil’s new middle class—
mum salary and the basic basket of retail, logistics, software, financial
food has multiplied. The basket of services, housing construction and
food currently represents 45 per- infrastructure.
cent of the minimum wage versus
68 percent in the year 2000. The Consider three recent examples.
consequence: More than 90 million State Grid Corp. of China, that
consumers buying everything from country’s largest electrical utility,
new LCD TVs—much in demand to recently spent $1.7 billion to buy
watch last summer’s World Cup—to seven Brazilian electricity transmis-
cars, prepared foods, mortgages and sion companies. Energy conglomer-
vacation packages. ate Shell International Petroleum
has signed a non-binding agreement
On the digital front, Brazil is trying with Cosan, a top Brazilian producer
to quickly move up the technology of ethanol, sugar and electric
ladder. There were 184 million cell energy, to create one of the world’s
phones in use in May 2010—which largest biofuels companies; the
5
Outlook 2010
means a majority of the population
Number 3 is now mobile. The number of person- (Continued on page 7)
Meet Brazil’s new corporate dynamos
• JBS. The company is now the world’s largest beef processor vast growth opportunities in areas ranging from savings
and exporter. It has annual revenues of $30 billion, a market accounts and credit-card operations to insurance products
capitalization of $11.8 billion and a presence in more than 110 and 401(k)-type retirement savings programs.
countries. Acquisitions have been integral to growth: In the
last 15 years, JBS has made more than 30 acquisitions. One • T AM Linhas Aéreas. Brazil’s No. 1 domestic airline is also
of its most significant purchases: its 2009 majority stake in the world’s 19th-largest carrier. Global events being held
US-based Pilgrim’s Pride. in Brazil—such as soccer’s 2014 World Cup and the 2016
Summer Olympic Games—will help boost leisure travel
• Cosan. Cosan is Brazil’s top sugarcane processor. In early 2010, in a country where business travelers account for most
the company signed a non-binding agreement with energy passenger air miles. TAM is currently in conversation with
giant Shell International Petroleum to form a joint venture that another regional carrier to merge operations.
would create one of the world’s largest biofuels companies,
projected to be a $12 billion to $21 billion enterprise. If trade • W
 EG. Latin America’s largest manufacturer of electrical
barriers are lifted in the United States, Europe and Japan, motors is quickly expanding its global presence, spurred
Brazilian ethanol may soon be sold in gas stations worldwide. by growth in demand for equipment for energy transmis-
sion, generation and distribution. At the end of 2009, WEG
• Itaú Unibanco. Now Brazil’s second-largest bank, as measured had nine plants in Brazil and six overseas. In May and June
by assets, Itaú Unibanco is one of the 20 largest in the of this year, the company made three acquisitions in sec-
world, based on market capitalization. Relatively low tors including electronic sensors for industrial automation.
use of financial services in Brazil presents the bank with

New sources of supply


China’s history of purchases of Brazilian iron ore amply dem- One sector stands out: ethanol made from abundant sugarcane.
onstrate Brazil’s potential as a supplier of raw materials. But More than four-fifths of new cars in Brazil run on ethanol or
they don’t tell nearly half the tale—of the country’s increasing an ethanol-gasoline mix, and the country’s sugarcane-based
ability to supply items like food, beverages, minerals and fuel is much cheaper to make than the US corn-based variety—
even oil. Self-sufficient since 2006, Brazil will reach the one reason Brazil is the world’s top ethanol exporter. But the
status of medium-sized oil exporter once pre-salt wells start ethanol itself is only part of the biofuels export potential; Brazil
to be operational. also has biofuels know-how for sale.

Brazil’s agricultural productivity has surged: Grain production


increased by 142 percent between 1990 and 2008, but the
acreage used to grow that grain rose by just 26 percent in
that time. And the country’s minerals exports say little about
the sheer diversity of materials, components, subassemblies
and finished goods the country supplies as well.

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Outlook 2010
Number 3
Crucible of new ideas
Brazil’s business sector has attracted attention for what The nation is also creating new centers of knowledge. Petrobras
Accenture calls its “super-agile” management models. Today, and the Federal University of Rio de Janeiro are developing a
business schools such as IMD and Wharton regularly feature giant global research center for the oil sector. The technology
Brazilian case studies. “Brazilians are known for their ability park, which is expected to employ up to 5,000 researchers
to manage complex situations,” said Mauro Guillén, strategic by 2014 at Fundão Island in Rio, is designed to bring together
management professor at Wharton, following a field trip a leading oil-exploration companies to develop the technologies
few years ago to study Brazil’s financial systems. needed worldwide to access undersea oil reserves.

A recent academic study indicates that Brazilian multinationals Embrapa, the nation’s agricultural research center, has
such as Vale and Embraer excel because they demonstrate collaborated with agrichemicals company BASF to create
unusual organizational flexibility, for example, permitting and herbicide-tolerant soybeans—the first genetically modified
even incentivizing subsidiaries to be unusually independent. crop developed in Brazil. And Brazilian petrochemicals giant
Another winning Brazilian management characteristic identified Braskem is blazing trails in bioplastics—in this case, plastics
by the researchers: “active waiting”—that is, constantly moni- made from sugarcane ethanol. The company, which aims to
toring conditions and getting ready to give immediate answers, be one of the world’s 10 largest petrochemicals companies
as opposed to the traditional approach of focusing on short- a decade from now, is building a giant plant, due to open next
term planning and intuition. year, to produce so-called green plastics. Food packaging
company Tetra Pak International, part of Swiss conglomerate
Brazil has also blazed trails in financial services. Years of Tetra Leval, is set to be a customer. The bioplastics market has
hyperinflation compelled its banks to invest heavily to tremendous potential. For example, the Coca-Cola Co. expects
accelerate transaction times. Today, checks clear in one or all of the plastic bottles it ships in 2020 to be made from
two days, and direct debit accounts further streamline processing. bioplastics.
The World Bank has praised Brazil’s “efficient, highly automated
payment system.” Cash machines in Brazil can offer more
than 500 types of service, including bill payment, movement
between funds and opening savings accounts.

For further reading (Continued from page 5) rocketing, thanks to easier access
to credit and rising incomes.
“Gearing up for the two-speed global joint venture is projected to have
recovery,” Outlook, October 2010 revenues between $12 billion and In the financial sector, Brazil is
“Game over?” Outlook, June 2010 $21 billion a year. becoming more attractive for global
private equity and venture capital
Billionaire Chicago real estate funds. With several huge public
entrepreneur Sam Zell has already offerings on the Bovespa, Brazil’s
injected more than $500 million in stock exchange, in the last two
a number of Brazilian companies that years, the funds have more opportu-
specialize in property and infra- nities to cash out. (Among the high-
structure. He has also announced er-profile investments: US venture
plans for more investments in firm Weston Presidio helped capital-
construction projects that will help ize Azul Linhas Aéreas Brasileiras,
Brazil prepare to host the World Cup the budget carrier launched in 2008
and the Olympics. Meanwhile, the by David Neeleman, Brazil-born
housing sector continues to hum: In founder of JetBlueAirways.) Also,
2010, two of the country’s biggest in 2009, several new local venture
homebuilders, PDG Realty and Agre funds were created in Brazil to
Empreendimentos Imobiliarios, invest in infrastructure, real estate,
merged, and six of Brazil’s 13 agribusiness and clean energy.
share offerings in the first months
7
Outlook 2010
of 2010 were made by real estate At the same time, Brazil’s business
Number 3 companies. House prices are sky- sector is generating big FDI out-
flows. Energy colossus Petrobras, wide, from Turkey and China to
which is 68 percent privately Senegal and the United States. And
owned, is an enormous influence a host of Brazil’s private-sector
by itself. By 2014, the company is businesses—from meat processor
set to invest nearly $200 billion— JBS to mining giant Vale—are
with $12 billion in oil exploration, understood to be lining up acquisi-
refining and distribution world- tion targets around the world.

Brazil’s rapid rise from inflation-dogged underdeveloped economy drowning


in debt to new world power has been astonishing. Two parts fiscal discipline,
one part export-led growth and one part rich natural resources, the nation’s
economic flywheel is spinning at top speed.

Of course, there are still plenty of potential brakes. The more the economy’s
annualized growth rate nudges 6 percent, the greater the fears of inflation.
Additionally, government spending as a proportion of GDP remains high,
and the current account deficit is expected to increase as the trade surplus
shrinks (with slowly recovering exports and quickly rising imports) and
profit repatriations rise. Moreover, currency appreciation due to high inflow
of dollars with increased resource exports may hinder competitiveness of the
local industry in favor of imports. For the most part, though, the prognosis for
the Southern Hemisphere’s superpower is very good. Few believe the incoming
administration will veer from the policies of the Cardoso and da Silva governments.
And with resources to spare, Brazil, an IMF creditor since 2009, is not about to
become a debtor nation again.

For executives in the rest of the world, the signals are all too clear. They have
Outlook is published by Accenture. a choice about whether their businesses get involved in Brazil, and they would
© 2010 Accenture. be unwise to ignore the abundant opportunities there. But they may not have
All rights reserved. a choice in whether Brazil soon gets involved in their businesses.

The views and opinions in this article


should not be viewed as professional About the authors
advice with respect to your business.
Roger Ingold, chairman of the Latin American Geographic Council for Accenture, is
Accenture, its logo, and the company’s county managing director for Brazil. Mr. Ingold, who began his career at
High Performance Delivered Accenture as an intern in 1981, specializes in the retail and food distribution industries
are trademarks of Accenture. and has extensive experience in sales strategy, supply chain and operations. Mr. Ingold is
based in São Paulo.
The use herein of trademarks that may
be owned by others is not an assertion roger.ingold@accenture.com
of ownership of such trademarks by
Accenture nor intended to imply an
association between Accenture and the Marcelo Gil de Souza is the global head of Accenture’s Corporate Strategy and
lawful owners of such trademarks. Growth Strategy groups. Mr. Souza, who is based in São Paulo, has worked with
clients in areas including corporate governance, M&A, post-merger integration,
For more information about Accenture, corporate strategy and operational excellence.
please visit www.accenture.com
marcelo.gil.souza@accenture.com

São Paulo-based Accenture manager Sabine Wimber contributed to this article.

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Outlook 2010
Number 3