Based on the events taking place in 2011, we wrote an article covering what we believe to be the direction the Brazilian economy is taking.
Over the last years Brazil has arguably been one of the hottest market in the world to do business in. However, as we enter 2012, Brazil might already be old news for most relevant international business.
Brazil has delivered impressive growth over the last decade, much fueled by high commodity prices, foreign investments and increased consumer credit.
1. Too much money is self-destructive
A poorly skilled workforce along with much money available in the Brazilian economy and high import duties can become the recipe for disaster. Companies end up having to throw good money after a workforce that is not competitive due to high import duties for products or service produced abroad.
Over the last 10 years Brazilian salaries increased 125% while the productivity has only increased 22% in the time period. The result is that Brazil has become less competitive internationally than it was 10 years ago.
The way to overcome this self-destructive trend is to open the Brazilian market for increased international competition. A suggestion like this is, for natural reasons, not a popular change that any politician with ambitions of being reelected would risk to front.
The downside of opening up the Brazilian market is clear, salaries will have to drop and the poorly educated part of the workforce might be losing their job or getting lower status positions. The upside would be cheaper products and services, as well as a local industry that would be internationally competitive.
Our long-term question if Brazil can really manage a healthy and protected domestic market will not be answered in 2012.
Brazil has one main challenge to address and it is productivity. Brazilians always like to compare themselves to USA, but while the GDP per capita in Brazil is of USD 11, 273, their North American brothers produce a GDP per capita of USD 46,860.
As unemployment has almost been distinguished in Brazil over the last years, the importance of increasing productivity has become more urgent.
The key to increase productivity lays in decreased bureaucracy and better education. However education does not mean a university degree, but rather companies that invest more into developing the skill set of their workforce.
Brazilian businesses have traditionally been hesitant to invest in the skill set of their workforce as employees in Brazil change jobs frequently and an increased skill set would make the workforce liable for a higher salary elsewhere.
In order to increase productivity, both business owners and employees will have to change their behavior. While business owners invest in their workforce, the workforce will have to increase loyalty to the company they work for. This change will have to start with business owners that disqualify job candidates that has changed jobs frequently.
2012 will be the year when it will be negative for job candidates to change jobs frequently in Brazil.
3. The no-unemployment problem
Brazil has for as long as people can remember operated with double digits unemployment rates. This has changed: as we enter 2012, the unemployment rate in Brazil approaches 5% and there is effectively a shortage of workers to address the increasing investments the country is experiencing.
The Brazilian industry has been custom to unlimited access to poorly educated workforce and they have structured their operations accordingly. With the new no-unemployment situation, the Brazilian industry will have to adapt their operation by investing into facility automation that can create the same output with a smaller but higher skilled workforce.
It becomes increasingly difficult to recruit and keep a skilled, trained and motivated workforce. In a country where everything is quickly changing there is always a new and more exciting opportunity and the human resources department will be increasingly important for Brazilian businesses in 2012.
4. The economic growth will stall
Delivering exceptional growth figures is easy for a country that started out low and is experiencing that the prices of most of their main export products are skyrocketing.
Although Brazil is a huge market and has a long term potential to become larger than USA, the growth that we have seen over the last half a decade cannot continue forever.
Brazil as a country will increase its wealth through the new wave of oil and gas related operations, but transferring this wealth into the Brazilian economy will increase inflation.
Stalling the economic growth should not be considered as unhealthy or negative. It shows that Brazil has control over their domestic market and that the growth that we have seen over the last years has actually been a sustainable one and not a bubble, as some people tend to believe.
5. Class mobility: the big fat lie
Social classes are incredibly important in the Brazilian society and rather ambitious market predictions for Brazil are often justified on how many people will move upwards in the social hierarchy.
The lie is so good that even most Brazilians believe it is true. However, there are two main flaws to this theory.
The first indication that a household has climbed to the next level on the social class ladder is that they are offered consumer credit. As belonging to a social class is usually inherited, they were never taught how to handle consumer credit and it becomes like free money as they do not have any reference point to the 35% interest rate that most consumer credit is subject to.
As a result, the better part of their increased income is used to pay interest to the banks, not to consume.
The second flaw is related to social class as a personal reference point. Often more important than the income of an individual, social classes represent a reference point to where the individual is comfortable in society.
People with increased salary do not necessarily change the perception of what social class he belongs to nor his consumer behavior. It takes more than money to switch from Brahma to Moët & Chandon.
2012 won't change anything; this lie is a too good story.
6. The real problem is bureaucracy
The real problem in Brazil is not corruption but bureaucracy. While it is estimated that 5% of the Brazilian GDP is lost in corruption, it is estimated that 17% of the Brazilian GDP is lost in bureaucracy.
However we do not see demonstrations in the streets against bureaucracy. Why?
Bureaucracy is a way of life in Brazil and it is the elephant that is too big to be talked about. Reducing bureaucracy would mean that millions of jobs would disappear, and it is not any jobs, it’s governmental jobs, the most secure type of job in the world.
It is no secret that bureaucracy leads to an increased base for corruption, but imagine the headlines if a hard working bureaucrat got fired because his very important paper moving routine was replaced by a computer system.
As business people, we would think that it should be possible to reassign these bureaucrats to useful public service jobs as there is still a lot to be improved in public services in Brazil. However, we all know that this is not how the government works, not in Brazil and probably nowhere else in the world.
As if bureaucracy in the government was not enough, the culture of bureaucracy has also infiltrated private companies for years. If you are living in Brazil you experience this every day; either it is the three different queues you have to wait in to get your morning coffee or the never ending visits to the notary office to notarize simple contracts.
As easy access to a reasonably cheap workforce is no longer possible in Brazil, 2012 will be the year when Brazilian private companies will take workflow optimization seriously and start reducing bureaucracy in their organizations.
7. The year of foreign failure in Brazil
Everybody knows it will happen. There are so many foreign companies investing huge amounts of money in the Brazilian economy that somebody has to fail.
Those who have been around for a while might remember AOL’s high-profile investment in Brazil along with Banco Itaù in the beginning of this millennium. Better known than their investment is their high profile failure when they had to close the office in Brazil and hand over their customers to their competitor Terra.
Enough money will not guarantee your success in Brazil and we start to see foreign companies burning their fingers here.
The Norwegian offshore supplier Aker Solution lost USD 100 million during one single quarter in 2011 due to lack of a qualified workforce and subcontractors in Brazil, while the computer part distributor Techdata announced that they would close down their Brazilian operation in the end of 2011 due to low margins and high cost of business in Brazil.
When we see both brick and mortar businesses and high tech offshore business failing, we can see an indication that their predictions for the Brazilian market might be too ambitious or they simply didn’t grasp the complexity of doing business in Brazil.
It would be surprising if 2012 goes by without an escalating number of foreign businesses closing down or in other ways failing to meet their expectations in Brazil.
When business owners are under pressure it might be tempting to cut corners in order to fulfill the predictions in Brazil. Even the highly regarded American network equipment producers Cisco found themselves in a very uncomfortable position some years ago when the Brazilian police raided their office and found that their supply chain had illegally imported network equipment without paying taxes.
It will be especially interesting to follow the high profile production investments done by Chinese companies in Brazil at the moment. Chinese companies are not used to operate production in western economies. It’s easy to predict that the cultural difference between operating production in China and Brazil will become a major challenge for these Chinese companies.
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