hector garcia lopez

Hector Garcia Lopez - © Living in Brazil - June 2005

“Doing Business in Brazil”

• General Facts of Brazil

• Macroeconomics South America

• Macroeconomics Mercosur / Mercosul


General Facts

Total Area 8,5 Mill. km2

Language Portuguese

Currency Real (R$)

Population ca. 176 Mill.

Population Growth 1,3 % pa

Membership Mercosur, ALADI, FTAA (ALCA)


Macroeconomics South America 2002


BIP/Kopf US$

Venezuela 4.679

Argentinien 2.850

Brasilien 2.596

Kolumbien 1.951

Andere 2.570

Total 2.779

BIP US$ Mrd.

Brasilien 457

Venezuela 90

Argentinien 117

Kolumbien 84

Andere 207

Total 955

Mercosur-Info

Bevölkerung Mio

Brasilien 176

Kolumbien 42

Argentinien 37

Venezuela 24

Andere 69

Total 348

Fläche tsd km 2

Brasilien 8.515

Argentinien 2.767

Kolumbien 1.142

Venezuela 912

Andere 4.006

Total 17.342



Macroeconomics Mercosur 2002

BIP/Kopf US$Uruguay 4.667Chile 4.400Argentinien 2.850Brasilien 2.596Paraguay 1.000Bolivien 875Total 2.779São Paulo 5.700

BIP US$ Mrd.Brasilien 457Argentinien 117Chile 66Uruguay 14Paraguay 6Bolivien 7Total 667São Paulo 207

Mercosur-Info

Bevölkerung MioBrasilien 176Argentinien 37Chile 15Bolivien 8Paraguay 6Uruguay 3Total 245São Paulo 37

Fläche tsd km2

Brasilien 8.515Argentinien 2.767Bolivien 1.099Chile 757Paraguay 407Uruguay 177Total 13.722São Paulo 249


Drivers & Challenges

• Main drivers for doing deals

• Main challenges for doing deals


Main Drivers

• Main Drivers for Doing Deals in Brazil

•Brazil is the fifth largest country in the world in area, has the tenth largest economy and a population of 175 million

•Many local companies are undervalued and in need of restructuring, capital and technology

•Enormous growth potential and consumer market•Broad industrial base and infrastructure, and a diversified

economy•Creativity and flexibility of labor force, coupled with its

competitive cost basis•Abundant agricultural, mineral and energy resources and

potential


Main Drivers (Cont.)

•Transportation networks (railways, highways, ports) and distribution channels in most industrialized areas

•Privatization in late stages and follow-on transactions still in developments

•Inflation under control•Import duties being reduced gradually•Government policies favoring exports•Foreign investors are eligible for most available fiscal

incentives•Goodwill generally tax deductible•New regulations favoring minority shareholders


Main Challenges

• Main Challenges of Doing Deals in Brazil

•Complex tax and employee related regulatory environment, with high taxes and social charges on payroll, sales and income

•Multiple taxes with fast changing legislation affecting business plans and increasing risks of contingencies

•Volatile economic environment•Fast-changing business conditions•Lack of local financing coupled with high real interest rates•Quality of historical financial information affected by fluctuations in

exchange rates and differences between local and international GAAP•Complex transfer pricing and foreign capital registration rules


Main Challenges (Cont.)

•Difficulties in reorganizing companies quickly, including high costs for employee terminations

•Important cultural peculiarities, including a different perception of the due diligence process

•Sometimes the “know-who” is more important than the know-how in the local market

•Considerable bureaucratic rules and regulations for certain businesses and industries

•Further investments needed in the distribution channels and infrastructure of certain areas

•Abundance of semi-skilled and unskilled labor•Social extremes with unequal distribution of wealth -a significant

portion of the population not participating in the consumer market


Overview of Brazil

• Key Figures

• Political Scenario

• Economic Overview

• Population Data

• Main Cultural Issues


Overview of Brazil

Key Figures

Population : 175 million (2002) 26 states and 1 federal district GDP 2002-US$450 billion in 2002 Currency: Real (since July 1, 1994) Language: Portuguese


Overview of Brazil (cont.)

Political Scenario

Federative Republic of BrazilLatest Presidential elections were held in October

2002. Next election in 2006.Luiz Inácio Lula da Silva elected President,

representing the leftist Labor Party



Economic OverviewThe second largest economy in Latin America and

the tenth in the worldPrimary economic sectors are: agriculture,

automobile, utilities, transport, industry, mining and energy.

Main economic regions are: São Paulo, Rio de Janeiro, Minas Gerais and Paraná.



Population data•Population : 175 million (2002)

•GDP per capita of R$5,210 (average in reais)

•70% of the people concentrated in the Southeast and Northeast regions

•Average life expectancy of 66 years

•20% of the population are rural dwellers and 80% urban

•42% of the population is under 20 years of age and less than 8% is over 66 years

•The population of the states of São Paulo and Rio de Janeiro are, respectively, 34 million and 14 million

•São Paulo is one of the fastest-growing cities in the world

•20 other metropolitan areas of Brazil have populations of more than 1 million

•30% of the population lives in the ten main cities

•Brazil represents the largest population in Latin America and the sixth largest in the world


Main Cultural Issues

• Language The official language of Brazil is Portuguese. There are no significant local dialects or other

derivations from the official language, but a number of words and phrases are at variance to those used in Portugal. English is the foreign language most used by the business community.

• Religion The predominant religion is Roman Catholicism. Many other religions are also practiced, since

immigrants of different creeds have settled in Brazil. There is general religious freedom in Brazil.

• Education Government-subsidized (free) and private educational facilities from primary school through

university, offer full or part-time curricula. The government also subsidizes national apprenticeship training programs in order to develop manpower for various industrial and commercial sectors, and an educational program to reduce illiteracy. In 2001, the illiteracy rate of the population older than 15 years in Brazil was of approximately 14% of the population. The general level of education requires much improvement, with approximately only 5% of enrolled students going on to higher education.


Main Cultural Issues (cont.)

Living standards

The standard of living of a large proportion of the population is very low, while that of the top stratum is extremely high. This income gap between the rich and poor has been a constant preoccupation of successive governments. Basic social indicators underscore the differences in regional development.

Cultural and social life in Brazil

With its mixed background of Portuguese, Italian, German, Japanese, East European and African immigrants, Brazil offers a wide diversity of cultural and social activities depending on the region of the country. Most major cities support cultural institutions. Leisure and recreation activities are mainly outdoors, taking advantage of the favorable climate. Many social clubs in Brazil offer extensive sports and social facilities.


Brazilian Indicators

• Inflation• Anti-inflation plans in perspective• Exchange rates & Interest rates• GDP – Real Growth rate• Economic Sectors & Economic Forecasts• Foreign Trade• Foreign Direct Investments• World Competitiveness• Country Reserves• Privatizations


Brazilian Indicators

* Prognose

Interest Rate (SELIC)

10

30

50

70

1988 1992 1996 2000 2004*

%

Trade Balance

0

20

40

60

80

1988 1992 1996 2000 2004*Export Import

US$ Mrd.

Imp

Inflation (IPCA)

0

500

1000

1500

2000

2500

1988 1992 1996 2000 2004*

%

*

0

200

400

600

800

1000

1988 1992 1996 2000 2004*

US$ Mrd.Gross Domestic Product


Inflation (IPCA)

22,4

9,6 5,2 1,78,9 5,9 7,7

12,5 9,3 7,5

05

1015202530

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004*

%

0,30,70,90,70,50,8 0,40,50,6

0,0

1,0

2,0

3,0

Jan Fev Mar Abr Mai Jun Jul Ago Set Out Nov Dez

%


Anti-Inflation Plans

* prediction

0

20

40

60

80

100

1986198719881989199019911992199319941995199619971998199920002001

%

Verão Plan

Bresser Plan

Cruzado Plan

Collor I Plan

Collor II Plan

Real Plan


Wechselkurse

Monatsdurchschnitt

3,81

2,853,13

2,38

3,12

1

1,52

2,5

3

3,54

4,5

J FMAMJ J ASONDJ FMAMJ J ASONDJ FMAMJ J ASOND

R$/US$ 2002 2003 2004


Leitzinssätze (SELIC)

* Endstand

1,31,21,21,21,41,1 1,3 1,3 1,3 1,2

0,0

1,0

2,0

3,0


%

42,038,9

23,931,2 19,0

17,417,3 20,0 16,5 17,5*

01020304050

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

%


GDP - Real Growth Rate

2,9

10,7

6,5

0

2

4

6

8

10

12

1950 1960 1970 1980 1990 2000

%


Economic Sectors 2003

% %

Agriculture,Forestry and Fishing

9 5,0

Manufacturing and Construction

32 -1,0

Services 59 -0,1

Total 100 -0,2

GDP Share Growth RateSectors


Economic Forecast

* Prognose

Economic Indicators 1999 2000 2001 2002 2003 2004*

GDP in net prices (US$ billion)

531 602 510 459 498 586

GDP real growth rate ( % ) 0,8 4,4 1,3 1,9 -0,2 4,7

Trade (US$ billion) 97 111 114 108 121 156

Trade Balance in (US$ billion) -1,0 -0,7 2,7 13,1 24,8 32,1

Exchange-rate(year end,R$/US$)

1,8 1,9 2,3 3,5 2,9 2,8

International Reserves (US$bil.)

36 33 36 38 49 47

Inflation (IPCA) 8,9 6,0 7,7 12,5 9,3 7,5


Foreign Trade 2003

ExportUS$ 73 billion

19%

25%

56%

Final Products

Raw Materials

Semi-finished Products

ImportUS$ 48 billion

4% 84%

12%

Final Products

Raw Materials

Semi-finished Products


Handelsbilanz

* vorläufige Daten

53 47 486260

495860

50 56 56

735855

47 48 53 51 48

94

0

20

40

60

80

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004*

US$ bi / Mrd.

4,65,6 5,8

8,9

5,5 5,54,83,74,2

5,3

9,19,09,37,9

6,65,75,87,9

02468

10

Jan Fev Mar Abr Mai Jun Jul Ago Set Out Nov DezImportação / Import Exportação / Export

US$ bi / Mrd.


Foreign Trade 2003 - Import Products (fob) % Countries %

Machinery and Equipment 15 USA 20

Eletric products 15 Argentina 10

Petroleum and derivatives 13 Germany 9

Chemical products 10 Japan 5

Vehicles and parts 7 China 4

Alimentation products 6 France 4

Pharmaceutical products 4 Italy 3

Manures and fertilizers 4 Nigeria 3

Plastics 3 United Kingdom 2

Others 23 Others 40

Total from EU 25Total 100

Total 100


Foreign Trade 2003 - Export Produtos (FOB) % Destino %

Soja e derivados 11 EUA 23

Automóveis e peças 10 Alemanha 6

Produtos metalúrgicos 10 Holanda 6

Derivados de petróleo 7 China 6

Produtos químicos 7 México 4

Carne e derivados 6 Argentinien 4

Produtos mecânicos 5 Japão 3

Minério de ferro 5 Itália 3

Produtos eletro-eletrônicos 4 Reino Unido 3

Outros 35 Outros 42

para UE 25Total 100

Total 100


Trade Brazil - EU

16,3 16,814,9 14,8

13,1 12,7

15,1

18,1

14,014,9

14,5 14,7 13,714,8

0

5

10

15

20

1997 1998 1999 2000 2001 2002 2003

Imports from EU Exports to EU

US$ Billion


Foreign Direct Investments

* prediction

26

11

19

29 30 31

2119

10

15

0

10

20

30

40

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004*

US$ Mrd.


Foreign Direct Investments

Entry 2003 : US$ 10,1 billion

41%

3% 56%

Services Industry Agriculture


© AHK-SP 01/01

Foreign Investment

Stock 1995US$ 102 billion

55%

43%

2%

Industry Services Others

1996 - 2003US$ 170 billion

4%74%

22%

Services Industry Others


2000 2001 2002 2003% % % %

USA 18,1 21,5 13,9 18,5Cayman Islands 6,7 8,3 8,3 14,8Holland 7,5 9,0 17,9 11,2Japan 1,3 3,9 2,7 10,6France 6,5 9,0 9,7 6,4Spain 32,1 13,1 3,1 5,5Germany 1,4 5,0 3,4 3,9Others 26,4 26,0 26,0 29,1

Country

Major Investors


Rate of World Competitiveness

IMD

Country 2002 2003 2004USA 1 1 1

Singapore 8 4 2

Germany 15 12 15

Chile 20 24 20

China 31 33 31

Brazil 35 31 35

Mexico 41 36 41

Colombia 44 44 44

Argentina 49 43 49


Devisenreserven

* vorläufige Daten

60 52 45 36 33 36 3849 47

020406080

1996 1997 1998 1999 2000 2001 2002 2003 2004*

US$ bi / Mrd.

50 4953 53 52 51 49 50 50 50

0,0015,0030,0045,0060,00


US$ bi / Mrd.


Privatizations 1991-2002

Energy Telecomunication

Siderurgy Mining

Petroleum and Gas Petrochemical Others

Total

Sector InvestmentsUS$ Bil. %

32,1 3132,1 318,2 87,3 77,3 74,2 4

12,4 12103,4 100


Workforce

• Labor Relations

• Labor Practices & Costs


Labor Relations

Brazil has a large labor force, but many workers are semi skilled or unskilled. There is a shortage of managerial, supervisory and technical personnel. Labor unions are a significant economic force in the country and have been known to be quite militant. Fringe benefits and social security costs are a significant element of total labor costs.

The labor force is of some 75 million, or 45% of the total population, with approximately 5.4% employed in agriculture, 24% in industry and 39% in services. Women comprised approximately 40.4% of this workforce in 1997 and this percentage has increased significantly in recent years. A significant part of the workforce is not formally registered.

In general, adequate labor is available. Semiskilled and unskilled labor is fairly easy to obtain, with Brazilian workers being recognized for their capacity for hard work and their willingness to learn. The Brazilian workforce is also fairly mobile. Skilled labor tends to be in short supply however. The number of personnel with proven technical, professional or management skills is growing as company in-house training and courses take effect, with these employees being highly sought after.


Labor Relations (Cont.)

Extensive social security laws and labor regulations govern employer-employee relations. However, foreign investors have not experienced much difficulty in the way of labor problems, mainly because they follow local standards and practices.

Employer and employee relations are dealt with principally in the labor laws (CLT) enacted in 1943 and subsequent legislation. The labor laws are applicable to all employees in regular registered employment, except for individuals in public employment or domestic labor, who have separate regulations. The labor laws make no distinction between skilled and unskilled workers or between those engaged in manual, office or professional work. Therefore, all types of workers are generally referred to as employees. A change in the legal structure or ownership of an employer does not affect the rights acquired by employees under the labor laws.


Labor Practices & Costs

Salaries

• In addition to the amounts paid to employees as salary, any other amounts which are paid on a regular basis are, for all legal purposes, considered as part of the employee’s remuneration and are, in general, taken into account in the calculation of vacation, 13th salary and the amount that must be deposited in FGTS, as well as termination payments.

• A fringe benefit is an additional item granted to an employee inexcess of the employee’s regular salary. Pursuant to the applicable labor legislation, the grant of an award or of any other benefit (such as vehicles) to an employee may be considered a fringe benefit, for the reason that any incentive award or benefit may represent an additional payment and consequently, compensation to the employee. In such cases, the total amount of the employee’s earnings (including taxable fringe benefits) shall form the taxable basis for the contributions that should be borne by the employer.

• Monthly salaries may not be lower than the minimum wage established by applicable law. Presently the “minimum wage” is equivalent to R$ 240 (some US$80). Some specific activities have minimum wage amounts agreed with the respective Unions.

• A Brazilian worker may not be paid a wage lower than that which is paid to a foreign worker for performing the same work, exception certain special circumstances established by law.


Labor Practices …(Cont.)

Paid Vacation

After a 12-month period, employees are entitled to a 30-calendar day paid annual vacation which must be taken within the subsequent 12 months. During the month of vacation, the employee is entitled to an addition 1/3 of his/her monthly salary. In the event that the legal period to take vacation has already expired, the employer must pay the employee in double.

3th Salary (Christmas Bonus)

At the end of each year, employees are entitled to an annual bonus equivalent to 1 month’s salary.

Profit Sharing

The employees’ profit sharing or the participation in the company’s results is established in the Brazilian Constitution. The law determines that the profit sharing or the participation in the company’s results has to be granted each six months, but it does not provide rules for calculating the amounts. Hence, many companies pay a fixed value, previously agreed with the employees and/or Unions. Normally, this value is lower than one monthly salary.


Labor Practices … (Cont.)

Overtime In general, compensation for overtime work is paid at a premium of at

least 50% of the compensation paid for normal working hours. Night Shift Additional Payment Employees that work between 10:00 p.m. and 5:00 a.m. are entitled to an

additional payment for night work, which corresponds to an increase of, at least, 30% of the amount paid per the daily working hour.

Family-Salary A monthly allowance is granted for each employee’s child under 14

years of age or to those which are disabled. Presently, the amount per child corresponds to R$11 (approximately US$3.50) for employees with salaries up to R$ 468 (approximately US$150). Employees with salaries higher than this are not entitled to this allowance.


Labor Practices …(cont.)

FGTS

Under the FGTS system, employers must deposit monthly, on the employees’ behalf, in a blocked bank account, an amount equivalent to 8.5% of the remuneration of each employee. This deposit is borne by the employer without any discount on the employee’s salary.

Social Security

Companies must pay to the National Institute of Social Security (Instituto Nacional do Seguro Social -“INSS”), an amount equivalent to 20% of the total payroll (monthly remuneration paid to all employees). In addition to this, some 8% to 12% (depending on salary levels and up to the limit of some R$180) of the employees monthly salary is withheld by the employer to be paid to the government

Insurance Against Labor Accidents

Payment of insurance by employers against labor accidents is normally due at rates which vary from 1% to 3% of the total remuneration paid to employees, depending on the “level of risk” presented by the type of activity of the company.


Labor Practices …(Cont.)

Education-Salary

Employers are also required to pay to INSS (a social security fund), a monthly contribution to “education-salary” equivalent to 2.5% of the total remuneration paid to employees.

Other Additional Payments •Payments contractually agreed upon between employer and employee; •Additional remuneration due to employee for unhealthy or dangerous working conditions;

– •Transportation vouchers;– •Weekend remuneration;

•Remunerated absence (sickness, maternity-leave, marriage, military service and electoral service enrollment, etc.);

– •Labor union fees; and

•Payment to specific institutions, such as the National Instituteof Colonization and Agrarian Reform (Instituto Nacional de ReformaAgrária–“INCRA”), the Social Service of Trade (ServiçoSocial do Comércio–“SESC”), Social Service for Industry (ServiçoSocial daIndústria–“SESI”), the Brazilian Service for Support of “Small Companies” (ServiçoBrasileirode ApoioàsMicro e PequenasEmpresas–“SEBRAE”) etc.

hector garcia lopez - © living in brazil - june 2005 “doing business in brazil” general facts...

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