By Vincent Bevins
Published: December 15 2010
For the increasingly wealthy and trendy Brazilian consumer, one brand that is proving difficult for them to get their hands on is Apple. The company has no stores in the country, one of the largest and fastest growing consumer markets in the world, and tech-hungry Brazilians pay about $1,500 for a new iPhone. According to O Globo, the Brazilian newspaper, when Steve Jobs was invited by a state official earlier this year to open a shop in the country, his reply was that Brazil’s “crazy, super-high tax policies” were too much for his company.
Unlike Apple, many other international companies no longer consider staying out of Brazil a viable option. Fast growth and a widening consumer base are providing big opportunities, like the $8bn flotation of Santander’s Brazilian subsidiary, the world’s largest in 2009.
The Brazilian economy is expected to grow by more than 7 per cent this year, and foreign companies are making money. But experts and executives say the labyrinthine set of practices to establish operations are making some companies think twice about investing. They say many companies find that difficult and overlapping regulations and complicated tax codes mean it takes newcomers much longer to get up and running than they expect.
Combined with stringent labour codes, this often means that their business models need to be changed entirely and, compared with other emerging markets, acquisitions are a more likely strategy as global businesses try to avoid the difficulty of having to re-navigate these waters. Other companies, meanwhile, give up or do not consider the country in the first place.
“Foreigners really only appreciate the headache once they are here starting to do business,” says Neil Montgomery, a lawyer with Felsberg & Associates in São Paulo who assists new companies in Brazil. “It usually takes about six months to a year for them to get used to all the bureaucracy, the red tape and all the cost”.
Even companies experienced in foreign expansion or from other emerging markets are often surprised by the challenge of doing business in the country.
“Once they are used to it they usually become comfortable,” says Mr Montgomery, citing a case he worked on with Turkish Airlines, “who were extremely frustrated, and are only now starting to have better feelings about Brazil”. But others find it too much. “I recently had a real estate company from Slovenia simply decide the hassle was too much and give up midway, and go home”, he says.
According to the World Bank’s most recent Doing Business Report, a ranking of countries according to the ease of doing business in them, Brazil ranked 127th out of 183 countries, below Mozambique and Nepal.
“Companies wanting to operate in Brazil usually hire local talent, a law firm and a consultancy to help them navigate [local taxes and regulations] and even do the feasibility project. It’s something that’s very different from other parts of the world,” says Sherban Leonardo Cretoiu, a professor of international business at the Fundação Dom Cabral, Brazil’s leading business school. “Bring expatriates here, yes, but don’t try to bring expatriates to do that job. It’s better to have a local manager or director.”
The aggregate average tax burden is high, even for developing economies, but actually coping with the red tape involved in paying taxes is sometimes seen as a greater burden. According to the World Bank, companies operating within Organisation for Economic Co-operation and Development countries must spend an average of 199 hours a year to complete the tax filing process. In Latin America and the Caribbean, 385 hours are needed. In Brazil, it is 2,600.
“The first advice we give is, when you prepare the business plan, please send it to someone in Brazil,” says Rodrigo Camargo, partner at the KPMG Global Business Group in Brazil. “We have to go over the tax implications.”
In practical terms, this means that companies often complain about the time it takes to get things done. “Of all the major risks, time is the biggest,” says Mr Montgomery. “In the beginning, not being able to account for timing due to bureaucracy is the biggest concern.”
Foreign companies usually set up local franchises and then struggle to get them into compliance with local law. Except in very rare cases, companies are advised not to attempt to set up a “branch” in Brazil, because of the difficult approval process and are encouraged to open a local company, regardless of the size of operations.
“We have three levels of administration,” explains Alexandre Bertoldi, managing partner at Pinheiro Neto, a law firm in São Paulo. “The competences of each field are a little blurred. We end up sometimes with conflicting or contradictory regulations. It can take about three to five months to get through these.”
For those that want to employ people, there is then the issue of the strict labour code, which was enacted in 1943. It was a very ambitious and pro-employee set of laws that was put on the books back when fewer Brazilians were part of the official economy.
“The legislation is archaic and very rigid. You cannot negotiate contracts, and all employees are treated equally,” says Mr Montgomery. “The cost of hiring someone is usually about 100 per cent of their base salary, per month, in addition to what you pay them. One common scheme was to hire senior management as non-employees, which brought the number down to about 25 per cent. But if things go sour in this case – or really in any case when a former employee files a suit – the odds of winning are less than 1 in 10.”
Tackling the difficulties of doing business in Brazil are rarely part of mainstream political discussion, says Mr Cretoiu. “Culturally, [Brazilians] aren’t really aware how comparatively difficult some things are. Apart from a few tax changes, these issues aren’t really on the agenda,” he says.
In order to avoid the pain of coming up with a wholly new set of strategies for taxes, permissions and labour laws, acquisitions are an especially attractive way of entering the market.
When Blackstone, the US private equity group, entered Brazil in September, rather than opening their own office, the group took a 40 per cent stake in Pátria Investimentos, a trusted local partner, and has given signs a full takeover is in the works. HSBC and Santander built up their positions in Brazil through acquisitions.
But buying a company usually means another set of homework assignments – doing due diligence to make sure there are no skeletons in the closets as previous managers tried to cut corners or didn’t fully understand how to comply.
“It’s very common to hear that it’s a kind of paradox. Many clients say that Brazil is from a personal point of view extremely friendly, and it’s very easy to adapt, and after two months they feel at home here,” says Mr Bertoldi. “But it’s still a very difficult country to do business in, and this has improved only slightly recently.”