Can International SMEs afford to enter the Brazilian market?

Aside

We were discussing the various economic indicators plus costs and resources of entering the Brazilian market with a potential client. A United Kingdom SME with around £1,000,000 in annual revenues. We talked to them last week and thought we would share some of the discussion as we are getting a lot of enquiries in this area.

At a high level what we discuss with SME/smaller sized potential clients is fairly simple, essentially:-

  1. If in a 1 to 3 year window. if you do not forecast your annual Brazilian revenues to be – say 400k in US Dollars or 300k in Euros or 250k in Pounds – with a reasonable margin – forget Brazil. Of course this depends on your profit margins and ability to generate cash to sustain the operation.
  2. If you are looking at doing revenues of over 1 million in any of the above currencies in a 1 to 3 year window then you need to do some serious financial planning.
  3. Anything in-terms of revenues between points 1 and 2 above you need to do some financial planning and analysis but you can still err on the side of ‘let’s try it and see’ – we see this a lot especially with more entrepreneurial companies who just want to get on with it and truly believe – even if they fail – they should at least break even – so in the spirit of nothing ventured = nothing gained – they go for it!
  4. When forming your strategy – forget a strategy for Brazil. Instead develop a strategy based on each major city in Brazil and then regional strategies etc. Brazil is too large to go with a big bang strategy. If you were outside of Europe and looking to enter, you would more than likely have a completely different strategy for say UK, France, Germany, Netherlands, Greece, Spain etc Not a European strategy per se.
  5. If you do not have the appetite to invest coupled with a reasonable medium to long term outlook – forget Brazil.
  6. Ask yourself – if you have a problem with one of your key accounts that needs urgent resolution, will this consume your total company resource pool or are you still able to have some resource free for Brazil? Selling in Brazil is predominantly based on relationships, you need to keep the relationships going at all times. With a local employee or presence this becomes much easier. Dealing with Brazil from afar is tricky. Dealing with Brazil on a fly in and fly out strategy is almost impossible and can be extremely costly. And this is before you get to the point of trying to sell FOB.
As a point of note – in our experience the fly-in and fly-out sales strategy for Brazil usually results in failure. Failure equals high costs (flights, hotels, general expenses etc combined with few or no business wins). Brazilian companies, typically do not like to deal with companies operating in this mode.

 

Brazilian companies like to do business with Brazilian companies. By this for clarification we mean – Brazilian companies and entities like to do business with Brazilian entities – in Portuguese, with Portuguese contracts, i.e. everything kept local.

 

From a regional strategic viewpoint Sao Paulo has almost 20 million people in the city and suburbs and almost 40 million people in the state. This is often and usually a great place to start. Rio coming in second is generally either the place to start due to the products or services you have or usually the second place to enter and its proximity to Sao Paulo certainly helps in this regard. There are many flights per hour between Sao Paulo and Rio de Janeiro and the flight time is around 45 minutes.

Rio de Janeiro and it’s suburbs have over 10 million and possibly 14 million depending on who you believe, the state around 20 million. So combined. Sao Paulo and Rio offer huge potential before you have to consider looking elsewhere in Brazil.

If you are looking at supply chain and logistics costs these two cities/states are usually the number 1 and number 2 places to start.

As mentioned above. Armed with a small amount of knowledge. it is quite straight-forward. If you have a reasonable medium to long term vision combined with the appetite and funding to invest plus the management resources available then Brazil offers a wealth of exciting and potentially highly profitable opportunities.

We talk to many small companies and individual traders from across the globe who think they can enter Brazil or even sell into Brazil FOB as easily as they can in some of the other western countries. Once we have explained the process, timelines and costs to them they are usually stunned.

According to the World Bank’s 2012 annual global report “Doing Business”, which evaluates the ease of starting a business, dealing with construction permits, registering property, and paying taxes etc, Brazil ranked 126th out of 183 countries in terms of being difficult to deal with.

As they say in Brazil – Football is a religion but paperwork and bureaucracy still rule.

Make no mistake the costs to enter Brazil are significant for smaller businesses. Unless you have a great understanding of your own niche in Brazil and understand the opportunities that exist for a small business it can be quite daunting.

As an example we have seen prices to open a legal entity range from $5,000 to $25,000+ (US Dollars) depending on who does it for you, then there are the various registrations with all the government bodies, opening a bank account and registering foreign invested capital with the Brazil central bank plus various translations plus the trouble of getting all the documents together in your home country. Realistically the cost to open a legal entity and do all of the required work is around $6,000 at the cheaper end of the scale. We (icaabs) have a very competitive offering where this is concerned.

Then you have to think of monthly ongoing costs:-

  1. You need an address in Brazil to open a company – for a virtual type address plan on $200 a month with phone services at a minimum
  2. You need a permanent Brazilian resident as a shareholder or legal representative – this is usually a short-term measure until you have your first senior employee but you can plan on anything between $500 and $25,000 per month for this. Again we (icaabs) have a competitive offering here.
  3. You need someone to do all of your fiscal/tax/accounting etc on a daily/monthly/annual basis – with minimal transactions and maybe 1 or 2 employees you can budget on $700 a month and upwards, again we (icaabs) have a competitive offering in this respect.

So in summary a new entrant can look at spending in their first year an absolute minimum of:

  • Up front costs $6,000
  • Say 6 months of a Permanent Brazilian representative $3,000
  • 12 months virtual address $1,200 – THIS DOES NOT GET YOU AN OFFICE – if you need a warehouse then it is obviously much higher! Although we (icaabs) do have some reasonably priced solutions.
  • Accounting/tax etc $8,400

So in the first year a bare bones cost is going to run around $18,600 before employees, sales costs, demo costs, exhibitions, marketing and advertising etc.

If you believe this is a lot of money then we also provide feasibility study projects and business planning type projects where we can gather all of the crucial information for you that will enable you to make some kind of decision based off relevant financial and non-financial information to enter the market. These reports are usually charged at less than the cost of a business trip to Brazil so are extremely good value. As they are bespoke based on customer requirements the cost of each does vary based on needs and requirements.

So the small company or SME does need to understand the ramifications for their business in terms of resources, cashflow, abilities to supply and taxes. Yes Brazil is an enormous market with huge potential but with inadequate planning and funding it has the ability to swallow a lot of resources that within the SME/ Small Company are often critical and in limited supply.

If you need any help in this areas please contact us via the contact us page on our website. We look forward to helping you!

Virgin Mobile eyes $100 million fund raising to spur expansion – FT

LONDON | Mon Oct 15, 2012 2:25am BST

(Reuters) – Virgin Mobile is raising up to $100 million (62 million pounds) from investors and private equity groups to roll out the Virgin Mobile brand to at least six new markets, the Financial Times reported on Monday.

Virgin Mobile, a mobile virtual network operator that aims to reach $3 billion in worldwide revenues by 2020, is seeking to expand to Brazil, Colombia, Chile, Poland, South Africa and Oman. It currently has 18 million subscribers in nine countries.

Brazilian imports rise and exports fall

Brazil rose ten positions in the ranking of importers of manufactured goods between 2005 and 2011.

In the same period, it fell three positions on the list of top exporters.

The oscillations show that, instead of growing as an exporter of industrialized goods, as it has always intended, Brazil has expanded as a major consumer market.

That is the conclusion of a recent study by Iedi (Institute of Studies for Industrial Development), based on WTO (World Trade Organization) data.

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Telefonica Brasil: 4.61% Dividend With Great Prospects For Growth

Telefonica Brasil (VIV) is a telecommunications company based in Sao Paulo, Brazil. It offers mobile services throughout Brazil and it is part of the larger Telefonica network. Its competitors include America Movil (AMX) and Oi SA (OIBR).

Why buy Telefonica Brasil?

  • Telefonica Brasil’s share price is severely undervalued at $22.40. Its fair value is almost certainly over a third higher than this or more. Its P/E ratio is currently 9.1 versus an industry average of 31.8. This is also a good indicator that the stock is undervalued.
  • The company has a very low debt to equity of just 0.1 and high free cash flows of BRL 3.488 billion. It also spent BRL 4.654 billion in capital expenditures last year showing the company’s desire to take advantage of the rapidly growing telecommunications market in Brazil. Indeed, the company has grown sales by an average of 22.3% over the last three years while maintaining a high net margin of 14.6%, these figures are impressive to say the least.
  • Telefonica Brasil’s ROE TTM is 17.9% versus an industry average of 6.9%. Therefore, stockholders in the company will likely see better than market returns in the future.

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PwC: Brazil, China, India primed for money manager M&A, expansion

Fast-growing economies in Brazil, China and India should provide future M&A or expansion opportunities for money managers, PricewaterhouseCoopers’ partners said Mondayin a webcast on global industry merger-and-acquisition activity.

“If you want to be considered a global business, it’s essential to be in Brazil,” said partner Graham Nye.

He said the rise of the Brazilian middle class will continue for years but warned that managers will find it difficult to enter the market because of the wait, sometimes up to two years, for approval from the Brazilian central bank and government officials.

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Brazil Heads for Solid 2013 Growth, but Also Inflation – BNP

09/24/2012 | 12:35pm US/Eastern

–Brazil heads for solid 2013 rebound, growth of 5.5%

–Inflation could rise sharply to 6.6% – BNP Paribas

–Inflation threat makes interest-rate hikes inevitable

 
   By Tom Murphy

SAO PAULO–Brazilian economic stimulus efforts will help produce a solid rebound for Latin America’s biggest economy in 2013, but at the price of rekindled inflation and interest rate hikes, according to BNP Paribas’s chief economist for Latin America, Marcelo Carvalho.

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Brazil Industry shows growth trend

National Federation of Industry survey informs that output is gradually increasing. The indicator was up in August.

Agência Brasil*

Brasília – The Brazilian industry output is on an upward trend, according to the National Federation of Industry (CNI, in the Portuguese acronym), which released the August edition of its Industrial Survey this Friday (21st).

According to the survey, “the production indicator reached 54.7 points in August, moving away from the 50-point threshold which separates negative from positive evolution.” In July, the indicator scored 51.1 points and in August of last year, 50.1 points.
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DirecTV May Bid For GVT To Expand Brazil Footprint

DirecTV (NASDAQ:DTV) is going to evaluate Global Village Telecom (GVT) for a potential purchase. {1} GVT, owned by Vivendi, is a telecom company in Brazil and offers phone, broadband and pay-TV services. Brazil is a critical market for DirecTV, accounting a large portion of its revenues. DirecTV’s intentions could be to strengthen its presence in Brazil and brace itself as the market gets more competitive in the future. It could use GVT’s service and bundle them with satellite TV to stay competitive.

GVT is Expanding Fast

GVT has been expanding quickly in Brazil. The company’s revenues in 2011 stood at around $1.94 billion, implying growth of close to 40% over 2010. [2] This year, the company’s management expects GVT to grow its revenues by 35%. [2] Broadband has been one of the prime drivers of growth followed by phone services. GVT’s broadband subscribers increased by 40% in 2011 compared to 2010, amounting to 1.53 million by the year end. [2] This fast paced growth continued in 2012 when GVT crossed 2 million broadband subscribers in August 2012. [3] GVT also recently started a pay-TV service and is seeing traction for the same.

Brazil Is Important, Bundling Will Help

The fast expansion of GVT makes it a potential target. Brazil is an important market for DirecTV as majority of its Latin American revenues can be attributed to this market.

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Brazil mobile phone sales pick Up in August

Mobile operators in Brazil together added 1.5 million customers in August.

Mobile phone sales in Brazil picked up again in August, following a ban on some sales in late July, but growth was still well below year-ago levels.

Mobile phone operators added 1.5 million subscribers in August, up 0.6% from July, according to telecommunications regulator Anatel. In August 2011, the operators added 3.7 million subscribers.

Still, numbers were up 15% from August 2011, totaling 257.9 million mobile phone subscribers, Anatel said.

Click here to find out more!”After the month of July was negatively impacted by Anatel’s decision to impose restrictions on some companies to add new wireless users, August figures show an improvement, but are still below last year’s levels,” said Vera Rossi, of Barclays Capital, in a note.
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Coca-Cola Affirms Brazil 2012 Commitment

RIO DE JANEIRO, BRAZIL – U.S. soft drinks giant Coca-Cola has said that the company is to keep its word over plans to invest R$2.8 billion (around US$1.4 billion) in the company’s Brazilian arm, Coca-Cola Brasil, this year. The company’s top man in Brazil chief said the company would meet its investment target for 2012, and was also “certain” to improve on it further next year.

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