High-Impact Entrepreneurship

Andre Ferreira on Brazil’s economic prospects [Transcript]

Endeavor is pleased to make public the following transcript from a presentation at the 2011 Endeavor Entrepreneur Summit in San Francisco. The event, which assembled over 450 entrepreneurs and global business leaders, featured dozens of entrepreneurship-related presentations by top CEOs and industry experts.

Overview: Andre Ferreira (Ernst & Young, Brazil) describes the economic prospects of Brazil in an intimate Q&A session. Andre Ferreira works in strategic growth markets for Ernst and Young in Brazil.

Transcript:

Andre: Today the objective is to understand what you guys are looking for with Brazil and Latin America. So would you like to know a little about Brazil? The size? The issues?

Question: Issues and culture and how you perceive foreigners.

Andre: Recently we had a great newspaper, a financial newspaper. In the first page we saw that Brazil is issuing visas for foreigners working in Brazil at a higher level than ever before. Nowadays we have few resources in terms of human capital. This has become a challenge nowadays so foreigners are very welcome. In Brazil, one of the challenges is the government. They do not provide enough resources for our population. In the last 8 years, we faced a huge change. More than 40 million people went from the poor to the middle class. And they are looking for health assistance, for education, so those kinds of businesses became very huge businesses. As a result, there are a lot of people we need to prepare to work. This is good for education and in the coming years we will have better prepared people. In the last five years, three or four or five private university companies became listed companies. We have an issue, which is education, but we also have opportunity for the companies that are looking to fill those positions. It is the same in the health field.

This is a picture of Brazil. We have the regulation, but it is not so clear. The rules are references, not to be fully in compliance with. We used to say that we pay taxes as the richest country, but we receive as a poor country. This is why there are a lot of opportunities for private companies that fulfill those needs. Nowadays, Brazil is experiencing a boom due to the transition and change of power. More than that, we have those sporting events in 2014 and 2016 and we need more infrastructure facilities. This is also a challenge because we need some investment from the government. When we look at Brazil 10 years ago and we look at Brazil now, we notice a dramatic change and many opportunities. In the beginning of any company and any business, there are few resources, few management resources, few human resources, but nowadays everyone is looking for ways to invest in Brazil. There are a lot of opportunities. My suggestion depends on your business. You can have different ways to get there. You have to evaluate very well and try to find a reliable company to invest in.

Question: Last year Brazil implemented a 2% tax on foreign investment. So if you are an investment fund in the US and you want to invest in Brazil, you have to pay 2% tax?

Andre: No, there is no specific tax. Equity? No. And the dividends are tax free. But the income is not tax free. Income is 34% tax.

Question: 100% ownership by foreigners is allowed, right?

Andre: Yes. There are some limitations on education and agricultural business. There are some specific limitations due to the specific regulations, but in general there is no limitation. There are some taxes on finance activities. But for investment as a whole, no.

Question: Could you talk about human capital and education?

Andre: The business is booming. There are not enough qualified people.

Question: Because there are not enough universities, or what?

Andre:There are a lot of universities. The government created a lot of rules to better check the quality of those universities, but the economy is growing faster than our human capital.

To give another point, the English language is a challenge as well. We had some companies that became huge companies just teaching English. Nowadays they are going to China to teach English. It’s amazing how big they became.

Question: With all this growth that is happening, I would think that potential Brazilian partners would be so busy with how successful they are that it would be difficult to find someone that has time to partner with us and start something.

Andre: I think we will always have someone interested, some executive that would like to create your business. The environment is good for that.

Question: How is the inflation?

Andre: After 1994, the inflation has become controlled at a reliable 5% and in the last 5 years it was around 3 and 4, this year it increased a little to 5.5. Nowadays this is a big concern, this inflation, but we believe that as a whole it is under control.

Question: Are most companies focused on export, or on the domestic market?

Andre: We demand exportation. This is our issue. Although 50% of our exportations is totally raw resources, 50% some industrial goods, but they are not high-end industries. But there is a lot of opportunity for the local market.

We have almost 200 million people. Brazil reached US $2 trillion GDP this year. Four years ago it was just 1 trillion. In 4 years, it went from 1 to 2 trillion. It took the United States 7 years to go from 1 to 2 trillion. Also we had the depreciation of our local currency and this helped this happen, but it is also because of the growth. It is expected to reach 3 trillion by the end of 2014. But when you look at what industries are contributing the most to GDP, it is all the local market industries – logistics, education, health, consumer products, retail, and business solutions.

Question: What is Ernst & Young’s strategy when it comes to strategic growth markets when you look at what are going to be the next big companies in the country? Do you have a specific focus on certain industries?

Andre: Yes, as I said, we have a screening and it identified 10 industries that are growing more than the Brazilian GDP – Logistics, health, education, products (foods, beverages), real estate, and gas. Ten years ago, we had less than half of the oil reserves we have now. This is due to the fact that it was discovered underground under the ocean. This is a huge opportunity because they need many different solutions to extract this oil from the sea.

Question: Do you have an optimistic outlook for the next five years?

Andre: Yes, I am optimistic. However, another issue is that we are a big country, but the economy is very concentrated between areas. The challenge is to start some business around some other cities. There is an outsourcer in the northeast of Brazil that has huge potential, more than Sao Paulo. It is another opportunity.

Question: And how are Brazilian people looking to expand outside of Brazil? Are they pushing to grow out of the country?

Andre: We had a Brazilian developed bank and one of its strategies was to invest a lot in potential transnational resident companies. So this bank invested a lot of money in companies that had the potential to make transnational transactions. Nowadays Brazil has a lot of business around South America and Africa. For instance, Angola has been built by Brazil. The engineering companies were Brazilian.

If someone would like to do business in Brazil, we have the least risks to deals based on the experience that we have. For instance, the agricultural business became a well known business. However, in the late 80’s, every company went broke. Nowadays, every company is recuperating and they have a lot of issues that need to be dealt with. The present is very good, the future is potentially very good.

Question: Are there preferred agreements with other countries like Mexico, Argentina, Uruguay, Chile, the US, or something like that?

Andre: We had those special agreements. We had bilateral agreements. But it’s difficult. We are always fighting with the US and Europe ….

Question: What is the tax structure for corporations?

Andre: This is the big challenge of Brazil. We have municipality taxes, state taxes, federal taxes. The income tax is around 34%. We have some specific situations and alternatives to reduce this for small companies. However the dividends are free of tax, even for investors. And we have a lot of tax on sales that can vary from 1 to 25%. We have the municipality tax that can vary from 2 to 5%. If you are a provider of services in Sao Paulo, it is going to cost 30%. This is a problem and you have to take care of it. The companies used to have huge staffs just to take care of that because if you don’t then you are going to have huge fines and interest.

Question: Can you outsource that? Are there companies that do that for you, guaranteed that there are no problems with the government?

Andre: Yes, you can that. Labor taxes are very high as well. There is also a challenge that instead of as a payroll, the companies started to hire people as individual companies. The labor tax is very high and the provider tax is only 14%.

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