Tuesday, 3 September 2013 00:00
Overall market size on imports worth $ 226 b in Brazil
Sri Lanka’s exports to Brazil are $ 48 million at 0.021% share.
11 Sri Lankan product sectors in the top 10 in Brazil
Last week I met up with sought-after international personality Ruchir Sharma, who is Head of Emerging Markets and Global Macro for Morgan Stanley and responsible for a portfolio of US$ 25 billion.
He was talking about the strange helicopter meetings that he indulged in when visiting Sao Paulo – the capital of Brazil- given the traffic snarl and security reasons. Apparently most CEOs travel by air even for meetings down the same street and almost all key organisations have a helipad on the rooftop of their offices. This led me to capture the dynamics of Brazil. Let me share the essence.
Officially called the Federative Republic of Brazil, it cuts across through eight million kilometres of land area which carry a population of 193 million people. The official language is Portuguese and the current called Real (R$). One US dollar is equal lent approximately two Real (R$), which gives us an idea of the strength of the economy in relation to the number one economy globally.
The per capita income is at 12,000 dollars, which is not that high but the reserves in foreign exchange and gold is estimated at 371 billion dollars, which gives power to the nation. Real GDP growth is at 1.3% and inflation at 5.5%. Overall trade balance is at $17 billion positive on a base of 495 billion dollars in trade as at 2012, which once again captures the economic strength of the country and why it is a member of the BRIC.
Doing business in Brazil
There are many ways of doing business with Brazil. A point to note is that that the procedures are same as any other country but one needs to understand the market dynamics of the country before selecting the method of entry.
I would go with appointment of a Commercial Representative from Brazil as the mode of doing business. The person will be remunerated by a commission he gets on the volumes traded. For instance, the Sri Lanka Tea Board has selected this option post a private-public visit to Brazil and a representative legally bound with a MOU. This is ideal for a small-scale exporter as the detail knowledge of the market can be sought whilst the language issue of dealing with retailers and media can be worked around.
If need be, detailed market research studies can be done like test marketing and product concept feedback secured whilst making the representative handle all Customs procedures and related logistics.
The weakness in this option is that the export company does not have contact with the customers such as supermarket chains but given the complexities of doing business in Brazil, this can be the most practical method of entry. Once the business grows, an exporter can set up a local office in Brazil and have more control over the market, which means that an exit clause must be agreed with the commercial representative which will require strong negotiation. One option is the appointment to be confined to a three-year duration so that at the time of renewal one can explore this option.
Key issue in Brazil
One of the key issues of doing business in Brazil that one must be aware of is the high tariff structure and the complexity of the system. Incidentally, the Sri Lankan portfolio of products currently exported attracts the highest taxes, which is where the opportunity lies for a Preferential Trade Agreement between the two countries.
There are varied types of taxes charged for export items. Import Tax (IT) where the percentage charged varies based on country of origin. Exercise Duty based on the type of product. Goods and Services Tax to protect local industries. Then there is a Social and Security Tax called COFINS at 7.6% and PIS at 1.65%, which are standard to any product that comes into the country. There is another tax called AFRMM that is aimed at supporting the Brazilian merchant marine and shipbuilding/repair industry and SISCOMEX use fee that covers import declaration registration costs. Over and above the usual costs associated with wharfage that is on movement of goods in a port is added to the end product.
In my view, with the integration of the economy with the rest of the world given that 223 billion dollars of export products come into the country, the above complexity will get ironed out. But, one must be cognisant of the above challenge. One option is to do a dummy costs or a shadow costing before arriving at the end product and meeting prospective customers in Brazil. This must be compared against the competitor products and may be indexed to determine attractiveness. A point to note is that price is a key determinant to purchase in the Brazilian market given the pressure on the purse, which is a reality all over the world.
For a typical Sri Lankan exporter, the current opportunities are industrial surgical gloves made with rubber which incidentally Sri Lanka does around 15 million dollars of business on a market size of 230 million dollars in Brazil. Then comes woven fabric at 10 million dollars on a market size of 270 million dollars in Brazil. Apparel accessories and rubber tyres account for four million dollars each with a market size of one billion dollars each in the country which incidentally Sri Lanka must pursue and see how this can be driven with the Preferential Trade Agreement.
Sri Lanka within top 10 exporters
Let me share the categories that Sri Lanka is within the top 10 exporter categories for Brazil. The number one position is retreated or used solid tyres, which is interesting. Dessicated coconuts, plastic apparel clothing accessories, activated carbon, ceramics and porcelain, spices, fruits and coconut oil make the portfolio. Maybe these can be the priority items as and when a trade agreement is being discussed between the two countries given that there is a comparative competitive space.
We can include black tea into this basket of goods given that currently around 150,000 dollars of export move into Brazil from Sri Lanka. This opportunity also brings in a responsibility to Sri Lanka to ensure continuity of supply so that once the market is opened Sri Lanka does not falter whilst maintaining the quality standards.
It’s worth conducting a ‘Brazil as an export opportunity’ program for potential exporters that can be on a private-public partnership. The reason being that post the program, a private-public delegation can make a ground visit like what the Sri Lanka Tea Board tested successfully early this year.
From the Brazil end probable commercial representatives can be lined up so that sector wise relationships can be tied in, such as one dedicated for tea, fruits and vegetables, porcelain, rubber products or it can be selected baskets of goods.
Based on the pick-up, may be a Sri Lanka export drive can be staged in key markets. For instance Brazil’s northern region has a free trade industrial zone called Manaus where many consumer electronics assembling companies are housed. Hence market connectivity can be established with such programs.
Sri Lanka can work on a Preferential Trade Agreement based on the private sector interest seen by way of the above given that India has Free Trade Agreement mooted since 2009.
(The author is actively involved in the economic development agenda of the country and is a respected thought leader in the country. The views expressed are strictly his own and not the thoughts of any organisation he serves.)