Demystifying the Brazil cost for Danes

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In this post I will:

  • Define what is the“Brazil Cost”
  • What are the consequences of the Brazil Cost for the companie in Brazil
  • Comment what are the possible solutions for the “ Brazil Cost”

The Brazilian industrial production hasn’t followed the internal domestic growth of the Market. Whilst the industry GNP walked back by 2, 5%, the retail sales volume rose by 8, 4% until November of 2012.

The weak performance of the industry has as main causes the so called “Brazil Cost” and the high appreciation of the Brazilian Real, which is the Brazilian currency.


What Danes should know about the “Brazil Cost”

The “Brazil cost” is the main factor for making the Brazilian industry less competitive when compared to the cost of producing the same product in other countries. The Brazil cost affects all industries wihtout a shadow of doubt, however the Brazilian transformation industry ends up being the most affected.

It is important to emphasize that when I mention the Brazilian industry, I mean all industries that are in Brazil, whether there is foreing capital invested or not.

The Brazil cost,is the sum of all current costs within the Brazilian economy resultant of deficiencies of several factors that are relevant for the competitiveness of the Brazilian economy.

More importantly, this cost does not depend of strategies adopted by companies and can only be decreased with national policies reforms.


What causes the “Brazil Cost”

Taxation

  • Direct taxation in the production among all levied taxes in the transformation industry
  • Irrecoverable taxes within the industry
  • Bureaucracy and time spent to pay taxes

Cost of working capital in Brazil

  • Cost of the working capital in Brazil is amidst one of the highest working capitals of the world. This happens not only because of the remuneration of short term deposits in which the reference is the Brazilian interest rate SELIC and also due the high spreads charged by banks.

Cost of Energy and Raw materials

  • Brazil in theory has more than enough natural resources that could ensure the offer and competitive prices of raw materials for many sectors of the economy, that could add value to all chain by generating income and jobs. However the natural resources availability isn’t reverted in competitive prices when compared to other economies

Cost of low quality Infrastructure

Several are the deficiencies in the Brazilian infrastructure network. The density of train networks as well as roadways are still far below of what is seen in other countries.

This fact ends up penalizing companies by increasing the costs of maintaining a fleet and putting a product in a warehouse. Moreover there are other deficiencies such as the saturated capacity and the bad conditions of roads and ports.

Additional costs of  the employees

Companies have to pay with its own resources services like healthcare, social security and assistance. This is a basic condition in Brazil to generate life quality to the employees of a company.

Appreciation of the Brazilian currency

When the currency of a nation is appreciated when compared to the dollar the industry growth is affected:

All factors mentioned above, including the appreciation of the Real are extremely relevant for the existence of the Brazil cost.


Overcoming the “Brazil Cost”

  • More investments in infrastructure are needed. If Brazilian federal government invests more in infrastructure, and create better roads, a decent railway system, and if all the infrastructure network can function properly a large chunk of this cost will decrease considerably.
  • This can be done by doing public private partnerships for instance. Denmark, for example has a fantastic infrastructure network, and the Brazilian government could make use of the Danish know-how to improve its country condition.
  • The domestic consumption in Brazil has exceded om at least five times production in Brazil, thereby incentivizing companies to import more products to supply the demand.
  • The Brazilian government must adopt policies to lower the spreads charged by the banks. The  high spread discourages the companies to invest in new infrastructure, because the interest rate to pay is too high. This means that the cost of working capital in Brazil is too high for companies that are willing to invest locally.
  • Elevated cost for using energy happens because the taxation on energy is too high. The government must revise the taxation on energy urgently.

 Conclusion

The Brazil cost presumes governmental intervention.

It is paramount for the Brazilian government to intervene in the issues listed above.

These actions are what are going to be the pilars to make Brazil grow in the long run  and make Brazil beocme an even more attractive destination for companies willing to manufacture locally and yet, have a competitive advantage.


 

Did I miss out on somehting? Please, let me know.

I would appreciate very much to hear your feedback. Put it on the discussion thread.

 

 

 

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Carlos Monteiro is a Brazilian citizen, graduated in Business Administration by the Catholic University of São Paulo. He lives in Odense, Denmark with his Danish Wife, Cathrine, and their half Danish /Brazilian daughter Ines Marie. You are very welcome to be in contact him at any time.

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