The heated discussion surrounding the aggression suffered by PSDB candidate José Serra – after all, was it a small ball of paper or a roll of crepe tape that hit him in the head? — provides the tone for the depth of debate in this latest run for President of the Republic. Serra and his opponent, Dilma Rousseff, wasted their time — and that of Brazilian voters — with everything, except those issues that should be given priority by whoever occupies the Planalto Palace starting January 1 of next year. On the rare occasion when they spoke of the economy, the candidates made vague promises of more employment, more income and less inequity because the government would see to that, as if it was the supreme agent of development, and companies mere co-stars without real importance. Worse. Both treated private enterprise with reticence, as if speaking about its contribution to the economy was condemnable. The closest they came to any discussion in this field was the sterile argument surrounding privatization, something that, without any rational explanation, became a bad thing. In relation to the companies themselves, only one, among the 4 million officially registered in the country, was mentioned – in excess, it must be said – during the candidates preaching: Petrobras. Not a word was said about the others, especially the private companies. The candidates ignored the fact these small, medium and large companies employed 33 million Brazilians, four times more than the public sector, including the state-owned companies. They ignored that they generated 2 out of every 3 reais of wealth produced in Brazil. They ignored that they pay two-thirds of all salaries in the country. They ignored that they are the greatest source a country can have to create more income and jobs and to develop. Nothing was mentioned about what the next president could – and should – do to improve the country’s business environment and stimulate the private sector to grow and accelerate development. “One thing is clear: the more enterprising a country, the better its performance in terms of sustainable growth and generation of jobs,” says David Audretsch, of the Institute for Development Strategies at the University of Indiana and one of the greatest authorities in the world on entrepreneurship. “The sooner Brazil learns this lesson, the better.”
Nothing was mentioned about what the next president could – and should – do to improve the country’s business environment
Luiz Seabra
Natura
3.2 billion dollars in earnings
CONFUSING REGULATIONS
In 1969, a young Luiz Seabra recently graduated in economics and owner of a small cosmetics store on, at that time, quiet Oscar Freire Street in the city of São Paulo, decided to create a new brand, Natura. It didn’t take long for the small store to make room for a battalion of door-to-door sales reps. Today, there are 1.2 million of them spread about the country. The company obtains its natural inputs by maintaining 400 researchers dedicated to the analysis of flora and establishing partnerships with 28 communities that depend on extractions from plants. But innovation is still a tortuous process in the country. Authorization for using a natural substance may take three years. Natura has 40 elements awaiting analysis. "Brazil needs a new regulatory framework in order to carry out innovation in a sustainable manner," says Seabra. There has been a proposal for regulating research on Brazil’s genetic heritage sitting on the back burners of the Executive Office of the Presidency for nearly three years. The backdrop for the problem is the complicated situation being experienced by Brazilian legislation. There are nearly 180 000 legal rules including laws, decrees and provisional measures that often have nothing to do with each other.
Luiza Helena Trajano
Magazine Luiza
2.2 billion dollars in earnings
INFERNAL BUREAUCRACY
Under the command of Luiza Trajano, a small family-run store in Franca in the state of São Paulo became the third largest retail chain in the country, with 116 stores in 16 states and 16 000 employees. The trajectory of success overcame a tumultuous environment. “I saw 17 currencies, 16 Ministers of Finance, zeroes being chopped off several times and a confiscation of savings accounts," she says. “I can say that Brazil has learned to deal with crises.” But now, with the economy booming, Luiza is concerned. The country has 23 million new consumers in Class C, but there are still many knots to untangle. “Companies need to be agile and competitive to take advantage of the moment,” she says. “How are we going to handle growth if we waste so much time on old problems, like bureaucracy?" She says that 10% of her employees – nearly 1 600 people – end up getting involved with organizing paperwork. The company needs an area half an Olympic-sized pool to keep 98 000 boxes of documents that could be requested at any time by some public entity. According to the PWC consultancy, the cost of bureaucracy in Brazil is four times greater than the international average.
Unfortunately, the candidates missed out on a fabulous opportunity to take this message to almost 140 million voters. Brazil exits the elections poorer than when they began, at least in terms of ideas. In most of the world, it is very clear that companies and entrepreneurs are the driving force of the economy. Since 2004, more than 1 000 reforms have been made in the world as incentives for companies in emerging countries. In April, American President Barack Obama promoted a meeting to discuss how to stimulate entrepreneurship not only in the United States - the largest global economy, severely punished by the 2008 crisis - but in the world. The person chosen by Obama to take on this theme was Secretary of State Hillary Clinton, second in the hierarchy of command to the White House.
Since 2004, more than 1 000 reforms have been made in the world as incentives for companies in emerging countries. Brazil’s is still missing.
Rubens Menin (on the left)
MRV
535 million dollars in earnings
PRECARIOUS INFRASTRUCTURE
In 1979, when he founded MRV, Rubens Menin had a dream of growing up selling low-income housing, which was unthinkable at the time. Today, his company employs 26 000 people. “Brazil has worked well over the past 16 years, but we need to do more,” he says. He believes the very poor infrastructure limits growth. “China consumes 50% of the cement produced in the world. Brazil just 3.5%.” A recent study by the LCA consultancy reveals that the quality of Brazil’s infrastructure is among the worst in the world – among 20 countries analyzed, we ranked 17th.
Marco Stefanini
Stefanini IT Solutions
324 million dollars in earnings
EXPENSIVE JOB
Marco Stefanini is from the generation of entrepreneurs who emerged with the restraint of trade for computer-related products. He graduated as a geologist and in 1987 he founded Stefanini IT Solutions. He survived the end of the restraint of trade, which would take place five years later, and he should earn 1 billion reais in 2010. He believes the next president should prioritize getting rid of the rigid labor laws. “The rules of 1930 do not apply to the Internet era,” he says. “We need more modern concepts. For example, the home office is a global trend, but it is not permitted in Brazil.”
Because it understands the importance of companies for development, EXAME presented a series of reports with suggestions in its latest editions – gathered from dozens of specialists – for improving the business environment in Brazil and for strengthening the economy. They are simple proposals for mitigating old and well-known obstacles, such as excess tax burden and complexity, antiquated labor legislation, deficiencies in labor training and lack of clear rules in many sectors (see box on page 46). Why talk about this at a time when Brazil is recording its greatest growth in more than two decades? Because of the simple ascertainment that this welcome expansion occurs despite - and not thanks to - the environment that surrounds our companies. The big question to answer is what the country’s potential would be if free competition were viewed as the safest and fastest way to generate jobs, innovate and lower and control prices. What are we wasting, as a country, due to the lack of vision, of courage and of willingness to make room for the entrepreneur spirit?
Perhaps the best thing to do now would be remove a series of obstacles the government itself imposes on business. They range from regulatory agencies equipped and driven by ideologies to one of the most incomprehensible tax structures on earth that sucks in nearly 40% of GDP without that meaning any improvement in life for the citizens. “Judging from the difficulties that exist to open and maintain a company, the government behaves as if it were an opponent of free enterprise,” says Fernando Alves, president of PricewaterhouseCoopers. “Investors arrive here enthusiastic about the market, but they are soon frightened by the staggering bureaucracy, unprepared labor force and tax system that taxes everything: payroll, production, financial operations, income, circulation of merchandise.” Someone who recently ran into this reality was businessman David Neeleman, founder of JetBlue in the United States and Azul Linhas Aéreas in Brazil. When he arrived to set up his business in Brazil in 2008, Neeleman was shocked by the taxes, work shift rules, overtime payment system, chaotic infrastructure of the airports, and most of all, the lack of logic in the laws. “Brazil needs agility, and the laws create a bureaucracy that slows everything down," says Neeleman. For example, he criticizes the fact that suspicions of corruption paralyze works, as occurred recently at the Vitória airport in Espírito Santo. “The best would be to continue with the renovation and the investigation simultaneously, as occurs in the United States.” Gabriel Rico, president of the American Chamber of Commerce, assesses that this shock explains why Brazil is acclaimed as the new fountain of opportunities yet still receives less in production investments than other emerging countries. “Last year, Brazil attracted 25 billion dollars in direct investments, while India, a country with a hermetic social structure, hundreds of dialects and religious and border conflicts that can lead to death, received nearly 35 billion,” says Rico. “The foreigners compared business environments.” Brazil’s tax burden is around 35%, whereas India’s doesn’t reach 19%. Here, the savings rate is 15% of gross domestic product; there it is nearly 34%. Brazil’s internal rate of investment is just over 18% of GDP. India’s reaches 40%.
Daniel de Jesus • Niely
252 million dollars in earnings
ABUSIVE TAXES
This chemist from Rio was born into a simple family and began his life as a businessman in 1981 manufacturing cleaning products for industrial machines in a garage in Nova Iguaçu, Rio de Janeiro. He had only one employee. In 1986, he restructured his business and created the Niely brand of shampoos and moisturizers. Today, the company has 2 000 employees and is market leader in hair color products. But Niely could be bigger. “The tax burden on cosmetics in Brazil is 40%, compared to 15% in most other countries,” says Jesus. “If the environment were the same, products would be cheaper for the consumer, sales would grow and my company would double in size." In other words, 2 000 formal jobs are lost at a single company in Brazil due to the tax burden. This same tax burden stimulates tax evasion and contributes towards keeping 70% of Brazil’s companies in informality, impeding a large part of them, most small in size, from following Niely's example of growth.
Part of the Brazilian government’s disregard towards companies is cultural in origin. Since colonial times, undertaking in Brazil is something associated with exploiting one’s neighbor. “Business success in Brazil is a personal offense,” says Tarqüinio Teles, founder of Hoplon Infotainment, a digital entrepreneur success story (see box on page 45). At the same time, there is veiled reverence of the government as the great provider of well-being, safety and economic growth. In school, children learn early on how President Getúlio Vargas drove development by declaring oil ours and creating Petrobras, and how he was smart in negotiating the creation of the National Steel Company with the Americans in exchange for the participation of Brazilian foot soldiers in the Second World War. There is not a single line in textbooks to explain the almost heroic trajectory of people like Leon Feffer. A poor Ukrainian immigrant, he began his life in Brazil selling envelopes at the door of the Post Office and fought to create a paper factory that through the hands of his descendants would become the Suzano Group, a conglomerate that earns 2.6 billion dollars and employs 4 500 people. “The first Brazilian entrepreneurs were pioneers without which Brazil would not have taken its first leap forward,” says economist Jacques Marcovitch, former dean of the University of São Paulo and author of the Pioneers and Entrepreneurs trilogy, which tells the trajectory of 24 founders of companies like Valentim Diniz, of Pão de Açúcar, José Ermírio de Moraes, of Votorantim, Attilio Fontana, of Sadia, and Johannes Gerdau, of Gerdau.
Aptitude for risk
Despite all factors to the contrary, Brazil has enormous entrepreneur potential, reinforced by one of the most thriving domestic markets today. A recent study by Global Entrepreneurship Monitor, one of the biggest international research projects on entrepreneurship, shows that Brazilians have great individual capacity for incurring risk, a skill inherent to successful entrepreneurs. According to the report, 68% of Brazilians would be willing to open a business even knowing the chance for failure is much greater than the chance for success. This report brings ten examples of large, medium and small companies that grew despite all obstacles. They are cases of overcoming, such as Magazine Luiza, which began in a small city in the state of São Paulo to become the third largest household appliance and furniture chain in the country, and Pif Paf, the largest food manufacturer in Minas Gerais, founded by a Portuguese immigrant. Their growth and that of an entire generation of green and yellow businesses is a sample of the country’s fabulous economic potential. “I saw 17 currencies, 16 Ministers of Finance, zeroes being chopped off several times and a confiscation of savings accounts," says Luiza Helena. “I can say that Brazil has learned to deal with crises.” The reports about those business people heard here also suggest how much we could progress if the environment were less hostile for those doing business. “Since the 1990s, most Brazilian companies have modernized, investing in management by results, and some actually export Brazil's management culture to the markets where they operate abroad,” says Erik Caramano, president of Movimento Brasil Competitivo. “But the government must also do its part, because most of the companies have already done their homework."
Today there are controversies concerning what “the government doing its part" would precisely be. The government of President Luiz Inácio Lula da Silva decided to increase its role in the economy through what was called “defense of large national groups”. State-owned companies, pension funds and especially the BNDES became partners of private companies in bail-out operations, or to contribute towards the internationalization of national groups. This pattern of government action can be an award for poor management. “There is a sort of natural selection in the world of business where bad businesses go broke for good ones to prosper,” says Armando Castelar Pinheiro, coordinator of Applied Economics at the Getulio Vargas Foundation of Rio de Janeiro. “Going against this logic is the same as letting the weeds take over the flowers in your garden.” The policy of shaping “national champions” is custom-made for those elected. But it does not transform because it does not stimulate what is most sacred in a market economy – fair competition, which forces companies that start from similar bases to create differences though competition. Without privileges. Without favors.
Andréa Basso • In Vitro
2.5 million dollars in earnings
DEFICIENT EDUCATION
The veterinarian from São Paulo Andréa Basso is one of the greatest specialists in genetic improvement of cattle in the country. In 2002, together with six partners, she founded In Vitro, a laboratory that has become a reference for reproductive biotechnology in Brazil. In 2009, In Vitro earned 2.5 million dollars – and it expects to exceed 4 million this year. "The only reason we will not grow more is due to a lack of skilled labor," she says. “Today, we train more than 90% of our employees. Brazil is lacking in professionals and that could pose a problem to our development." According to the OECD, Brazil has the lowest rate of adults with university degrees among the 36 countries evaluated.
Laércio Cosentino
Totvs
495 million dollars in earnings
LOW COMPETITIVENESS
Engineer Laércio Cosentino had a meteorical professional trajectory. From intern to partner at Microsiga in just five years, he was one of the people responsible for popularizing process management and automation programs among small and mid-sized companies in Brazil. Today, with Totvs, he has gigantic global competitors like Oracle and SAP. He hopes for measures that help in competitiveness from the new president of the Republic. According to the World Economic Forum, Brazil is ranked a modest 58th among the most competitive, trailing powers like Azerbaijan and Costa Rica. “The next government needs to deal with delicate issues like tax, labor, political and social security reform," he says. “The current environment frightens the foreign investor. There are a great many people willing to put money in Brazilian companies, but current rules are too complicated.” One of the changes defended by Cosentino is to make labor laws more flexible. He feels the obligatory signing of working papers should only exist for those making up to 2 000 reais per month. “There should be free negotiation for those making more.”
In the current model, money left over in some sectors is lacking in others. An example of those encountering difficulties comes from information technology colleges. Today, Brazil has a new generation of students and new grads in technology with the desire and creativity to create software, especially video games, a market that moves more than 20 billion dollars per year in the United States alone. This talent can be measure by the performance of young Brazilians in the Imagine Cup, a sort of cerebral cup held annually by Microsoft to stimulate students from around the world to develop projects in the technology area. Brazilians have stood out since the creation of the competition in 2003. Over the past five years, the country has been the record holder in enrolled projects. In 2006, Bill Gates, intrigued by the successive victories by Brazilians, requested a presentation from a local subsidiary of the company to understand why youths from a country without any tradition in technology were outdoing Asians and Europeans. “The Brazilian is creative and has the skill to work in teams, two essential qualities for promoting innovation,” says Paulo Iudicibus, director of new technologies and innovation at Microsoft. “But it doesn't have the capital and structure to take the project forward."
Specialists are unanimous in affirming that the path to development in the 21st Century, the era of knowledge, is supporting those who dedicate themselves to creating new products capable of competing globally. “Today, the world is full of countries with sophisticated innovative practices,” says the American guru John Kao, a consultant called Mister Innovation by The Economist. “Historically, Brazil made use of a large domestic market to develop its industrial park, but from now on it needs to participate more actively in the ecosystem of global innovation.” Large companies are able to generate innovation, but many changes arise from smaller, more agile and daring companies.
Gazelle companies
“The Brazilian government needs to pay utmost attention to a type of company we call a gazelle,” says Julia Rosen, vice-president of the innovation and entrepreneurship program and Arizona State University. According to the Kauffmann Foundation, an American entity dedicated to entrepreneurship and innovation, these businesses are three to five years old, able to create revolutionary technologies, offer high growth potential and have incredibly ambitious leaderships. Therefore, they are considered crucial elements for a national strategy of innovation. Apple and Google were gazelle companies in the past. “They comprise less than 1% of American companies,” says Julia. “Bu they generate 10% of new jobs."
Avelino Costa (on the left)
Pif Paf
455 million dollars in earnings
HOSTILE ENVIRONMENT
Avelino Costa, 76, from Portugal, arrived in Brazil in 1952. Six years later he bought a poultry and egg establishment. Today, he is the owner of Pif Paf, a meat processing plant with headquarters in Greater Belo Horizonte and 7 500 employees. “I don’t know if I’d have the guts to start back up from scratch today," he says. “There is so much bureaucracy that it discourages entrepreneurism in the country.” The World Bank’s Doing Business report shows that from 2009 to 2010 Brazil got worse in eight out of ten issues evaluated.
Ulisses Sabará
Beraca
60 million dollars in earnings
DISREGARD FOR INNOVATION
Ten years ago, Ulisses Sabará had an unusual idea: set up a factory in the middle of the Amazon Forest to export exotic raw materials to cosmetic industries. He invested 10 million dollars to produce natural oils in the state of Pará and today he supplies multinationals like L’Oréal and Unilever. “A large part of the resources was invested in product research and development," he says. “In Brazil, innovation is still little valorized.” The most recent survey by the World Intellectual Property Organization shows that Brazil has 29 871 patents in effect, whereas the United States has 1.8 million.
Tarqüinio Teles • Hoplon Infotainment
Earnings not revealed
CAPITAL FOR FEW
Despite the name, the online video game Taikodom: Living Universe was developed by a Brazilian company from Santa Catarina, Hoplon Infotainment, which employs 100 workers. The game has been available on the Internet since 2008 and it is played by nearly 1 000 people. That number could reach 10 000 in 2011 when it begins to be distributed abroad by GameFirst of the USA. “All by itself, Taikodom should increase the country’s video game exports fivefold,” says Teles, a typical representative of new technology entrepreneurs. It is a group that struggles to get financial support. Teles was only able to develop his game because he received 15 million dollars from a venture capital fund, a still rare alternative in Brazil. “We are the odd man out in the sector,” says Teles. “We must compete with the government, which offers a 2 digit return with zero risk to investors.”
Other emerging countries have already understood the formula. China is still the world’s factory founded on cheap labor, but at the same time, it is investing in new technologies. India, besides concentrating efforts in information technology services, invests in the automotive and pharmaceutical sectors. An example of government action to benefit development comes from Korea. At the end of the 1950s, the country was in a shambles from the war. Nearly 40% of the industrial park had been destroyed by the North Koreans. As the BNDES does today in Brazil, 60 years ago the South Korean government concentrated most investments in the large industrial conglomerates. The situation began to change at the beginning of the 1970s, when President Park Chung-Hee promoted a political reform known as Yushin, or revitalizing reform. The measures adopted included privatization (an evil word in Brazil’s election campaign), massive investments in education and opening the economy to international competition. The new rules stimulated production diversification and were the driving force for small and medium businesses. The effect was overwhelming. From 1972 to 1976, South Korea’s GDP grew more than 10% per year. In a second phase, the government began to give priority to research and development, increasing investments in new technologies from 0.6% of GDP in 1980 to 3% in 2001. With that, the country entered more sophisticated sectors such as electro-electronics, telecommunications, petrochemicals and digital technology. Participation of small and medium companies in industrial job generation jumped from 20% in the initial post-reform years to nearly 70% in the beginning of the 2000s. The impact on the generation of wealth and well-being of the population can be measured by the leap in GDP per capita. In the 1950s, before the reforms, it was 876 dollars, less than 10% the American. Today, it exceeds 17 000 dollars, equal to one-third the American.
Yes, it is possible to improve
In previous editions and in this report EXAME consulted specialists from four vital areas to the country's economy - taxation, labor, education and regulatory - and it obtained ideas the next president of the Republic can use to advance in each
1 work
Azerbaijan, Tonga and Uganda are some of the countries where hiring a new employee is easier than in Brazil — in reality, there are 137 such examples. After hiring comes the burden of contributions. In the United States, the payroll tax burden for companies is 9%, and in Uruguay, 48%. Brazil hits them with 102%. Modernizing labor laws and reducing payroll costs are essential measures for increasing company competitiveness. One of the proposals is to facilitate the hiring of young college grads, since the unemployment rate for 18 to 24 year olds is higher than 16%. At the same time, 8 million Brazilians would be more secure on their jobs if Congress approves a legal framework bill for hiring outsourced services.
2 TAXES
The list of taxes Brazilians pay is one of the longest in the world: there are 85 including taxes, fees and contributions. In one of the most chaotic fronts and with the most negative impacts on business, it should be at least possible to simplify the system. One of the ideas is to do like in other countries and show how much the consumer is paying in tax for each product or service right on the invoice. Unifying taxes such as income tax and social contribution on net profits would also greatly reduce confusion and collection costs. And, in order to do away with the insecurity caused by issuing 4 000 new norms in six months, one way would be to stipulate that the government can only make changes until June 30, which take effect the next year.
MercadÃo of São Paulo: showing the tax on the invoice is an advance that has yet to be won
3 Regulation
The legal entanglement is so great in Brazil even the laws are questioned. Over the past two decades, 4 000 of them were the object of lawsuits claiming they were unconstitutional. This lack of clear rules obstructs business. Brazil does not have legislation that defines competence for granting environmental licenses. Today, a project, whether a hydroelectric plant or a hotel along the coast, can suffer intervention from the municipality, state or Union, and wait years if there is any divergence. One way out is to approve a bill, in proceedings for seven years now, that stipulates competence for granting a license in accordance with the work's area of influence. In relation to competition, unification of the official surveillance entities, while strengthening Cade and simplifying the merger and acquisition analysis process.
Vulcabras factory: if payroll taxes were lighter, both companies and workers would win
4 Education
The education level of Brazil’s population is still very low even when compared to other emerging countries. Only 38% of Brazilians between 25 and 34 years of age have completed high school. In Chile, that rate is 64%, and in Korea, 97%. Brazil must urgently apply a shock of quality to the classroom. The adoption of means for strategic planning and for measuring teaching results, already applied in states like Minas Gerais and Pernambuco, is a possible solution. Another idea is to do like Singapore and train school directors to be actual managers. The best teachers need incentives and to be offered higher earnings. Definition of the basic curriculum to be taught in each grade is a basic proposal that would help improve student progress.
Rare example: Brazil should provide the majority of children with conditions such as those in the municipal school of Nova Petrópolis in Rio Grande do Sul
Clear laws are the basis for any healthy economy. But Brazil lives in an entangled web of contradictory rules
A possible agenda for strengthening the business environment in Brazil does not only assume the adoption of more modern criteria for deciding the destination of public investments. Besides improving the tax system, labor relations and education structure (themes dealt with in prior editions of EXAME), a government that sees private enterprise as an ally, and not an enemy, must above all else play the essential role of regulator. Clear laws are the basis for any healthy economy and, unfortunately, today Brazil lives in an entangled mess of often contradictory rules. “There is no exaggeration in saying one goes to sleep with one law and wakes up to another,” says José Carlos Costa Pinto, partner at Ernst&Young. Infrastructure is one of the sectors that most feels deficiencies in this area. “The difficulties in infrastructure result from a lack of appropriate legislation that defines governance, decision jurisdiction and control mechanisms for investments,” says Marcos Lisboa, former Secretary of Economic Policy of the Ministry of Finance. In many sectors, the role of regulatory agencies and licensing entities is not well-defined. As an example, Lisboa cites the case of the water basins. “Who regulates construction of a hydroelectric plant; which decisions are in the jurisdiction of the agencies and what is the role of each of the control entities?” he asks. “All these issues are precariously defined." If that equation is well solved, today’s problem could become a solution. “The way things are, infrastructure could stop the country. But we have a huge opportunity for sector companies,” says Rubens Menin, president of MRV, one of the largest constructors in the country, with earnings of 535 million dollars in 2009.
Those who accompany the work by companies and their complicated co-existence with the government say it will be difficult for the next president to shake their trust in the country’s potential. What is at play is less the risk of a short-term crisis and more the quality of growth we will have from now on. Are we going to build a country with strong companies, but that flourish by their own merits? A country where the government finally fulfills its classic roles – security, education, health, regulation – making room for the private sector to operate in the others? Are we going to work for a culture that valorizes the role of the entrepreneur in constructing our country? Or are we going to persevere in the old stereotypes of the villainous capitalist and protective State? These are decisions we must all make – and about which, unfortunately, our political leaders seem not to have much to say.