“COMPETITION IS ONE OF THE MOST POWERFUL FORCES in the evolution of humankind. We do not know the future, but one thing is certain: as competition continues to evolve, it will be the source of a great part of our prosperity.” That is how American Michael Porter, the main theoretician in the world on competitiveness, begins his most recent book, the masterful Competition, a compilation of his main works over decades of study about how companies and countries can stand out in the global game – and prosper. There is an entire section in the book dedicated to a dispute among nations. In it, Porter is emphatic in relation to the causes that decide this game. “A country’s prosperity is created, not inherited. It does not stem from natural resources, numbers of workers or currency value. A country’s competitiveness depends on the capacity of its companies to innovate. In the end, success results from an internal environment that is dynamic, challenging and has an eye on the future.”
Theoretical books on economics and business are not exactly the preferred works at the highest levels of government, here or anywhere else. However, especially in today’s Brazil, the study of themes tied to competitiveness would be an investment that would pay for itself a thousand times over. Among the most competitive nations in the world are countries like Sweden, United States, Germany and Japan. It is no coincidence that these societies offer a standard of living close to the maximum humanity has ever achieved thus far. The underdevelopment at the other end of the spectrum in places like Chad, Angola, Burundi and Zimbabwe is shocking. Today’s Brazil is somewhere in the middle of the two extremes, which is very little for a country with ambitions for power. Throughout this semester, we will learn President Dilma Rousseff’s priorities. Dilma has been demonstrating a much less euphoric style than former President Luiz Inácio Lula da Silva. It would be great if she also demonstrated the recognition and willingness to overcome the huge obstacles that exist for constructing a truly developed economy. Advances over the past two decades have put us in the scope of the main corporations and investors in the world, but they have produced a dangerous illusion – that Brazil is already a great global competitor. As false as a 3 dollar bill. The blunt truth is we are taking a beating from many of our competitors. We are walking slowly, while they are running. In a world where China stipulates the new standard for competition, even for Americans, our only way out is to accelerate our pace.
True, we are experiencing a good economic moment. But it is prudent to analyze it at a distance. Much of the well-being achieved in recent years is due to the global boom in the commodities market. No one in their right mind is going to complain when the price for some of our main products goes up. The risk is complacency, dependence on markets that are volatile by nature and that oscillate despite our desires. At EXAME’s request, the economist Celso Toledo, director of the LCA consulting firm, elaborated a study showing that Brazil's average growth of 4.5% over the past five years was in large part due to China, our major client in the commodities market. Toledo shows that if the Chinese economy had grown 7% per year since 2005, and not 11%, Brazil’s GDP would have grown at an average rate of 2.5% - the same mediocre pattern as in the 80s and 90s. There is nothing wrong with enjoying the good winds from abroad. But we should not forget that they can change from one moment to the next. And the best antidote at a time like that is an economy that, according to Porter, produces created and not inherited results.
We still come up short in this aspect. Yes, there is a Brazil that receives a gush of dollars, raises it income level and is home to a growing consumer market. But that Brazil has costs that crush private enterprise and the competitive capacity of companies – regardless of how good they are in what they do. It is the same old inefficient and slow Brazil, which carries a bloated, big-spending, bureaucratic and ineffective state on its shoulders. Over the past two months, EXAME has heard nearly 50 entrepreneurs, executives, economists and scholars on competitiveness to understand the root of the problems of many Brazilian companies when it comes to facing foreign competition. As a whole, the scenario is worrisome. In the ranking of competitiveness elaborated by the World Economic Forum, Brazil occupies 58th place, out of 139 countries - trailing Azerbaijan. All of our major competitors, including Korea and China, are well ahead of us. The signs of Brazilian industry losing strength begin to accumulate. Industrial product exports are decreasing month by month, contrary to what we see with commodities. The trade balance for industrialized products, which was once 23 billion dollars in favor of Brazil, finished 2010 with a negative balance of nearly 40 billion. In many industries, the option of buying from China what was once made here is an ever more present reality. Entire sections are in check – like the aluminum manufacturers, which in 2010 saw two factories get shut down, one belonging to Vale and the other to the Indian group Novelis, and which may disappear in coming years, drowning in costs that are incompatible with international standards
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"We are at a decisive moment," says economist Paulo Rabello de Castro, one of the mentors of Movimento Brasil Eficiente (Movement for an Efficient Brazil), which aims at elaborating proposals for the country to develop in a more competitive manner over the next 20 years. “Brazil should not specialize in anything. It must maintain the diversity that allows it to take advantage of the wind from one direction or the other. The range of our economy is a sort of insurance.” That means not losing the capacity that has been constructed over decades in industry. Rabello recalls that the opposite danger once existed: of the country disdaining its enormous agricultural potential. In the 1970s, the military government focused all its efforts on industry. Agribusiness, currently responsible for nearly 25% of GDP, survived thanks to visionaries and technological advances obtained through Embrapa.
Whoever is at a disadvantage in international competition only has one reason to celebrate - the possibility of taking a qualitative leap which is unfeasible for already developed nations. According to a study by American economist Jeffrey Sachs, structural changes in the field of competitiveness translate into economic impacts visible in five years. But for that to happen, it is necessary to demonstrate Chinese-like determination. The specialists heard by EXAME are unanimous in pointing out an extremely promising scenario if Brazil decides to rid itself of restraints in four areas – the suffocating tax system, outdated labor legislation, precarious infrastructure and an unparalleled interest rate in the world. An obstinate and consistent attack on these problems could help the country join the group of the 40 best in economic competitiveness, alongside Switzerland, Sweden, United States, China, South Korea and Poland. This scenario, named “Competitive Brazil”, is compatible with a sustainable 6% growth rate per annum. In one decade, Brazil's per capita GDP could double to 10 000 dollars, comparable to the current standard for Koreans. The Human Development Index, a measure of well-being, would exceed Italy’s. We repeat: all this in ten years. "Countries like Japan and Korea have already demonstrated the social gains for those who seek competitiveness incessantly,” says economist Stéphane Garelli, director of the IMD Institute’s World Competitiveness Center in Switzerland, and one of the most respected scholars on the theme in the world.■
WHERE DO WE WANT TO GET
The major challenge may not be economic now. The solutions presented in this report for the four main problems of competitiveness are not new. The bottom line is the capacity of our political elite to promote the proposed shock. Ever since China’s rise as a power, there has been a recurring comparison between authoritarian and democratic regimes in terms of their capacity to carry out reforms. The theory did not end the debate. The most that can be said today is that dictatorships tend to produce faster transformation, but without the needed social consensus for sustaining them over time. However, there is a point that seems valid for both systems. It is only possible to adopt comprehensive reforms if it is clear where one wants to get. Laying out goals and demanding results, two conducts inherent to day-to-day activity at private companies, is rare in the public sector – especially in Brazil. In the past, Japan may have been the best example of how a country can take flight after incorporating these ideas. Destroyed by war, Japan embraced the ideal of a qualitative leap in education and of gaining foreign markets - the same strategy adopted later by Korea. With that, Japan became the second largest economy in the world, a position it only now lost to China. More recently, Poland repeated the same story. Just over 20 years ago, it was a completely closed communist country. In 1990, it promoted an ample modernization of its economy aimed at joining the European Union. It invested in infrastructure and education and has become one of the most dynamic economies on the continent. With skilled labor, but lower costs, it attracted industries from neighboring Germany and saw its per capita gross domestic product grow from 1 500 dollars in 1990, to 11 000 in 2009. Two years ago, Poland was the 53rd most competitive country. It is currently 39th. "The imposition of goals for joining the European Union was decisive for all the progress we had,” says the economist Tadeusz Kowalski, professor at the University of Poznan, Poland.
Brazil does not have an external objective, such as joining a rich nations club. It must decide on its own what it wants to be in the future. This is something on which all hope is currently deposited on the vision of President Dilma. She has apparently demonstrated sensitivity in understanding the problems that hamper the country’s competitiveness. She called entrepreneur Jorge Gerdau Johannpeter to head up a committee that will propose measures for increasing public sector efficiency and reducing its expenses — the basis for all other reforms. She appointed Fernando Pimentel to Ministry of Development, Industry and Foreign Trade with the mission of helping to strengthen Brazilian companies in the global game. “We are preparing a package with incentives for competitiveness,” says Pimentel. “We are going to send bills for two fronts to National Congress: tax relief and a reduction in payroll taxes. And there is still the third approach: debureaucratization.”
If there is true willingness, national producers can get their machines ready. While conducting this report, EXAME came across an expressive set of cases of how the country has lost business due to production's heavy structure. Examples? A drill that costs 18 dollars to be produced in Brazil pays no less than 27 dollars in taxes. What is most incredible is that a similar Chinese drill costs only 23 dollars here - including freight from China to Brazil, port costs and import duties. It is practically an invitation to move production to Asia – and with it, skilled jobs. In the case of automobiles, a bi-fuel car pays 29% in taxes. In the United States, this tax burden is 5%. In practice, a Toyota Corolla 1.8, which costs 60 000 reais here, costs the equivalent of 27 000 reais there. The result is Brazil has specialized in producing automobiles with little sophistication. “The effect is perverse, because the necessary labor quality is lower, the worker earns less and he will buy cheaper products,” says the consultant José Roberto Ferro, president of the Lean Institute, specialized in industrial competitiveness. For these and other reasons, it is no surprise that the tax burden should receive the most criticism from business owners and economists. The current burden, almost 40% of wealth, is among the highest in the world. One of Movimento Brasil Eficiente’s goals is to limit it to 30% of GDP. “We call this reform the 10-10-10. One third would go to Social Security, another to the states and municipalities and the third to the federal government,” says Rabello. “The effect would be extraordinary in 20 years.” A change in how they are charged would also be welcome, as occurs in Sweden. There, the tax burden in 48% of GDP, but the country is still ranked second in competitiveness. That is because the taxes are heavy on income and profits, but light on production and investment. In Brazil, everything is burdened, including earnings, investments and exports. “In order to build a factory, we pay 18% in taxes on investments. In Sweden, they pay 6%. In Uruguay, 1%," says Carlos Aguiar, president of Fibria, Brazil’s largest manufacturer of pulp.
Sweden is also an example when it comes to giving back the citizens' tax monies in the form of services. It is the opposite here. This is evident in the quality of public education and in the conditions of our infrastructure. Pothole filled roads, expensive and crowded ports, congested airports, lack of railroads and power outages are signs of the lack of investments. The main product in agribusiness' export schedule, the soy bean, is an example of how logistical problems can undermine competitiveness. Thanks to favorable climate and soil conditions and to producer technology, soy bean planted in Mato Grosso is among the most competitive in the world. However, the entire advantage is wasted during transport to the port. The lack of railways and waterways, plus the terrible conditions of the roads, makes freight costs on average fourfold higher than in the United States, where transport is handled by barges. Furthermore, almost 5% of the production here never reaches its final destination, resulting in annual losses in earnings of 5 billion dollars. The result: today, profitability for the Brazilian producer is less than for the American. In infrastructure, the government could help not only with investments, but also with clear rules. Cargill, of the USA, has been trying to obtain a license since 2002 to expand its port terminal in Santarém, Pará. Paving the BR-163 highway from Mato Grosso could triple the volume shipped by the port. "What’s the use in improving the road if the port won’t have the capacity to handle all the production?" asks Paulo Sousa, director of grains for the company.
One of the most startling factors that weigh against Brazil in international competition is the high cost of capital. The cost of money in Brazil is on average 13% per year. There is nothing even remotely similar in the world. In Chile, the highest ranked neighbor, this does not exceed 4%. Countries like Japan have rates near zero. “We are penalized twice. First, because we have to pay more. Then, because in face of the earnings from financial applications, shareholders want returns of more than 10% in Brazil, while they are happy with half that in Europe and Japan,” says Cledorvino Bellini, president of Fiat and Anfavea, an association that gathers the automobile manufacturers. Reducing the cost of capital is not an easy mission. It depends on the government’s efforts to cut expenses and take fewer resources in the market. “The government uses a great part of the resources available at the banks. There is little left over for the private sector," says Armínio Fraga, former Chairman of the Central Bank and partner at the Gávea Investimentos managing firm. If Brazil is able to reach Australia’s level, owner of the second highest interest rate in the world, the gains will be enormous. According to Professor Samir Cury, from the Getulio Vargas Foundation’s School of Administration, if Brazil’s interest rate fell from 5% to the Australian level, the country would gain 1.5 percentage points in terms of growth. A reduction in interest rates would also exert less pressure on the exchange rate, one of the biggest complaints of exporters.
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LONG-TERM SUCCESS AS WELL
Countries that are successful in the art of reforms also know how to dose long-term impact measures with others that are more immediate. Given our geographical dimension, it is illusory to think the results in infrastructure can materialize in less than a decade. It is also improbable for the tax burden to be reduced before that. Since politicians rarely risk their terms for such long-term results, it is necessary to reconcile these measures with others, with quick effects. In this aspect, no change would be as effective as the modernization of labor laws. The cost of a Chinese worker is, on average, one third the cost represented by a Brazilian worker. In pocket salary is only part of that sum. "My product arrives in the United States at a price 40% higher than its Chinese equivalent," says Benny Rosset, owner of Cia. Marítima, one of the country’s largest bikini manufacturers. Sales abroad, which once represented more than 20% of the company’s revenues, represent only 8% today. In the United States, Cia. Marítima only operates in the more expensive bikini bracket, where innovation is what counts. Large scale sales of basic articles to American chains, like Gap, have already been dominated by the Chinese. In order to mitigate this situation, the Ministry of Finance introduced a reform proposal in 2009 that reduced payroll tax burdens by nearly 10%. For such, social security contributions would be reduced from 20% to 14%, and the education salary, of 2.5%, would be removed from payroll. The end of contributions of another 2.5% for the S system, which includes institutions like Sesi and Senac, is also on tap.
It is not possible to win all the battles in international competition. Porter says that part of the success stems from knowing how to choose the areas in which to specialize. It is inevitable for part of industrial production to transfer to China, given the scale obtained by the country. However, it is a shame that we do not even know which areas deserve a fight. With the country’s costs so much higher than the competitors, we cannot identify our limits. A scenario of competitiveness would make room for a phenomenon common to nations that have been successful – advance towards a sophisticated economy capable of generating innovation. There would be so many gains it is hard to believe we could miss the opportunity. In what we hope to be a prophetic statement, Armínio Fraga says: “It is going to take very, but very much work. But in the end, Brazil will make it.” ■
BUSINESS | retail
THE INTERNET’S DARK HORSE
Founded by Hermes, the catalog sales group from Rio de Janeiro, Comprafacil has taken over second place in e-commerce, leaving behind competitors like Pão de Açúcar and Magazine Luiza | LUCAS AMORIM
AN UNEXPECTED DISPUTE CAN BE SEEN today in the Brazilian e-commerce market. Half a dozen companies compete not for first, but for second place. B2W, owner of the Americanas.com and Submarino brands has a comfortable lead, with a 40% share of online retail, having earned nearly 6 billion reais in 2010. The battle for second place involves powerful companies like Pão de Açúcar, Walmart, Carrefour, Magazine Luiza and Ricardo Eletro, which also have a strong presence in traditional retail. However, at the head of the group, there is a company without a single physical store behind it: Comprafacil.com from Rio. Over the past two years, its sales have grown threefold from 460 million to 1.4 billion reais – a pace nearly three times greater than sector expansion (see chart). This growth carried it to second place among the major e-commerce companies for the first time in 2010, surpassing Nova.com, which gathers three virtual stores from the Pão de Açúcar group — Extra, Ponto Frio and Casas Bahia — according to a survey conducted at EXAME’s request for the GMattos consulting firm, specialized in the Internet. “It is one of the most accelerated growths in the country’s e-commerce history,” says consultant Gastão Mattos, responsible for the study.
Founded in 2003 by the sixty year old catalog sales group from Rio, Hermes, e-commerce has become the company’s core business, and it represents two-thirds of the group’s 2.1 billion reais in sales. This growth in the virtual world has led Comprafacil to inaugurate the first phase of a new 140,000 square meter distribution center dedicated exclusively to its online operation - a structure four times larger than the one for catalog sales, in Campo Grande, western Rio de Janeiro. Its 12 meter high shelves are stocked with 40 000 different products – from coffee machines to chain saws – a portfolio threefold more encompassing than the one destined for traditional catalog sales. By the end of 2011, the variety of items offered by Hermes should reach 50 000 – the same level maintained by B2W and far ahead of the nearly 20 000 items sold by the other competitors. “On the Internet, the dynamic is simple: whoever has more products attracts more consumers,” says Alessandro Gil, partner at the Ikeda consultancy.
E-commerce emerged as a means to combat paralysis at the Hermes group, founded in 1942 by the German immigrant Siegfried Haberer, who had begun with door-to-door sales of watches and jewels brought from Switzerland to the Rio elite. In the 1960s, Hermes began to sell a huge variety of items, like pans, clothes, books and household appliances to class C and D consumers. After decades of growth with this model, the company got to the beginning of 2000 with a network of 400 000 resellers spread about the country and stagnant sales. That’s when Gustavo Bach, the founder’s great-grandson and son of the group’s current president, Cláudia Bach, returned to Brazil after studying four years in the United States. There, he got to know catalog sales chains that successfully migrated to the Internet, like the contract LL, where the partner lends its brand, but Comprafácil receives the orders, stores the products and delivers them to the consumer's address. "No other company dedicates itself to this sector like Comprafacil, which is practically alone in this market,” says Alexandre Umberti, partner at the e-bit consultancy. Throughout last year, Comprafacil signed more than 200 contracts with companies from the most diverse sectors – from the Webjet airline to the Estácio de Sá chain of schools. One of the most recent is the agreement to operate the virtual store for Flamengo, the most popular soccer team in Brazil, signed in the beginning of February and which projects sales of products with the team’s insignia as well as from the Comprafacil portfolio. Another front opened in 2010 is the logistic management of third parties. Accustomed to making deliveries to the most isolated backwoods of the country, Comprafacil is responsible for supplying the physical stores belonging to the Ipiranga service stations and the Mundo Verde natural products retailer. Altogether, these agreements are responsible for 20% of its earnings. "Since Comprafacil does not have physical stores, we decided it was the ideal partner to manage our operation on the Internet, without any conflicts," says Jeronimo Santos, director of retail and marketing at Ipiranga.
Besides seeking new partnerships, Bach has dedicated a great part of her time to acquiring smaller sites. In October, she bought the Rio collective purchase site Oferta X and began to offer not only services, but discount coupons to restaurants and products as well. The next acquisitions should be companies specialized in travel and tickets – two of the fastest growing sectors at the leader, B2W. With these initiatives, Bach intends to double sales this year. The battle should get even more difficult from now on. Nova.com, whose revenues grew 62% in 2010, plans on going public by 2012. "We were once only one-tenth the size of the leader," says Bach. “Now that we got this far, we are going to do everything to hold our position.”■