Brazil, an Attractive Growth Option

Transcription

1 Brazil, an Attractive Growth Option Succesfully investing and managing complexities in a unique and dynamic environment

2

3 Introduction Local and foreign companies from around the world and across industrial sectors, both established and potential new entrants, are seeking out opportunities in Brazil and what it represents in terms of profitable growth. However, in doing so, it is key to recognize and accept that Brazil is fundamentally different from other so called emerging economies and from developed countries, especially as it matures. Brazil presents differences across the board, from institutions all the way to the firm level. These factors continue to influence business organizations and managerial behaviours in distinct segments. The maturity path that Brazil is following is different from the one that other emerging economies are following and the one that developed countries once followed, and hence the demands at the macro and micro economic level are quite different. The end result could be different from the one developed countries reached. In the case of Brazil it has: Attractive growth rates and the potential to become a developed economy in the mid/long term; Growing per-capita income, with differences in consumption behaviour when compared to both emerging economies and developed economies; Both untapped talent pools and specialized labour shortages; Transparency, market regulation and operational efficiency under development; Unique economic and political environments which are still stabilizing. Finding new sources for growth is the key reason companies are vigorously investing in Brazil. Many traditional multinationals and domestic conglomerates are playing both offense and defence. They know they must be on the ground, investing for the long term, physically close enough to learn the ways of markets that differ from those they re used to. The challenge lies in how to successfully invest in such a unique and dynamic environment. This environment requires innovations in products, technology, and services, as well as major changes in operating procedures. No longer can a company simply export a product to a distribution network in Brazil and expect it to succeed. Multinationals business models are based on practices established in the markets of the developed world, where the game is won slowly by finding cost savings and making product improvements that capture single percentage points of market share over time. Brazilian consumers, even the poorest, have become too sophisticated for that. In fact, companies may have to rethink repetitive business models to compete effectively. All of this is easier said than done, of course, because consumers in Brazil are extremely diverse and their habits are changing. In some ways, they resemble those in developed nations: they are aware of and have a fondness for brands and want access to a variety of products at different prices, including products they aspire to but can t currently afford. Yet their tastes are often localized, and while they are middle-class in regional terms, they are still not wealthy enough to replace products regularly, because their percentage of truly discretionary income is lower. Otavio Maia Advisory Leader PwC Brazil Brazil, an Attractive Growth Option 1

4 Ensuring Return on Investments An Integrated Approach There are new players, new products, new services, new retail formats, new financial products, new consumers with changing demands the marketplace has changed and traditional business models are no longer valid. The perspectives for the Brazilian economy for the coming years are positive. However, the recent and continuously changing growth drivers are affecting the way companies do business, forcing them to review fundamental assumptions in their strategies and consequently their business models. Business executives are asking What new challenges will I face, what is on the horizon that I cannot see and what do I need to prepare for to avoid business disruption? These questions are on the minds of business professionals as they seek to enter or expand in Brazil, where in some cases there are less mature governmental institutions, opaque regulatory practices, uncertain labour markets and supply chain disruptions. 2 PwC

5 As a result many companies, those wishing to enter and those already present in Brazil, are being taken by surprise. There are new players, new products, new services, new retail formats, new financial products, new consumers with changing demands the marketplace has changed and traditional business models are no longer valid. The risk lies in missing the opportunities to capture and sustain growth. The gap between the wish implicit in the growth strategy vs. actually achieving the desired results could be widening. A wise business approach toward Brazil would be one that seeks to tap the country s potential while taking a proactive approach toward managing emerging complexities. Some companies have already taken such an approach and are already succeeding. Others remain on the sidelines, missing the country s opportunities because they lack an adequate approach. Brazil, an Attractive Growth Option 3

6 Some of the challenges of doing business in Brazil can be divided into 3 categories: market entry, operational and exit strategy as described below: Challenge Type of Challenge Considerations Market Entry Country Political and economic factors that might impair investments, property rights and expected earnings; Regulatory Business structure and model Tax Talent Some sectors are still protected from imports through trade barriers; Government requirements that might represent barriers to entry (licensing, reporting obligations, mandatory requirements, etc.); Tax, legal and regulatory requirements to establish most adequate business structure in order to capture opportunities aligned to long term strategy; Taxation occurs at all levels (federal, state and municipal) and need to be understood and incorporated in business planning and business set-up; Talent is scarce and can be costly. Furthermore, it is critical to become familiar with domestic labor laws and labor uses, including conducting detailed analyses of statutory law, jurisprudence (case law), and prevailing practices. 4 PwC

7 Challenge Type of Challenge Considerations Operational Market Improvements in income distribution are fuelling growth. New members of the Brazil s middle class are demanding new products and services; Reliable market information is frequently difficult to obtain. Need to take into consideration other factors when assessing market potential (e.g. availability of natural resources, purchasing power, the strength of infrastructure, the quality and extent of education, reliability of the social safety net, etc.); Financing risk Local interest rates are among the highest in the world; Cross-border funding faces regulatory barriers (generally exchange barriers); Need to have a long term financing/funding strategy as well as an adequate hedge structure; Competition International companies continue their push into the Brazilian market, having to cope with regional differences in a country of continental dimensions and with profound diversity; Exit Strategy Credit Indirect tax Regulatory Need to develop new business models; Underestimating local competition and their reaction capabilities is key. Competition in more mature -segments can be tough and there is a need to maintain continuous competitive analysis on your peers in the business; There is still a deficiency in quality of available information to assess credit-worthiness and make a credit judgment. The credit information systems are improving, but a large gap still exists when compared to developed countries. There is a need to develop an approach combining sound risk-acceptance criteria with a deep understanding of the particulars of the domestic economy; Government can rely on indirect taxes rather than on direct taxes as the core source for generating public monies. This can impact pricing policies and profitability; Government may impose requirements that might represent barriers to business operations (licensing, reporting obligations, mandatory requirements, etc.). A typical exit strategy could be to sell the company to a third party, or to organize a successful Initial Public Offering (IPO) to distribute ownership of the company in the open capital market. This requires preparation and understanding of adequate timing. Brazil, an Attractive Growth Option 5

8 How PwC can help In order to manage the complexities of doing business in Brazil, along the entire business lifecycle of a company, and avoid potential pitfalls whilst investing and doing business in Brazil, PwC can help companies through an integrated approach: 1 Ensuring successful market entry Making the right market entry choices, aligned to global strategy and reducing risk through clear understanding of local complexities Assess tax and legal implications of entry scenarios Incorporate local on the ground knowledge Identify key stakeholders early and how to influence them Assess entry mode alternatives vis-à-vis market behaviour 2 De-risking complex growth Maximize success of your growth strategies by understanding the risks facing your business and the likely costs of mitigating them Prioritize opportunities that strengthen strategy (i.e. core assets and capabilities) Target opportunities that provide scope for growth in the medium/long term Review the underlying core of portfolio strategy as well as the historical performance, market prospects and expected performance of every business within the portfolio Divest or exit non-core businesses, improve and grow the remainder Re-balance the portfolio to achieve the desired outcomes in terms of synergies, returns, growth, cash flow and value creation 3 Getting ahead of regulation Navigate regulatory environment, understanding potential implications to customers, competitive landscape and your business model Determine the touch-points of regulation on the business Understand relevant regulatory reforms (realized or proposed) Anticipate and plan for competitor and regulatory response Identify the opportunities and risks presented for your business and develop strategy accordingly 6 PwC

9 4 Delivering deal value Capture full potential of deals with deep understanding of the role of M&A, clear rationale for any transactions and an executable integration plan Determine which firms could be attractive to meet those goals and potential synergies Understand timing requirements to drive approach (wait and see vs. hostile take-over) Conduct robust strategic, financial and operational diligence Plan the integration and synergy realization and fit with the business well in advance Execute integration 5 Managing complexity Manage customer propositions and operating model more effectively by addressing the necessary and unnecessary sources of complexity Identify & quantify opportunities to capture value and key drivers of value and variety Understand drivers of cost to serve and complexity Identify performance improvement levers Trade-off value for cost and define differentiated value proposition Align people, process & organization 6 Aligning performance Drive performance improvements by aligning strategy, processes, organization and remuneration design and risk management Understand organizational needs and how to source them Understand corporate and BU strategic priorities and value drivers Identify performance gaps (processes, organization, technology) Develop action plans (fact-based) to close gaps Dis-aggregate strategy into KPIs and develop incentive/reward framework Brazil, an Attractive Growth Option 7

10 Our purpose is to assist companies to ensure adequate return on investments, managing complexities inherent to the dynamic Brazilian environment and with potential risks under control, covering the entire lifecycle of a company, from pre-entry all the way to re-positioning in the market place. These propositions can be combined to produce relevant solutions to complex problems: Combining propositions Potential Benefits Pre-entry 1 Ensuring successful market entry 3 Getting ahead of regulation 2 De-risking complex growth Using the right mode of entry Optimize investment Reduce risk of failure Alignment with overall growth strategy Entry 1 Ensuring successful market entry 5 Managing complexity 4 Delivering deal value 6 Aligning performance Adequate entry timing Improved realization of potential synergies Reduced risks around integration Process, organization and technology requirements identified and sourced Optmize investment Improved ramp-up of revenues Growth 2 De-risking complex growth 5 Managing complexity 4 Delivering deal value 6 Aligning performance Improved understanding of changing customer needs New business models and sources of revenue Anticipate and plan for competitor and regulatory response Align performance requirements to growth path Improved business cost to serve and complexity (streamlined processes and organization) Technology in place as enabler Improved profitability Re-positioning 2 De-risking complex growth 5 Managing complexity 4 Delivering deal value 6 Aligning performance Define investment (or divestment) strategy and define risk profile of options Growth opportunities identified and prioritized Re-balance portfolio for growth M&A as growth option Optimize investments 8 PwC

11 Contacts For further information, please contact: Otavio Maia [55](11) Rogério Gollo [55](11) Federico Servideo [55](11) Sachin Mehta [55](11)

12 Follow us facebook.com/pwcbrasil 2013 PricewaterhouseCoopers Brasil Ltda. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Brasil Ltda., which is a member firm of PricewaterhouseCoopers, each member firm of which is a separate legal entity. PwC refers to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm s professional judgment or bind another member firm or PwCIL in any way.