Selling Perfumes in Paris

Brazilians have been buying French beauty products for years. But now Brazilian cosmetics company Natura has just opened a store in Paris, selling its perfumes, creams and cosmetics in one of the world’s most discriminating markets. Success in Paris would give Natura the clout to expand beyond South America into other European markets.

Natura is not alone. Brazilian companies are selling compressors and aircraft in China, cement and steel in the US and Canada, as well as banking services throughout the world. Even as the domestic economy shows signs of fulfilling more of its potential, many Brazilian companies are looking to overseas markets to provide a guarantee of future growth.

In Brazil, “globalization” is a negative term usually taken to mean exposing domestic manufacturers to the threat of cheap imports and competition from big, sophisticated foreign manufacturers setting up on their doorsteps. Economists and analysts focus on foreign direct investment flows, one of the main indicators for any economy. Heavy FDI volumes bolster a country’s balance of payments and reassure portfolio investors about its ability to pay its debts. Multinationals also create jobs and wealth in the real economy and often transfer technology that gives the domestic economy’s competitiveness, efficiency and growth an additional boost.

Foreign Investment
Few economists are particularly concerned about the threat Brazilian companies pose to competitors in other countries or the impact of Brazilian outward investment on the global economy. But the figures are changing quickly. The volume of capital invested overseas by Brazilian companies reached $70.7 billion at the end of 2004, up from $54.9 billion in 2003, according to the Central Bank. Exporters have invested in opening offices and distribution channels in key export markets. “Companies enter new markets through exports, then later on open offices and plants there to support their sales,” says Sidnei Corrêa Marques, head of the Central Bank’s foreign capital and foreign exchange department. An increasing amount takes the form of intra-company loans to overseas subsidiaries – a proxy measure for direct investment overseas. That amount rose to $15.2 billion in 2004, up from $10.1 billion a year earlier.

AmBev, the brewing and soft drinks company, is one of the leaders of this new breed of multinational. In the first quarter of 2005, its operations in North America and Latin America outside Brazil accounted for nearly 27% of AmBev’s  $1.6 billion in group sales. A large part of these revenues came from AmBev’s Labatt division in North America, which it began managing following the merger with Interbrew of Belgium in 2003. But AmBev has also been expanding aggressively in the Americas. It holds almost 55% of Argentine brewer Quinsa and also has operations in Paraguay, Uruguay, Chile, Bolivia, Ecuador, Peru, Venezuela, the Dominican Republic, Guatemala and Nicaragua. Markets in the northern part of South America and in Central America represent about $3 billion a year in beer sales, says Pedro Ferraz Aidar, AmBev’s director for investor relations. “Given its size, this region represents a great opportunity for growth for AmBev,” he said.

Other big industrial groups are well established overseas. Votorantim Cimentos, the cements division of industrial conglomerate Votorantim, has overseas assets worth $1.3 billion. It began expanding outside Brazil in 2001 with the $700 million acquisition of St. Mary’s Cement from Lafarge of France. St. Mary’s has factories in the Great Lakes region of the US and holds 50% of Suwannee American Cement of Florida. In February this year it agreed to buy factories in the Great Lakes from Cemex, the Mexican cement giant, for $389 million. Votorantim now controls about 6% of the US cement market.

Reluctant Globalizer
Despite the size of its investments, Votorantim is a reluctant globalizer. “Internationalization is a necessary evil,” says Antônio Ermírio de Moraes, group chairman. “I would rather invest all my resources in Brazil. We were obligated to go overseas against our will because demand in the home market stagnated.” That may be so, but foreign investment opens promising new markets for companies and diversifies risk. And by investing in highly-rated countries such as the US, a Brazilian company’s local subsidiary can access financing at a fraction of the cost its parent would otherwise pay. This technique helped Cemex expand around the world.

Brazilian steelmaker Gerdau has overseas operations in the US, Canada, Uruguay, Argentina and Chile. Mining giant CVRD has prospecting operations in Venezuela, Peru, Chile, Argentina, Angola, Gabon, Mozambique, and Mongolia, a steel mill in the US, a manganese plant in Norway, and offices in various countries in Europe, Africa and the Far East. Oil group Petrobras is present in 15 countries overseas, including exploration, production and refining facilities in Angola, Argentina, Bolivia, Colombia, the US and Nigeria.

Brazil’s Embraco, the world’s leading supplier of compressors for refrigerators with 25% of the global market, is a veteran at this game. About 40% of the company’s sales come from its overseas operations. It has factories in Italy, China and Slovakia as well as in Brazil. It has other business units and distributors in the US, Mexico and Italy. In China, for example, where it has a joint venture with local company Snowflake, it plans to double current production to 4.5 million compressors a year by December 2006.

“China has become an export platform, and our customers are also setting up in there. We have to keep up,” says Ernesto Heinzelmann, Embraco’s president. The company is starting to shift production away from its higher-cost factory in Italy, which it bought from Italian compressor maker Aspera in 1994. Production there will be reduced to 2 million units from 4 million a year, while the unit in Slovakia will increase output by a third to 4 million units. The Slovakian unit is a greenfield development by Embraco that began production in 1999. “We are going after competitiveness in Europe,” says Heinzelmann.

The Lure of China
In spite of Embraco’s positive experience, China is a difficult country for foreign manufacturers. Embraer, the Brazilian aircraft manufacturer, has been producing regional passenger jets there in a joint venture called Harbin Embraer since 2003. It invested $25 million in the venture but admits it will take longer than expected to make a return on its investment. Part of the problem, says Maurício Botelho, Embraer’s president, concerns rising taxes on airfares, which have hurt profitability and put a cramp on airlines’ purchases of new aircraft. Marcopolo, the bus maker, faced more serious problems. It abandoned plans to build a factory in China after local manufacturers were able to quickly copy its imported buses in alarming detail – including its logo.

Financial services are following Brazilian business overseas. In June, government-owned Banco do Brasil launched BB Securities New York, a brokerage aiming to service Brazilian companies on the New York and Chicago markets. The bank already had a brokerage offering similar services in London. Since the 1960s, it has built a network of 38 overseas units that hold a total $21 billion in overseas assets. Antônio Lima Neto, vice-president for international operations, says the network is designed “to follow the map of Brazil’s foreign trade.”

Opening BB Securities New York, Lima Neto says, is a logical consequence of the growing international ties of Brazilian companies. “If you are supporting a client’s international operations, as that client grows he will want to access overseas [financial] markets and it is important to be able to offer a Brazilian service.” Private-sector banks have followed similar strategies, although to a lesser extent.

The real’s strong revaluation over the past two and a half years has made it less expensive for Brazilian companies to invest overseas. Márcio Lutterbach, a partner at KPMG Corporate Finance in São Paulo, says Brazilian companies were involved in 22 acquisitions of foreign companies in 2004. “The process can only intensify during 2005,” he says.

The stand-out deal so far this year has been the purchase of Loma Negra, the Argentine cement maker, by Camargo Corrêa Cimentos for $1.03 billion including debt assumption. The acquisition will double Camargo Corrêa’s capacity to about 5.5 million tons a year. “Brazilian companies need to become global players,” says José Paschoal Rossetti, economist at business school Fundação Dom Cabral. “Because to become competitive in the current climate of increasingly open economies, they need to arrive at a scale that is often bigger than that needed for the Brazilian market.” LF