February 1984 - VOLUME 5 - NUMBER 2
Treading Water In Brazil
Most Multinational Corporations Look Like Thy're In Brazil to Stayby Charles Thurston
Four years worth of crippling recession in Brazil, accompanied by staggering inflation, monetary devaluation, and falling world prices have caused big increases in the country's idle industrial capacity - and seriously affected the markets and profit margins of multinational corporations operating in Brazil. As a result, most foreign corporations have trimmed their direct investments, and many are now being forced to bring in outside capital just to stay in business.
The investment drop in the last two years has been substantial. According to David Wicker, current Vice President of the American Chamber of Commerce in Brazil and president of National Distillers of Brazil, total American investments increased by only $300 million in 1982 after growing by some $2 billion in 1981, and $900 million in 1982.
The impact on European and Japanese companies has been substantial as well. Figures supplied by the Council of Common Market Chambers of Commerce indicate that investments from the European Economic Community in 1983 will have dropped two-thirds from the 1982 mark of $600 million. Dutch multinationals in particular have had difficulties; faced with up to 60 percent idle capacity, most are having to invest to keep from closing down completely.
Brazil has traditionally been the third most important investment outlet for Japanese multinationals after the U.S. and Indonesia. But feeling the world economic pinch at home, the pioneering Japanese investors in mineral production have been reluctant to continue their investments until Brazil determines its own developmental priorities amidst what Brazilian Minister of Industry Camilo Penna calls "$50 billion worth of incomplete projects."
These cutbacks are indicative of overall foreign investments in the country, which by some estimates will have dropped 50 percent in 1983 from a $1.5 billion annual level in 1982. Government economists note that the estimated $400 million direct investment total for 1983 will be the lowest since 1975.
There are a number of factors in the investment drop. First is inflation, which has been rising from levels of 40 percent in 1978 to over 200 percent today. Insecurity over the government's rapidly changing monetary policy has been another main cause. Subsequent to a 23 percent devaluation of the cruzeiro late last February, a group of managers from 40 top multinationals in Brazil met to consider possible business strategies. Dollar loans from home offices had suddenly become much more expensive and losses from the fluctuating exchange rates began to loom darkly. This forced financial officers to make new budget analyses not only on a monthly basis, but weekly and even daily - a policy also necessitated by the government's tendency towards overnight economic legislation.
The net decision, however, was to stay in Brazil: as one company president then put it, "nobody is losing money."
Another factor is import restrictions. Adapting to meet International Monetary Fund demands in late 1982, Brazil imposed across the board restrictions which allowed the country to achieve a $6 billion trade surplus for 1983. But the belt pinching began to hurt companies dependent on imported primary materials. As a result, some have been forced to turn to the black market for supplies. In one case last May, the government seized some 25 tons of illegally imported electronic equipment from companies like NEC (Nippon Electric Company), Sony, Matsushita, and AAF, a subsidiary of Allis-Chalmers.
The investment slowdown has also resulted from the military's growing concern over autonomy in what it considers the country's strategic industries. "At the moment, there are a multiplicity of restrictions on foreign investments in Brazil. There exist sectors forbidden to foreigners, which lamentably include sectors of high technology," complains Wicker. These restrictions result in a situation in which "Brazil effectively prohibits the transfer of technology and risk investment," he argues.
Wicker points to the country's strong protectionist barriers in the so-called "sunrise industries" - computers, automation, genetic engineering, and agroindustry - as the main deterrent to investment growth. "There seems to be a dominant opinion in Brazil that the rest of the world is anxious to make voluminous investments in the country in order to rob it of its sovereignty," says Wicker. "The truth is otherwise."
The government's practice of turning away investors eager to sink money in Brazil while the country is virtually cut off from foreign banking sources has been highly criticized by Brazilians. An editorial from the respected newspaper Jornal do Brazil went so far as to label the discouragement of "honest joint ventures" a "crime against Brazil."
There is even dissension within the government's own ranks. Minister of Industry Camilo Penna has criticized the government's recent moves, especially the limits placed on capital investments in the pharmaceutical and computer industries. While a great defender of Brazilian nationalism, Penna believes that the country must produce cheaply to compete in the international market and that automation technology is the only route to that end.
Some recession-induced business practices of multinationals are coming under fire from the harried Brazilian government. The Ministry of Justice has unofficially accused multinationals, especially West European companies, of engaging in a practice of firing local staff in order to bring in home office employees. One reason for the move: unemployment pressures in Europe are more politically sensitive, and unions more powerful.
Japanese multinationals, on the other hand, have sent many Japanese employees back to Japan. According to a Bank of Tokyo officer, companies are "reducing operations to skeleton staff" in order to keep doors open during the recession. Costs of maintaining dollar salaries, housing, schooling, and other cost of living adjustments are simply too high to justify the presence of home-office personnel during adverse business conditions. Still profitable after all these years
Despite the enormous problems faced by Brazil, however, the country still continues to be a top investment priority for many multinationals. During a trip to Brazil last year, Carl Horst Hahn, president of Volkswagen, indicated that, after Germany, Brazil was the company's first investment priority and referred to it as the "country of the future." Of West European companies, Volkswagen and chemical giant Rhone-Poulenc are the leading investors in the country today.
Some multinationals are performing astonishingly well during the austere times. Anderson Clayton, a commodities firm, made record profits last year, registering a profit increase of some 1,090 percent between June of 1982 and September of 1983, during which inflation in Brazil was calculated to have risen 220 percent. The company does not expect a repeat record performance this year, however, since projections for 1984 are of a "black year."
Another company profiting handsomely is Alcoa, a leader in the Brazilian metals sector. Alcoa is considering adding a trading and insurance company to its group in Brazil, not unlike other multinationals which have significantly diversified from original business lines once established in the country. As an export firm, Alcoa benefited from the devaluation last February, increasing exports from $600,000 in 1982 to $45 million last year. The company expects an upturn in world aluminum prices to raise their export levels to $85 million this year.
Like many other investors who are reaping high profits in the country, Alcoa also seems to have come to stay. The company's $1.43 billion Alumar aluminum facility-part of the government's huge mining, industrial, and agricultural project known as "The Great Carajas" (see MM, September 1982)-is reputedly now the most expensive private development project in the country.
A temporarily less profitable-but equally bullish-company is Shell Oil, which recorded a loss in its Brazil operations in 1983 for the first time in 70 years. Shell president Abel Carparelli indicated that currency devaluation, price controls,, and unrealized gains from long term investments in the metals sector led to the negative numbers this year, but expects things to turn around in due time. Shell is making a $682 million long term investment in aluminum production projects, diversifying from its petroleum business.
A more discouraging situation is that of Ford's Philco electronics subsidiary, which faced with government restrictions on foreign activities in that sector, has been put up for sale. Despite an established $30 million investment in its semiconductor facility, Brazil's special secretariat for information industries ruled that such business should be reserved for national companies. Potential Brazilian buyers of the company are awaiting government subsidies to get involved in the risky industry. Several multinational computer companies, headed by IBM, have been battling the newly created protectionist agency, but appear to be losing ground thus far.
The question of whether Brazil can afford to continue to subsidize emerging national industries at the cost of falling behind in the world technology race is one which many fear will only be answered when the country comes up a loser in international trade. Yet making the quantum leap into the ranks of the highly industrialized world powers is a Brazilian dream which refuses to settle down to earth, despite the $100 billion worth of IOUs that have accumulated in the attempt.
Charles Thurston is a reporter with McGraw-Hill based in Sao Paulo, Brazil.