Brazil: a present power

One of the most common clichés about Brazil is that it is a country of the future. This cliché goes back to the 1940s, when the novelist Stefan Zweig published what was his last book, dedicated to Brazil. Nevertheless, we are now witnessing something unprecedented: the emergence of Brazil as a present power and not just an eternal promise for the future.

Today, Brazil is one of the major emerging countries, which along with China and India are changing the course of the world.³ In 2011, Brazil became the seventh economic power in the world (and in 2012 the sixth), with a nominal GDP of more than $2 trillion. The economy is larger than Spain's, and ten times larger than Chile's. In the various international arenas, such as the G20 or the IMF, its role has become more prominent. On issues of climate change or international commerce, the position of Brazil matters.

Brazilian president Lula was declared to be one of the most influential leaders in the world in 2011. The economic pragmatism of the country (combining monetary and fiscal orthodoxy with major social programmes) has become a reference for many emerging economies, including those in Latin America. Above all, one of the great achievements of the Lula years has been establishing this combination successfully, when few people believed it possible in 2002. The nation has also managed to reduce endemic poverty and inequality through growth and targeted programmes. The middle class in Brazil is growing quickly and in 2010 represented nearly 45% of the total population (a growth of 10 percentage points in less than five years).

Economic progress has remained visible, with great successes reaped at the beginning of 2010 when it was announced that Brazil would host the World Cup in 2014, and, for the first time in its history, the 2016 Olympic Games. An agricultural superpower, Brazil is becoming a first-rate international player in the oil market, as shown by oil discoveries off the coast of Río. But let us not fool ourselves and fall into yet another cliché: Brazil does not just export soybeans, oil and minerals; it also exports high-tech products, as evidenced by the performance of its national champions in aviation, technological services or cosmetic products. As we will see, Brazilian multilatinas operate in very diverse sectors – including agro-industrial, mining and aviation.

The Olympics and the World Cup ultimately symbolise the massive change in the world economic balance that we are witnessing; and Brazil, along with China and India, is one of the main actors in this change. The case of Brazil is symbolic. In the middle of the 2008–12 global crisis, the country received record foreign direct investments ($45 billion). This record was exceeded in 2010, with $48.5 billion of FDI. Yet even more symbolic is the fact that Brazil has also become a strong overseas investor (Figure 3.1).

Figure 3.1 FDI flows in Brazil, 2000–10 (in $ billion). Source: UNCTAD and Banco do Brasil, 2011.

Bradesco was predicted a new record for 2011 with nearly $60 billion of FDI in Brazil.⁴ The annual sums between 2007 and 2011 (including the global crisis of 2008) defy any historical comparison, with averages that were well above the five-year period (1997–2001) when major investments were also made. It was expected that China, after investing about $12.6 billion in Brazil in 2010, would exceed this amount in 2011, with $13 billion in FDI⁵ (Figure 3.2).

Figure 3.2 FDI flows in Brazil, 1995–2011 (in $ million). Source: Bradesco, 2011.

At the same time as this foreign investment tsunami was taking place, Brazil also experienced an unprecedented increase in foreign investments made by its companies abroad. The progress of Brazil and its financial markets has widened all the financial metrics of these multilatinas. The decade 2000–10 witnessed the emergence of multinationals whose stock market capitalisations are now comparable to those of their counterparts in OECD countries. That of the bank Itaú-Unibanco, for example, exceeds many of its European rivals, including the Spanish bank BBVA; the mining company Vale is comparable with the Anglo-Australian mining company Río Tinto; and the oil giant Petrobras surpasses its European competitors, capitalising more than the Spanish oil company Repsol or the French oil company Total.

The Brazilian miracle

In the oil sector, with the recent discoveries in Río de Janeiro, Brazil is becoming one of the world's largest producers and exporters of crude. Petrobras, the largest company on the continent in terms of stock market capitalisation, is already one of the largest in the sector and an innovative player, with offshore technological capacity. The company encourages diversification towards bio-fuels, and ethanol in particular. This will also become an important axis of diversification, given that the government insists that Petrobras is supplied 65% locally. This will enable the company to build its own oil freighters and platforms and provide services. Norway followed a similar strategy with its national champion Statoil – and the company has become a very powerful rival for diversifying towards high-technology clusters.

Perhaps the Brazilian miracle is to be found in this unique combination of pragmatism in terms of both macro- and microeconomic policies. When most advisors (international organisations and economists from Ivy League universities) recommended privatising all the banks, Brazil remained calm and encouraged diversity: some banks were privatised, some were bought by foreign companies, some remained public, and others remained in the hands of private national investors. This unique combination has enabled the country to weather the global crisis of 2008–12 more easily than others, as it could turn to diverse channels of bank financing.

The same is happening in other sectors where the Brazilians were repeatedly told that they should change course, and abandon their obsession with national champions, especially in the high-technology sectors. Once again (and rightly so), the Brazilians did not heed the advice of international experts and wise men, and today the multilatina Embraer rivals the Canadian Bombardier and the French Dassault as the largest aviation company in its market segment.

However, there is another sector where the Brazilian miracle has been stunning: agro-industry. Within a couple of decades, Brazil managed to launch various agro-industrial multinationals that now dominate their sectors. The most recent is Brasil Foods, founded in 2009 after the merger of Sadia and Perdigão. The company has more than 113,000 employees and operates in 116 countries. Exports represented slightly more than 40% of its income in 2010 and it has three industrial plants outside Brazil: in Argentina, Britain and Holland. JBS Friboi was founded in 1953 and has 125,000 employees in 110 countries. It is now the largest animal protein processing company in the world. Today, this multilatina has production platforms and offices in Brazil, Argentina, Italy, Australia, the United States, Uruguay, Paraguay, Mexico, China and Russia. The majority of its income (65%) comes from the United States, followed by Brazil (16%) and Australia (12%). The Brazilian state (through the Brazilian Development Bank, BNDES) still holds 30% of the capital.

Following these two giants is Marfrig, the third largest agro-industrial company in the country. It has 90,000 employees and branches in twenty-two countries, and it exports its products to 140 countries. The company has made purchases in Argentina (Quickfood, bought in 2007 for $140 million), Britain (Moy Park, bought in 2008 for $680 million), the USA (Keystone Foods, bought in 2010 for approximately $1.3 billion). Another major acquisition in 2010 was Seara Alimentos Ltda from Cargill Inc. ($900 million). Another company that stands out is Cosan, a Brazilian conglomerate and leader in bioethanol, sugar and energy. Founded in 1936, the company had 45,000 employees in 2011 and has joined with Shell to develop one of the largest bioethanol projects to date.

To these Brazilian multilatinas, we must add ABInBev, the largest brewing company in the world, and resulting from the merger of various brewing companies in Brazil, Belgium and the United States. It originated as the Brazilian company Ambev – the largest private consumable goods firm in Brazil and the largest brewing company in Latin America – which merged with the Belgian beer company Interbrew, and went on to be called InBev. In 2008, the Belgo-Brazilian company InBev acquired the US firm Anheuser-Busch for nearly €33 billion, and formed Anheuser-Busch InBev – the largest brewing company in the world. The headquarters of this multinational is now in Belgium, but more than half of its management board, including its CEO and CFO, are Brazilian.

Not only are international groups such as Brasil Foods, ABInBev, Cosan and JBS Friboi rising, but an innovation-based green revolution has taken place after repeated efforts since 1990. In just thirty-two years, Brazil has gone from being an importer of foods to becoming one of the world's top agricultural powers, competing with the traditional ‘big five’ in this sector: the United States, Canada, Australia, Argentina and the European Union. It is also the first country in the tropical belt successfully to make such a leap, as all the other major players are in temperate zones in the northern and southern hemispheres.

The boom in productivity by Brazilian farms has been spectacular. Between 1996 and 2006, the country's crops grew more than 360%; meat exports multiplied tenfold, exceeding those of Australia (now the world's second largest meat exporter). Today, Brazil is the world's largest exporter of sugarcane and ethanol, and one-third of the world's soy exports are from Brazil. These triumphs have been achieved as a result of innovation and productivity. To grasp the miracle that has taken place, we must remember that Brazil today provides a quarter of the soy sold worldwide, and that only 6% of the country's total arable land is under cultivation. In addition, all of this has been achieved despite the clichés that continue to be associated with the country, namely, without subsidies or state intervention. According to the OECD, government subsidies granted to farmers total less than 6% of farm income; whereas they exceed 12% in the United States, and 26% on average in other OECD countries (29% in the European Union). Industry best practices are now found in the emerging countries, in Brazil, and not in OECD countries.

Despite another lingering cliché, this miracle was not achieved by destroying the rainforests. The expansion of the farms took place more than 1,000 kilometres away from the area of the Amazon, in the acid lands of the Cerrado region. In these lands, a government agency called EMBRAPA (Brazilian Enterprise for Agricultural Research) started importing plant and animals species from 1973 onwards, and the agency found a way to adapt soy from Asia to the climates and lands of Brazil. This achievement was based on genetic research, as well as trial and error, and it took several years to arrive at the miracle of productivity that is now the envy of the entire world. Based on innovation in the processes and products, EMBRAPA managed to shorten the production cycle of soy so that two crops can be harvested each year. And soy was not the only area where the country made unexpected leaps. Brazil is now the world's largest exporter of orange juice, chickens, coffee, meat and sugar; the world's second largest exporter of soy and corn; and the fourth largest exporter of cotton and pork.

The potential for development in the agro-industrial sector is enormous: the world population will climb from 7 billion to more than 9 billion by 2050. Brazil has the world's largest expanse of unused arable land. According to the FAO, it still has more available land than the USA and Russia combined; and once again, all of this land is far from the Amazon and in the region known as the Cerrado (where 70% of the total production in Brazil is already concentrated). To this, we must add that Brazil has access to more than 8 trillion cubic meters of water per year: Brazil alone (with 190 million inhabitants) has more renewable drinking water than all of Asia (with 4 billion inhabitants).

The Brazilian miracle is both democratic and economic. Other tropical countries now seek to import the Brazilian innovations, but what is striking is that there were no shortcuts. EMBRAPA achieved its breakthroughs not overnight, but as a result of dedication, trial and error, daring initiatives, and some luck – that is, by innovation and entrepreneurship. With more than 8,000 employees, EMBRAPA has also begun to develop international cooperation by exporting Brazilian technology around the world, including Africa. In terms of international cooperation, the company maintains sixty-eight bilateral technical cooperation agreements with thirty-seven countries and a total of sixty-four institutions. In addition to laboratories in the United States, France and the Netherlands, EMBRAPA also has a regional office in Ghana to share scientific and technological knowledge with Africa.

The investment path of the Brazilian multilatinas is still important. Although many of the investments are concentrated in Latin America, even in this region there is scope for an increased presence.⁶ The case of Peru is illustrative: the total stock of Brazilian FDI hardly exceeded a billion dollars in 2010. Since 2005, it has been growing at an annual rate of 30%, concentrated in mining, hydrocarbons, industry and services. However, despite this recent growth, Brazil has less of a presence than other countries in the region, such as Chile for example, which invests 30% more in Peru than Brazilian firms.

It is very likely that the investment relationship will continue to experience exponential growth over the coming years, as indicated by data from 2011. In the first half of the year alone, Brazil announced investment projects in Peru worth more than $24 billion, according to estimates by BBVA.⁷ The builders Odebrecht and Andrade Gutiérrez are managing several highway projects. Petrobras and Odebrecht are involved in a macro gas project managed by Camisea. The most significant project, however, is in the hydroelectric sector, where the Brazilian giant Eletrobras is building several plants in Peru that could represent an investment of $15 billion (Table 3.1).

Table 3.1 Main investments by Brazilian multinationals.

Source: BBVA, 2011.

Brazilian multilatinas are searching for new investment frontiers

Brazilian multilatinas are also intensifying their search for new markets and countries where they can invest. They are raising their horizons beyond Latin America, the United States and Europe, and focusing on new frontiers in Africa, the Middle East and Asia.

Relations have blossomed quickly over the decade 2000–10 with Africa. This has been generally true for BRIC nations and not only for Brazil: trade with the African continent increased from $22 billion to more than $166 billion between 2000 and 2008. Standard Bank estimates that by 2015 this trade will triple and reach $530 billion. Africa represents 6.3% of Brazilian trade. Back in 2001, Europe accounted for more than half of exports to Africa, and the United States was ahead of China. But by the end of the decade, Europeans and Americans had lost position, whereas China had made remarkable progress and Brazil accounted for 2.6% of total exports to Africa, compared to less than 1.8% at the beginning of the decade. The majority of Brazilian exports to Africa go to just two countries – Angola and South Africa – which together account for 75% of the regional total (Figure 3.3).

Figure 3.3 Progress of Chinese and Brazilian exports to Africa, 2001–9 (as percentage of the total exported). Source: BNDES (Brazilian Development Bank) based on UNComtrade, 2011.

FDI in Africa is mainly led by South Africa and China, followed by India, Taiwan, Korea, Turkey and Brazil. In the 2000s, China and India have invested $29 and $25 billion in the African continent, and Brazil has also made a major impact with more than $10 billion invested, exceeding Russia ($9 billion).⁸ In 2009, the stock of FDI of the BRIC countries in Africa represented about $60 billion, and this is projected to more than double by 2015 and reach $150 billion.⁹ By then, China and India will continue to lead BRIC investments in Africa, with $70 and $40 billion, respectively. However, Brazil ($25 billion) will have set itself apart from Russia ($15 billion). These amounts, as the IMF pointed out, are low estimates given that total FDI is expected to be higher.¹⁰

A prime example of the growing Brazilian interest in Africa is the multinational Vale. This Brazilian mining giant has an investment plan for $9 billion in several countries until 2014. These countries are located (not surprisingly) in North and South America, with major investments planned in Argentina, Peru and Canada. However, the plan also includes African countries such as Guinea, Zambia and Mozambique, as well as Asia and the Middle East (Oman, Indonesia and Malaysia). In Argentina, Vale projects include a potassium mine ($1.2 billion), one of the firm's largest developments planned.

In Mozambique, Vale is working with the Brazilian construction company Odebrecht in the development of coal reserves, the construction of an energy plant, and rail and port infrastructures for coal exports. These initial investments are estimated at more than $1.3 billion. In Mozambique, the oil company Petrobras and the iron and steel company CSN are also active.

For its part, Odebrecht has become the largest company in the Angolan private sector, with activities that range from food production to ethanol production, construction and retailing. Cement construction company Camargo Corrêa has further investments planned after recently investing $8 billion mainly in production units in Angola and Mozambique. Brazilian banks Bradesco and Banco do Brasil are also seeking opportunities in these two nations.

The presence of Brazilian multilatinas in Africa illustrates something that we pointed out in the introduction to the book: the world is becoming increasingly decentralised. Direct investments made by Brazil in Africa total about $10 billion. In 2010, more than half of international trade in Africa will be carried out with other emerging countries and not with OECD members. Since 2008, this South–South trade (including that trade with Brazil) represented more than 50% of the total trade of the African continent.¹¹ During his last term in office, Lula visited about twenty-seven African countries (during his first term, he visited the continent six times), and doubled the number of Brazilian embassies on the continent. Meanwhile, trade jumped from $3 billion to nearly $30 billion between 2000 and 2010. BNDES (the Brazilian Development Bank) started a process of internationalisation with credit lines of $2 billion available for operations in Africa. In addition to the interest in African countries, there has also been an increase in relations with Arab countries. As we have seen in the previous chapter, this progress also reflects the growing South–South trend. Brasil Foods announced in 2011 an investment of $120 million in the United Arab Emirates where it plans to open an industrial plant.

Brazilian multinationals are just the tip of the iceberg. Their expansion abroad is the largest and the most spectacular one from Latin multinationals. However, as we will see in the following chapter, they are not alone. The pioneers in fact have been Spanish-speaking multinationals, namely from Argentina and Mexico. Later some from Colombia, Chile and Peru also joined the pack. Brazil became a significant source of outward foreign direct investment (OFDI) only in the 2000s. As we have seen in this chapter, Brazilian multinationals’ outward FDI is concentrated in the secondary and tertiary sectors. The investments are going mostly to neighbouring economies, the USA and Europe, even if more recently we have seen an increasing interest for new geographies like Asia, the Middle East and Africa. During the decade 2000–10, Brazilian OFDI continued to show a high level of concentration particularly in North America, Latin America and the Caribbean, which together accounted, on average, for 79% of all FDI stock from Brazil between 2001 and 2008, followed by Europe (21%); Asia, Africa and Oceania together accounted for the remaining 1%.¹²

In less than a decade the stock jumped from $52 billion in 2000 to $181 billion in 2010, recovering in 2010 ($12 billion of OFDI). This growth has been spectacular in comparison not only with other Latin American countries but also with other BRIC emerging countries. By 2008, Brazil had a larger stock of OFDI than all of the other large emerging economies considered, except for Russia. Only in 2009 did China surpass Brazil. The internationalisation of Brazilian multinationals is an impressive phenomenon, comparable to other BRIC countries. It should not however mask what is going on throughout the continent. In fact, as we will see, the expansion of Spanish-speaking multinationals was also impressive. These multinationals also went abroad before the Brazilian ones, pioneering the Latin American multinationals boom.

In 2011, underlying the diversity of the multilatinas phenomenon, Brazilian multilatinas focused more on the domestic market (which explained why overall outward FDI from Latin America went down from $45 billion to $22 billion between 2010 and 2011). Chile had the most outward FDI with $12 billion. Mexico invested outside $10 billion, and Colombia $8 billion.¹³ As we will now see, it looks as though, beyond Brazil, Andean multinationals are intensifying their internationalisation, while the Mexican ones are experiencing a revival.