Brazil is Quietly Flexing its Economic Muscle

It’s impossible to read any newspaper or publication that doesn’t mention China, Russia or India and their impact on the world economy. Brazil, as one of the BRIC »participants«, often seems to be overshadowed. A quick search, however, of the WSJ news archives for developments involving Brazilian companies, both internationally and domestically, shows the following recent activity:

• Brazilian meatpacker Marfrig Alimentos SA announced in mid-June that it agreed to acquire distributor Keystone Foods for $1.26 billion to increase its presence as a supplier to big restaurant chains. Keystone, the largest privately held meat-products company in the U.S. and pioneer of the boneless chicken nugget, serves more than 28,000 restaurants in 13 countries, including the U.S., Europe and Asia. With the acquisition, Marfrig becomes a lead supplier to McDonald’s Corp., ConAgra Foods Inc., Campbell Soup Co. and Yum Brands Inc. As Marfrig’s President Marcos Molina said, »The global food market is growing and Brazil has capitalized on this growth by strategically consolidating within the protein industry.«
• Spain’s former incumbent, Telefónica SA, and a leading service provider in both Brazil and Argentina, has increased its bid for Portugal Telecom (PT) SA’s indirect stake in Vivo Participacoes SA to €6.5 billion (US$8 billion) from an earlier offer of €5.7 billion. As growth in European and other mature markets has stalled, service providers around the world have scrambled to acquire assets in growth markets. PT prefers not to lose Vivo, one of Brazil’s leading wireless operators, as its share represents a significant portion of earnings. Both Telefónica and PT need their foothold in Brazil — with its young population and fast-growing economy — as a primary growth platform.
• Brazilian state run energy company Petrobras has announced that it will have a five-year capex of US$224billion (2010 - 2014). This is higher than the US$174billion invested in the five-year plan of 2009-2013. Approximately 53% of the budget will go towards exploration and production.
• Brazil’s mines and energy ministry has added four wind farms and a thermo plant to the government’s special infrastructure development incentives program.
• Alcoa has determined that Brazil is of strategic interest and is investing in the construction of a US$1.5 billion bauxite mine in Juruti, Brazil, in the middle of the Amazon. Among Alcoa’s considerations was the Amazon’s availability as a low cost source of bauxite, which is used to make alumina, which is a key ingredient of aluminium. Alcoa considers Brazil’s government to be stable, and with a growing economy with cheap and generally available electricity. Another advantage that Brazil offers is an extensive coastline that aids in shipping metals and minerals to North America, Europe and China.
• In April Brazil awarded a contract to build and operate the world’s third-largest hydroelectric plant on a tributary of the Amazon River. Named Belo Monte, the US$11 billion project is designed to produce around 11,000 megawatts of power. The contract was awarded to a group led by the state-run electricity utility that included builder Construtora Queiroz Galvão SA and various Brazilian engineering firms. Belo Monte is part of Brazil’s broader strategy to power economic growth by harnessing its rivers. In contrast to other major economies, Brazil generates most of its electricity from river dams.
• General Motors Co. said in late June that it would create a new South America unit, based in Sao Paulo, Brazil to cater to the region’s growing vehicle market. As GM emerges from bankruptcy and rebuilds its core North American market, the company is looking to boost revenues by targeting fast-growing markets, among them South America. Profit margins in South America and other emerging markets are lower than those in the U.S. and Europe, where sales of SUV, trucks and higher end vehicles bolster the bottom line. As the WSJ reported per Ward’s Automotive Group, vehicle sales in South America by all manufacturers grew by more than 20% in the first quarter compared to a year ago. Once established GM’s unit will have 29,000 employees, which will include existing sales and manufacturing operations in Brazil, Argentina, Colombia, Ecuador and Venezuela, as well as sales operations in Bolivia, Chile, Paraguay, Peru and Uruguay.

Brazil’s industry is farther down the value-added chain than China and other Asian emerging economies, which is customary as lesser developed countries seek to leverage abundant natural resources for export. But as we have seen with Japan, Korea, Taiwan, and more recently with China, it will be incumbent on Brazil to broaden its manufacturing base. Domestic growth involving power generation projects, building and road construction, described later in this article will push domestic industries to meet this growing demand.  As with all emerging economies pent up demand will spur further growth, the question is how well Brazil’s government can introduce and implement policies that will help manage growth so the country doesn’t experience the manic swings of boom to bust that have prevailed for much of its history.