Brazil Digital Report PDF

Brazil Digital Report
1st Edition
April 2019
McKinsey & Company 1

About this report
The Objective
This report presents an overview of Brazil’s economy, including its innovation, digital and entrepreneurial landscape. The facts show that Brazil
offers many exciting opportunities and has many challenges – opportunities for innovation – to drive productivity, growth and social advances.
The Audience
This report is intended for all those who can play a part in driving the innovation agenda in the country – entrepreneurs, investors, public and
private institutions and business leaders around the world, and digitally savvy, intellectually curious Brazilians.
The methodology
This is a curated compilation of public information and selected proprietary McKinsey data. It can be revised annually, and we hope it will
generate many years of editions that will tell the ongoing story of Brazil’s digital and innovation evolution.
Acknowledgments:
McKinsey thanks the support it has received from Brazil at Silicon Valley, a student-led movement that started at Stanford
University and whose mission is to improve Brazil’s competitiveness and global relevance through technology and innovation.
More information at www.brazilatsiliconvalley.com. “

Disclaimer
The Brazil Digital Report (“Report”) is based on information that has not been generated by McKinsey & Company, Inc. / Brasil Consultoria
Ltda. (“McKinsey”), and has not been subject to McKinsey´s independent verification. McKinsey does not attest that the information in this
Report is accurate or complete in every respect.
The analyses and conclusions contained in this Report do not purport to contain or incorporate all of the information that may be required
to make an informed decision. The reader should conduct a more detailed investigation and analysis before making any decisions or
entering into any transactions. McKinsey makes no representations or warranties regarding the accuracy or completeness of the
information in this Report and expressly disclaims any and all liabilities based on it.
This Report should not be considered and/or construed as strategic, financial, legal, tax or accounting advice and does not constitute legal,
accounting, tax, or similar professional advice normally provided by licensed or certified practitioners.
The analyses and conclusions in this Report are based on various assumptions that may or may not be correct, being based upon factors
and events subject to uncertainty. Future results or values could be materially different from any forecast or estimates contained in the
analyses.
McKinsey shall not be obliged to maintain, update or correct the report, nor shall it be liable, in any event, for any damage or loss caused
by the use of the Report, including, without limitation, lost profits or indirect damages.

Participants
Authors
Nicola Yran Jordan Marina Marcio Alexandre Julia Gabriela

Calicchio Dias Lombardi Mansur Fleury Carneiro Berbel Barbosa
Andre Carlos Christopher Conrado Felipe Filipe Julia Julio

Coutinho Dare Craddock Sertorio Boaretto Carvalho Broide Galache
With the
support of
Amadeus Djalma Julio Hugo Rodrigo Solange Victoria

Orleans Rezende Vasconcellos Barra Barbosa e Lima Bertasoli
Silva

Digital
Macroeconomics Perspective
Chapters
Entrepreneurship Sector Deep

Ecosystem Dives

Digital
Chapters

Ecosystem Dives

Macroeconomics But to expand growth and make other
advances, the country will need to close gaps with
developed and emerging economies:
▪ Productivity has grown very little over the
last decade
▪ The demographic and workforce boom is
over, meaning that productivity gains will be
needed to drive growth
▪ We lack innovation, patents, and a skilled
workforce…
The Brazilian economy has reached a tipping ▪ … and we have not seen any sign of home-
point grown tech or innovation giants among our
top-performing companies.
▪ GDP growth has returned
▪ Consumer and industry confidence are high
▪ Inflation and interest rates are at all-decade
lows
▪ Country risk is on the decline
▪ Capital markets are active as ever…
▪ …and BOVESPA is at its highest point to date.

Brazil’s economy seems to have reached an tipping point; after a recent economic
slowdown, GDP is rising again
Real GDP Growth

% difference vs previous year Trend Forecast
8 7.5
7
6.1
5.8
6
5.1
5 4.4
4.0 4.0
4 3.2
3.1 3.0
3 2.5 2.7
1.9
2 1.4 1.2
1.1 1.1
1 0.5
-0.1
0
2003
2000
2001
2002
2004
2005
2006
2007
2008
2009
2010
2012
2013
2014
2015
2016
2017
2018
2019
2020
2011
-1
-2
-3 -3.6 -3.3
-4
Source: EIU, BCB McKinsey & Company 8
GDP
% of growth by component
Main driver of growth
2014 2015 2016 2017 2018
Private GDP growth 0.5 -3.6 -3.3 1.1 1.2

consumption is
the main driver of Private consumption 1.5 -2.2 -2.6 1.0 1.4
this growth
Government consumption 0.1 -0.3 0 -0.2 0
Gross fixed investment -1.0 -3.0 -2.3 -0.4 0.8
External balance 0.2 3.0 1.5 0.1 -1.0
Stock building -0.3 -1.0 0.1 0.7 0
Source: IBGE McKinsey & Company 9

Agriculture and services account for significant economic growth
Share of sector by GDP Share variation CAGR

R$ trillion, % 2010 – 2018 (p.p.) 2010 – 2018
1.7 2.1
Agriculture 4.9% 6.6% 1.7 6.4%
Industry 27.4% 20.6% -6.8 -1.2%
Services 67.8% 72.8% 5.0 3.3%
2010 2018
Total 2.4%
Source: FGV-Ibre, EIU McKinsey & Company 10
Industry can tap its significant capacity to boost
production in the short term
% installed capacity usage

84
83
82
81
80
79
78
77
76
0
10 13 14 15 16 17 18
Source: CNI McKinsey & Company 11

Consumer and industry confidence have reached
their highest point since 2014
Industry and Consumer Confidence Index

Index, Jan/2010 = 100
110
100
93
Industry
90 confidence
Index
80 Consumer
80
confidence
Index
70
60
50
2010 2011 2012 2013 2014 2015 2016 2017 2018 Dec 18’
Source: FGV, IBRE McKinsey & Company 12

In 2018, Bovespa reached its highest ever market
cap of R$3.8 trillion…
Bovespa Market Value

R$ billion
13.8%p.a.
13.4% 41.4% -3.1% 23%
4.000 3.855
3.500
3.000
2.500
2.000
1.500
1.000
500
160
0
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Feb/19
Source: B3 McKinsey & Company 13

… and its highest score
Bovespa Index
Score Mar 18th, 2019
100.037
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000 4,354
0
1990 95 2000 05 10 15 19
Brazil’s capital markets are developing and
diversifying funding for companies
Capital markets1 – domestic issuance CAGR

R$ billion 2012-2017
177
+5% p.a.
12% 37%
Equities (IPO) 144
140
137 11% 14%
Equities 3% 10%
(follow-ons) 7% 13% 112 113 11% 12%
8% 5% 13%
Certificates of 1% 1%
13% 16% 9%
receivables
13% 27%
Corporate
82% 77% 67% 1%
bonds 70%
71% 63%
2012 2013 2014 2015 2016 2017

1 Excluding FIDCs and real estate funds
Source: BCB; ANBIMA; press clippings; McKinsey analysis McKinsey & Company 15
IPOs have been on the rise
IPOs
Number of IPOs 2
2
US Stock Exchanges
Brazilian Stock Exchange 2
1
2
12
2
6
2 10 3
1 1
1 1 3
2014 15 16 17 2018
1 Azul has had an IPO on both B3 (Brazil) and NYSE (US). 2 Companies have had an IPO on US Stock Exchanges
The “Brazil-risk” rate has fallen significantly since
2016
EMBI
Basis points
2,400
1,600
1,400
1,200
Brazil loses investment
1,000
grade rating
800 Brazil elevated to
investment grade
600
400
241
200
228
0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Source: IPEA McKinsey & Company 17

Interest rates and inflation are low
Selic & IPCA IPCA Predicted IPCA
% Selic Predicted Selic
15
14
13
12
11
10
9
8.0
8
7
6
5
4.0
4
3
2
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: BCB McKinsey & Company 18

Exchange rates have been volatile in the short
term…
Exchange rate Predicted rate % Fluctuation of last 12 months
Exchange rate evolution

R$/US$, end of period
4.5
4.0 3.75
3.5
3.0
2.5
2.0
1.5
1.0
% Variation of last 12 months
30%
20%
10%
0%
2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 2020
Source: EIU, BCB McKinsey & Company 19

… but in the long term, R$ has shown relatively low
depreciation when adjusted for inflation
Exchange rate evolution

R$/US$, end of period
Exchange
4.0 3.87 rate
3.5
Inflation-
3.0 2.90 adjusted
exchange
rate
2.5
2.0
1.5
1.0
0.5
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 18

Brazil needs to address major productivity and innovation challenges; productivity
has improved little in recent years
Labor productivity evolution CAGR

US$ PPP 2017 per hour worked 1990-2018
75
70
United States 1.9%
65 France 1.2%
60
55
50
45
40
35
30
Russia 1.5%
25 Chile 3.0%
20 Brazil 1.3%
15
China 8.8%
10
5
India 5.0%
0
1990 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 2018
Source: Conference Board Total Economy Database (2018) McKinsey & Company 21
The country can no longer rely on demographics for
economic expansion
Annual growth
%
2.7
-45%
Workforce growth
2.1 1.5
0.8
Productivity growth 0.6 0.6
Last 15 years Next 15 years,

assuming same historic
productivity growth
Source: McKinsey Analysis McKinsey & Company 22

More years of schooling have not improved
productivity
Brazil
Average labor productivity - GDP per worker Malasia
US$ thousands China
50 2010 Chile
45 Korea
40
35 2010
30
1980
25
20 1980
15 1980 2010
2010 1980
10
5 1980
0
2 3 4 5 6 7 8 9 10 11 12
Average length of schooling of adult population

(grades successfully completed)
Source: World Bank and Barro-Lee McKinsey & Company 23

Brazil’s top companies are similar, with no significant technology players like
those in the US and China
Biggest companies in market cap

Technology companies
US$ billion
Brazil USA 67% of total China 38% of total
top-10 value top-10 value
2010 2018 2010 2018 2010 2018
190 93 309 927 334 499
145 87 255 778 242 491
93 77 205 766 184 311
55 61 191 751 147 261
43 28 190 542 130 220
29 27 184 492 119 184
29 14 175 388 85 181
25 13 170 344 57 159
16 13 169 341 53 142
14 11 168 314 46 139
Source: Forbes 2000; Capital IQ McKinsey & Company 24

Brazil participates in only a few global commercial
trade agreements
Access to consumers worldwide1

%
100% 95%
5%
Global Chile Brazil
Number of
commercial 400 27 9
agreements
1 Access to customer defined as population of countries which are part of the commercial agreements
Source: McKinsey “Brasil 2030” (2017) McKinsey & Company 25

IT investment continues to grow faster than GDP but at a slow and steady pace,
with software and IT services growing fastest
IT investment by type in Brazil CAGR Established tech company examples

R$ billion 2016-2018
Brazil
+3% p.a.
Total 150
143 7 1%
Data Center Systems 7
12
12 -1%
Devices
18
21 6%
Software
25 4%
Internal Services 23
International
Telecom Services 35 34 -1%
IT Services 48 52 4%
2016 2018
Source: Charts/graphics created by McKinsey & Company based on Gartner research: Gartner, Forecast: Enterprise IT Spending by Vertical McKinsey & Company 26
Industry Market, Worldwide, 2016-2022, 4Q18 Update. R$/US$ exchange rates: 2016 – R$ 3.49, 2017 – R$ 3.19, 2018: R$ 3.64
Digital
Chapters

Ecosystem Dives

Digital perspective
The Brazilian consumer is ready for digital But digital inclusion has only just begun:
disruption. In many ways, it has begun:
▪ Access and proficiency vary widely across
▪ More than two out of three Brazilians have regions, social classes and age groups
access to smart-phones and the internet
▪ Internet speeds are slower than in many
▪ Brazilians spend more than 9 hours per day developed and emerging economies
connected (among the highest rates in the world)
▪ E-commerce penetration is still low –entire
▪ They rank #2 or 3 in the world in using leading categories are still in their infancy
social media platforms including Facebook,
Instagram, YouTube, Netflix, WhatsApp and ▪ While Brazilians are avid consumers of
Pinterest digital media, they are not yet making many
transactions or spending money online.
▪ Digital advertising continues to grow in double
digits…
▪ … as does e-commerce, the shared economy,
and home delivery services.

Two out of three Brazilians have access to the internet, more than the global
average…
Internet users Internet penetration by country

% of total population % of population aged 16-64, 2017
70 67 United Kingdom 95
61 Japan 93
60 58 South Korea 93
55
51 United States 88
49 Malaysia 79
50 46
41 Argentina 78
39 Russia 76
40
34 Italy 73
30 Turkey 67
Brazil 67
20 Mexico 65
China 53
10 Global Average 53
Indonesia 50
0 India 34
2008 09 10 11 12 13 14 15 16 2017
Source: We Are Social (2018); CETIC.br (2017); McKinsey analysis. McKinsey & Company 29
Smartphone penetration is already high and in line
with global and developed economy averages
Smartphone penetration Operating system

% population that uses a smartphone1 %
China 83
1 15
USA 78
Turkey 77
United Kingdom 77
84
Chile 76
Colombia 75
Type of internet connection by
Argentina 73 smartphones in Brazil
% smartphone users; 2017
Mexico 72
Global Average 71 Access to 3G/4G 71

Brazil 71
Wi-Fi only 25
South Africa 60
No connection 4
India 40
1 For Brazil, the CETIC.br value was used (most updated value)
Source: Google’s The Connected Consumer Survey; CETIC; Statcounter; McKinsey analysis (2017) McKinsey & Company 30
The typical internet user in Brazil is urban, under
45 years old, class A-C and accesses the internet via
mobile devices
Rural 5% +60 5%
15% DE 22% University 22%
45 to 60
34 to 44 16% Female 53%
C 50% High School 49%

Urban 95% 25 to 34 28%
Elementary
16 to 24 25% Male 47%
AB 31% Illiterate / 29%
10 to 15 10% Pre-school
1%
Geography Age Gender Social
Literacy
Class
90%
38% 37%
17% 12% 7%
Mobile phone Laptop Desktop Tablet TV Videogame
Means of access
Source: CETIC.br (2017) McKinsey & Company 31

Brazilians spend more time using internet-based
services than their US counterparts
Time spent on digital/broadcast media1

Hours per day
9.1
Brazil
-31% US
6.3
4.0 +17%
3.4 3.4
-41%
2.0 -5%
1.2 1.1
Internet (via any device) Social media TV (broadcast, Average daily time
(via any device) streaming and spent listening to
video on demand) streaming music
1 Data represents adult respondents only; Survey-based data: Figures represent respondents' self-reported activity
Source: CETIC.br; Google consumer barometer (2018) McKinsey & Company 32

Connected Brazilians are among the most avid internet users
Time spent on internet

Hours1
5.4 PC or Tablet Mobile
3.6
5.0
3.9
4.5
3.7
4.8
3.6
4.6
4.3 4.2 4.0
9
3.4 3.3 3.1
h/ Day
2.0 2.0 1.8
44%
Philippines Brazil Argentina Mexico India USA China Russia UK
Mobile
1 Survey-based data: figures represent users’ own reported activity
Source: We are Social (2017); GlobalWebIndex; McKinsey analysis
Brazilian’s internet usage is highly concentrated on
social and content-related apps and sites
Rank1 Website Category

1 google.com Search Engine
2 youtube.com TV and Video
3 facebook.com Social Network
4 globo.com News and Media
5 uol.com.br News and Media
6 mercadolivre.com.br General Merchandise
7 instagrarn.com Social Network
8 live.com Email
9 twitter.com Social Network
10 WhatsApp.com2 Social Network
1 By monthly number of visitors, not considering adult websites
2 Considering only computer access
Source: SimilarWeb (2019) McKinsey & Company 34

App usage is high across multiple categories
(detailed below)
Daily activities done on computers or smartphones

% of respondents1
Social activities
83
56 54 54
44
41
32
26 26
21 20
13
6 4
Online Social News Search Music E-mails Online Office Video/ Games Virtual GPS/Map e- Online
chat Networks engines videos Software voice call Assistants Learning shopping
1 Based on a November 2018 survey of an stratified sample of 2,477 individuals from urban areas between the ages of 15 and 60, from Class A to D in Brazil
Source: Google Consumer Barometer (2017); McKinsey Analysis McKinsey & Company 35
More than 7.5 million users - more users than NET
(Pay TV player)
Most active non-English speaking country in the world
for the platform
Video Larger revenues than SBT (TV channel)
streaming More than 69 million viewers per month (#2 in the

world)
Many Brazilian channels lead global subscriber
rankings:
• #4 Kondzilla – 46 million
• #14 Whinderson Nunes – 34 million
• #24 Felipe Neto – 30 million
Source: Press clippings, 2017/2018 data McKinsey & Company 36

More than 20 million users
• +500K drivers
• +100 cities in Brazil
• +1 billion trips
Mobility
• +600K taxi drivers
• + 1K cities in Brazil
More than 3.8 million users in São Paulo (global leader)

Rio de Janeiro the first partner1 city in the world
1 First city to join the Connected Citizens Program,
a platform for information exchange aiming to help
cities solve mobility issues

Third-largest user base in the world
Brazil is a pilot country for new products (e.g. Stories
Social for Events, Facebook Gaming creator)
network
(Facebook More than 50 million users
applications)
Second-largest user base in the world

Most widely used communication app in Brazil
91% penetration among internet users

Sixth-largest user base in the world
Social
network More than 29 million users
(other selected
Third-largest user base in the world
applications)

Second-largest user base in the world
Country with the highest growth

+390K deliveries daily
+50K restaurants
+120K deliverers
+480 cities in Brazil
109% growth in deliveries in 2018
Investment in 2018: US$ 500 million
Food
+800K users
delivery +15 cities
Investment in 2018: US$ 220 million
+1.7K restaurants
+30 cities
+200% annual growth since launching (2017)
Strategic partnerships: McDonald’s, Subway, Ipiranga, etc.
Investment in 2018: US$ 480 million (global)

More than 13 million subscribers
#5 “Radio station” in São Paulo
Largest audio streaming service in Brazil
Audio
streaming More than 3 million subscribers
Partnership with TIM, creating the TimMusic cobrand
platform

More than a billion downloads
#19 on App Store publisher ranking
Gaming Brazilian game market:

More than 60 million gamers (#3 in the world)
375 game studios
+1,700 games produced in 2018
+US$ 1.3 billion annual market revenue

1,196 Coworking spaces
169 cities
R$ 127 million in revenues
+214K users
+88K workstations
Coworking
+7K direct employees
Examples:
Source: Censo Coworking Brasil (2018) McKinsey & Company 43

97% of search engine market share
Most visited website
Google
environment #5 in global online visitors
Only country apart from US with a complete Google

ecosystem infrastructure

More than 6 billion app downloads per year
#4 in the world in app downloads
Mobile app
creation/usage Average of 83 installed apps and usage of 12
apps per day
#4 largest app producer in the world
Source: Press clippings McKinsey & Company 45

Examples of leading Brazilian apps
More than 180 countries 10 million downloads

5 million subscribers Most downloaded
3 international recognitions shooting game in Apple
2x
(Compared
20 million downloads
Store in 2016
Duke's Choice Award

to 2017)
15,300 visits per day on Winners in Latin America
website in 2016
Increase in number of
Translated into 4 languages 25th Cosmetic Current
app developer startups Award: Digital Point of
with revenue above Sale of the Year.
R$1 million
90 million users
In 2015, Colorfy was the
second most downloaded
free app on the App Store

Smartphones are among the devices with the
highest penetration in Brazil …
Device penetration in Brazil

Percentage of population1 who use each kind of device
95
89
71
38
15
7
2 2
Television Mobile Smart- Laptop or Tablet Device for E-reader Wearable
(Any kind) phone phone desktop computer streaming device tech device
(Any type) computer internet
content to
TV
1 Survey based; Data represents adult respondents only

…but there’s still room to increase penetration
across devices
Device penetration in Brazil and US

Percentage of population1 who use each kind of device
+1% -6% Brazil

95
89 90 89
+10% +103% US
78 77
71
+207%
46
38 +300%
28
+400% -86%
15 14
7 10
2 2
Mobile Smart- Laptop or Tablet Television Device for E-reader Wearable

phone phone desktop computer (Any kind) streaming device tech device
(Any type) computer internet
content to
TV
1 Survey based; Data represents adult respondents only

Brazilians are spending much more time on
internet
Time spent on media CAGR

Hours per day 2014 - 2016
14
13
34%
Internet 30% 12.2%
Print 18% 18% 4.4%
TV 28% 26% -0.1%
Radio 25% 22% -2.0%
2014 2016
Source: Brazil Media Survey McKinsey & Company 49

Pay TV and digital are the fastest-growing channels
for media investments
Total Investment in media and advertising CAGR

US$ billion; % split by type channel 2013-2018
16
+7% p.a. 4% -16%
6%
3%
10%
11
25%
Print media
14%
Other 7% 35% 24%
Pay TV 4%
16%
Digital
TV 59% 45% 1%
2013 2018
Source: Magna Global; 1 US$ = 3,192 RS$ McKinsey & Company 50

In digital marketing, video and social segments
show the highest levels of growth
Total Digital Investment in Media and advertising CAGR

US$ billion; % split by type channel 2013-2018
5,55 3%
4% 2%
9%
22% 39%
29% 35%
Other
Video 1,87 4%
Social 13% 8%
Display 19% 43% 18%
Search 56%
2013 2018
Share of
mobile media 9 57
%
Source: Magna Global; 1 US$ = 3,192 RS$ McKinsey & Company 51
But there is still room for growth and penetration in digital advertising
Total investment in media and advertising

US$ billions; % split by type channel
16 208 69 8 11
Other 5% 10% 9% 9%
4% 12%
7% 2% 3%
Printed Media
Digital 36% 31%
58% 46%
52%
PayTV 10% 21%
1%
9%
Broadcast TV 45% 16% 38%
38%
22%
15%
2%
Brazil US China Russia India
Source: Magna Global (2018); 1 US$ = 3,192 RS$ = 6.759 CNY = 58,32 RUB = 65,12 INR McKinsey & Company 52
Brazil is a few years behind US in terms of digital media investments…
Total investment in media and advertising

% split by channel
Digital has surpassed TV in

70 70 media investments in the
USA since 2015
60 60
TV
50 50 Digital
40 40
Digital
30 30 TV
20 20
10 Others 10 Others
Print Print
0 0
2013 14 15 16 17 2018 2013 14 15 16 17 2018
Brazil USA
Source: Magna Global McKinsey & Company 53
... not only in the total investment amount but also
in dollars per hour of user
Digital investment in media and advertising

US$ cent/hour of user
59.9
4.9
26.4
Digital 5.3
28.6
1.6
Print 0.4
TV 3.3
Brazil US
Source: McKinsey analysis (2018) McKinsey & Company 54

Digital inclusion has only just begun: Digital access
varies across geography and demographics
Internet access per segment
% of respondents who have accessed internet in the past three months
Urban 71
Geography
Rural 44
Southeast 74
Northeast 58
Region South 69
67%
North 58
Midwest 76
Illiterate/Pre-school 9
Education
Elementary 45
completed
High School 85
University 94
of overall respondents have
Up to 1 51 accessed internet in the past
Income
1 to 2 64 three months
2 to 3 73
Number of
3 to 5 84
MW 1
5 to 10 88
>10 94
10 to 15 84
16 to 24 88
Age 25 to 34 85
Years 35 to 44 76
45 to 59 years old 54
>60 25
1 MW: Minimum Wage (monthly)
Source: CETIC.br (2017) McKinsey & Company 55
Across regions, households with the highest incomes are almost four times more
likely to have internet access than those with the lowest incomes
Internet access in Brazilian by income level Number of MW1

% of households with internet access by income
Up to 1
19
30 1 to 2
58 2 to 3
72 21 3 to 5
88 38
N >5
56
NE 75
87
25
40
54 CW 29
65 SE 43
88 68
76
21 92
32
55 S
74
83
1 MW: Minimum Wage (monthly)
Source: ICT households Survey (2017) McKinsey & Company 56
Internet speeds are still lower than in many
developed economies
Internet speed on fixed broadbands Average Speed for Mobile

Mbps, 2017 Mbps, 2018
11.29 22.72
Asia Pacific 46
USA 46
North America 43
Global 39
Western Europe 38
Central & Eastern Europe 33
Brazil 13
Latin America 12
Middle East & Africa 8

Global
31
Average
Source: Cisco VNI (2017), OOKLA – SpeedTest (2018) McKinsey & Company 57
E-commerce has grown quickly in the last five
years…
e-commerce market size

R$ billion
Highlights
Average Spending
28.8 +13% p.a. 47.7
2013 2017
R$429
3.7% 5.1% # of orders
Penetration 111.2
million
Black Friday (2018)
31.3 55.1
Buyers million million R$2.6Bn
(+23% more than in 2017)
Source: Webshoppers e-Bit; Euromonitor; Press clippings; E-bit/Nielsen (2017/2018) McKinsey & Company 58
… but e-commerce penetration in Brazil still lags that of China and developed
nations…
e-Commerce penetration
%1
20
19
16
12 12
9 9
8 8 8
6
5 5
China South UK USA Netherlands Germany Australia Japan France Canada Brazil India Russia
Korea
1 e-Commerce sales over total retail sales

Source: Euromonitor (2017) McKinsey & Company 59
…with considerable variation in penetration across
product categories
Category
Penetration Leader penetration
%1 %1
Toys and games 29 72
Electronics 20 44
Appliances 10 37
Apparel 4 29
Beauty/ personal care 3 23
Home and garden 1 17
Alcoholic beverages <1 8
Packaged food <1 10
Home care <1 13
1 e-Commerce sales over total retail sales

Source: Euromonitor (2017) McKinsey & Company 60
Online shopping is split across sectors, but phones and appliances account for
most of the spending
Spend volume Transactions Average purchase value

Category %1 %1 R$
Phones/mobile 21.2 9.2 988
Appliances 19.3 10.8 767
Consumer electronics 10 3.6 1,192
Computer h/w and s/w 8.9 4.5 848
Home and decor 8.4 10.5 343
Apparel and accessories 6.1 14.2 184
Beauty and personal care 4.8 12.0 172
Sports 4 6.4 268
Food and beverages 2.2 4.0 236

1 Category share of total e-Commerce
Source: Webshoppers e-Bit (2017), McKinsey analysis McKinsey & Company 61
Today, 32% of e-commerce purchases are via
mobile phones
e-Commerce purchases
Share of mobile in online buying, % “Brazilian consumers adopt
new technologies early. As a
0.3
result, companies, especially
2011 retailers, have taken
advantage of apps as
extensions of their digital
operations. When we see the
different market segments,
71% of Brazilians use mobile phones retail is the one with the
32 to access the internet
highest penetration of apps.”
20181
Major retailers report 60% - 75% of
traffic from mobile devices and 35% - Felipe Almeida – Manager of ad
45% of total e-commerce sales products for apps at Google
1 Estimate for the first semester 2018

Source: eBit Webshoppers, IBGE, Novarejo, Press clippings (2018) McKinsey & Company 62
E-commerce players have greater inventory periods and longer delivery times
than those in the US and China
Average days sales in inventory Average delivery time

Days Days
87 2-71
44 1-5
37 22
1 The cities of São Paulo and Rio de Janeiro have special transport systems for products that offer "2-hour", "Same-day" or "next-day" delivery
2 90% of deliveries are due in two days
Source: Company annual reports (2017); Companies’ website McKinsey & Company 63
Digital
Chapters

Ecosystem Dives

Entrepreneurship ecosystem
Brazilians tend to be entrepreneurial: More than 39% of economically active people work in entrepreneurial
endeavors. But only a small share of those efforts are channeled towards innovation.
That said, more startups are pushing the digital and innovation:
▪ Entrepreneurial ecosystems are vibrant across the country
▪ Investments by angel investors and VC continue to grow at high double-digit rates
year on year, surpassing the US$ 1 billion mark in 2018;
▪ The country’s first eight unicorns were nominated in the past two years
▪ More unicorns are on the horizon.
Barriers to growth remain, however:

▪ VC investment as a share of GDP is still way behind other economies
▪ Brazil remains one of the hardest places in the world to open, run and
particularly close a business, raising the cost of failure
▪ Despite the growing number of STEM and engineering graduates, recruiting
and developing digital talent remains a major challenge.

Using the broader definition of the word, Brazil is a
country of entrepreneurs
Entrepreneur % of workforce ages 18-64 who are entrepreneurs Most common activities
14% Restaurants
2015 39% 2 Family work 9% Apparel
5 Employer
An entrepreneur is someone who,
rather than working as an Domestic
7% Catering
7
employee, founds and runs his or work Auto
her own business, assuming all the 7% Mechanics
risks and rewards.
2010 32% 5% Beauty
Saloon
Self-
26
employed 5% Snacks
2005 21%1
3% Cosmetics
Source: GEM (2016) McKinsey & Company 66

The typical entrepreneur is female, under 34,
lower-middle class and with a high school
education at best
Income
Age Number of minimum
Gender Years wages
10 3%
55< %
>4
17 25% 4
45-54 %
23
51% 49% 35-44 % 29% 3
30
25-34 % 29% 2
20
18-24 % 14% Up to 1
Education
No formal education Elementary High School Undergrad/Grad/PhD
27% 20% 46% 7%
Source: GEM (2016) McKinsey & Company 67

Company mortality rates are high: two-thirds go
out of business within five years
Main reasons for closing
16% 16% 16%
2/3
12% of companies close within
five years
10% 10%
6%
4% 4%
3%
2%
1%
Lack of Lack of Lack of Labor Taxes Delinquency Competition Bureucracy Marketing Crisis Credit Other
clients capital knowledge
Source: GEM; Sebrae (2016) McKinsey & Company 68

Brazilian market is less favorable to new businesses
than many other markets
Ease of Doing Business Index

Variables
Country Rank
Starting a business
2010 2018
Dealing with construction permits
United States 04 08
Getting electricity
Russia 120 31
Registering property
France 31 32
Getting credit
China 86 46
Protecting investors
Chile 40 56
Paying taxes
India 132 77
Trading across borders
Brazil 127 109
Enforcing contracts
Resolving insolvency
Source: World Bank “Ease of Doing Business Index” (2018) McKinsey & Company 69
The cost of failure is high and closing a company in
Brazil is bureaucratic and expensive
Main challenges
Stages in closing a company in Brazil
Business owners must
provide documentation for
Cancellation of the company’s last five
Corporate Taxpayer years of activity
Federal
ID (CNPJ)
Further steps vary according
Registration of the Cancellation of to the type of company; it is
articles of association State Payer ID mandatory to have certificates
State in every area requested for
cancellation
the business activity of the
company
Cancellation of
Municipal
Municipal Documents provided often
Taxpayer ID
expire before the end of the
closure process and need to be
updated
The cost of higher than the
closing down a +44% cost of opening a
company can be company
Source: Sebrae (2016); Endeavor “Bureaucracy in the lifecycle of companies" (2017) McKinsey & Company 70
Despite Brazilian entrepreneurism, the country ranks at the bottom of the
innovation index compared to developed and other BRIC economies …
Global Innovation Index

Rank
Global Knowledge and

Innovation Human capital Market Business technology Creative
Index Institutions and research Infrastructure sophistication sophistication outputs outputs
United States 6 13 21 24 1 8 6 14
France 16 21 11 10 11 19 19 12
China 17 70 23 29 25 9 5 21
Russia 46 74 22 63 56 33 47 72
Chile 47 37 61 53 54 48 48 58
India 57 80 56 77 36 64 43 75
Brazil 64 82 52 64 82 38 64 78
Ease of starting a business and Credit and tariff rate applied pulling
business environment the variable down
Source: Global Innovation Index (2017) McKinsey & Company 71

The Brazilian government and private enterprises
spend 1.3% of GDP in R&D…
R&D
% of GDP
3.0
2.7
US
2.5
2.2
France
2.0 China
2.1
1.5 1.3
1.1 Brazil
1.0 0.8 Russia
India
0.5 0.4
Chile
0
2000 2008 2016
Source: WorldBank McKinsey & Company 72

72
…But Brazil still punches significantly below its weight in the number of patents
Patents by country
Patent applications / million inhabitants
220
217.6
207.2
200
180 173.1
160
140
120 117.2
100 93.2 89.3

80 76.4
60
40
20 15.2
9.0 7.9 7.1 3.4 2.0 1.7 1.5 1.2 0.5
0
Germany Netherlands United France United Canada Australia China Turkey Russian Chile Brazil Mexico Colombia India Argentina Peru
States Kingdom Federation
Source: World Economic Forum “Network Readiness Index” (2016) McKinsey & Company 73
Brazil lags in the efficiency of patent registration,
especially compared to countries like Japan
Application process Patents registered

Years Thousands per year
14 456
+65x
1
7
Brazil Japan Brazil Japan
Source: WIPO (2016) McKinsey & Company 74

Although there is an increasing number of engineering & computer science
graduates...
Engineering and Computer Science degrees

Thousands
CAGR
2012 - 2017
153
138
+13% p.a.
44 36%
118 35
99 25 12%
91 19
Civil engineering 17
Production engineering
84
14
18
15 13 17%
10 11 8%
Mechanic engineering 12 12 9 12
11 13
Computer Science 6 7 8 12 11
11%
10 10 8 10 3 6%
Eletric engineering 9 2
6 7 7 2
Computer engineering 2 2 2 47 49 52
40 40
42 6%
Other engineering majors
2012 2013 2014 2015 2016 2017
Source: INEP “Censo de Educação Superior” McKinsey & Company 75

…Brazil still lags in absolute numbers of STEM graduates…
Graduates in STEM1 Absolute number of graduates

% of total population Millions
North America 4.8% 15,7
Spain 4.2% 2,0
United Kingdom 3.4% 2,2
France 2.0% 1,4

India 1.7% 22,7
China 1.1% 15,0
Brazil 1.0% 2,0
1 Science, Technology, Engineering, Mathematics

Source: OECD database (2018), National Statistics websites for China and India (2017) McKinsey & Company 76
… and current enrollment status suggests that this will not change in the short term
Distribution of tertiary students among areas of study

%
Brazil North America France United Kingdom
7
17 19 18 19 22
27
40
56 74 38
63
Spain India China

11 1
21
28
35 STEM1
40
Humanities, social science,
59 education, business, law
54 Others
51
1 Science, Technology, Engineering, Mathematics

Source: OECD database (2018), National Statistics websites for China and India (2017) McKinsey & Company 77
Only a small share of students and the overall
population go abroad for higher education
Share of students studying abroad

% of the total tertiary enrollment
10.0 9.9%
France
5.0 5.0%
United States
4.5
4.0%
Russia
4.0
3.5
0.3% 0.4% Chile

0.3% 0.3% China
0.2%
0.1% Brazil
0
2014 2015 2016 India
Source: OECD McKinsey & Company 78

The Brazilian startup scenario
Startup
start·up·
noun
New venture that aims to develop a

viable business model usually based >10,000 >30k+ USD 1 billion+
on innovative technology. Founders startups jobs created investments in 2018
design startups to develop and
validate a scalable business model to
meet a marketplace need or solve a
problem.
3 8
IPOs Unicorns
Source: Startup Base; ABStartup; LAVCA (2018) McKinsey & Company 79

Most startups are less than two years old, have fewer than six employees and no
revenue
Years since establishment Size of teams (including directors) Annual revenue since 2016
% % R$ thousands
Less than 1 year 9 1-5 members 63 No revenue 39
Less than 50 30
1 to 2 years 37 6-15 members 27
50 to 250 15
250 to 500 5
500 to 1,000 6
4 to 6 years 9 More than 50 members 1
1,000 to 2,500 2
More than 6 years 8 Only informal workers 2 More than 2,500 3
Age
46% are less Team Size
63% have less Revenues
69% have an annual
than 2 years old than 6 members revenues of less than R$50K
Source: ABStartups “Radiografia Startups Brasileiras” (2017) McKinsey & Company 80

Most startups are in professional services, technology, media and telecom, and
financial technology
Industry focus
%
16.2
11.0
9.3
8.8
8.2
7.5
7.1
5.7
4.4
3.9 3.7 3.4
2.8 2.6
2.0 1.7 1.6
Professional Telco FinTech Health Retail EdTech Mobility Media Agrotech Real Consum- Environ- Tourism Biotech HR Tech Lawtech Others
Services Estate ption ment

Most startups build business models or differentiate using advanced analytics and
big data
Most used technologies provided by startups

%
Analytics/ Cloud Artificial IoT Digital Virtual Blockchain Biotech Others

Big Data Intelligence Transformation Reality
37% 23% 14% 8% 4% 2% 2% 2% 8%

Most startup founders are men with technical
backgrounds
Gender Background
% %
Female
12
Business
35 32
58
Technical
Male
88 Age
65
33 years old on
average
Founders Teams
Source: Startse (2017), Technical Background = graduated in STEM fields McKinsey & Company 83
Founders say that the main obstacles to growth in the first three years are consumer
engagement, cost of acquisition, revenue and funding
Main obstacles
%
Consumer engagement 23%

Marketing and consumer acquisition 13%
Pricing and revenue 11%
Funding 9% Detailed next
Technology 9%
Operations 9%
Client retention 8%
Client experience 7%
International expansion 6%
Others 5%
Most startups are still in their early stages and rely
on funding from family, friends and angels
Main sources of funding

% of startups
Other 5%
Bank Financing 1%
Venture Capital 1%
Public funds 4%
Accelerators 4%
Angels 9%
Family and friends 76%

Angel investment is growing quickly in Brazil
Angel investment evolution

R$ million
984
851
+14% p.a. 784
688
619
495
450
2010/2011 2011/2012 2012/2013 2013/2014 2014/2015 2016 2017
Source: Anjos do Brasil McKinsey & Company 86

Brazil accounts for 70% of the VC, private equity and
private investment activity in Latin America, totaling
US$ 546 million in deals in just the first half of 2018 Brazil
Investment in LatAm VC deals 1H of the year

Investment in Brazil VC deals
US$ million, number of deals Full year US$ million, number of deals
1,200 1,141 +123% p.a.

US$ million
497 546
1,000 +64% p.a. 362
+41% p.a. 169 66 88
800 780 110 47
30 34
594 1H2016 2H2016 1H2017 2H2017 1H2018
600 526 249
500 476
425
400 371 145
200 119
186 182
197 92
70%
143 111 of LatAm
VC activity
69
0
2011 12 13 14 15 16 2017 1H17 1H18
Source: LAVCA McKinsey & Company 87

Examples of Brazilian VCs
Kaszek Monashees Valor Inseed Redpoint
QED Endeavor Redpoint

Canary Ribbit Investors Catalyst eVentures
Source: Press clipping (2019) McKinsey & Company 88

In terms of venture capital as a share of GDP, Brazil lags mature nations
Total Venture Capital activity - 2017 Total Venture Capital amount

¨% Total Venture Capital/GDP US$ Billion
84,2
USA 0,43%
Canada 0,16% 2,7
Germany 0,11% 3,9
Brazil 0,04% 0,9
Source: World Bank, Press clippings, LAVCA (2017) McKinsey & Company 89
Many interesting deals were made in 2017…
Company Sector Amount invested

US$ million
Transportation Tech 200
Marketplace 135
FinTech 61
Heathcare/Life Sciences 50
Big Data 45
Food delivery 500
FinTech 39
Marketplace Private
Marketplace Private
Source: LAVCA; Crunchbase McKinsey & Company 90
And Brazil’s first unicorns were nominated in 2018,
followed by IPOs and exits
Company Sector Amount invested

US$ million
1
FinTech 2,300
IT (Data center) 1,800
FinTech 1,100
Transportation Tech 1,000
2
Marketplace 500
Food delivery 500
FinTech 330
Education 194
Marketplace 124
Education 17
FinTech Private
1 Considers disclosed private investments over US$1bn, recently IPOs from companies with market cap over US$1bn, and non-disclosed
investments with market perspective over US$1bn 2 Deal executed in 2019
Source: Crunchbase; Startupi McKinsey & Company 91
With its first unicorns, Brazil joined the ranks of
Global unicorns3
some leading countries
Latest market
156
cap2
Startup1 US$ billion
8.8 unicorns
92 unicorns
8.4
4.0
8 1.8
16 unicorns
Unicorns 1.3
1.1
Private
13 unicorns
Private 10 unicorns
1 Considers disclosed private investments over US$1bn, recently IPOs from companies with market cap over US$1bn, and non-disclosed
investments with market perspective over US$1bn
2 For public companies, reference value on Mar 8 th, 2014
3 CB Insights criteria
4 unicorns
Source: CBinsights Unicorn Ranking, Crunchbase, LAVCA (2018) McKinsey & Company 92
Brazil has
many
innovation
hubs, with
most startups
in eight states
and Distrito
Federal
Detailed next
Source: ABStartup, Press clipping (2019) McKinsey & Company 93

Not exhaustive
São Paulo startup ecosystem

Highlights 2017
Investment / Support
Incubators/Accelerators Education institutions institutions
3,300+ 25+
startups incubators
15+ 600+
accelerators higher education
Startups institutions
1 São Paulo 2 Campinas 3 Ribeirão Preto 4 São Jose
dos Campos
3 Ribeirão Preto
Campinas
5 Piracicaba 6 Sorocaba 5 2
4
Piracicaba 1 São José
6
dos Campos
São Paulo
Sorocaba
Source: Crunchbase, ABStartup, Anprotec, Valleys' websites, Anpei; INEP (2017), SPConecta, Press clipping, McKinsey & Company 94
Not exhaustive
Santa Catarina startup ecosystem

Highlights 2017
550+ 20+
startups incubators
5+ 90+
Startups institutions
Joinville
1 Florianópolis (Startups SC) 2 Joinville 3 Balneário Camboriú 4 Blumenau
Balneário do
Camboriú
Chapecó
Stup UX 2
4
5 3
Blumenau 1
5 Chapecó
Florianópolis
Source: Crunchbase; ABStartup, Anprotec, Valleys' websites, Anpei; INEP (2017), Mapa Startups.SC, Press clipping McKinsey & Company 95
Not exhaustive
Minas Gerais ecosystem

Highlights 2017
890+ 15+
startups incubators
10+ 290+
institutions
Startups
Belo Horizonte Uberlândia Uberaba Juiz de Fora
1 (San Pedro Valley) 2 (Colméia /UberHub) 3 (Zebu Valley) 4 (Zero40)
Uberaba
Belo
Horizonte
3 (San Pedro
Valley)
2 1
Juiz de Fora
4
Uberlandia
Source: Crunchbase, ABStartup, Anprotec, Valleys' websites, Anpei; INEP (2017), Censo mineiro de startups, Press clipping, McKinsey & Company 96
Not exhaustive
Rio de Janeiro startup ecosystem

Highlights 2017
Education
Incubators/Accelerators institutions Investment / Support institutions
750+ 25+
startups incubators
10+ 130+
institutions
Startups
1 Rio de Janeiro 2 Sul Fluminense
Sul Fluminense
2
1 Rio de Janeiro
Source: Crunchbase, ABStartup, Anprotec, Valleys' websites, Anpei; INEP (2017), Press clipping, McKinsey & Company 97
Not exhaustive
Paraná startup ecosystem

Highlights 2017
Education Investment / Support

Incubators/Accelerators institutions institutions
580+ 7+ incubators
startups
9+ 180+
institutions
Startups
1 Curitiba 2 Ponta Grossa 3 Londrina 4 Maringá Maringá
Londrina
4 3
Curitiba
2
1
Ponta Grossa
Source: Crunchbase, ABStartup, Anprotec, Valleys' websites, Anpei; INEP (2017), ParanáTech Mining Report – Distrito, Press clipping, McKinsey & Company 98
Not exhaustive
Rio Grande do Sul startup ecosystem

Highlights 2017

915+ 8+ incubators
startups
5+ 120+
institutions
Startups
1 Porto Alegre 2 Santa Maria 3 Caxias do Sul 4 Canoas
Caxias do Sul
Santa Maria
3
Canoas
2 4
1
Porto Alegre
Source: Crunchbase, ABStartup, Anprotec; INEP (2017), Press clipping; Report: Mapeamento de comunidades de startup – Porto Alegre McKinsey & Company 99
Not exhaustive
Pernambuco startup ecosystem

Highlights 2017

185+ 3+ incubators
startups
4+ 105+
institutions
Startups
1 Recife
Recife
Source: Crunchbase, ABStartup, Anprotec; INEP (2017), Press clipping; Report: Mapeamento de comunidades de startup – Recife McKinsey & Company 100
Not exhaustive
Bahia startup ecosystem

Highlights 2017

240+ 4+ incubators
startups
4+ 105+
institutions
Startups
1 Salvador 2 Feira de Santana Feira de Santana
Salvador
2
1
Source: Crunchbase, ABStartup, Anprotec; INEP (2017), Press clipping; Report: Mapeamento de comunidades de startups – Salvador McKinsey & Company 101
Not exhaustive
Distrito Federal startup ecosystem

Highlights 2017

180+ 5+ incubators
startups
6+ 60+
institutions
Startups
1 Brasília
Brasília
Source: Crunchbase, ABStartup, Anprotec; INEP (2017), Press clipping; Report: Mapeamento de comunidades de startup – Brasilia McKinsey & Company 102
Digital
Chapters

Ecosystem Dives

Sector Deep
Chapter Dives
A B C D
Finance Health Education Government

Finance
State of the industry ▪ The financial services industry continues to be attractive in Brazil, with assets growing faster
than GDP, controlled delinquency, reduction in cost to income, steady profit growth and ROE of 14%.
▪ The industry is highly concentrated, however, with plenty of room for financial inclusion.
Compared to developed countries, Brazil has low penetration of nearly all financial products, including
bank accounts, credit – particularly long-term credit – investments and insurance.
Digital trends ▪ Brazilian banking customers have gone digital – more than half are active online or mobile banking
users, and more than half of banking transactions are electronic.
Startup ▪ Around 400 FinTechs are active in Brazil, innovating and fighting for share across
environment segments and products but particularly in payments, where two to four unicorns
have emerged, depending on how you count them: Stone, Nubank, PagSegudo and
XP.
▪ Disruption continues in this volatile market. Digital wallets have emerged, some
credit- based FinTechs have gone through several funding rounds, and digital banks
are acquiring new clients by the millions.
▪ Some of this disruption is being led by incumbents, such as Bradesco/Next, Banco
Original, Caixa/Youse, SafraPay, BB/Cliclic, Santander/Openbank.

Total banking assets in Brazil continues to grow,
but at a slower rate
State of the Industry
Total banking assets

R$ trillion
+3% p.a.
+11% p.a. 7.8
7.2 7.2 7.3
6.7
5.9
2013 14 15 16 17 2018

106
The insurance sector is growing faster across lines

Premium evolution
R$ billion
GDP -3%p.a.
growth
+9% p.a.
252
39
Life
154 981
VGBL
22
Health
60 42
Other P&C 21 33
19
Auto 32 41
2012 20181
1 3Q2018 annualized
Source: SUSEP; McKinsey Global Insurance Pools; press clippings, McKinsey analysis McKinsey & Company 107
107
Financial services revenues have been under
pressure due to spread compression
Average spread of new credit transactions

%, end of period
22.7
18.5 18.8
17.4 16.9
14.8
14.1
13.4
2011 12 13 14 15 16 17 2018

108
Since highs in 2016 and 2017, delinquency rates
have declined
Delinquency rate – corporate and individual

%, more than 90 days
4.5 4.2
4.0 3.9 3.9
4.0 3.5 3.5
3.5 3.2 Individuals
3.0 2.7
2.3 Corporate
2.5 2.0
2.0
1.5
1.0
0.5
0
2014 15 16 17 2018

109
The industry has focused mostly on efficiency,
significantly improving cost-to-income ratios
Brazilian banking system cost-to-income ratios

%
56.3 56.3
54.0 54.0 54.1 54.5
50.2 51.0 51.1
2010 11 12 13 14 15 16 17 2018
Source: BCB, McKinsey analysis McKinsey & Company 110

110
These trends have helped the financial sector
become highly profitable, with ROEs of 11-17%
Brazilian banking system ROE

%
16.7
16.1
15.4
13.9 13.9
13.1 13.1 13.1
11.3
2010 11 12 13 14 15 16 17 2018

111
This particularly impacts Brazil’s biggest banks,
which have seen earnings rise significantly over the
past decade
Annual profit of Brazilian banks
R$ billion
CAGR
2010 - 2018
+8% p.a. 96.1
85.7 83.8
25.0 8%
23.4 24.0
66.4 65.7
61.4 8%
58.1 19.1
53.2 53.2 20.2 21.6
15.7 17.2
13.3
14.6
13.6
14.7 1%
12.9
11.0 12.0 15.1 14.4 11.0
10.0 11.4
15.1
10.4 13%
12.1 15.8 7.2 12.5
11.7 11.2 8.0 12.2
3.8 5.2
12.2
7.1
7.0 4.1 8.0 15%
3.9 3.6 5.6 6.7 5.5
2.1 2.2
2.7 16.6 13.6 16.7
Others 10.5 11.6 7.7 9.1 10.6 11.3 6%
2010 11 12 13 14 15 16 17 2018

112
Industry concentration is high and increasing
Banking industry concentration

Share of total assets, R$ trillion
100% = 5.9 6.7 7.2 7.2 7.3 7.8
Top 5 banks 80% 80% 78% 83% 82% 82%
Others 20% 20% 22% 17% 18% 18%
2013 14 15 16 17 2018

113
The insurance market also shows high level of
concentration
Insurance concentration by GWP1
%
100% 100% 100% 100% 100% 100% 100% 100% 100%
Others 39% 40% 37% 38% 36% 36% 35% 37% 40%
Top 5 61% 60% 63% 62% 64% 64% 65% 63% 60%
2010 11 12 13 14 15 16 17 2018
1 Gross Written Premium
Source: SUSEP, McKinsey analysis McKinsey & Company 114

114
The payment industry has become much less
concentrated with new entrants and FinTechs like
Stone and Pagseguro
Acquiring transaction volume market share
%1
100 100 100 100 100 100 100 100 100

1% 3% 5% 6% 8% 11% 15%
23% 28%
41% 41% 40% 39% 37% 37% 34%
30%
30%
58% 56% 55% 54% 54% 52% 51% 48% 42%
2010 2011 2012 2013 2014 2015 2016 2017 2018
1 Specifically Acquiring
Source: ABECS, BCB, Companies’ reports, McKinsey analysis McKinsey & Company 115
115
Financial inclusion remains a big opportunity: 25%
of economically active people do not have a bank
account
Brazilian bank account holders1
%
94
75
71 72
67 69
2014 15 16 17 2018
1 Number of individuals with active relationship registered in a financial institution over the total population
Source: BCB; IBGE; FDIC McKinsey & Company 116

116
Credit penetration, for example, is less than half
that of developed nations

Consumer Credit Penetration
% of GDP
201.4 195.3
168.7
157.3 151.0
138.5
112.5
68.1 61.8 55.8

42.8
18.1
France China United Japan United Chile Italy Brazil Colombia India Mexico Argentina
Kingdom States
Source: BIS (3Q18) McKinsey & Company 117

117
Furthermore, Brazilians have a higher ratio of
short-term vs. long-term debt compared to
developed nations
Credit portfolio average maturity - individuals
Months, end of period
100
65 66 66
63
58
52
47
42
2011 12 13 14 15 16 17 2018 North

America

118
The penetration of investment products is rising
quickly but still lags the US and other developed
countries by wide margins
Assets under management
% of GDP
154
67
63
56
50
47 46 47
44
2011 2012 2013 2014 2015 2016 2017 2018 North

America
Source: ANBIMA, McKinsey “North American asset management in 2018: The New Great Game” (2018) McKinsey & Company 119
119
Insurance penetration is also low,
with significant room for growth via customer
education and product innovation
Auto insurance penetration
% of total fleet
93
87
36
27
23
Spain North America Chile Peru Brazil
Source: McKinsey analysis; SUSEP; Companies’ reports; press clippings (2017) McKinsey & Company 120
120
The number of internet banking users has
increased dramatically, driven by mobile banking
Digital trends
Number of internet and mobile banking users
Millions
118
+32% p.a.
86 59
75
56 46
42
39
31
59
Internet banking 27
33 40
25
Mobile Banking 12
2013 14 15 16 2017
Source: Febraban McKinsey & Company 121
121
As a result, the number of bank branches is
declining – a trend that is accelerating
Digital trends
Number of bank branches
Thousands of branches
-1% p.a.
-4% p.a.
23,0 23,1 22,6
21,5 20,9
2014 2015 2016 2017 2018

122
Mobile and internet already account for more than
half of all banking transactions in Brazil
Digital trends
Transactions by channel
Billions of transactions, % of total transactions
100% = 40.3 48.8 55.7 65.4 71.8

Mobile Banking 4%
10%
20%
28%
36%
Internet Banking 41%
37%
32%
24%
22%
ATM 23% 21%
18% 16%
14%
POS
16% 15% 14% 15%
Branches 13%
Correspondents 9% 10% 8% 9% 8%
Contact Center 3% 5% 6% 7% 6%
4% 3% 3% 2% 2%
2013 2014 2015 2016 2017
Source: Febraban McKinsey & Company 123

123
Most payments are still made in cash, with a growing
share of credit and debit card transactions
Digital trends
Breakdown of payment transactions
% of transacted volume
25% 22%
31% 28%
Check 38% 36% 34%
11% 12%
10%
8% 9%
Debit card 7% 8%
17% 17% 18%
15% 15% 16%
Credit card 14%
42% 43% 45% 46% 47%

Cash 41% 41%
2011 2012 2013 2014 2015 2016 2017
Source: BCB, McKinsey analysis, Euromonitor McKinsey & Company 124

124
The number of FinTechs is rising
FinTechs
FinTechs
Number of FinTechs
404
332
+96% p.a.
244
130
54
Aug/2015 Apr/2016 Feb/2017 Nov/2017 Aug/2018
Source: Radar FinTech McKinsey & Company 125

125
Payment-focused FinTechs represent the bulk of this growth but lending and
financing are also important
Estimates
FinTechs
Share of number in Latin America 20% -2%
FinTechs in database1 Banking segment’s share
of total banking revenues
10% -5%
11% -1% <5% 7.5%-10%
15% +3% 5%-7.5% >10%
Customer 9% +5%
4% -6%
segments
8% Share of FinTechs
…%
Retail +1% identified in
5% 0% each bucket1
5% +2% 4%
-2% Difference in
Commercial2 …%
percent vs. rest
2%
0% of world
Large 1% -1%
corporate3
Products
1 153 LATAM FinTech companies in our database; includes double counting as FinTechs present in more than one segment or product are counted twice
2 Includes Small and Medium Enterprises
3 Includes Investment Banking, Sales and Trading, Securities services, retail investment, Non-CA deposits and asset management factory
4 Revenue share includes C/A deposit revenue
Source: McKinsey Panorama FinTech database (2016) McKinsey & Company 126
Moreover, in the last few years, we have seen the
birth and rise of a number of digital banks
FinTechs
Number of digital accounts
Thousands 2017 2018
2,500
1,600
1,500
1,452
620²
542
500
435¹
379 400
86
38
1 Considering 3Q2018 numbers for 2018

2 Considering 1H2018 numbers for 2018
Source: Companies’ reports; Press clippings (2018) McKinsey & Company 127
127
Map of the Brazilian FinTech ecosystem
FinTechs
Source: FinTech Lab (2018) McKinsey & Company 128

128
The three biggest unicorns and recent success
stories belong to FinTechs
FinTechs
Valuation Funding IPO

Founded US$ billions US$ billions Date
2013 4.0 0,7 N/A
2006 8.8 2,3 Jan 18
2013 8.4 1,1 Oct 18
Source: Crunchbase McKinsey & Company 129

129
Sector Deep
Chapter Dives
A B C D

Health
State of the industry Brazil, the home of SUS, one of the most inclusive public health care systems in the world, has seen
major changes in the health sector in the last decade:
▪ Significant improvements in key indicators such as mother and infant mortality rates
▪ Double-digit growth in per capita spending driven by the private sector
▪ The growth, consolidation and profitability of the main insurance providers.
Brazil’s healthcare does not yet meet WHO standards, however, and quality is far from universal:
▪ Brazil still lags some countries and WHO minimums in infant mortality, number of doctors and
hospital beds per capita and other important metrics
▪ Standards vary widely across regions, states and cities
▪ Healthcare costs have risen much faster than inflation, which is particularly worrisome
in a population that is aging fast.
Digital trends Brazil’s health industry is falling significantly behind in the adoption of
digital technologies such as electronic patient charts, electronic health
care records and online consultations.
Startup
environment More than 200 startups have risen to this challenge, pushing the digital
innovation agenda with new business models around big data, IoT
medical devices, health marketplaces, and health education, among
others.

Infant mortality rates have declined
Infant mortality in Brazil

Per thousand live births
24.5
-5% p.a.
19.8
15.1
2006 2010 2016
Source: WHO; World Bank McKinsey & Company 132

132
Maternal mortality has also declined sharply

Maternal mortality
Per 100 thousand live births
60
-10% p.a.
48 46 44
2012 2013 2014 2015
Source: WHO; World Bank McKinsey & Company 133

133
The Unified Health System (SUS) is one of the most
inclusive health models in the world
Coverage extension supported by government vs. GDP per capita (2017)
Coverage
extension
supported by
government
GDP per capita

10 20 30 40 50 60
Source: McKinsey analysis; Instituto Coalizão Saúde referencing the World Bank; London School of Economics study and Commonwealth McKinsey & Company 134
134
Fund (2017)
Health spending as a share of GDP is in line with
OECD, but spending per capita is still lower than
developed countries
Total spend on health Spending per capita

% of GDP US$
Private Public
3.1 14.0 17.1 9,536
1.9 9.5 11.4 4,026
5.1 3.9 9.0 780
3.2 4.9 8.1 1,102
1.9 3.1 5.0 426
2.9 1.0 3.9 63
OECD average 9% 9
Source: OECD (2017) McKinsey & Company 135

135
The private sector has grown and consolidated. In health and insurance plans, the
three largest players increased their market share to 34%

Revenues, 2011 Revenues, 2017 Market Share Variation
R$ billion R$ billion % p.p.
7.5 9% 20.4 12 3
34% of
6.8 7% 18.6 12 4 market
3% share
5.8 13.6 10 3
2.5 3% 4.9 4 1
2.3 2% 4.7 4 1
2.0 4.3 4 2
2%
1.7 4.1 4 2
2%
1.7 3.9 4 2
1.6 2% 3.6 4 2
1.4 2% 3.3 3 1
Others 51.0 60% 97.8 Others 40 -20
Source: ANS McKinsey & Company 136

There is considerable room for improvement. For
example, infant mortality is still high for Latin
America
Infant mortality
Per thousand live births, under 1 year
13.5 13.1
12.6
9.9
8.0
7.0
Brazil Colombia Mexico Argentina Uruguay Chile
Source: WHO; World Bank (2017) McKinsey & Company 137

137
Infant mortality varies widely across regions and
states: twice as many children die in Roraima as in
Santa Catarina
Infant mortality rate by state
%
RR 18
AP 18
PI 16
BA 16
AM 16
SP 11
PR 11
DF 10
RS 10 Infant mortality (under 1 year) per

thousand live births
SC 9 2x > 15 12 14.9 < 11.9
Source: Datasus (2017) McKinsey & Company 138

138
The maternity mortality rate is also higher than in
peer countries
Maternal mortality
Per 100 thousand live births
64
52
441
39 38
22
15
Source: WHO; World Bank (2017) McKinsey & Company 139

139
And the maternity mortality rate varies widely
across the country
Maternal mortality rate by state Maternal mortality
Per 100 thousand live births Per 100 thousand live births
AP 110
MA 98
PB 87
TO 84
PI 81
SE 47
PR 44
ES 37
RS 36
SC 30 ~ 3. 5x
> 70 50.1-70 < 50
Source: Datasus (2017) McKinsey & Company 140

140
Brazil has fewer physicians per
person than most developed
countries
Physicians Physicians
Per thousand inhabitants Per thousand inhabitants
1.8
Chile 1.6
Turkey 1.7
1.4
Brazil 1.8
Mexico 2.2
Canada 2.4
USA 2.5
UK 2.8
Australia 3.5
Spain 3.8
Italy 3.9
Germany 4.1
1.0
Minimum recommended
2000 2017 by WHO
Source: OECD (2017) McKinsey & Company 141

Brazil also has fewer hospital beds
per person
State of Ithe ndustry
Number of hospital beds Hospital beds

Thousand, % Per thousand inhabitants
436 415
Mexico 1.7
Brazil 2.0
Chile 2.1
Turkey 2.5
Private 68.0 64.0 Canada 2.7
UK 2.8
Spain 3.0
USA 3.1
Italy 3.3
Australia 3.7
36.0 Germany 8.2
Public 32.0
Japan 13.2
4.7
2009 2016 OECD
Average
Source: OECD; SUS (2016) McKinsey & Company 142
Access to private health plans and beds varies
widely across the country
Private plan beneficiaries Private bed beneficiaries
For every 100,000 inhabitants For every 100,000 inhabitants
SP 38.0 RS 1.7
RJ 31.7 GO 1.6
DF 30.2 PR 1.5
ES 27.4 DF 1.4
PR 25.0 RJ 1.4
MG 24.3 RO 1.4
RS 23.4 SC 1.3
SC 21.4 MT 1.3
MS 17.2 PE 1.3
MT 16.5 SP 1.3
GO 15.7 PB 1.3
RN 15.0 MS 1.2
SE 14.5 MG 1.2
CE 14.1 BA 1.2
PE 14.0 MA 1.2
AM 12.8 CE 1.1
AL 11.4 PI 1.1
PB 10.7 ES 1.1
BA 10.5 AL 1.1
PA 9.5 RN 1.1
PI 8.7 PA 1.1
RR 8.2 TO 1.0
RO 8.1 RR 0.9
MA 6.7 AC 0.9
TO 6.1 AM 0.8
AP 5.7 SE 0.8
AC 5.4 AP 0.6
-86% -62%
Source: FBH and CNSaúde “Hospital Overview in Brazil" (2018) McKinsey & Company 143
143
Medical inflation far exceeds baseline inflation and
rates in many other economies
Difference between medical and general inflation

p.p.
9.7 9.4
9.0
8.6
6.6
4.7
4.0
3.0 2.9 2.6
USA UK Canada Brazil China Mexico France Chile Russia India
Source: McKinsey; IESS, Viewswire (2012 – 2017) McKinsey & Company 144
144
Demographic pressures will raise health care demand
and spend: people over 60 will account for 20% of the
population by 2030
Population by age Average cost of public
Millions,% hospital treatment
195 212 223 R$
60+ 10% 14% 1,786
19%
40-59 22%
25% 1,522
28%
15-39 42%
40%
36% 840
5-14 17%
14% 824
12%
0-4 8% 7% 6% 1,677
2010 2020e 2030e
Source: McKinsey analysis; Instituto Coalizão Saúde referencing the IBGE; Datasus; Press clipping (2017) McKinsey & Company 145
145
Will the private sector reinvent itself in time? In
2030, only about 10% of the elderly will be able to
afford private plans
Number of Share of the health plan cost % of the

minimum in household income for an elderly in
wages elderly person¹ 2030 ²
Up to 1 % 174 27
1 to 2 116 29
2 to 3 69 14
3 to 5 43 10
Able to be 5 to 10 23 6
covered by
private 10 to 20 11 2
plans
(<40%) +20 9 1
No salary 0 11
1 Recital: only 1 elderly person in the family; Midpoint within the income range; Same proportion of households in each income range and
same average real price of health plans in 2030; R$1,233 as the average monthly price for health plans for people over 60 years; 40%
of family income for payment of health plans
2 Considers the same distribution of elderly in all income ranges. Proportion of people 60+ years of age in the Brazilian population in 2014
was ~11%
Source: IBGE (2018) McKinsey & Company 146
146
Brazil has a long way to go in health innovation and
a digital future
Digital trends
Future Index
Score
UAE
Netherlands 58.9
65.3
24%
of health units use
China 58.1 electronic medical
records
USA 57.4
United Kingdom 56.4
France
Germany
54.6
54.5
85%
of cities do not have the
Brazil 50.6 necessary equipment to
implement electronic
Japan 49.0 medical records
1 The Future Health Index (FHI) measures the perception of readiness of 13 key countries to realize the benefits of connected and
integrated medical care
Source: Future Health Index Philips (2016) McKinsey & Company 147
147
Digital trends
Type of patient chart used1

% of healthcare establishments
45
For example, only 23%
of healthcare
establishments have
fully electronic charts 23
– 45% are still entirely
17
paper-based 12
Charts are entirely Charts are Most charts are Most charts Don’t know/did
paper-based fully electronic paper-based, although are electronic not answer
some are electronic
1 How records are kept according to the answers provided by the healthcare facilities visited
Source: TIC Health Survey; Regional Center for Studies to Develop Information Society (2017) McKinsey & Company 148
Brazil is home to more than 200 HealthTech
startups across hubs
2017
HealthTechs
+263
São Paulo
39%
startups Belo Horizonte
9%
17% 15% 7%
Recife
Management Systems Hard Sciences
are the sectors with the most startups ...are the cities with
the most HealthTechs
Source: Liga Insights Health Tech (2017) McKinsey & Company 149
Map of the Brazilian HealthTech ecosystem
HealthTechs
Source: Distrito (2018) McKinsey & Company 150

150
Sector Deep
Chapter Dives
A B C D

Education
State of the industry The recent history of education in Brazil is one of quantity more than quality.
▪ Despite a record high number of high school and college graduates, fewer than 40% of the
population has completed high school, and more than 10% are illiterate.
▪ Moreover, the dramatic increase in years spent in education has had little effect on average
hourly earnings.
▪ Although private and public investments in education – absolutely and as a share
of GDP – have risen significantly, Brazil is performing worse in international
education scores and rankings.
Digital trends Digital technology can help achieve scale inside and outside of classrooms.
▪ Distance learning is leading the way, with strong growth. Up to 25% of applications
to higher education institutions are for distance learning.
More than 350 startups are driving innovation.

Startup ▪ They focus mostly on content management, education management
environment systems, educational games, and adaptative learning platforms.

Education is evolving quickly, but most people have
not finished high school
Education profile
Share of total population Variation
p.p.
University complete
University incomplete
8.9%
3.5%
12.1% 3.2
4.6%
High school complete 20.8% 1.1
23.8%
High school incomplete 6.2% 3.0
Elementary complete 9.5% 6.9%
7.9%
59.4% % of population didn’t
finish high school
Elementary incomplete 37.7%
33.9%
Illiterate 13.4% 10.7%
2012 2018
Source: The Economist Intelligence Unit McKinsey & Company 153

153
More than 40% of undergrads major in social
sciences, business and law
Breakdown of higher education majors
% of
Thousands
total
Social sciences,
business and law
333 386 41%
Education 82 150 16%
Health & social
services
115 144 15%
Engineering &
construction
89 123 13%
Mathematics &
computer science
36 57 6%
Humanities & arts 22 30 3%
Services 11 25 3%
Agriculture &
20 25 3%
veterinary
Total 939
Private education Public education
Source: “Evolution of the Brazilian education sector” from Falke empowered by EMIS (www.emis.com) (2018) McKinsey & Company 154
154
Employees with university degrees earn
twice the national average – the highest salary
increase across levels
Average monthly salary per educational level Registered employees

R$/month, only includes registered employees %
PhD 11.0 0.3
Master’s degree 7.2 0.7
University complete 5.6 21.2
Average 2.8
100%
University incomplete 2.7 3.8
High school complete 2.0 48.4
High school incomplete 1.6 6.4
Elementary complete 1.8 9.2
Elementary incomplete 1.7 9.7
Illiterate 1.3 0.3
Source: MTE-RAIS (2018) McKinsey & Company 155

155
The penetration of higher education is much higher
in developed countries
Share of total population

%
27
25
11
6 6 5
3
Russian United France Chile Brazil India China

Federation States
Population with tertiary degree

Million
35 83 7 1 11 60 36
Source: OECD; Our World in Data (2017) McKinsey & Company 156
156
Education in Brazil is unevenly distributed
Education profile per region Difference between SE

Share of population at each level and NE educational level
p.p.
University complete 15% 14% 13%
8%
4%
8%
4%
8.2
University incomplete 5% 5% 5%
22% 22%
22% 21%
5.3
High school complete 27%
8% 7%
High school incomplete 7%

7%
8%
6%
10%
7%
7%
-13.4
Elementary complete 8%
37%
38%
33% 35%
Elementary incomplete 31%
13% 16%
Illiterate 8% 10% 8%
SE CW S N NE
Source: The Economist Intelligence Unit (2017) McKinsey & Company 157
157
Educational spending is low compared to developed
economies and even within Latin America
Spending on education
% of GDP
6.65
6.26 6.23
5.76 5.62 5.48 5.36 5.28
4.92
4.45
3.78
3.31
UK South USA Belgium Argentina Chile Mexico France Brazil Japan Hungary Russia
Korea
Source: World Bank (2017) McKinsey & Company 158

158
Despite improvements, the quality of education is still among the worst in the
world, ranking #63 out of 70 countries
PISA - Student performance

Average score in mathematics, reading and science
Score, 2009 Rank¹, 2009 Score, 2015 Rank¹, 2015 Delta
China 546
2 533
2 0
France 497 496
25 26 -1
US 496 488
26 31 -5
Russia 468 492
40 28 12
Chile 439 443
45 44 1
Brazil 401 395
54 63 -9
OECD Avg. 497 OECD Avg. 492
1. 65 participating countries in 2009; 2. 70 participating countries in 2015
Source: PISA (2015); IBGE; OECD McKinsey & Company 159

Even compared to countries with the same GDP per
capita, Brazil’s PISA results are below average
PISA Science 2015

Mean Score Latin American countries Rest of world
600
580
560
540
520
500
480
460
440
420
400 Brazil
380
360
340
0
0 20,000 40,000 60,000 80,000 100,000 120,000 140,000
GDP per capita

PPP USD
Source: PISA (2015) McKinsey & Company 160
160
Across the world, educational institutions are using
a variety of delivery formats to boost flexibility
Digital trends
Format Description
Courses delivered online

Distance learning
Timeline decided by the university

Technology- Often includes interactive elements
based
Courses delivered in any format, such as on different

campuses or without attendance requirements
Students can complete modules at their own pace
Non-tech- No admission requirements
based
Part-time courses, e.g., 1-year degree completed in 2 years

Compressed degrees, e.g., 3-year degree completed in 2
years
Modularization – in credit-based systems, students choose
Flexible timing
how many courses to take each term, with a certain number
of credits required for a degree
Source: Expert interviews McKinsey & Company 161

Penetration of distance learning courses is
increasing, reaching 25% of total higher education
applications in 2017
Digital trends
Applications for distance learning Institutions that offer distance

higher education courses learning higher education courses
% of total applicants 000
7.1
5.9 20%
Non-distance 25%
Public
learning 75%
90%
80%
75%
Distance 25% Private

learning 10%
2004 2016 2009 2016
Source: INEP (2017) McKinsey & Company 162

162
The private sector is largely responsible for the
evolution of distance learning in Brazil
Digital trends
Evolution of distance education in Brazil CAGR

Thousands of enrollments 2003 - 2017
1,466
124 8%
931
182
1,342
49%
Public
749
50
Private 45
5
2003 2010 2017
Source: “Evolution of the Brazilian education sector” from Falke empowered by EMIS (www.emis.com) (2018) McKinsey & Company 163
163
Brazil’s many education startups aim to address a wide range of topics, mostly in
content management (1/2)
EdTechs
Number of Brazilian states Work with Content

with at least 3 EdTechs 73% 49% Management System
solutions
Number of EdTechs Work with Educational

based in the state of 43% 365 19%
Management System
solutions
São Paulo
Focus on the Basic EdTechs Use SAAS to generate

Education segment 47% 70% revenue
EdTech’s most Data and process

Content
offered products
are:
generation 61% collections 19%
Source: ABStartups and CIEB (2017) McKinsey & Company 164

Brazil’s many education startups aim to address a wide range of topics, mostly in
content management (2/2)
EdTechs
Basic Higher Other More
education education Corporate Languages courses than one
Solutions (# of companies) 171 24 30 15 75 50
Content Management System 35 42 57 87 77 44
Educational Management 28 25 5 24
System
Educational games 16 4 24 3 10
Learning Management System 16 13 17 13 9 18
Adaptive Platform 3 17 3 4 4
Student Information System 2 1
Source: ABStartups and CIEB (2017) McKinsey & Company 165

Map of Brazil’s current EdTech Ecosystem
EdTechs
Source: ABStartups & CIEB (2018) McKinsey & Company 166

166
Sector Deep
Chapter Dives
A B C D

Innovations have transformed public services in the last two decades
1996 1997 2009
Electronic voting Law of

Income tax Transparency
Election results are Digital income tax returns
available in just a few The law obliges the
and electronic filing have union, states and
hours after voting ends been available since 1997. municipalities to make
By 2011, all filings were all their spending
digital. publicly accessible on
the internet

The public sector is driving innovation and creating apps for citizens
Public initiatives to foster innovation Government apps
The Colab-i initiative is part of the Audit Court’s In the e-Proinfo app, students can view their courses and
Research and Innovation Center, which supports detailed information on institutions, courses and classes,
innovative projects through cooperation and as well as participate in discussion forums
skill-building
The CAIXA Bolsa Família app shows payment dates for
state welfare and lets citizens see what payments have
been made
iGovLab seeks solutions to increase efficiency
and scope of state management policies. It is In the Educação Conectada app, users can see a school’s
linked administratively to the São Paulo state technology adoption on a scale of emergent, basic,
government. intermediate or advanced
The Receita Federal app helps people file income tax
Inovagov seeks to foster creative solutions, returns. The free platform automatically stores user data
promote a more humane focus on user and allows forms to be filled out in stages
experience and integrate the efforts of different
sectors, resulting in better processes and
services in the public sector’s innovation culture. Others
Source: Press clippings; Institutional websites McKinsey & Company 169

Brazil lags global leaders in digital government
e-Government Development Index

Composite index (x100)
UK 90
France 88
USA 88
Russia 80
Chile 74
Brazil 73
China 68
India 57
Source: UN (2017) McKinsey & Company 170

170
Brazil also trails on the Open Government index,
which includes civic participation and the right to
government information
Open Government Index

Composite index (x100)
USA 73
France 69
Chile 68
India 57
Brazil 57
Russia 49
China 43
Source : World Justice Project (2015) McKinsey & Company 171

171
Brazil has many opportunities to improve digital
services for citizens
Digital transactions for citizens

Number of countries offering service via digital platform
Available
2014 2018 in Brazil?
Pay utilities 41 140
File income taxes 73 139
Register a business 60 126
Pay fines 42 111
Apply for a birth certificate 44 86
Apply for marriage certificate 39 82
Register a motor vehicle 33 76
Apply for drivers licence 29 62
Apply for personal identity card 27 59

172
How can Brazil improve its government services?
Days to… Benchmark
Open a company 79 0.5

Obtain a
construction permit
425 93
Obtain electricity 64 18
Fulfill an average
company’s tax
85 3
obligation
Source: World Bank, Ease of Doing Business (2017) McKinsey & Company 173
173
Many countries invest in digital innovation to improve citizen satisfaction (1/2)
Examples
Digital interaction with citizens and companies
Convenience and customization Single point of contact

Citizens and companies use the same safe login Single point of contact for residents and
on both bank and government platforms companies for more than 800 transactions –
including driver's license, birth certificate, etc.
End-to-end digital processes
Shared services model Automation of back-end payments

The State's Shared Services Model currently All citizens and companies utilize a bank
provides financial accounting, HR and payroll account designated for public payments
services on a national level to the majority of
government sector agencies
Source: McKinsey analysis; Press clippings McKinsey & Company 174

Many countries invest in digital innovation to improve citizen satisfaction (2/2)
Examples
Decisions based on data
Data analysis reSources Data analysis reSources

Saudi Arabia monitored the MERS crisis in real The job agency platform uses data analysis to
time by consolidating data from all relevant points segment candidates and make customized
of contact to support decisions recommendations for potential positions
Sharing and publication of data
Strong top-down policies Data accessibility and interactivity

The platform removes technological barriers An M.I.T. Media Lab project aims to be the most
that inhibit the sharing of data without errors comprehensive visualization of US government
between government agencies data, "transforming data into stories"
Source: McKinsey analysis; press clippings McKinsey & Company 175

GovTech startups are flourishing across areas and
types of problems
Transparency Communication
Transportation
Statistics and data analysis
Efficiency / Operations
Source: GovTech Brasil; Brasillab (2019) McKinsey & Company 176

176
Social perspective and
Appendix
other selected metrics

Although it is one of the largest countries and economies, Brazil still struggles to
convert its potential into wealth and welfare for everyone
Attribute Rank Attribute Rank
Area 5 HDI 79
Inhabitants 8 GDP per capita 76
GDP 8 IHDI (Inequality index) 96
Agricultural exporter 3 Education (PISA) 63
Soy production 2 Innovation 64
Users on social 3 Global Peace Index 106

networks
Source: Press clippings, UN, OECD, World Bank, FAO (2017-2018) McKinsey & Company 178
Brazil’s growth has lagged that of most developed and BRIC economies
Real GDP Evolution

Index, 2010 = 100
180
China
170 India
160
150
140
130 Chile
120 US
Russia
110 France
Brazil
100
2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: EIU McKinsey & Company 179

The population is growing steadily, but the number
of births has dropped almost three-fold in the last
40 years
Total population
Millions of inhabitants
250
2.9% 1.7% 1.2%
200 209
150
100
50
0
1950 1960 1970 1980 1990 2000 2010 2020
Number of children per family
1950 6.2 1980 4.4 2000 2.4 2018 1.6

180
Inflation varies by type of product and service; the costs of housing, health and
education are rising faster than average
Habitation
Inflation rate per segment Education
% Health
20 Food and beverages
18 Transport
16 Communication
14
12
10
8
6
4
2
0
-2
-4
2013 2014 2015 2016 2017 2018 2019

Brazil’s population is aging; the ratio of workers to
retired people could decline to 60% by 2040
Predictive demographic profile for 2040 CAGR Variation

% of population per age bracket 2015-2040 p.p.
2015 2040
65+ 4 5 7 10 2.6% 8
40-64 13 14 17 17 1.0% 7
15-39 21 21 16 16 -1.2% -10
0-15 11 11 9 8 -1.0% -5
Economically
active person 8.2 3.7
per retiree
Source: IBGE (2018) McKinsey & Company 182

Most Brazilians are are in lower-income economic
classes – a share that has increased in recent years
Class income distribution in Brazil CAGR

Share of homes per income class 2007-2017
2008 2014 2017
A 5% 5% 2% -10%
B1 9% 12% 5% -6%
B2 19% 24% 18% -1%
C1 23% 26% 23% 0%
C2 23% 21% 25% 1%
D/E 21% 13% 27% 3%
1 Note: households were classified according to the Critério de Classificação Econômica Brasil, defined by ABEP. According to ABEP, the
average household gross monthly income per social class is: Class A: RS$ 20.272,56, Class B1: BRL 8.695,88,Class B2: RS$ 4.427,36,
Class C1: RS$ 2.409,01, Class C2: RS$ 1.446,24, Class D/E: RS$ 639,78
Income inequality has declined but the country is
still among the most unequal in the world
Income distribution inequality – Gini Index Variance

Index, 0 - 100 2013-2018, p.p.
2013 2018
France 31 33 2
India 35 35 N/A1
Russia 40 38 -2
United States 41 42 1
China 43 42 -1
Chile 52 48 -4
Brazil 58 51 -7
1 Not possible to calculate since there is just one data point in the interval
Source: World Bank; McKinsey analysis McKinsey & Company 184
Brazil has lagged on the Human Development Index
HDI (Human Development Index)

Index value
0.95
US
0.90 France
0.85 Chile
0.80 Russia
Brazil
0.75
China
0.70
0.65
India
0.60
0.55
0.50
0.45
2000 2002 2004 2006 2008 2010 2012 2014 2016
Source: World Bank, UN McKinsey & Company 185

Housing and food represent the biggest share of spending for most households
Consumption profile per income class

% of monthly income, total income (R$ Thousands), average monthly spending per category
30.3 2.0
1.5 1.6 2.7
3.7 3.1
Beauty and personal care R$ 446 0.9 R$ 55
3.9 5.3
Appliances and elecronics 4.6 R$ 485 2.1 R$ 64
5.9 5.7
Education R$ 1130 6.4 R$ 18
6.5
Clothes R$ 1189 R$ 109
11.2 R$ 1785 R$ 44
Leisure
26.5
Health R$ 1396 R$ 118
Transport R$ 1959 R$ 130
23.2
Food and beverage R$ 3387 R$ 543
Housing and domestic costs R$ 7036 R$ 715
34.9
Other 38.0 R$ 11521
R$ 252
12.3
A D/E
Source: IPC-MAP (2018) McKinsey & Company 186

Brazil grew GDP per capita more slowly than other
BRICS and recently was surpassed by China
GPD per capita

US$ PPP / inhabitants
65 62.1
US
60
55
50 46.9
France
45
40
35
30 25.7 Russia
25 26.7 Chile
20
18.1 China
15 Brazil
15.9
10
7.6 India
5
0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Source: The EIU McKinsey & Company 187

GDP per capita varies significantly
among the largest cities in Brazil
GDP per capita per region GDP per capita for the top 20 cities by
R$ thousands/inhabitant GDP/capita 2016 population Population
xx R$ Thousands per year
CAGR 2011-2016 Millions
Brasília 79 3
19 16 São Paulo 57 12
4.9%
Rio de Janeiro 51 6
7.7%
Campinas 50 1
Porto Alegre 50 1
Duque de Caxias 45 1
Curitiba 44 2
Guarulhos 40 1
Belo Horizonte 35 3
40 Manaus 34 2
7.5% Goiânia 32 1
Average Recife 30 2
Brazil 39 Campo Grande 29 1
30
São Luís 26 1
4.9%
Natal 25 1
Fortaleza 23 3
Maceió 21 1
36 3
6.0% 7.5%
Salvador
Belém
21
20 1
São Gonçalo 16 1
-72%

Unemployment varies widely across regions
Unemployment rate
% of total economically active population
Region Unemployment
16 Labor rate
15 law 14.4
Northeast
reform
14
13 North 11.5
12 11.9
Southeast 12.5
11
10 Southt 7.9
9
8 Center-west 8.9
7
6
5
4
3
Q3 Q3 Q3 Q3 Q3 Q3 Q3
2013 2014 2015 2016 2016 2017 2018
Informality is high in many sectors of the economy
Sector Informality
% of occupied people
Construction 64.2
Agriculture 60.5
Other services 47.4
Lodging and restaurants 41.9
Transportation 33.6
Retail 33.4 Total informality
Manufacturing 27.3 Share of workforce
39%
Real estate 21.6
Public administration & social services 21.2
Extractive industries 16.0
Finance 9.0
Utilities 7.5
Source: PNAD (2015) McKinsey & Company 190

Brazilian worker profiles
Position (2015) Industry Company size
Family work 2 Transport 5

5
Employer
7
Construction 7 1 to 9 18
Domestic work Professional
services 10
Private sector 12
(not registered) Agri. & fishing 9
10 to 19 10
Public sector 12 20 to 50 12
Others 16
50 to 100 8
Self-employed 26 Public services 16 100 to 500 18
Retail and auto 17 500 to 999 8

Private sector
(registered) 36
Industry 22 1000 or more 26
Source: IBGE (2015); PNAD; McKinsey analysis McKinsey & Company 191

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McKinsey & Company 1

McKinsey & Company 2

McKinsey & Company 3

Nicola Yran Jordan Marina Marcio Alexandre Julia Gabriela

Andre Carlos Christopher Conrado Felipe Filipe Julia Julio

Amadeus Djalma Julio Hugo Rodrigo Solange Victoria

McKinsey & Company 4

Entrepreneurship Sector Deep

McKinsey & Company 5

Entrepreneurship Sector Deep

McKinsey & Company 6

McKinsey & Company 7

Real GDP Growth

2014 2015 2016 2017 2018

Private GDP growth 0.5 -3.6 -3.3 1.1 1.2

Gross fixed investment -1.0 -3.0 -2.3 -0.4 0.8

External balance 0.2 3.0 1.5 0.1 -1.0

Stock building -0.3 -1.0 0.1 0.7 0

Source: IBGE McKinsey & Company 9

Share of sector by GDP Share variation CAGR

Services 67.8% 72.8% 5.0 3.3%

% installed capacity usage

Source: CNI McKinsey & Company 11

Industry and Consumer Confidence Index

Source: FGV, IBRE McKinsey & Company 12

Bovespa Market Value

Source: B3 McKinsey & Company 13

Capital markets1 – domestic issuance CAGR

2012 2013 2014 2015 2016 2017

Source: IPEA McKinsey & Company 17

Selic & IPCA IPCA Predicted IPCA

% Selic Predicted Selic

Source: BCB McKinsey & Company 18

Exchange rate Predicted rate % Fluctuation of last 12 months

Exchange rate evolution

Source: EIU, BCB McKinsey & Company 19

Exchange rate evolution

Source: BCB McKinsey & Company 20

Labor productivity evolution CAGR

Productivity growth 0.6 0.6

Last 15 years Next 15 years,

Source: McKinsey Analysis McKinsey & Company 22

Average length of schooling of adult population

Source: World Bank and Barro-Lee McKinsey & Company 23

Biggest companies in market cap

Source: Forbes 2000; Capital IQ McKinsey & Company 24

Access to consumers worldwide1

Global Chile Brazil

Source: McKinsey “Brasil 2030” (2017) McKinsey & Company 25

IT investment by type in Brazil CAGR Established tech company examples

Entrepreneurship Sector Deep

McKinsey & Company 27

McKinsey & Company 28

Internet users Internet penetration by country

Smartphone penetration Operating system

Global Average 71 Access to 3G/4G 71

C 50% High School 49%

Mobile phone Laptop Desktop Tablet TV Videogame

Source: CETIC.br (2017) McKinsey & Company 31

Time spent on digital/broadcast media1

Source: CETIC.br; Google consumer barometer (2018) McKinsey & Company 32

Time spent on internet