Analysis of

Brazil
By CDM Consulting
Ltd.
Word Count: 3290

Ruari McDonald
(1244483), Clare Doolan
(1234382) & Gordon
Campbell (1241953).
12/13/2010

1
Table of Contents
1.0 Introduction 3
1.1 Political Factors 3

1.2 Legal Factors3

1.2.1 Taxation 3
1.2.2 Business Start ups 4
1.2.3 Labour 4
1.2.4 Trade 4
1.3 Economic Factors 4

1.4 Socio-Cultural Factors 5

2.0 Entry Modes 6

2.1 Franchising 6
2.2 Joint Venture 7
3.0 Local Dynamos in Brazil 8

3.1 Positivo Informatica 8

3.2 Casas Bahia 10
4.0 Multinationals Operating in Brazil 12

4.1 Volkswagen 12
4.2 Nestle 14
5.0 Conclusion 16

Appendix 17

Bibliography 24

2
1.0 Introduction
The following study has been undertaken by CMD Consulting Ltd. on behalf of
our client Numme Ltd. to assess the feasibility of entering the Brazilian market.
Numme Ltd., a medium sized, Irish based food producer wish to expand into
international markets. We will look at the political, legal, economic and socio-
cultural factors that need to be considered when conducting business in Brazil.
On the basis of the clients industry, we have recommended two possible entry
modes available. As part of our analysis we have included a review of both local
and international organisations that currently successfully operate in Brazil.

1.1 Political Factors Affecting Business in Brazil

Brazil has been a Federal Republic since 1985 and has a federal constitution
established since 1988. The Brazilian Federation consists of three distinct
political entities: the states, the Municipalities and the Federal District (See
Appendix 1.1).

Brazilian politics has been dogged by corruption over the past number of years
(See appendix 1.2). The fractious relationship that exists between Brazil’s
political parties inevitably slow the passing of the reforms that are necessary to
maintain fiscal stability and increase growth ( Brazil Country Overview October
2010) Barbara Ginfield, Export Development Canada, Issue 1, Page 2).

Transparency International’s 2010 Corruption Perceptions Index places Brazil at

number 69 of the 178 countries surveyed. However, it should not pose any
imminent danger to political stability. The Country Watch Political Risk Index
allocated a score of 8/10 to Brazil (China scored 7/10). A score of zero marks the
highest political risk.

1.2 Legal Factors

Our research into the Brazilian legal system has identified the following as being
the main areas for concern (see appendix 1.2).

1.2.1 Taxation

Brazil’s taxation system is extremely complicated and can pose major problems
for new businesses setting up in the country. We would recommend hiring a tax
professional to ensure that all tax laws are fully adhered to.

The top income tax rate is 27.5%. The standard corporation tax rate is 15%,
however a 10% surcharge and a 9% social security contribution brings the
effective corporation tax to 34% (2009 Index of Economic Freedom).

3
Residency status is automatically granted to a foreign company if it is
incorporated in Brazil. Capital gains are treated as regular income and taxed at
15% (Complete Worldwide Tax and Finance).

1.2.2 Business Start-Ups

Brazil’s regulatory environment limits the ability to start, operate and close a
business (see appendix 1.3). We have found that starting a business can take
three times the world average of 35 days, and obtaining a business license takes
significantly longer than the world average of 218 days (2009 Index of Economic
Freedom).

1.2.3 Labour

Labour laws in Brazil are inflexible and can hinder employment. The costs
associated with hiring employees and even releasing employees are high (See
appendix 1.6).

1.2.4 Trade

Brazil’s average tariff in 2008 was 7.9%. Import bans, restrictive regulations and
licensing rules, subsidies and protection of property rights need to be considered
before doing business in Brazil (Economic Freedom Report 2009).

1.3 Economic Factors

Brazil is the largest economy in Latin America.

The economic policies adopted by current president Lula, have ensured stable
economic growth. The stability has been built around a floating exchange rate
mechanism, inflation targeting and a strong macro-economic framework. Real
GDP growth has averaged 5% between 2004-2008. Current growth forecasts are
similar to those of China (8-9%) (Financial Times).

Brazil’s rising incomes mean that a new band of lower-middle class Brazilians are
filtering through and can now afford consumer goods. The strength of the
Brazilian currency means that their purchasing power has also increased. The
appearance of this new consumer group saw Brazil’s imports for September jump
43% year on year, representing the biggest increase of any developed economy
(Financial Times - December 06 2010).

Consumer credit is expanding at a rate of 20% per annum, which has helped
push inflation to a current 4.5%, well above the government’s target. We have
noted that the government has tried to cool this lending bubble by increasing the

4
banks’ reserve requirements. This allows the government to restrain liquidity in
the market with implementing interest rate hikes (Financial Times). We believe
that should credit continue to grow at its current rate, it could destabilise the
banking system (See Appendix 1.7).

Brazil’s labour costs are judged to be high for those of an emerging economy.
The average manufacturing costs per hour in 2008 was US$8.28 (Instituto
Brasileiro de Geografia e Estatistica).

1.4 Socio-Cultural Factors

Brazil is home to almost 192 million people. It is a diverse and multicultural
society with the largest population in Latin America and the 5th largest population
of any country in the world.

Business tends to be conducted in Portuguese; however English is favoured over

Spanish as a second language. Brazilians are far more relaxed and their concept
and understanding of punctuality are quite different than those of their European
and US counterparts to which can lead to frustration for international business
people. As is similar in China, working relationships are key to any successful
business opportunity, with Brazilian’s refusing to do business with those that
they do not have a relationship with. It is important to note that ‘getting to the
point’ is something that Brazilians find offensive, so remember to make some
small talk first, then get down to business. Brazilians are status conscious, most
notably in business and adhering to standards of hierarchy is to be expected
(CountryWatch – Brazil 2010).

Poverty and social unrest is evident in Brazil, however this is improving. In 1995,
43.4% of Brazilians were considered poor by IPEA (Brazil’s Federal Economic
Research Institute) and 20% were living in destitute. By 2008 these numbers had
fallen to 28.8% and 10.5% respectively.

5
2. Entry Modes
We have identified the following modes of entry as best suited to your company.

2.1 Franchising
Franchising is an agreement where a franchiser sells an intangible property (e.g.
brand name) and insists on rules for operating the business.

According to a recent report Rizzo Franchise Study 2010, Brazil is now the third
largest market in the world for franchising and it is expected that revenues of
almost US$135 billion will be generated from such franchises in 2010.

We have identified several advantages to using this method as an entry mode to

Brazil:

• It overcomes the restrictive regulatory environment that exists in Brazil.

• It limits the costs and risks associated with setting up a business in Brazil,
which is attractive due to the unfamiliar market or should there be a lack
of capital available to you to develop foreign operations.
• The franchisee already has the knowledge of the local market, which helps
foster good relationships with local distributors and customers and greater
market acceptance.

However some disadvantages do exist:

• There is a lack of control with the movement of profits abroad.

• There is very little input into how the profits of the franchisee are utilised.

6
 • The overall business strategy of the franchise is defined by the franchisee,
meaning there is an inability to engage in global strategic coordination.
• Lack of quality control.

We are of the opinion that the advantages outweigh the disadvantages

associated with using franchising as a successful entry mode into the Brazilian
market. It is important to note that when conducting business internationally,
currency exchange movements must be considered. It is our opinion that to limit
such fluctuations, a clause should be entered into the franchise agreements that
all payments made to you, as the Franchisor, are made in Euro’s.

2.2 Joint Venture

In 1996, Brazil eliminated the distinction between foreign and domestic capital.
Many US companies have entered the Brazilian market through joint ventures.
We would recommend a similar entry strategy.

A joint venture is a strategic alliance between two or more individuals or entities,

usually firms, to engage in a specific project or undertaking (R P Emery &
Associates 2010).

It must be noted that foreign participation in joint ventures is limited to 50% of

the company’s capital and to one third of its voting stock (Source: American
State’s Foreign Trade Information System 2006).

There are significant advantages available to you, should you decide to

implement this entry strategy:

• You can avail of the local partner’s knowledge and expertise.

• Costs and risks associated with the business can be shared amongst both
parties.
• Joint product development and technology sharing
• You can take advantage of the already established distributions channels,
brand name and political connections that are available to your partner.
• The punitive Brazilian import duties can be avoided

7
To ensure that you do not fall foul of Brazilian competition laws, should you
consider a joint venture, we would recommend that that the successful partner s’
size, market share and resources are smaller than those of the industry leaders.

As with all entry modes, there are some disadvantages:

• There is a dilution of control – such as technological.

• There is a risk that your partner could become a competitor.
• The cultural differences that exist in Brazil could lead to
misunderstandings and conflict.
• There is inherently more risk associated with this strategy than with
Franchising.

When entering into a joint venture with a Brazilian company special attention
needs to be given to potential tax liabilities and potential labour law liabilities as
discussed previously in this report.

We also studied the viability of a direct export mode of entry to Brazil. However
we would not recommend this approach. Although all of the customary import
channels exist in Brazil (agents, distributors, trading companies etc), the costs
and storage and the tariffs that are applied to imports remain too high.
Infrastructure is also poor (Appendix 2.0). Given the fact that Brazil spends
almost twice as big a share of GDP on transportation costs than the United
States (Reuters), until such time as infrastructure is drastically improved and
transportation costs are lowered, we would not recommend an export mode as a
valid entry strategy to the Brazilian market.

3.0 Local Dynamos in Brazil

Many local companies operating in Brazil are currently thriving despite the global
economic downturn and fierce competition from large multinational
organisations. The Boston Consulting Group identifies these companies as “Local
Dynamos” (appendix 2.1).

After extensive research into local Brazilian companies, we have highlighted two
that best display the criteria outlined by the BCG report; Positivo Informática, a
computer and IT Company and Casas Bahia, a key retailer.

3.1 Positivo Informática

Positivo Informática is a computer and IT company founded in May 1989 from the
Positivo Group, the largest educational group in Brazil. Positivo are now the

8
largest manufacturer of computers in Brazil with a market share greater than
both HP and Dell combined (appendix 2.2).

Brazilian PC Manufacturer Rankings (units – 2009)

Position Company Market Share

1st Positivo 16.1%

2nd HP 7.8%

3rd Dell 6.7%

Other 69.4%

Total 100.0%

Source: IDC – International Data Corporation

Positivio’s strategy is aimed at capitalising on the growth in the retail sector,

increasing market share in the corporate sector while continuing to look for
opportunities to grow their business (appendix 2.3). They intend to be at the
forefront of technology, adapting products to meet the needs of the Brazilian
market while keeping costs low and operating efficiently.

The range of products offered by Positivo, focus specifically on local market

needs. The Multifunctional Media PC combines computer and TV in one unit. This
low cost machine geared towards moderate-income households (Group C) can
also be used as a TV. The Family PC is one of their latest concepts. The add-on
enables members of the family to view anything from homework help to recipes
through their portal (news.cnet).

Breakdown of Brazilian Population by Income Group (%)

2005 2009 Average No of Families

Monthly **
Income R$ *

A/B 15% 16% 2,563 9

C 34% 49% 1,277 28.2

9
D/E 51% 35% 733 20.3

*Household **Millions

Source: Survey “O Observer – O Barometro” 2009 – IPSOS

With a focus on the retail sector, Positivo have developed strong relationships
with key retailers. Casas Bahia, who only stock Positivo PCs, specialise selling
goods on credit to low income families.

This year Positivo have announced investments in technology to increase

production capacity from 330,000 units a month to 390,000 (reuters). Low cost
of labour, increased production capacity and economies of scale all work
together to increase profit margins.

Keeping up with the latest developments in technology, Positivo are launching

their first computer model with 3D. The Positivo Premium 3D Notebook with high
definition is aimed at the tech savvy market segment. In a bid to increase
market share in the corporate segment they have released The Positivo Master
Line which promises excellent performance and efficiency as well as eco-
friendliness (PositivoInformatica.com).

Key to their success, Positivo have been able to sustain long term growth. The
market leader in Brazil since the final quarter of 2004, they are ranked 13th
overall in the world (10th in desktops and 15th in notebooks). Despite the world
wide economic downturn, Positivo recorded their second highest quarterly sales
volume ever in 3Q10, selling over 521,800 PCs.

Positivo Market-Share Raking 2009

Positivo – 2009 PCs Desktops Notebooks

Brazil 1st 1st 1st

Latin America 4th 2nd 4th

World 13th 10th 15th

Source: IDC – International Data Corporation (www.positivoinformatica.com)

10
 3.2 Casas Bahia
Casas Bahia is the largest non-food retailer in Brazil selling furniture, appliances
and other goods mainly through finance. They have recently negotiated a joint
venture with Brazilian owned Pao de Acúar group and combined the group has
40% of the Brazilian retail market share ahead of French Carrefour (22.5%) and
American giants Walmart (16.9%) (Exame).

Pao de Acucar acquisition of Casas Bahia (September 2009)

PAO DE ACUCAR CASAS BAHIA

Revenue 26 Billion Revenue 14 Billion
Stores 1294 Stores 513
Employees 80,000 Employees 57,000
Distribution Centers 18 Distribution Centres 12

Their strategy is based on offering credit sales to lower income groups (Groups
C, D & E) and continuing to increase market share while keeping costs low. Over
90% of the company’s revenue comes from the proceeds of credit sales. 70% of
Casas Bahia’s 23 million customers buy through store financing and 66% are
repeat customers (C. K. Prahald, 2010)(appendix 2.4).

In 2009 Casas Bahia implemented an online strategy to gain competitive

advantage and reach new customers across Brazil. Working with IBM, they built a
secure online store which enables customers to order items for home delivery or
reserve them for collection. With an increase in internet usage due to the PNBL

11
and a wider availability of PCs to their target market, the online store has been a
huge success. Receiving more than 250,000 customer visits per day, the online
store has created a major new revenue stream for the company while lowering
operational costs. (ibm.com)

The company have more than doubled in size over the last decade, successfully
scaling up quickly while sustaining long term growth (Kamcity). Mass marketing
and a highly effective advertising strategy has attracted a large consumer base.
3Q10 sales were up by 10% and Group Pao de Acucar expects profit margins to
improve in the long term due to the growing middle class in Brazil (appendix
2.5).

4.0 Multinationals Operating in Brazil

Despite the challenges outlined, many large multinationals have successfully
entered the Brazilian market. These leading companies have adapted their brand
to suit local needs allowing for both economical and cultural differences. Both

12
Nestle and Volkswagen have been operating in Brazil for decades going from
strength to strength. We will now look at the factors contributing to their ongoing
success.

4.1 Volkswagen
Volkswagen is one of the world’s leading car manufacturers operating 61
production plants in 15 European countries and 6 countries in the Americas, Asia
and Africa. They first entered the Brazilian market 1953 with a modest twelve
employees manufacturing the VW Beetle with parts imported from Germany
(Volkswagen do Brazil). Developing cars that were cost effective and cheap to
fix, popularity for Volkswagen grew over the years. Today they are the largest
private company in Brazil with 22,000 employees. (Exame magazine) In Brazil
alone they produce 3,000 units per day and have the largest dealer network with
more than 600 dealerships (vw.com) Sales have improved consistently over the
last three years as illustrated by the graph below.

Source: www.volkswagenag.com

For nearly 25 years the bestselling car in Brazil has been the VW Gol, aimed at
the C and D income groups. In 2009 it was voted “Car of the Year”. Continually
adapting the Gol to meet the needs of the local market and keeping it affordable
has been key to this success. The latest model features improved agility and
rigidity, essential for rough Brazilian road conditions. With 15 million inhabitants
in San Paulo alone, traffic congestion is a major issue. VW have responded to this
problem by improving the acceleration of the car making it more responsive and
easier to manoeuvre in areas of high traffic volume (Gustavo Henrique Ruffo,
Worldcarfans).

The Volkswagen Group have an ambitious product strategy. They aim to have
total market penetration across all product segments and demographical
customer groups. (Supplier Business Ltd, 2009) 26 new products were released
by VW in 2010 alone, targeting all of Brazil’s income groups. The VW Saverio
pickup has been developed solely for the South American Market (Worldpress).
Competing with the Chevrolet Montana and Fiat Strada, the Saveiro is a mid
priced, pickup aimed at a younger mid-income market. For the higher end of the
market targeting income group A/B, VW have developed the Passat CC, a stylish
executive coupé (Volkswagen do Brazil).

Thomas Schmall, CEO Volkswagen do Brazil, is confident in VW’s future success

“We will enjoy significant growth in Brazil this year (2009) and win market share.

13
Our target is to sell one million vehicles per year in Brazil by 2014, thus making
an important contribution to the success of the Group’s strategy 2018”.

4.2 Nestlé
With headquarters in Switzerland and operating in almost every country in the
world, Nestle are one of the leading companies in manufacturing food and
beverages. The first factory was built in Sao Paulo, Brazil in 1921. Providing
many basic goods, Nestlé products are present in 98% of Brazilian homes today
(Kantar Worldpanel). Ranked 48 in the Fortune 500, Nestlés total revenue for
year end 2009 was US$101.5bn (appendix 4.2). With US$9.3bn in revenue, Brazil
is a huge contributor to Nestlé worldwide.

Nestlés strategy is based on growth, innovation and renewal of existing products

across all geographic locations. They differentiate their products and services

14
based on the needs of the local economy and culture (Nestlé.com). In keeping
with their strategy, Nestlé Brazil have launched the innovative Até Vocé a Bordo
(Nestlé Takes You Onboard) to serve Brazilians in the most difficult to reach
areas of the Amazon River. Neslté Até Vocé a Bordo is a floating supermarket
that visits 18 towns on a monthly basis. This will serve 800,000 people every
month significantly increasing Nesltés consumer base. Exclusive to Nestlé the
service offers a range of over 300 of their products for sale each month.

In addition, Nestlé have developed Até Voce (Nestlé Comes to You), which is a
successful door to door sales operation employing over 7,000 people and
reaching over 3 million households per year (nextbillion.net). Both services
target market penetration for groups C, D & E which represent 82% of food
consumption in Brazil (Exame). The low cost of labour keeps operational costs
under control.

Growth has continued in Brazil with Q310 reports suggesting a positive future
outlook. The multi-tier strategy, which adapts products to suit different price
levels, has been a success, ensuring all income groups are targeted
(nestle.com). The huge success of Nestle’s Nespresso (Appendix 4.3) coffee
machines and related products also holds massive potential for the emerging
economy as its people look to climb in social status and purchase more luxury
goods (reuters.com).

15
5.0 Conclusion

Despite the aforementioned political hurdles faced when doing business in Brazil,
the government is functioning well. Political stability together with prudent
economic hurdles over the years, have both ensured that Brazil as a nation can
now stand on its own on the international stage.

The regulatory environment is a hindrance. The taxation system could be

simplified and the employment laws amended to favour the employee more so
than the business. Trade tariffs need to be addressed.

However as our case studies have illustrated both domestic and international
companies are flourishing. While establishing and operating a business in Brazil
would be challenging, we would be of the opinion that based on the entry modes
we suggested earlier, gaining access to and having a presence in this dynamic
economy should be at the very least be considered.

16
Appendix

Appendix 1.1
There are 26 federal states and the Federal District is located in the capital
Brasilia. The federal district shares the same characteristics of a state, but it is
not a state in its own right. There are three independent branches of the federal
republic: executive, legislative and judicial. The President controls the executive
branch. Legislative power is exerted by Congress, which consists of a Senate and
a House of Representatives. The judicial branch is comprised of federal, state
and local courts with the highest court being the Supreme Court. We have found
that relations are often difficult between the executive and legislature, as well as
between federal and state governments.

In contrast to the military totalitarianism of the 1990’s, Brazil has enjoyed

relative political stability for the past fifteen years. This has been a direct result
of the prudent policies adopted by the outgoing President Luiz Inácio Lula da
Silva (Workers Party) and his predecessor Fernando Henrique Cardoso (founding
member of the Brazilian Social Democratic Party).

September 2004 saw 137 politicians and 400 government officials, many of
whom were members of Congress and the Central Bank, being identified by
federal prosecutors as being involved in a corruption scandal that involved the
illegal movement of up to $60 billion from Brazil to international locations (Latin
Business Chronicle).

More recently, Dilma Rousseff (Lula’s successor on 01/01/11), was embroiled in

numerous well publicised scandals. These scandals involved Rousseff’s party
breaking into political opponents tax record for the purpose of ‘mud-slinging’;
rumours of ‘vote buying’ to ensure her success in the elections and revelations

17
that the government were accepting bribes in return for lucrative government
contracts (Reuters).

At a state level, we have noted other serious abuses. The most notable being the
police, which are rumoured to be involved in death squad executions and gun for
hire killings. Torture and coerced confessions are common practice. Due to the
fact that the judiciary is not believed to be completely independent from the
government, judicial decisions are not believed to be fair.

The Transparency International 2010 Corruption Perceptions Index measures the

perception of the degree of corruption as seen by business people and country
analysts and ranges between 10 (highly clean) and 0 (highly corrupt).

The Country Watch Political Risk Index is calculated by Country Watch’s Chief
Editor using established methodology and is based on varied criteria including
political stability, political representation, democratic accountability, freedom of
expression, security and crime, risk of conflict, human development,
jurisprudence and regulatory transparency, economic risk, and corruption.
Scores range from 0-10. A score of 0 marks the highest political risk, while a
score of 10 marks the lowest political risk.

Appendix 1.2
Brazil’s legal system is based on Civil Law. The twenty six federal states of Brazil
have the authority to adopt their own constitution and laws, however their
autonomy is limited by the principles outlines in the federal constitution. The
Federal Government has exclusive authority to legislate on civil, commercial and
labour matters. The Federal Government, the state and the Federal District have
concurrent authority to legislate on matters such as tax, financial, education and
the consumer.

Appendix 1.3
Public health, mail and telegraph, nuclear energy, mining, airlines with domestic
flight concessions, transportation and aerospace industry are restricted to
foreign investment. Foreign investors can hold a minority stake in media,
financial institutions and insurance companies upon prior authorisation from the
government.

Acquisition of Property

The New Brazilian Civil Code regulates the acquisition of property by potential
investors. Foreign entities have the same right to acquire property in Brazil as
national individuals. However, regulation provides for restriction on foreign
entities purchasing properties near the coast or near areas of national security. It
is of significant importance when considering the purchase of land, that the
seller has due title to such land. This is due to the tiles of large areas of
Brazil being in dispute since colonial land grants were made (Doing Business in
Brazil, UHY International, 2010)

18
Registration of Foreign Capital

Any foreign investor, or company receiving a foreign investment, must register

the investment with the Central Bank (BACEN) under the Electronic Declatory
Registry for Foreign Direct Investments (RDE-IED). The investor must obtain a
BACEN access code allowing it to use the RDE-IED. Once the access code has
been granted information relating to the Brazilian company, the foreign investor
and their legal representatives must be provided to the Central Bank. Once
completed, a RDE-IED number is allocated to the foreign investor which will allow
parties to enter into a contract to covert the foreign currency to Brazilian Real’s.
Once the investment has been made, the parties have 30 days to register it. This
registration allows the foreign investor to remit profits and initial capital invested
through the same exchange market as was used to bring the capital to Brazil.

Foreign Corporate Entities

Foreign corporate entities operating in Brazil that hold assets or right with
regards to real estate, equity interests, current accounts, , investments in
financial and capital markets must register with the Federal Taxpayers’ Registry
for Corporate Entities (CNPJ/MF). For transaction relating to financing, leasing and
imports, the Central Bank will grant enrolment with the CNPJ/MF.

Capital Contributions

Investments in the form of assets, such as plant and machinery, are subject to
rigorous controls, similar to those that are applied to the import of capital
equipment when domestic suppliers can provide similar equipment.

Import Taxes

Import taxes range from 1.65% to 25%.

Appendix 1.6
The Labour Law Consolidation Act governs employment law in Brazil. Areas to
note are as follows:

Terms of Employment

Lower level employees do not require an extensive written contract.

Individual employment contracts may be writing or implied by virtue of the
relationship between the employee and the company.

Hiring Procedures

19
Each employee must have an employee work and social security booklet (CTPS).
The employer must record the content of the employment contract in the
employee’s CTPS. The company must also register each individual’s employment
in its employment registry. The employer must update this registration
throughout the employee’s employment, recording details such as holidays
taken, work accidents and illnesses, and termination of employment.

Transfer of Employees

An employee may be transferred to a new location as part of his/her employment

, however all moving costs must be bourne by the employer and the employee
must receive an increase in payment of at least 25%.

Termination without just cause

The law does not commit an employer to explaining the reasons for terminating
their contract, nor does the law distinguish between redundancy and terminating
the employment without just cause. Should the employer terminate the contract,
the employee is entitled to:

– Payment for unused holidays and proportional holiday pay proportionate

to how many months the employee worked in the previous 12 months,
plus one third;
– Christmas bonus proportionate to the number of months worked during
the calendar year; and
– the employee’s dismissal fund (FGTS) contributions plus a 40 % fine.

Termination with just cause

Employees are entitled to pay for unused holidays plus one third. The employee
does not receive the 40% fine on its balance.

Resignation

An employee must give 30-days written notice. The employee is entitled to:

– pay for unused holiday plus third (after one year in employment)
– a proportionate Christmas bonus equivalent to the number of months
worked during the calendar year.

Upon expiry of fixed‐term employment contracts, employees are entitled to:

– holiday pay proportionate to the number of months worked in the previous

12 months, plus one third;
– Christmas bonus equivalent to the number of months worked during the
calendar year; and
– FGTS contributions.

In addition a party who terminates a fixed‐term contract without just cause must
pay damages to the other party. Those damages are 50% of the amount of
compensation the employee should have received until expiry of the contract.

20
Furthermore, if the employer terminates the contract, it will also have to pay the
40% FGTS fine.

Holidays

Employees are entitled to 30 days holidays upon completion of 12 months work.

In addition to this, a holiday bonus of one third of the employee’s monthly salary
must be paid.

Thirteenth Months Salary

Every year at the end of December, employers must pay a bonus equal to one
twelfth of the salary earned in the month of December for each month of service
during the calendar year.

Appendix 1.7
The current expansion of credit led to near collapse of Banco PanAmericano in
November. This is a medium sized bank that has undergone significant growth
due to its lending practices to low income consumers. It’s default rates now
stand at 20%. A government rescue package of R$2.5bn was needed in
November to ensure its survival and cover losses from non-performing loans.

An area for concern is Brazil’s current interest rate, which stands at 10.75%.
Again this rate is the highest amongst most developed economies. It is our view
that such a rate could threaten to destabilise the Brazilian currency as yield
hungry investors pour money into the economy.

Appendix 2.0
Although the government has earmarked R$160 billion for infrastructure
projects, as part of the Accelerated Growth Programme (PAC), progress is slow
(Brazil Infrastructure Report, Financial Times May 06 2010). At the end of 2009
only 11% of the planned infrastructure improvements have been completed.

Appendix 3.1
The Consulting Group (BCG) suggests that Local Dynamos that have continued to
have an edge over multinational competitors usually have several of their “Six
Key Success Factors” implemented simultaneously. These are:

• Customising to local needs

• Devising innovative business models that overcome local challenges
• Leveraging the latest technologies
• Benefiting from low cost labour and overcoming shortages of skilled labour
• Scaling up fast
• Sustaining long-term hyper-growth without imploding

21
We based our research on Positivo and Casas Bahia around these key success
factors and the individual organisations strategy. See www.bcg.com

Appendix 3.2
Positivo Informática was founded with the initial objective of manufacturing
computers for sale to Positivo Group customer schools throughout Brazil. In
1990, the Company won tenders to supply computers and IT solutions to
government-owned companies and institutions. They have continued to supply
schools and government agencies with PC’s and IT services. (MZweb).

Brazil’s government is focusing on the development of the IT sector with

ambitions to become one of the top IT outsourcing countries in the world by the
end of 2010. Government spending in IT has increased in 2010 with the Ministry
of Education and Schools rolling out their ‘one computer per student’ program.
BRL100m was made available to public schools for the purchase of computers as
well as covering the cost of networking costs. Total ICT spending for the Brazilian
Government reached BRL1.89bn from Jan-Jul 2009 (mynewsdesk). This made a
huge impact on Positivo’s sales for 2009.

Appendix 3.3
With an estimated 25% of homes with a computer in Brazil, there is a
considerable growth opportunity for Positivo. Lower cost machines, tax
concessions and more credit options means this figure could rise to 36% by
2013. In May 2010 the Brazil government launched a National Broadband Plan
(PNBL) with the goal of tripling broadband services by 2010. They plan to invest
BRL11bn in the plan with a target to provide 50% of Brazilian homes with
broadband services. This will allow Positivo to further increase their consumer
base. Demand for IT systems and solutions is expected to rise anticipating the
2016 Olympic Games in Rio be Janeiro giving Positivo the opportunity to expand
into new market segments (MZWeb).

Appendix 3.4
Casas Bahia are so determined to retain customers that they sent a letter to 2
million customers that had defaulted on their instalment repayments offering to
clear their debt and reactivate their credit. All the customer had to do was show
up at the store. 350,000 customers accepted at a cost of $300 million to the
company. The pardon generated sales from new purchases and increased
customer loyalty to the company (Michael Kepp – Latin Trade).

Appendix 3.5

22
Factors Influencing Consumption (Group Pao de Acucar):

A study undertaken by Target Marketing predicts that more than 30 million

Brazilians are expected to join the A, B, & C classes in Brazil between 2009 and
2014. This rise in the Brazilian middle class means increased demand for goods
such as plasma TV’s, computers and furniture. Casas Bahia and the Group Pao
de Acucar expect a continual increase in sales revenue as a result of these
changes. (Group Pao De Acucar)

The upcoming 2014 World Cup and the 2016 Olympic games are expected to
have a positive impact on the local economy leading to increased spending
household items supplied by the group.

Appendix 4.1
VW Brazil has shown consistent growth in vehicle deliveries in the previous 3
years based on the first quarter performance results of 2008, 2009 and 2010.
Where Brazil shows steady increases of 6.4% and 8% on year on year (yoy) sales
in ’09 and ’10 respectively, the results in the other emerging economies and
other nations is varied.

Russia has seen a 20% fall in yoy sales for the first quarter of 2010. India
meanwhile has seen massive increases amounting to 105% improvement of
vehicle deliveries for 2009. China remains strong and shows continual
improvement with a further jump of 61% this year.

Germany, despite improved figures, has shown minimal growth with 4% growth
in 2009 yoy, and this figure falling to only 1% for 2010 yoy.

Finally, the United States has seen the biggest turnaround over the three year
period with sales falling by 19% yoy for 2009 and then recovering with deliveries
rising by 32% for 2010 against 2009. This figure is a 9.75% increase on the 2008
first quarter result.

Appendix 4.2
The Fortune 500 Index shows Nestle in a position of 48th for the year 2009. This
is based on the following figures, in $millions:

• Revenues of 101,564.6
• Profits of 16,669.6

This level of profit puts them in 9th position in the list of the most profitable
companies in the world. The top 10 consisting of the following:

1. Exxon Mobil
2. Gazprom
3. Royal Dutch Shell
4. Chevron

23
 5. BP
6. Petrobas
7. Microsoft
8. General Electric
9. Nestle
10.Industrial and Commercial Bank of China

The figures also show a massive gap between Nestle and their nearest industry
competitors. With Nestle in the 48th position, the nearest rival is Unilever
followed by PepsiCo in 121st and 175th position respectively. With revenues of
just below $60bn and $44bn, both Unilever and PepsiCo are significantly lower
down the table.

2010 shows Nestle in 44th position, a climb of 4 places, despite a decrease in

revenue of a little over $2bn for the period.

Appendix 4.3
Nestle Nespresso

The Nespresso concept was came to life in 1987 and has become a global brand
in recent years through effective marketing and changing consumer tastes and
expectations. The birth of ‘coffee culture’ has seen sales of home coffee
machine grow exponentially and has seen companies like Nespresso develop and
grow at a rapid rate ( estimated value of €2.6bn in 2010). With ‘boutiques’
around the world, the brand is based on quality and luxury and a sense of
exclusivity. It aims to bring the luxury of fine aromatic coffee to your home and
has done so through excellent marketing, particularly with the introduction of
George Clooney as the brand ambassador (the jakartaglobe).

Brazil is the largest producer of coffee in the world and also the second largest
consumer of coffee in the world (behind the US). Nespresso uses coffee sourced
from around the globe, including Brazil, which enables it to add value by
sourcing and supplying locally (online.wsj.com).

Currently with five boutiques in Brazil, the brand should begin to see an increase
in sales as people enter new income groups and climb the social ladder
(revistapib.com).

24
Bibliography

• PR Newswire [Online] Available: http://www.prnewswire.com/news-

releases/totvs-in-1q10-140-growth-in-net-revenue-17th-consecutive-
quarter-of-double-digit-growth-and-622-new-clients-361-a-first-quarter-
record-92366259.html (Accessed 17/11/10)

• BCG [Online] Available:

http://www.bcg.com/expertise_impact/publications/PublicationDetails.aspx
?id=tcm:12-15208 (Accessed 17/11/10)

• BN Americas [Online] Available:

http://www.bnamericas.com/news/technology/Totvs_sees_Q3_net_profits_s
urge_110* (Accessed 17/11/10)

• Research and Markets [Online] Available:

http://www.researchandmarkets.com/reportinfo.asp?
report_id=1288949&tracker=related
http://in.reuters.com/finance/stocks/keyDevelopments?symbol=POSI3.SA
(Accessed 17/11/10)

• Positivo Informatica [Online] Available:

http://www.positivoinformatica.com.br/site/ (Accessed 17/11/10)

• Reuters [Online] Available:

http://in.reuters.com/finance/stocks/keyDevelopments?symbol=POSI3.SA
(Accessed 17/11/10)

• MZ Web Brazil [Online] Available:

http://www.mzweb.com.br/positivo/web/arquivos/Positivo_Release_3T10_e
ng.pdf (Accessed)

• MZ Web Brazil [Online] Available:

http://www.mzweb.com.br/positivo/web/conteudo_en.asp?
tipo=3653&idioma=1&conta=44 (Accessed 17/11/10)

25
• T Nooz Gol [Online] Available:
http://www.tnooz.com/2010/09/16/news/brazil-airline-gol-takes-to-
youtube-and-elevators-for-image-redo/ (Accessed 17/11/10)

• Reference for Business [Online] Available:

http://www.referenceforbusiness.com/history2/18/Casas-Bahia-Comercial-
Ltda.html (Accessed 29/11/10)

• IBM [Online] Available: http://www-

01.ibm.com/software/success/cssdb.nsf/CS/STRD-83NJ4E?
OpenDocument&Site=default&cty=en_us (Accessed 29/11/10)

• The Brazilian Economy [Online] Available:

http://www.thebrazilianeconomy.com/how-far-will-he-go.php (Accessed
29/11/10)

• Carrefour [Online] Available: http://www.carrefour.com/cdc/group/current-

news/q3-2010-sales-en-1.html (Accessed 29/11/10)

• FT [Online] Available: http://www.ft.com/cms/s/0/c784059c-d880-11df-

8e05-00144feabdc0.html#axzz162cDDf4o (Accessed 29/11/10)

• Datamonitor [Online] Available:

http://www.datamonitor.com/store/News/carrefour_faces_tough_competitio
n_in_brazil?productid=E75E4D9D-92FF-4BAE-A14D-00C4D0099E3C
(Accessed 29/11/10)

• My News Desk [Online] Available:

http://www.mynewsdesk.com/us/view/pressrelease/reportsandreports-
brazil-information-technology-q3-2010-486007 (Accessed 29/11/10)

• PR Log [Online] Available: http://www.prlog.org/10843051-recently-

released-market-study-brazil-information-technology-report-q3-2010.html
(Accessed 29/11/10)

• Fin Facts [Online] Available:

http://www.finfacts.ie/irishfinancenews/article_1019464.shtml (Accessed
29/11/10)

• Idclatin [Online] Available: http://www.idclatin.com/bric.asp (Accessed

29/11/10)

• MZ Web [Online] Available:

http://www.mzweb.com.br/positivo/web/conteudo_en.asp?
idioma=1&tipo=3655&conta=44 (Acessed29/11/10)

26
• BN Americas [Online] Available:
http://www.bnamericas.com/news/technology/Positivo*s_Q3_net_down_as_
competition_from_international_manufacturers_intensifies (Accessed
29/11/10)

• Added Value [Online] Available: http://www.added-

value.com/source/2010/06/innovation-inspiration-brazil-the-basics/
(Accessed 29/11/10)

• News CNet [Online] Available: http://news.cnet.com/8301-13860_3-

9920786-56.html http://news.cnet.com/8301-13860_3-9920786-
56.html#ixzz166gCBuig (Accessed 29/11/10)

• MZ Web [Online] Available:

http://www.mzweb.com.br/positivo/web/conteudo_en.asp?
idioma=1&tipo=3654&conta=44 (Accessed 01/12/10)

• BUS UMICH [Online] Available:

http://www.bus.umich.edu/FacultyResearch/ResearchCenters/ProgramsPar
tnerships/IT-Champions/Casas%20Bahia.pdf (Accessed 01/12/10)

• Novell [Online] Available: http://www.novell.com/success/casas_bahia.pdf

(Accessed 01/12/10)
• IBM [Online] Available: http://www-
01.ibm.com/software/success/cssdb.nsf/cs/STRD-83NJ4E?
OpenDocument&Site=wp&cty=en_us (Accessed 01/12/10)

• The Free Library [Online] Available:

http://www.thefreelibrary.com/Greased+lightning
%3A+Casas+Bahia+aims+low+and+sells+fast+to+grow+in...-
a0150956132 (Accessed 01/12/10)

• ICMR India [Online] Available

http://www.icmrindia.org/casestudies/catalogue/Marketing/Casas
%20Bahia-Marketing%20to%20the%20Poor-Marketing%20Case.htm
(Accessed 01/12/10)

• KamCity [Online] Available:

http://www.kamcity.com/namnews/asp/newsarticle.asp?newsid=56939
(Accessed 01/12/10)

• Volkswagen [Online] Available:

http://www.volkswagenag.com/vwag/vwcorp/content/en/the_group.html
(Accessed 01/12/10)

27
• Volkswagen [Online] Available:
http://www.volkswagen.com/br/pt/Volkswagen_do_Brasil/historia_da_volkw
agen/volkswagen_do_brasil.html (Accessed 01/12/10)

• Indian Cars Bikes [Online] Available: http://www.indiancarsbikes.in/auto-

news/volkswagen-group-deliveries-rise-112-august-19483/ (Accessed
10/12/10)

• Webcache [Online] Available:

http://webcache.googleusercontent.com/search?
q=cache:mFbpTm4SvJoJ:www.volkswagenag.com/vwag/vwcorp/info_cente
r/de/talks_and_presentations/2010/04/Q1_Presentation.-bin.acq/qual-
BinaryStorageItem.Single.File/Presentation
%2520Q1%25202010%2520WEBSITE.pdf+volkswagen+car+deliveries+in
dia+Q1+2010&cd=1&hl=en&ct=clnk&gl=ie (Accessed 12/12/10)

• Volkswagenag [Online] Available:

http://www.volkswagenag.com/vwag/vwcorp/info_center/en/news/2009/04/
aak_q1_09.html (Accessed 10/12/10)

• Autoworld [Online] Available:

http://autoworld.wordpress.com/2009/08/25/new-2010-volkswagen-
saveiro-pickup-truck-for-south-america-details-photos/ (Accessed
10/12/10)

• My News Desk [Online] Available:

http://www.mynewsdesk.com/us/view/pressrelease/brazil-autos-report-q3-
2010-411051 (Accessed 10/12/10)
• Supplier Business [Online] Available:
http://www.supplierbusiness.com/uploadedpdfs/Volkswagen_sample.pdf
(Accessed 11/10/10)

• Group Pao De Acucar [Online] Available:

http://rigpa.grupopaodeacucar.com.br/grupopaodeacucar/web/arquivos/GP
A_Apresentacao_3T10_ENG.pdf (Accessed 11/10/10)

• World Car Fans [Online] Available:

http://www.worldcarfans.com/1080701821/new-vw-gol-aims-to-keep-and-
expand-its-leadership (Accessed 11/10/10)

• Nestle [Online] Available:

http://www.nestle.com/MediaCenter/PressReleases/AllPressReleases/Q3res
ults2010.htm (Accessed 10/12/10)

28
• BCG [Online] Available: http://vendor.tekrati.com/research/10210/ link to
http://www.bcg.com/expertise_impact/publications/PublicationDetails.aspx
?id=tcm:12-15208 (Accessed 10/12/10)

• Auto Motive World [Online] Available:

http://www.automotiveworld.com/news//82951-the-battle-for-brazil-s-car-
market (Accessed 01/12/10)

• Money CNN [Online] Available:

http://money.cnn.com/magazines/fortune/global500/2010/countries/Brazil.
html (Accessed 01/12/10)

• PR Inside [Online] Available: http://www.pr-inside.com/outlook-for-

multinational-companies-in-r1854122.htm (Accessed 01/12/10)

• PR Inside [Online] Available: http://www.pr-inside.com/market-report-

brazil-autos-report-r1883430.htm (Accessed 05/12/10)

• Media VW Press Release [Online] Available:

http://media.vw.com/press_releases/volkswagen-group-invests-in-
brazilian-growth-market (Accessed 07/12/10)

• Volkswagen Media Services[Online] Available: https://www.volkswagen-

media-
services.com/medias_publish/ms/content/en/pressemitteilungen/2009/11/2
7/volkswagen_do_brasil.standard.gid-oeffentlichkeit.html (Accessed
10/12/10)

• Media VW [Online] http://media.vw.com/press_releases/volkswagen-group-

invests-in-brazilian-growth-market (Accessed 11/12/10)

• Anba [Online] Available: http://www2.anba.com.br/noticia_especiais.kmf?

cod=8798623 (Accessed 27/11/10)

• Auto Motive World [Online] Available:

http://www.automotiveworld.com/news//82951-the-battle-for-brazil-s-car-
market (Accessed 12/12/10)

• V Brazil [Online] Available: http://www.v-brazil.com/business/largest-

corporations.html (Accessed 25/11/10)
• Industry Week [Online] Available:
http://www.industryweek.com/articles/volkswagen_recalls_193600_vehicle
s_in_brazil_21070.aspx (Accessed 25/11/10)

29
• Next Billion [Online] Available: http://www.nextbillion.net/news/marketing-
to-the-poor-lessons-from-nestls-strategy-in-the-amazon (Accessed
25/11/10)

• Reuters [Online] Available:

http://www.reuters.com/article/idUSN1911120220100319 (Accessed
25/11/10)

• Nestlé [Online] Available:

http://www.nestle.com/MediaCenter/PressReleases/AllPressReleases/Santa
+Barbara.htm (Accessed 10/12/10)

• Nestlé [Online] Available:

http://www.nestle.com/MediaCenter/NewsandFeatures/AllNewsFeatures/Ne
stle_Nutrir_Brazil_10_years_food_education.htm (Accessed 10/12/10)

• Entrepreneur Trade Journals [Online] Available:

http://www.entrepreneur.com/tradejournals/article/167695555.html
(Accessed 10/12/10)

• Ad Brands [Online] Available: http://www.adbrands.net/br/nestle_br.htm

(Accessed 10/12/10)

• Reuters [Online] Available:

http://www.reuters.com/article/idUSTRE61I1MK20100219 (Accessed
10/12/10)

• Reuters [Online] Available:

http://www.reuters.com/article/idUSTRE68F36920100916 (Accessed
03/12/10)

• Financial Times [Online] Available: http://media.ft.com/cms/46af78b8-

5719-11df-aaff-00144feab49a.pdf (Accessed 05/12/10)

• Brazil International [Online] Available:

http://www.brazilintl.com/agbusiness/general/setupbusiness.htm
(Accessed 05/12/10)

• Foreign Trade Information System [Online] Available:

http://www.sice.oas.org/ctyindex/USA/ftbbra2006_e.pdf (Accessed
29/11/10)

30
 • OECD [Online] Available:
http://www.oecd.org/document/4/0,3343,en_2649_34833_34038340_1_1_1
_1,00.html (Accessed 29/11/10)

• Open Democracy [Online] Available:

http://www.opendemocracy.net/arthur-ituassu/brazil-democracy-vs-
poverty (Accessed 03/12/10)

• R P Emery & Assocaites [Online] Available:

http://www.rpemery.com/articles/advantages_and_disadvantages_jv.htm
(Accessed 03/12/10)

• Quick MBA [Online] Available:

http://www.quickmba.com/strategy/global/marketentry/ (Accessed
07/12/10]

• Set Up Global [Online] Available:

http://www.setupglobal.com/downloads/Setup_in_Brazil.pdf (Accessed
05/12/10)

• The Jak Art Globe [Online] Available:

http://thejakartaglobe.com/analysis/pricey-coffees-create-buzz-in-upscale-
brazil/313953 (Accessed 11/12/10)

• Online WSJ [Online]

http://online.wsj.com/article/SB1000142405274870438830457520240221
6730116.html (Accessed 11/12/10)

• Revistbpib [Online] Available: http://www.revistapib.com.br/english-

market.php (Accessed 11/12/10)

• Fortune [Online] Available:

http://157.166.255.24/magazines/fortune/global500/2009/full_list/
(Accessed 11/12/10)

Books:

Kelly, R. et al. 2010. Brazil: 2011 Country Review, U.S: Country Watch

C. K. Prahalad. 2010 The Fortune at the Bottom of the Pyramid: Eradicating

Poverty through Profits. FT Press, US.

31
Luthans & Doh. (2009) International Management; Culture, Strategy and
Behaviour. 7th edition, McGraw-Hill.

32