In Brazil great opportunities for SMEs

May 9, 2018

For more information on Brazil’s opportunities for Italian SMEs, click here.

Italian companies, and in particular SMEs, can find a very interesting market in Brazil both for what concerns exports as well as for assistance/support in opening new branches, especially considering that the “Made in Italy” has a very strong value in the country. We talked about it with Graziano Messana, founder of GM Venture, Vice President of the Italian Chamber of Commerce in São Paulo and a lecturer at the Luiss Business School.

Brazil is very broad and with deep differences among its states: why can it represent a new business frontier?

We are talking about a country of continental dimensions that can be compared to the size of Europe or the United States. The state of São Paulo is very developed and produces 32% of Brazil’s GDP.
It is a state where technology has a very rapid reaction and is reflected in the lives of consumers. I mention some examples. The digital receipt linked to a virtual basket of consumers (consumed by indicating the tax code and then receive part of the tax credits through bank credits) has now been in place for several years, encouraging the request for a receipt.
On the transportion level, it’s imporant to highlight the case of Uber that in the last 6 months has traveled more than 500 million people while Cabifly, one of Uber’s competitors, allows to travel by helicopter. We are talking about a state that catalyses 20% of investments in all of South America.
Then there are the northern states of Brazil that are less developed but present good opportunities in the tourism sector, renewable energy and infrastructures.
Historically, in the south of Brazil, various factories have been created and thrived, distributed between the states of Santa Catarina, Paranà, Rio Grande do Sul. The proximity to the hydroelectric plants (responsible for the creation of 75% of the energy) has favored this industrial settlement and I take this opportunity to remember that Brazil has the most “renewable” energy matrix of the industrialized world. The south, especially the state of Rio Grande do Sul, concentrates the majority of wineries in Brazil (1,100 in total) and this is a growing sector, where the per capita consumption is still very low.

What are the opportunities for Italian SMEs?

The opportunities for Italian companies are various. Home automation and digital security solutions are very popular for both residential and commercial applications. The renewable energy sector, and the supplies that revolve around this industry, is growing at double digit rates, somewhat reminiscent of the boom that took place in Europe many years ago.
But even traditional sectors like furniture or fashion are worthy of mention.
Certainly, Italian companies have a big distinguishing element and appeal for Brazilian customers who buy Italian design even at prohibitive cost (in the last 10 years imports from Italy have doubled), while for fashion the appeal is not necessarily determined by luxury. Testment of this is the recent expansion, also occurred during a period of crisis (that we can say has been left behind) of the Intimissimi group.

What are the fiscal and legislative issues that Italian companies can face?

If you start a business from scratch, the procedures for setting up a Brazilian company are not too complex and are very similar to those of an Italian company. The state of São Paulo offers more rapidity according to our experience, and anyways, after the start-up phase, the possibility of opening other branches in other stases still holds. It is important to protect and register brands/patents at the National Institute of Intellectual Property because the phenomenon of imitations and piracy is still widespread. Regarding the authorizations and fiscal incentives matters, there is a very efficient government arm of São Paulo (SPInveste) which offers a lot of support, especially when a company wants to evaluate a local production project.
At the legislative level, therefore, I do not see much criticality if we talk about a greenfield project (starting from scratch) assuming that Italian companies take proper and informed decisions before formulating the investment and do not discover bottlenecks along the way. More attention instead needs to be paid to acquisitions of existing companies or joint ventures, because we have had several cases in which we had to take remedial action, as foreign partners were not sufficiently guaranteed.
To summarize, I would say that in this last case (acquisitions or joint ventures) the greatest risks regard fiscal or labour liabilities not “intercepted” by the due diligence or deriving from the previous, informal management. In the case of startup projects, it is easier to study the tax structure in the analysis / preliminary phase and to start already with the right design. It is advisable to simulate a hypothetical P&L (profit/loss plan) for the first year and also choose the appropriate tax regime (in Brazil you have two options) because you can exercise the option on the choice of the regime only once during the year.

For an Italian SME it is better to export or set up business in Brazil?

We have followed more than 50 cases since 2006 that span several sectors. The answer depends a lot on the peculiarity of the product.
However, the strategy to export and be competitive in Brazil is to use a contained FOB (free on board) price, respect the transfer price rules and sell to its Brazilian branch with direct importation, bypassing intermediaries and shortening the chain as much as possible, with the idea of generating profits and distributing the result to the parent company that will be 95% exempt in Italy.
Quite often, the misunderstanding is due to misinformation that leads to the belief that import duties in Brazil double the cost of products. The duties themselves are there and range from 1% to 35%, in some cases we have even obtained a total exemption, but all the other taxes that affect an import can be recovered with a mechanism similar to that of Italian VAT if a branch is opened/present in Brazil.
In some cases, for example, we imported a semi-finished product and finished production here. In industrial segments, this is often advisable because we import technology and noble parts from Italy and buy materials such as carpentry or low quality here on site.

Which sectors are expected to grow more in Brazil in the coming years?

As previously mentioned, renewables are growing strongly, the important presence of Enel Green Power is admirable, and in the solar sector, only investments of 28 billion euros are expected over the next 15 years.
An important trend concerns the Internet of Things (IoT) which draws a transversal growth in the sectors of hardware and software, industrial automation, agribusiness, health and hospital management, urban mobility.
The beauty and cosmetics sector is worth 33 billion euros (4th market in the world after China, Japan and the USA) and is a market favoured by the culture of beauty, the ageing population and the increase in purchasing power of lower social classes.
The education sector continues to offer good prospects and, for example, initiatives around the “distance learning” proliferate, also considering that Brazil suffered a very deep crisis in 2015/2016 and came out of this crisis only at the end of 2017 recording a 1% GDP growth (in 2016 it was -3.5%). This has led to a lot of unemployment and therefore requalifications and new training methods present, in our opinion, opportunities to be explored.
In any case, the country’s growth prospects for 2018-2019 are at around 3% a year, so expectations are good, beyond the uncertainty surrounding the October elections. The first quarter has already shown several new initiatives by small and medium-sized Italian companies that have returned to invest.

Original article in Italian.

If you want to open a business in Brazil, check out three simple steps to do it, here.

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