China 4 - 0 Brazil

When Brazil was competitive

I know that I am exagerating when I say that Brazil is only competitive in football (soccer) - even though they have recently lost a friendly against Germany. 

However, after this loss they decided to cancel all "classics" (games against top teams) and only play against teams such as Ghana, Guinea and others. A recent game against Argentina in the Roca Cup ended 0-0 - the rematch will be at the end of this month.

Unfortunately this reaction is very exemplary for a Brazilian behavior style. Recently, imported cars have been flooding into the country - especially Hyundai has been very succesful and is even in the process of building a huge plant. On the lower end, the Chinese companies JAC and Chery have entered the country with a bang and riding on a weak USD, opening dealerships and advertising heavily - both are also planning on building plants. And on the upper end, Jaguar, BMW (also planning a plant), Audi, and even Mini have been extremely succesful catering to the wealthy. What was the reaction of the government?: Slap on (even) more taxes on imported cars (i.e. outside of Mercosul) and cars with less than 65% local content (local producers have 45 day grace period). This will raise the average price of most cars not qualifying for exemption by 25% or more, thus killing off the efforts of many of the new emergents. This will not help the Brazilian car industry which already sells expensive and mediocre cars - ask a Brazilian for his opinion the best that is locally produced and he will, without a blink of the eye tell you: Omega!

Where was I? Competitiveness: The World Economic Forum has released their latest competitiveness index and, surprise surprise, Brazil did not showcase well. And this is not related to the companies itself - although there are also weakness there. Brazil finished overall in 53rd place (of 142), better by 5 positions since the last time and on par with India (56th), but way behind China (26th). What drags down Brazil are

"[...] the lagging quality of its overall infrastructure (104th) despite its Growth Acceleration Programme (PAC), its macroeconomic imbalances (115th), the poor overall quality of its educational system (115th), the rigidities in its labor market (121st), and insufficient progress to boost competition (132nd) are areas of increasing concern."

Brazil is saved by market size (10th) - but even business environment (31st), financial markets (40th), technological adoption (44th) and innovation (47) are only midfield.

So overall, Brazil has improved but still is far from being a future leader and if we look very closely, indicators under strong governmental influence perform much poorer than those which are driven by the private sector... Drive on the local roads, fly into any airport, try to hire somebody with an intermediate level of English-speaking skills (or try to fire them later!) and you will know why.

Well, at least Brazil is still better than Argentina in competitiveness. Argentina is currently ranked 85th.

BTW, the top 10 this year were Switzerland, Singapore, Sweden, Finland, United States, Germany, Netherlands, Denmark, Japan, and United Kingdom.

The Asian Perspective on Brazil

"Brazil will gain a place as a significant player in the multi-polar international system taking shape since the end of the Cold War simply on the basis of its economic size and material capabilities. However, its potential to influence international outcomes is likelyto be determined more by the capacity of the country’s elites to identify and harness qualitative assets associated with its stable and democratic governance than by any hardpower assets."

This introduction belongs to an article published in Asian Perspective in 2007. What is interesting is that this is a view of Brazil from the position of other emerging economies and not Europe or the US. The article highlights all the material advantages Brazil has - but these have been mentioned elsewhere.

What is more interesting is that Brazil is placed as a "soft power", i.e. it may shape politics due to its close ties to the western world, it's sheer size and it's focus for decades on economic integration - in the region and globally. Rather than going for global domination, Brazil has sought to find it's place as a partner.

The early participation in peace-keeping missions (such as Haiti), it's hosting of the Earth Summit in Rio in 1992 and it's vast (currently) non-quantifiable ressources of Oxygen and Water give it additional clout, especially if it continues to play by these rules.

The article finishes with what has to be done and it highlights the weaknesses in (too) big government and inefficiency, inequality, lack of education, high taxation and poor rate of investment. However, if overcome, Brazil would be set to become a true BRIC.

Yes, Brazil still has enormous opportunities and recently I had a long discussion with my wife and we came to the (very German) conclusion that the only impediment that Brazil was not "there" yet (or close to there) was that the country was tripping over it's own feet and that it had not yet defined what "there" was. The potential exists and opportunities are huge and Brazil has advanced greatly over the past decades - but the elemental challenges still have not been reliably adressed: Education, Inequality, Taxation, Infrastructure and Bureaucracy.

The R-Word?

The last few months have been very strange. As mentioned in the "about me" section, I work for a chemicals company and while we are in specialty chemicals, many of our suppliers and market partners also are in a broad range of chemical commodities.

What is strange is that while everybody keeps talking about Brazil being the country of the future and with growth opportunities everywhere, we, our market partners and suppliers have started to feel something weakening. While raw materials have spiralled out of control around the world, the favorable exchange rate has kept imports somewhat in check - so raw material costs are not on the levels of the rest of the world. Thus, the lack of demand cannot really be based on cost, or at least not fully. So consumer demand is still also up and capital inflows have remained strong?

To check if it really is just my neck of the woods, I have consulted people in the automotive industry: Demand is down... And I have checked my favorite indicator: Diapers. Diapers is not something that you stop buying just because the economy is down - in fact, it probably would be one of the last things that you would stop buying... yet even here a huge diaper producer in Brazil has told suppliers to slow down on deliveries... Is consumer demand weakening?

As the central bank has hinted that interest rates may start falling soon (after all, the 12.5% already are the maximum level that the bank wanted to reach... in December) and that commodity prices have peaked... and capital inflows have been mainly due to high real interest rates, and not so much to invest in the country.

I would not call it a recession - there is just too much business activity going on, but the economy continues on the brink of overheating, especially in real estate. Infrastructure is not keeping up to the demand, and the creaking is becoming visible on all ends. If consumers start balking too - and consumer indebtness has gone up strongly in 2011 - then the economy may be in trouble.

I would not go long on the BOVESPA if I were you...

1000km of traffic jam... every day

Lies, nothing but lies...

(Picture by: Mariordo Mario Roberto Duran Ortiz/Leticia Ferreira)

I just read that in 2010, Germany had a total of 400.000km of registered traffic jams. I am not really sure how those were computed, but I assume they took the maximum length per occurence. This would then amount to a total of 1095km per day. The automobile club ADAC, the voice of all German drivers, advocates building more and better streets, claiming the situation to be unbearable.

Clearly, nobody from the ADAC has ever been to São Paulo. On any single day at any single time, please feel free to visit the website of Apontador/Maplink, which, in a partnership with the Radio Station Sulamerica (specialized in traffic reports and affiliated to the insurance broker ING), will show you a picture that would make the Germans gasp.

On a normal day, before and after rush hours the website will register between 150 and 200km of traffic jams. In the mornings and evenings, the length can easily double. So, if we take morning, noon and evening as separate incidents, we also get 1000km of traffic jams a day... just in the metro area of São Paulo.


Personally, although I don't feel that way, I can be considered lucky: I have a 33km commute and it takes me 45-60min in the morning and 60-70min in the evening, putting my average speed at about 35-40km/h. The average in São Paulo is below 20km/h. The reason for my "luck" is that of my 33km, I have 29km on 2-4 lane expressways and drive against the flow (I live in town and work outside). Nevertheless, awful situations occur: A few weeks ago, like every morning, I left home at 6:25 - and I arrived at work at 10:40...

Time Magazine ran this nice article a few years ago, and every single word is true. Recently, I had a meeting scheduled for 9:00 on Avendida Paulista (downtown) and I live in the southern zone, ca. 18km away from there. I decided to play it safe and left home at 7:30. At 9:00 I was sitting inside a McDonald's, reading a newspaper and sipping a cappuccino after calling to the meeting and telling them I could not make it (nobody was upset, everybody understood the reason). I had simply given up

Why all of this? Road infrastructure is a mess, public transportation is not even close to adequate (I have seen small towns in Germany with a subway network of similar extension to the one in Sampa) and the amount of cars is amazing. The city of 11m people of has a total of 7m registered vehicles, of which 5.1m are passenger cars... and 1000 additional ones are added every day...

ipad to be produced in Brazil

Now this is interesting news. According to market rumors, Apple is planning a billion dollar investment in a factory in Brazil to produce, among other things, the ipad 2... And there is more than a rumor to it. I know where the site is located... on the freeway (between Jundiaí and Indaiatuba) that I often take on weekends to a nice hotel fazenda. In the past months I had wondered about a huge building sporting the Foxconn-Logo on the side, but stupid me never considered that this might be for Apple.

Surely there is a huge fiscal and financial incentive involved, in addition to an ipad costing half of what it would if it had to be imported, thus making it accessible to a much larger part of the Brazilian population. Currently, the ipad sells for an eyewatering USD1000 in Brazil.

Apparently production is to start in November. If this is true, then the price for ipads in Brazil will fall by half and Brazil will have a nice hightech toy to export. The only problem about the export is that the ipads will have to pass through the Guarulhos or Viracopos Airports or the Santos Port. But let that be our worry when the time arrives.

Apple-afficionados, get ready...

World Cup Troubles

Let Us Hope there are no second thoughts about this

To make it quick: The 2014 World Cup is in trouble. A report to be released these days (today?) will put a green light on the stadium construction of Belo Horizonte. Full Stop. All other stadiums will receive a yellow light for progress - except for Natal and São Paulo, where construction hasn't even begun. To be honest, I still do not know where and how the São Paulo stadium should be built.

The second part of the bad news is that almost all infrastructure to support the world cup (airports, roads, subway, etc.) will receive at least a yellow light. The "grand plan" for São Paulo is expected to be to block all access roads to and from stadiums and major hotel districts to allow soccer fans to get to and from the games - killing off the rest of the city.

The third part of the bad news is that, contrary to initial official news, almost no private money will be used for infrastructure and stadium construction. The required money is estimated to be a total of ca. 10 billion Euros, of which 7.2 billion Euros alone are for airport infrastructure projects. The available 147m EUR from the private sector are from soccer clubs used to build or refurbish their own stadiums. In other words, the tax payer will pay for 98.5% of the cost. Good job.

The fourth part of the bad news is that the world cup will be in roughly 1200 days.

The fifth and final part is that at least six stadiums with infrastructure need to be ready in 835 days - for the confederations cup...

EDIT AND UPDATE: Since last year, costs for stadium construction have already gone up, on average, by 57% according to AFP. Top cost increases were registered in Salvador, at 170%.

Holiday Perspective (Infrastructure, part n)

Lining up in Paradise

The nice thing about going on holidays is that it gives a fresh perspective on many things. In this singular case, it is the same old topic which I believe will most likely keep Brazil from growing: The lack of infrastructure investment.

Spending my holidays with my family in the south of Brazil, we did a few fun things, which strangely enough, brought the infrastructure topic right back up to the front line.

We are currently on Ilha do Mel in the Paraná state. The island is a small gem, to over 90% an ecological reserve without a single car, comprised mainly of wooden huts. The island is also just off the coast from Paranaguá, one of the most import ports of Brazil. From any point off the seaside coast of the island, I can see at least 30 ships lined up single file to move into the port. In addition, I have just read that this is the average number of ships lined up to enter the Santos Port, Brazil's most important one. Considering each ship is roughly 200m long and 500m away from the next one, we are talking about a 30km queue... on average. 

In November, I had met with a supplier and he told me that while he was awaiting urgent cargo, his ship's captain decided, while in queue, to continue the journey onwards to Buenos Aires first, to unload a part of his cargo, as Santos had informed him he was 55th in line and would take roughly 2 weeks to enter the harbor.

The second story is also about Paranaguá, in this case the access to the port. There is a lovely historical railway from Curitiba down to the port, built 1883 which crawls through the mata atlantica at an excruciating slow speed over very narrow bridges with spectacular views. It is well worth the journey.

Anyway, while we were heading down the track, I was also surprised at the amount of workers on the line conducting maintenance work, most from América Latina Logística S.A., which is the operator of the track. We also passed several freight trains parked next to the single track, the longest of which had 88 (!!!) freight wagons. I have seen longer ones, mainly in the west of Canada, but considering the ones here run along a track that was originally built over 130 years ago, this is quite a feat. I then asked a few people and yes... this is the MAIN route to transport cargo via rail to Paranaguá... It is hardly a surprise then that large corporations in  Brazil, such as Vale, are investing massive amounts of money to provide for their own private railroads.

Scenic cargo route

In parallel, once again I read a critical (Brazilian) article, in this case one about sustainability and growth in Brazil, and here, once again, infrastructure investment was put as key to SUSTAINABLE development. To ensure the country will not collapse in the next years, infrastructure investment must grow from the current 2% of GDP (China has 6%) to at least 4% immediately - starting with basic sanitation, ports, airports, roads... Oh boy, a long way to go.

Bullet Train Delayed

High-Speed Train Route Proposal (From Wolters Kluwer)

A very typically Brazilian story - the bullet train Brazil wanted to partially build in time for the Olympics in 2016, and be completely finished by 2017 (see the entry from Wolters Kluwer above), has been delayed.

The 20bn USD project was supposed to have all bids in by Nov 20 and the decision by Dec 16 has now been postponed to April 29 to allow "all interested companies to participate". Also, according to the auctioning body, this delay will not delay construction... really? So they will just work 6 months faster?

I do not want to sound negative, but

a) The project will never be finished on time, Brazil has a great history of announcing and then not delivering - especially this bullet train has been a company fantasy for decades (just like the maglev in Germany)

b) The project will cost a fortune - 20bn will never be enough

c) The route will run a completely different route

If Brazil is lucky, the project will be completed by the 2020 Expo... for which a site also still has to be found.

Picture of a country that may stop

The Estado de São Paulo, a major newspaper in São Paulo recently ran an impressively critical article about the infrastructure problem in Brazil. Renée Pereira, the author, highlighted six major points which may lead to what in Brazil is called the apagão, or blackout, highlighted by last Novembers Black-Out which left all of what has economic importance in Brazil without energy for two hours.

This black-out today is mainly pointed at logistics: With Ports, Airports, Roads and Rail at maximum capacity (in many cases over it), any further growth will lead to a gridlock which may then lead to a spiral downwards. Until 2008 this was a problem, but not so much - a combination of the Brazil faith in that "tomorrow" things will improve, a global crisis that took off some strain off the infrastructure for a few months and much slower growth prior to the crisis - made many believe, that things would somehow work out.

1. With Brazil barely dipping into the crisis and now speeding out, infrastructure is the big problem. Investments in ports are long-overdue and some problems are ridiculous: Take that several terminals at the main Santos Port cannot operate during rain, which makes them pretty useless during the heavy rainy season which lasts from end of November to March. 
2. Railways are a further problem - the railway network is at 28.000km - tiny, especially if you compare it to the (albeit well-developed) German network of 34.000km. In addition a large portion of the railway network in operation today is fully privately owned - a large portion belonging to the mining giant Vale, which exclusively uses it to ship iron ore to the (clogged) ports.
3. This puts a great strain on the roads, which transport 60% of all goods in the country today. Many roads, especially outside of the São Paulo area, are in a poor state of conservation and publicly funded - meaning that their state usually deteriorates over time. The poor state of the roads increases the costs of transport by 28% - in some cases the cost of kg/km is higher than in high income countries. Benchmarks I have done between my local logistics suppliers and German examples make it appear as if I were massively overspending on freight.
4. Airports fare not much better. São Paulo Guarulhos airport, the major hub in Brazil has been basically unchanged since the 1990s - but today operates at way over 100% of capacity - over the past 8 years, passengers have gone from 11m to expected 22m this year. With more freight being shipped back and forth and more Brazilians moving into the middle class and thus able to buy a ticket, will probably triple demand in less than 20 years (from todays clogged levels!). Guarulhos is not alone. This interesting statistics on wikipedia show 18 of the 20 major Brazilian near or over their capacity in 2009 (the first post-crisis year!) - in 2010 the situation is much worse. The Rio city airport Santos Dumont has surpassed the total 2009 passanger volume after the first 8 months of operation of this year. If you try to imagine further growth and then throw in a 2014 World Cup and 2016 Olympics, imagine the mayhem...
5. (and 6.) Finally access to energy (each citizen is average of 18h without power per year, 20min per week), water (only 85% have access to clean water) and basic sewage systems (only 58% have access to sewage systems) are also behind necessity, most of this access provided in the major metro areas. Especially the North-East of Brazil often seems like sub-saharan Africa...

Sadly, the author does not propose any solutions - although a mix of the following would surely be of great help: Privatize airports, roads and ports, support PPP in basic infrastructure and plan, plan, plan. Allowing uncontrolled growth, as is still common in São Paulo, ensures that private investors build residential and commercial buildings, factories and other industrial installations, but leave the roads, electricity and water supply to the state, without any form of coordination. In addition, strong public investment in basic infrastructure and the decentralization of all logistics needs from the São Paulo-Santos-Guarulhos triangle would surely give the country some room to breath...

Brazil, to be or not to be.

What I like about the Pearson Publishers, is that they actually manage to have clear, critical and sometimes even contradicting opinions if you look at their two flagship publications, the FT and The Economist.

If we look at a recent The Economist article first, called "Four Reasons to Believe in Brazil", from July, the outlook is outright positive. The highlights are commodities and the global commodity hunger, the second oil (actually also a commodity, but the focus here is on self-subsistency and strategic importance in an increasingly energy-hungry world), demography (i.e. a major amount of people joining the work force and slower birth rates kicking in meaning infrastructure is set for the kids there and more people there to pay for it), and urbanisation, where wages usually are higher and access to education, infrastructure, etc. are much better.

Mr. Wolf from the FT takes on a much more pessimistic view in his June article "Why Brazil must try harder". Commodities also plays a significant role here, but with a highlight that while exports in Brazil have increased, the share of manufactured goods still remains low. This is similar to what I recently heard from a presentation of the Trade Ministry at the São Paulo Chamber of Business. The share of commodities in exports has actually increased. All of this still leaves Brazil at a lower development level, as industry development is not significantly challenged if all you have to do is dig out the stuff and ship it to China.

Most interesting, however, is Mr. Wolf's comparison of Brazil to two other BRICs, China and India. Brazil has lower ratios of trade, savings, exchange-rate ratios and population, and lower growth, meaning that while Brazil may have gained in the world, it has fallen behind China and India in world power over the past decades.

I believe it is exagerated to say, that this means that Brazil will not be of any significance in the future, but Mr. Wolf does have a point - especially if we consider the massive infrastructure needs the country has and the low level of savings, there is something Brazil must do, to catch up.

Invest in Infrastructure

Ok, it's more an advertisement than news, and it is German, but the main two points are:

1. Invest in Infrastructure in Brazil

2. The government in Brasilia has noticed this too - there will be a World Cup and Olympics... or so they hope.

But read my lips: There will be no bullet train by 2014 and none by 2016 between SP and Rio... the bullet train is the oldest promise of wanting to be the country of the future - I had heard it when I still lived here in the early 90s...

Read more here.

For Brazil, It's Finally Tomorrow

The Wall Street Journal has written a mostly positive article about Brazil - and the catchphrase, Brazil Country of the Future still hangs in there...

For the past century, Brazil has been a land of great potential—but few results. With runaway inflation and stratospheric national debt, the country was too much of a mess for anyone to take it seriously on the world stage.

How things have changed [more] (Source: WSJ Online)

Basically, Mr. Prada highlights the three major points I always have to complain about Brazil: Lack of adequate public infrastructure, still rampant corruption and horrible education. If Brazil wants to "leapfrog" into fourth place, then these are the things that need to be addressed. Especially if we consider, that Education usually takes a generation to kick into the economy with full force, the time to invest is now, to be able to get where the country would like to be by 2050.