Brazil

Economic Factors
Brazil is the eight largest economies in the world by GDP PPP 2.178 Trillion dollars in
2010 and is expected to rise to 2.31 trillion dollars in 2011 and is one of the fastest growing
in the world. But the economy has recently stagnated due to credit curbs, higher borrowing
costs and budget cuts checked demand. Real GDP growth rate is 2.9 % in 2011. The
industrial production growth rate is 4%.
A

The GDP Sector Breakup (2011 est.)

Source: IMF and CIA Fact book

Political
The Brazilian Federal Constitution was issued in 1988 and heralded a return to democracy
after almost 30 years of military dictatorship. Brazil is a federal republic divided into 26
states plus the Federal District, which includes the capital, Braslia. The states are also
divided into municipalities.
Brazil holds democratic elections for the president, senators, representatives, state governors,
legislators, mayors and municipal councils. Presidential Elections are for 4-year terms by

direct suffrage. Legislative power is exercised by the 81-seat Senate and the 513-seat
Chamber of Deputies. The Senate is elected for 8-year terms. The Deputies are elected for 4year terms. The size of legislative assemblies in each state varies according to its population.
Brazil is the world leader in electronic online voting; approximately 100 million
voters.
Dilma Rousseff has won the Brazil presidential election. She is the handpicked successor of
Brazil's Workers' Party (PT) president Luiz Inacio Lula da Silvathe, the outgoing president.
He left office with approval ratings over 80%. So it can be assumed that the policies wont
change for the foreseeable future due to change in political leadership. (Source: Guardian)
Legal
The Supreme Court is the highest instance of Judiciary Power in Brazil. Its main purpose is to
guard the Constitution. The Supreme Court is composed by eleven Justices, appointed by the
President of the Republic and approved by the Senators.
Brazil follows a Civil Law system
system.
Relations
Brazil is a member of Mercosur, Cairns Group (Coalition of agricultural exporting nations
lobbying for agricultural trade liberalization.), G20, NAMA 11 (Coalition of developing
countries seeking flexibilities to limit market opening in industrial goods trade), Friends of
Fish, W52 (Source: WTO)
Foreign Direct Investment
Brazil has the highest FDI in all the developing nations of the world. Import barriers have
been reduced and many state-owned enterprises have been privatized. Tax reforms have been
proposed but are still pending approval. Their main goal is to simplify the current tax system
especially for the countrys VAT taxes.
Stock of direct foreign investment at home: $426.4 billion (31 December 2011 est.)
Country comparison to the world: 13

Brazilian IP Rights
Brazil, once criticised for lax intellectual property rights protection, has been stepping up
implementation and enforcement of international IP rules in recent years. The country
complies with all major aspects of the TRIPS agreement
Culture
Brazil is a collectivist society evident in Brazilian business culture where often family
members will often be found working for the same company, either family owned or
otherwise. Time in Brazil is approached in a very relaxed and flexible manner. Punctuality
and precise plans are not common. Brazilian companies have rigid hierarchical relationships
and decisions are taken top down. Personal relationships more than the formal roles matter in
how much power managers wield.

Sector Ethanol Production

Porters Diamond
Demand Conditions

The oil crisis of 1973 first made the government realize the need to reduce oil
dependence and so began promoting bio-fuel through The National Alcohol
Program. Annual worldwide ethanol exports now total 6.5 billion litres (about 1.7
billion gallons), but research suggests that by 2020 they could reach 50 billion to 200
billion litres, depending on crude-oil prices and the evolution of regulatory regimes
around the globe(Source :McKinsey)

By 2010 manufacturers that build flexible fuel vehicles that use bio- fuel include
Chevrolet, Fiat, Ford, Peugeot, Renault, Volkswagen, Honda, Mitsubishi, Toyota,

Citron, Nissan, Honda and Kia Motors.

Brazil is the tenth largest energy consumer in the world and largest in South America.

Import Substitution - The Electricity imports of Brazil can be reduced through use
of ethanol.

PCEI mroxo pndosuurtscmti op nti o n

Electricity Data, Source: CIA Fact book

Factor Conditions
Ethanol production in Brazil uses sugarcane as feedstock and relies on first-generation
technologies based on the use of the sucrose content of sugarcane. Ethanol yield has grown
3.77% per year since 1975 and productivity gains been based on improvements in the
agricultural and industrial phases of the production process. Further improvements on best
practices are expected to allow in the short to mid-term an average ethanol productivity of
9,000 litres per hectare.
Land: Brazil currently has 6 million hectares of sugarcane under cultivation. As many as 24
million additional hectares of land could realistically be available for sugarcane production
Labour: Brazil has abundant unskilled labour needed for sugarcane cultivation.
The Brazilian government provides three important initial drivers for the ethanol industry:
guaranteed purchases by the state-owned oil company Petrobras, low-interest loans for agro-

industrial ethanol firms and fixed gasoline and ethanol prices where hydrous ethanol sold for
59% of the government-set gasoline price at the pump.
Related and Supporting Industries
Plants: There were 378 ethanol plants operating in Brazil by July 2008, 126 dedicated to
ethanol production and 252 producing both sugar and ethanol. There are 15 additional plants
dedicated exclusively to sugar production.

These plants have an installed capacity of

crushing 538 million metric tons of sugarcane per year, and there are 25 plants under
construction expected to be on line by 2009 that will add an additional capacity of crushing
50 million tons of sugarcane per year. The typical plant cost approximately USD 150 million
and requires a nearby sugarcane plantation of 30,000 hectares.
Distribution infrastructure: The industry can store and transport four billion litres of
exports a year, mainly between the southeast region and nearby ports. As companies expand
northward, transporting ethanol from the centre-west regions to the coast will require an
additional 1,000 to 2,000 kilometres of pipelines and railways.
Electricity Generation: Brazil has several experimental programs for the production of
electricity using sugar cane ethanol as fuel. A joint venture of General Electric and Petrobras
is operating one commercial pilot plant in Juiz de Fora, Minas Gerais.
Firm Strategy, Structure and Rivalry
The competition in this sector is fairly high. The major companies are Vanguarda Agro,
Cosan, Grupo Farias, Grupo USJ, ETH, Tereos International, Tropical, UNICA (Brazil
Sugarcane Industry Association. Cosan is the largest sugarcane producer and processor in the
world. ETH is a company of rganizao Odebrecht. The Japanese company Sojitz
Corporation, a multinational that sells commodities, hold 33% of the shares.

SWOT Analysis
Strength

Rising Oil Prices - Without technology breakthroughs, a shortage in global liquid

fuel supplies, including petroleum, ethanol and bio-diesel, will emerge in 2015, and
rise to about 10 million barrels per day in 2050, when international oil prices will soar

to $120 a barrel. (Source: McKinsey)

Gaining popularity of dual-fuel ethanol flex vehicles in Brazil and also in other parts

of the world.
The Electricity imports of Brazil can be reduced through use of ethanol.
The Natural Advantage of Brazil in producing ethanol The Brazilian soil, climate
is most suitable for sugarcane cultivation. Sugarcane is the most suitable crop for biofuel production compared to corn, maize, oats etc based on energy yield. Brazil is the
largest sugarcane producer in the world. Also the inexpensive labour in Brazil is also

an advantage.
Government Subsidy Gasoline taxes are kept high while Ethanol tax is low.
Environment Friendly - Benefit of ethanol is the reduction of greenhouse gas
emissions as compared to gasoline, because as much carbon dioxide is taken up by the
growing plants as is produced when the ethanol is burnt, with a zero theoretical net
contribution. Also addition of ethanol to gasoline lowers CO emissions.

Weakness

Dependence on US as export destination

Dependence on Government Subsidies
Dependence on Sugarcane harvest which depends on climatic conditions

Threats

Brazil's President Dilma Rousseff has decided to reduce the amount of ethanol mixed
into domestic gasoline as part of her efforts to combat inflation. Rising prices for
sugar -- and therefore for sugar cane-derived ethanol -- have been a major factor in

pushing inflation above Brazil's official target range

Ethanol production has also raised concerns regarding water overuse , soil erosion and

possible contamination by excessive use of fertilizers

Deforestation This issue may force government to limit the area used to cultivate
sugarcane.

US protecting infant bio-fuel industry - The U.S., potentially the largest market for
Brazilian ethanol imports, currently imposes a tariff on Brazilian ethanol
ofUS$0.54 per gallon in order to encourage domestic ethanol production and protect
the budding ethanol industry in the United States. USA has started bio-fuel production

from corns.
Rising food prices The attractiveness of sugarcane has resulted in less cultivation
of food crops leading to rising food prices.

Opportunities
China
China temporarily lowered the import tariff on denatured ethanol to 5 percent in 2010, a
drastic decrease from 30 percent in 2009. This tariff cut only benefited imports of denatured
ethanol for chemical use (not fuel consumption). There is no threat of bio-fuels development
in China, because China has a huge population to feed with limited land resources, while biofuels, directly or indirectly, will compete with food supply,
European Union
2008 was a record year in terms of imports of ethanol (fuel and non-fuel), including those
imports of ethanol mixed with other chemicals, and reached at least 1.9 billion litres,
representing an increase of 400 million litres compared to 2007. From these imported 1.9
billion litres of ethanol between 1.4 and 1.5 billion litres came from Brazil alone and was
destined for use in the European transport fuel market.
Import 2011 - 3,850 thousand litres

Factor proportions theory

According to factor proportions theory, differences in a countrys proportionate holding of
factors of production explains differences in the costs of the factors and that export
advantages lie in the production of goods that uses such abundant goods. The factors in which

Brazil have a clear edge are the land available for sugarcane cultivation and the inexpensive
labour available for cultivation.
Brazil has specialized itself in sugarcane cultivation. Advancements in fertilizers and natural
pesticides have all but eliminated the need to burn fields. Sugarcane fields are traditionally
burned just before harvest to avoid harm to the workers, by removing the sharp leaves and
killing snakes and other harmful animals, and also to fertilize the fields with ash. This has
eliminated issues regarding wild life destruction.
Trade diversion
Even though the U.S. has imposed a USD 0.54 tariff on every gallon of imported ethanol
since 1980, the Caribbean nations and Central American countries are exempt from such
duties based on the benefits granted by the Caribbean Basin Initiative (CBI). CBI provisions
allow tariff-free access to the US market from ethanol produced from foreign feedstock
(outside CBI countries) up to 7% of the previous year US consumption. Also additional
quotas are allowed if the beneficiary countries produce at least 30% of the ethanol from local
feedstocks up to an additional 35 million gallons (132.5 million litres). Thus, several
countries have been importing hydrated ethanol from Brazil, processing it at local distilleries
to dehydrate it, and then re-exporting it as anhydrous ethanol.
So the trade barriers imposed by US have not impacted the sector, as they have diverted the
exports to Caribbean nations.
Trinidad and Tobago exports to US Fuel Ethanol (Renewable) in 2010 1021
Annual Thousand Barrels (Source: US Energy Information and Administration)

References

http://www.imf.org/external/pubs/ft/weo/2011/02/weodata/weorept.aspx
http://www.brazilintl.com/agbusiness/agcompanies/sugarcane/agcompanies_sugarcane.htm
http://www.wto.org/english/thewto_e/countries_e/brazil_e.htm
https://www.mckinseyquarterly.com/Energy_Resources_Materials/Positioning_Brazil_for_bi
ofuels_success_1950
https://www.cia.gov/library/publications/the-world-factbook
http://www.un.org/esa/sustdev/csd/csd16/sideevents/presentations/14may_hunt.pdf
http://www.eia.gov/dnav/pet/pet_move_impcus_d_nus_NTD_mbbl_a.htm
http://www.tradingeconomics.com/brazil/indicators
http://www.ip-watch.org/2009/03/11/wto-review-finds-brazil-progressing-on-trade-policy-iprights-protection/
http://www.guardian.co.uk/world/2010/nov/01/dilma-rousseff-wins-brazil-president
http://epure.org/theindustry/eumarket
http://www.brazilintl.com/agbusiness/agcompanies/sugarcane/agcompanies_sugarcane.htm
Doing Business in Brazil Ernst & Young Terco