The rocky road to Rio: What shippers need to know about doing business in Brazil
Brazil may be the new "land of opportunity," but longstanding logistics and bureaucratic headaches remain.
By Toby Gooley
The "Road to Rio" is a busy one these days. Brazil sailed through the global economic recession relatively unscathed, and its economy is more stable today than perhaps at any time in its history. A growing middle class has sparked demand for housing and retail goods. All of this has combined to make Brazil one of the world's few economic bright spots—and a very attractive market for manufacturers, retailers, and the businesses that serve them.
That's why companies from around the globe are moving into Brazil in a big way. But like the manufacturers that rushed into China more than a decade ago, they're discovering that new markets can present new challenges. To make it in Brazil, businesses have to adapt to the country's unique logistics environment and play by some often-mystifying rules. Here's a brief look at just a few of Brazil's many challenges and some strategies for dealing with them.
Get a good accountant!
Any discussion of logistics in Brazil starts with laws and taxes, which are a frequent source of frustration for outsiders. Brazil is "highly regulated, it is protective of domestic industry, and you have to deal not just with inconsistent laws and regulations but also with inconsistent interpretation of those laws and regulations," says Humberto Flores, president for the Americas of DHL Supply Chain's technology and aerospace business unit.
As an example of inconsistent enforcement, Dale Rogers, professor of supply chain management at Rutgers University, cites an electronics manufacturer's experience with a law requiring products manufactured in Brazil to be returned to their point of origin for disposition. Rogers, who is also the leader of the supply chain sustainability practice at Brazil's Instituto de Logística e Supply Chain (ILOS), says the manufacturer was excused from compliance in 2009, was required to comply this year, and will get a break from enforcement again in 2011. "This sort of thing seems capricious, and it can be confusing," he says. "Brazilian managers are very flexible and are able to change course quickly. For the typical American, who thinks things are going to stay the same, it's hard to adjust."
Brazil's tax system is equally complicated. "There are more than 70 different types of taxes, and there are monthly debits and credits. You have to be able to understand how that will impact your business," says São Paulo-based Bill Scroggie, managing director of Penske Logistics in South America. He advises adding tax experts to your team to help navigate national and state tax codes. Tax compliance is so important that competition for knowledgeable accountants is fierce, he warns.
The tax regime has a big influence on transportation. For example, the CTRC (truck bill of lading) and the nota fiscal (fiscal invoice) are not just shipping documents; they are supporting documents on which the complex Brazilian tax system is based, confirming for tax purposes that a delivery actually took place and that a sale has been completed. In 2008, federal authorities began a modernization program that will standardize the tax bookkeeping system and convert it to an electronic system. The CTRC and nota fiscal are in the process of changing to the new system. The modernized tax system will promote information sharing at all levels of government almost in real time, and it will save taxpayers money by eliminating paper documents and reducing bureaucracy, Scroggie explains.
The tax burdens are so heavy that sometimes "where you route a truck is actually determined by tax rules rather than what makes the most sense from an efficiency point of view," says Rogers. Companies often route shipments to take advantage of varying state value-added taxes on sales and services, he explains. Because those rates depend in part on whether a transaction is intra- or interstate, it can be cheaper overall to ship longer distances.
The bustling city of Manaus exemplifies how tax benefits can take precedence over logistics efficiency in Brazil. The city, located at the confluence of the Amazon and Rio Negro rivers in the middle of the Amazon jungle, has only one road in and out—the poorly maintained Brazil Route 174, which cannot accommodate heavy truck traffic. The nearest consumer market is 1,500 miles away, Flores says. But tax incentives designed to promote manufacturing in underdeveloped areas are so attractive that dozens of multinational companies—Sony, Phillips, Nokia, Samsung, and Whirlpool, to name a few—bring raw materials and components in for assembly and ship out finished products, mostly for domestic consumption.
The lack of highway access means manufacturers are forced to use freighter aircraft, barges, and small ships to move the goods in and out of the jungle. Heavier goods travel four days up the Amazon River and the Rio Negro to Manaus and four days back down the Amazon for export or domestic consumption. Air freight is typically reserved for high-value, lightweight items, such as cell phones.
It's hard to imagine that the benefits of manufacturing in Manaus outweigh the logistical drawbacks, but companies that manage to qualify for the full range of tax breaks can halve tax liabilities that would otherwise account for 45 percent of the goods' value, according to Flores. That more than compensates for the added logistics costs, he says.
Be realistic about transportation
The transportation challenges may be daunting, but they're not insurmountable. In Brazil, where there's a will, there's a way—even in some very remote areas. Earlier this year, for example, the global freight forwarder Damco and a local barge company launched an all-water service from Porto Velho on the Madeira River to Manaus. The service will help businesses in the remote states of Rondonia, Acre, and Mato Groso export cotton, leather, minerals, lumber, and beef.
Because Brazil is such a vast country, it's important to be realistic about what's feasible when it comes to transportation, experts say. "The country's economy is expanding quickly, but the infrastructure, including ports, airports, and roads, has not been able to keep up," Scroggie says.
Infrastructure has been in the spotlight lately because Brazil will host soccer's World Cup in 2014 and the summer Olympics in 2016. Better roads, ports, and airports will be needed to support those events. But more than 90 percent of respondents to a survey of supply chain professionals in Brazil, conducted by BDP International earlier this year, questioned whether much-needed improvements would actually be completed in time to meet the demands of these events.
In the meantime, the country's seaports are putting a lot of money into improving their facilities, says Rogers. And an expansion project in São Paulo has added a six-lane highway along with a "ring road" that routes trucks around the city center. Diverting trucks to the ring road has already reduced traffic volume inside the city by 40 percent, Scroggie reports.
Whether a company does business with big chain stores, with mom-and-pop stores in the city, or with customers in the Amazon jungle, Scroggie advises setting realistic expectations regarding both transit times and delivery agreements. Companies must make sure their contracts' transportation provisions are consistent for all parties, and that any penalties or consequences for late or failed deliveries are clearly spelled out in agreements throughout the supply chain, he says. Agreements should also take into account the varying regulations and conditions imposed in each state, he adds.
Another matter to settle in advance is how transportation-related communication will take place. For example, it may take several weeks to get a signed proof of delivery from a small retailer in the interior because the physical document has to make its way back through the logistics network. "You have to have agreed-upon rules about how that will happen," Scroggie says.
Use 3PLs to your advantage
As Brazil becomes an increasingly important player in global supply chains, logistics outsourcing is taking on a bigger role. More than 60 percent of respondents to the BDP International survey said they were outsourcing more of their transportation-related functions to third-party logistics companies (3PLs). Respondents also said they were relying more on specialized service providers to gain better control of inbound shipments and improve compliance with import regulations.
Big-name multinational 3PLs are active in Brazil, but there are also a number of homegrown competitors. "Brazilian 3PLs tend to be smaller than the companies multinationals typically deal with," says Rogers. Some of the better-known Brazilian 3PLs include Rapidão Cometa, Grupo Júlio Simões, and Tagma.
The big multinational 3PLs have an advantage because they can participate in global contracts for multinational clients and they hire bilingual staff, Scroggie says. The local logistics companies may have a pricing edge, but with the exception of some of the larger firms, they typically employ only Portuguese speakers.
Third-party service providers have already made big inroads into Brazil's warehousing market. It's common to see large multi-client facilities or warehouses that are shared by multiple logistics providers. "A warehouse may have 1 million square feet but five different 3PLs, each with 200,000 square feet," Scroggie reports. Whether a company operates its own warehouses and DCs or outsources depends in large part on volume. For example, French retailer Carrefour outsources its DC operations, while Wal-Mart Stores runs its own facility, though it outsources its e-commerce fulfillment.
Growth and change
Companies seeking to learn more about logistics management in Brazil will find there's no shortage of resources. They can choose from a variety of logistics and supply chain conferences, trade shows, and degree programs, including conferences and seminars organized by ILOS, which collaborates with the Council of Supply Chain Management Professionals. In addition, IntraLogística, the monthly magazine published by Instituto IMAM, offers an excellent introduction to warehousing and material handling trends in Brazil.
But those in the know warn that logistics-related information can have a short shelf life. The logistics and supply chain scene in Brazil is growing fast and changing almost daily. "Brazil has changed dramatically in the 10 years I've been going down there," says Rogers. "If your perception of Brazil is based on what it was a few years ago, you'll be wrong. If your perceptions are even two years old, they'll be out of date. And if they are five years old, not much is the same."
About the Author
Contributing Editor Toby Gooley is a freelance writer and editor specializing in supply chain, logistics, material handling, and international trade. She previously was Senior Editor at DC VELOCITY and Editor of DCV's sister publication, CSCMP's Supply Chain Quarterly. Prior to joining AGiLE Business Media in 2007, she spent 20 years at Logistics Management magazine as Managing Editor and Senior Editor covering international trade and transportation. Prior to that she was an export traffic manager for 10 years. She holds a B.A. in Asian Studies from Cornell University.
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