2012

Business Operations in Emerging Economies: Expanding a Smartphone business to Brazil

Akua Serwaa Ansah Pladmor Consulting Group 3/28/2012

Introduction Strengthening its state with many years of solid monetary and fiscal policies, Brazil today is proving itself as competitive global market which is able to face the repercussions of globalization problems and global financial crisis, without being extremely shaken. As a result of this, it is gaining increased attention from international media and global investors. Brazil is one of the leading emerging BRIC countries and has in the past few years become a target market for many multinational economies due to the opportunities it is impregnated with. The countrys recent and continuous advancement as a competitor in the world market has placed it in the lime light and also recently made it one of the competitive markets for smart phone businesses. It is for this reason that this report focuses on Brazil as the ideal choice for MSBS Mobile Company to consider in their quest to expand its smart phone manufacturing business to Latin America. The main aim of this report is therefore to address the key issues to be considered by MSBS Mobile before and when entering into Brazil, the rules to comply by and proposed strategies to enable them deal with possible challenges that could be faced.

Brazil at a glance Population: Area: Capital: 190.7m (2010 Brazilian Census) 8,511,965 square kilometers Brasilia

Key Economic Centers: So Paulo, Rio de Janeiro, Belo Horizonte, Salvador Language: Currency: Political System: Last Election: Time: Portuguese 100 Centavos = one Real (R$) Bicameral Federal Republic Elected President October 2010 -Head of state: Dilma Vana Rousseff (2010) AEST 13 hours

Country Profile Brazil is the largest country in South America and the fifth largest in the world. It has currently overtaken the UK as the worlds 6th largest economy and is listed as the seventh largest consumer Market with its large population of 190.1 million. Brazil is strategically positioned and shares borders with all the other South American countries except for Chile and Ecuador. It therefore serves as a gateway for access to other possible lucrative markets. Over 50% of the population is economically

active1. Although GDP growth is expected to ease in 2012, the recent discovery of more offshore fields is expected to add between 50 and 100 billion more barrels to current reserves. Being the largest and most diversified industrial base in South America it has become one of the destinations with major Foreign Direct Investments and is ranked fourth among emerging markets. To add to that, its position as the fourth largest cellular phone market in the region makes it an interesting business opportunity for MSBS Mobile to consider.

Economic situation Brazils growth is fostered by increase in productivity and improvements in farming practices as it has a vibrant agricultural sector. Export of commodities has also over the years contributed to this boost. In 2011 the GDP of Brazil at current prices reached R$ 4,142 trillion, and this is expected to rise by 2.8% this year. Inflation is also expected to reduce from 6.6% in 2011 to 5.4% this year. The country also benefits from FDI with inflows exceeding 55 billion US dollars in 2011. China the highest investor, accounted for about 13 billion US dollars in 2011. Manufacturing makes up 12.8% of the GDP and employs 115.1% of the workforce. The biggest manufactures are producers of automobiles, consumer electronics and, computers and software and the heavy industries. Brazils service sector accounts for 56.9% of the GDP and this portrays steady growth in the lower middle class. Exposure to the 2014 world cup and 2016 Olympics is expected to promote the tourism sector and create more revenue for the economy. Although Infrastructure has been improved over the years it is however still inadequate and the country aspires to fund projects to improve this situation.

Political Brazil is that is currently listed among the politically stable; its period of political instability dates back 25 to 50 years when it was under Portugal. A military coup in 1964 led to more than 20 years of military dictatorship until a peaceful transition to democracy followed in 1985. The country's judicial system is currently not functioning correctly as many of the judges are corrupt. Brazil's largest cities are also some of the most dangerous in the world. The disparities in the distribution of income tend to cause unrest and violence. The government's IBGE statistics agency says that the richest 10% of households had 44.5% of the nation's wealth, while the poorest 10% had only 1.1% of the wealth. This propagates certain risks as these disparities have led to the influx of dealing in cocaine and other narcotics. These activities are blamed for many of the 370,000 deaths by violence in Brazil over the past ten years. Drugs have financed arms purchases and intensified turf wars between gangs in Rio do Janeiro and other cities.

Data from Ipea: Institute of applied Economic Research, Brazil (December 2009)

1.

KEY ISSUES : Smart phone business environment in Brazil

1.1 Growth of the Brazilian smart phone market Brazil has currently been listed as one of the emerging countries which will drive growth in smart phone sales in coming years. The trends in the table below show the increase in growth of the market share according to shipments made. The prediction for 2016 is that Brazil will become a part of the top 5 countries with the highest share in smart phone market(Villate, 2012). Country level smart phone market share for 2011, 2012, and 2016 based on shipments2
Country PRC USA INDIA BRAZIL UNITED KINGDOM OTHERS TOTAL 2011 Market Share 18.2% 21.3% 2.2% 1.8% 5.3% 51.2% 100% 2012 Market Share 20.7% 20.6% 2.9% 2.3% 4.5% 48.9% 100% 2016 Market Share 20.2% 15.3% 9.3% 4.7% 3.7% 46.8% 100%

This growth is supported by study analysis conducted by WMcCANN3 and Grupo Mobi on research conducted by IPSOS Media CT4 which provides data showing that 179 million Brazilians were using smart phones and this included students, workers, the unemployed and housewives. These people were seen to fall between the ages of 14 and 59 years old. Further data from Nielsen prove that smart phone sales in the country increased to 179% in 2011 (from 2010), with Android having 61% of the market share by the end of 2011. (Ilusis Interactive graphics, 2012) This shows the rapid evolution of the Brazilian market in the last couple of years, making it a strategic market for the establishment of a new smart phone business, to be able to benefit from the imminent growth.

Source: IDC Worldwide Quarterly Mobile Phone Tracker, March 2012.

3 4

W/Brazil, iconic local agency merges with McCann Ericksons Brazil operations to form WMcCann. Ipsos MediaCT , media, content and research specialists conducted the research on consumer trends in smartphone usage.

Smartphone use
45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% High Class Middle Class Lower Middle Class Smartphone use

1.2 Consumer Behavior: Smartphone Usage The constant increase in the adoption of smart phone usage by Brazilians is reflected in the graph by showing what percentage of individuals in the various social classes that can afford or by any means do possess smart phones. 40% of smart phone users are high class individuals while the middle class closely follows with 33.7% and the lower middle class has 10%. This greatly reflects the consumer behavior with reference to smart phones. With a stable economy and increasing wealth among the middle class there is this increasing thirst for technology especially mobile technology. (Medeiros, 2011). This shows that Brazil is a likely profitable venture for smart phone business as it is evidently on its way to become one of the leading markets. This is a good time for a smart phone business to invest to be able to benefit from this rapid growth. The penetration rate appears to be good for all the social classes even including the lower middle class. According to the studies 40.5% of low middle class Brazilians attested to the intention of changing their mobile phones in less than 6 months.

1.3 Active Internet Use in Brazil In 2011, Brazil recorded one of the highest growths of 3G in Latin America. This was an increase of 130% when compared to the growth level of 2010. This is also propagated by the aggressive data plans that mobile phone carriers are offering for web-enabled phones and smart phone purchases, and this is pushing Brazil into a powerful mobile market. The number of active internet users in Brazil

in September 2011 was 46,300,0005. With the new number, Brazil beats Germany, France and the UK in number of active users at home or at work. The Brazil ranks third in the list of countries that monitor the internet using the same methodology and the United States and Japan are in the first place. This drive for web usage in the country supports the need for smart phones and hence the demand for this technology to be able to sustain the use of internet at every point in time.

1.4 Government Incentives It was reported in the Estadao Journal that it is the intention of the Brazilian governments to reduce the taxes placed on smart phones which are manufactured in Brazil. Brazils telecommunications minister Paulo Bernardo was reported in January to be putting together a petition for smart phones to be granted tax exemptions (OEPC, 2012). This is similar to the grants that have been offered for the production of personal computers and tablets. This is aimed at propelling the digital economy in Brazil as the demand is already high because individuals want to stay connected to the internet no matter their location. This idea of tax reduction for smart phones should therefore accelerate the implementation of new device manufacturing plants: including Huawei and Alcatel who have revealed their excitement with the possibility of this proposal being approved to be able to accelerate their plans to have local manufacturing in Brazil. According to the existing Law of Good, industrial taxes are reduced from 9.25% to 0, but the manufacturer must initially produce the device with at least 20% of local content to be granted fiscal benefit. In three years time the local content is expected to be increased to 80%. 1.5 Competing with emerging market multi-nationals As the largest Latin American economy and a potential leader in the smart phone business there exist many competitors who are already doing business in the Brazilian market and those who have intentions of entering into the market. Brazil is the field for top smart phone producers like and as mentioned before Android is currently holding more than 50% of the market. Typical examples of smart phone businesses that have been expanded to Brazil include Micromax and Dell and aside this are the numerous high end smart phone providers who work through agents like Palm, Window phone and HTC. As mentioned before there also is competition in the manufacturing aspect as recently Huawei has announced its intentions of entering into the market. The company will therefore have to strategize to compete fiercely against these entitities.

Data from Nielson Online Ibope

2.

The Brazilian business environment

2.1 General ease of doing business World Bank data ranks the overall ease of doing business in Brazil as 120 in 2011 and 126 2012 in out of 183 countries. This shows a drop in 6 places. Although the country is a high performing member of the emerging BRIC countries, this rank shows that it is among the lowest 1/3 of countries in terms of ease of doing business. This does not only affect domestic companies but foreign companies as well because it involves the need to follow very bureaucratic and time consuming procedures in order to be able to start a business in the country. The World Bank & IFC Enterprise Surveys 2009 reveals that senior managers often need to spend almost 19% of their time dealing with government regulations and that only 34% of companies agree that public officials interpret regulations consistently and predictably. Topic Rankings DB 2012 Rank
Starting a Business Dealing with Construction Permits Getting Electricity Registering Property Getting Credit Protecting Investors Paying Taxes Trading Across Borders Enforcing Contracts Resolving Insolvency

DB 2011 Rank
120 125

Change in Rank
5

127 51 114 98 79 150

133 53 109 96 74 148

6 2 -5 -2 -5 -2

121 118 136

116 118 137

-5 No change 1

2.2 Need for commitment The establishment of a foreign business in Brazil tends to require careful thought and preparation to make a commitment to remain in the country. Unlike many other countries in the world Brazil does not give the liberty for foreign companies to test the viability of doing business or finding a sustainable market in the country. Foreign operations or foreign business entities are required to exercise a lease on the premises from the very first days in order to initiate recognized business dealings with the

country. The setup of branches is allowed upon presidential approval. Due to the involving process the most viable option for a start is a subsidiary. Businesses must therefore be prepared to establish its presence in the country before progressing. The many steps involved in this process makes it very tedious for foreign business who want to start operations in the country because it involves obtaining operating permits and registering employees with the state unemployment insurance program (Nair, 2011) 2.3 Limitation for foreign businesses The need to preserve their domestic economy has caused Brazil to resort to the practice of providing laws that restrict the participation of foreign companies. These include reduction and limitation of products and services provided by foreign companies on the national market. To add to that there is a limitation on the percentage of stocks that one foreign entity can reach. Sectors that are totally forbidden are Radio, TV and publishing; air transportation; health care; security services. Those partially forbidden with condition include Cable television, Road Transportation. The sectors which are not forbidden happened to include telecommunications. This therefore opens the possibility for MEB mobile to consider extending their operations to Brazil. It must be noted however those licenses are provided based on the technological and financial potential of the foreign company. (Puin, 2012) 2.4 Tax burden in Brazil To begin with, a foreign company is resident if incorporated in the country i.e having a recognized subsidiary in the country as mentioned before. Therefore according to the tax laws, foreign companies are only subject to tax if they engage in certain sales and operations involving companies or agents who are resident in Brazil. It is further stated in the Brazilian tax laws that Brazilian branch offices, agencies or representative offices of companies domiciled abroad are subject to income tax on income arising in Brazil. Tax burdens in Brazil are however so high and has been reported to surpass 33% of the countrys GDP. This is a problem for both foreign and local businesses of the country. According to the Global Competitiveness Report for 2011-2012 by the World Economic Forum, tax regulations and tax rates are highlighted as two of the most problematic obstacles to doing business in Brazil. Global In 2011 Apple Inc. had to put on hold, the opening of a retail store in Brazil due to the high tax burden (Fujikawa, 2011). This is therefore an issue that must be taken into consideration when planning on entering the market. 2.5 Competing with local companies Although Brazil presents many opportunities as a potential success in the smart phone market, one cannot ignore the fact that in spite of the many opportunities, it is also beset with cultural difficulties (Nair, 2011). Brazilians are open to many cultures and foreign dispositions however this personal friendliness does not totally reflect on their appreciation of foreign companies. There is a deeply founded bias against foreign companies in Brazil (Team, 2012). This position stems from the fact that most multinational SMEs do not want to do upfront major investments before closing deals in the country. Brazils legislation therefore tends to give more accord to multinational corporations that are

willing to put in major upfront investments in the market. From a cultural perspective Brazilians are seen to be expensive and difficult to manage and this leads to a preference for local products and services even with higher prices or lower quality. 2.6 Corruption in Business One of the shortfalls of Brazil which is viewed as a serious threat which has to be dealt with is corruption. Brazil is said to be struggling with a political culture that observers view as corrupt and favoring vested interests. The current head of state has taken a firm stance towards intolerance for corruption and this led to the resignation of some high public officials from their positions. This cancer is extended to the area of business as well. In spite of the well-functioning business environment several studies have shown that corruption in Brazil is also another obstacle in the way of foreign businesses especially doing the entry period. This is supported by the Enterprise Surveys 2009 by the World Bank & IFC which reveals that almost 70% of the surveyed companies perceive corruption to be a 'major constraint' for doing business in Brazil. Again, according to the World Economic Forums Global Competitiveness Report 2011-2012, companies operating in Brazil give the likelihood of having to pay facilitation payments or bribes in relation to (a) imports and exports, (b) public utilities, (c) annual tax payments, (d) awarding of public contracts and licenses and (e) obtaining favorable judicial decisions an aggregate score of 4.1 (where 1 = very common and 7 = never occurs) (Brazil Country Profile, 2011).

3.

Recommendations

The following recommendations are being made to serve as possible strategies to help the company circumvent some of these challenges that could be faced upon entry into this market. The company should be prepared to face the possibility of not making their first usual margins on their first operations in the country. With reference to the tax burdens which are high in Brazil it is possible for this to affect the sales price because initially the company will be importing its products before exploiting the possibilities of establishing a manufacturing plant based in the country. As a new entrant it will be difficult for the company to make up for these burdens by placing a mark up on the price therefore the company would have to find means of hedging to support some of these initial short comings. At the same time the company should also try to find solution on how to reduce the tax burdens significantly by creating value in Brazil. Measures to enable this include subcontracting to Brazilian partners or hiring workforce in Brazil. This should be one of the imminent objectives of the company to relieve it of some of these tax burdens. In the long run in order to be more competitive the company should be able to establish its manufacturing operations which should comply with the laws that would make it possible to benefit from the smart phone tax exemptions which are likely to be approved in the near future. Creating local

value in combination with owning a local entity that can pay out dividends to the foreign HQ is usually the most optimal tax constellation for multinational SMEs. The challenge of local competition can be addressed by either finding the price point of your local competitors and matching or exploring the possibility of selling the products at a lower competitive price and then adding other services which will enable you to charge more to make up for the initial loss. The company must also make it a point to hire an intern or a trainee in their branch office to be able to address the language differences because they can sometimes serve as an impediment to progress. It is very difficult to come up with ways of dealing with the issue of corruption as a foreign entity in Brazil. As the government is still trying out harsh measures to combat the problem, it would be advisable for the company therefore to have very strict anti-corruption policies and disclose them publicly. This will show the societal goodwill of the company and enable all their potential and existent business partners to be aware that they are against corruption. Therefore as an example an Anti-corruption certification can serve as a clear positive differentiator for organizations doing business in Brazil.

4.

Conclusion

Brazil offers many opportunities to its investors. The difficulties that have been raised can be circumvented with well thought out strategies that can make the business survive in the country. From this report MSBS Mobile Company will therefore be advised that the most interesting country of choice for its expansion into Latin America is Brazil.

Bibliography
Brazil Country Profile. (2011). Retrieved March 31, 2012, from Business Anti-Corruption Portal: http://www.business-anti-corruption.com/country-profiles/latin-america-the-caribbean/brazil/generalinformation/ Castano, I. (2012, January 24). Carlos Slim May Pour $14 Billion To Strengthen Latin American Cell Phone Empire. Retrieved March 30, 2012, from Capital Finance International: http://capitalfinanceint.com/latinamerica.php Fujikawa, E. (2011, April 5). Why are the taxes in Brazil so high? Retrieved March 31, 2012, from The Brazil Business: http://thebrazilbusiness.com/reflection/why-are-the-taxes-in-brazil-so-high Ilusis Interactive graphics. (2012, March 9). Retrieved March 30, 2012, from Ilusis: http://www.ilusis.com/?p=1725 Medeiros, I. (2011, August 18). Consumer Behavior in Brazil: leading in worldwide purchase of mobile phones and HD TVs. Retrieved March 31, 2011, from Designative, Thoughts on design, technology and culture: http://designative.info/2011/08/18/consumer-behavior-in-brazil-leading-in-worldwidepurchase-of-mobile-phones-and-hd-tvs/ Nair, S. (2011, August 19). Top five Compliance Issues for businesses expanding to Brazil. Retrieved March 31, 2012, from Corporate compliance insights: http://www.corporatecomplianceinsights.com/top-five-compliance-issues-for-businesses-expanding-tobrazil/ Nair, S. (2011, August 19). Top Five Compliance Issues for Businesses Expanding to Brazil. Retrieved March 30, 2012, from Corporate compliance INSIGHTS: http://www.corporatecomplianceinsights.com/top-five-compliance-issues-for-businesses-expanding-tobrazil/ OEPC. (2012, January 25). Brazilian Government Studies Tax Reduction for Smartphones. Retrieved March 31, 2012, from Smart engagement: http://smart-engagement.com/blog/2012/01/25/braziliangovernment-studies-tax-reduction-for-smartphones/ Puin, K. (2012, March 29). Limitation of foreign Participation in Brazillian Companies. Retrieved March 30, 2012, from The Brazil Business: http://thebrazilbusiness.com/article/limitation-of-foreignparticipation-in-brazilian-companies Team, M. D. (2012, February 1). Practical Challengees in Brazil for Multinational SME's. Retrieved March 31, 2012, from Modern DC Business : http://www.moderndcbusiness.com/practical-challenges-in-brazilfor-multinational-sme%E2%80%99s.html Villate, R. (2012, March). IDC Latin America Predictions. Retrieved March 29, 2012, from IDC: http://www.idclatin.com/default2.asp?ctr=bra

Section One

To be completed by the student

Please tick as appropriate

MBA FT

Name (s): Akua Serwaa Ansah....................................................

MIB

Undergraduate

Certificate

......................................................................................................... .........................................................................................................

MBA PT

MSc

Diploma

Specialization .............................................................................

..............................................................................................................

Intake n : MIB31.............................................................................

Student ID Number (s): 111601 ....................................................

Grenoble Main Campus

Off site (state which one)

Subject : Business Operations of Emerging Economies............................................................................. Assignment

Oral Presentation

Exam

Title: Final Project ............................................................................................................................................................................................ I hereby declare that the attached assignment is my own work and understand that if I am suspected of plagiarism or other form of cheating; my work will be referred to the Disciplinary Committee which may result in my exclusion from the program. Signature : Akua Serwaa Ansah ...................................................... Date: 20 November 2011 ............................................................
th

Section Two

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