Competitive Brazil Challenges and strategies for the manufacturing industry

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Competitive Brazil Challenges and strategies for the manufacturing industry

•• The statistics mentioned in this book reflect the latest available information at the closing of this publication. The disclosure of data by the press or any other market sources updating the statistics exposed herein does not annul the informative purpose of this material, which is to analyze the changes and essential trends established and developed throughout the years, despite one-off changes or shortterm economic and business cycles.

•• The contents of articles written by the guest authors in this collection do not necessarily reflect the opinion of Deloitte.

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Contact for readers: comunicacao@deloitte.com

About DeloitteDeloitte provides services in audit, consulting, tax avisory, corporate finance, outsourcing, to clients spanning multiple industries. With a global network of member firms in more than 150 countries, Deloitte brings world class capabilities and deep local expertise to help clients succeed the best performance, wherever they operate. Deloitte’s 186,000 professionals are committed to becoming the standard of excellence and they are unified by a collaborative culture that fosters integrity, outstanding value to markets and clients, commitment to each other, and strength from diversity. Deloitte has been in Brazil since 1911. Nowadays, the Firm is one of the market leaders and its over 4,500 professionals are recognized by integrity, competence and capability to turn their knowledge out in the best solutions for their clients. Deloitte’s operations cover throughout the Brazilian territory, with offices in São Paulo, Belo Horizonte, Brasília, Campinas, Curitiba, Fortaleza, Joinville, Porto Alegre, Rio de Janeiro, Recife and Salvador.

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© 2012 Deloitte Touche Tohmatsu. All rights reserved.

Project directionJosé Othon Tavares de Almeida

Editorial boardJuarez Lopes de AraújoAltair RossatoHeloisa Helena MontesJosé Othon Tavares de Almeida

Editorial coordinationRenato de Souza (Mtb 26.563)

EditionJulio Meneghini (Mtb 52.308)

Editorial productionSthefani Tironi (Mtb 43.533)

Graphic production and image selectionElisa PaulilloOtavio Sarsano

Production supportEster RossiKarina SousaLi Ying Yu

Promotion supportAndrea BragaDébora CostaNadia Ikeda

Further economics informationFernando RuizGiovanni CordeiroGabriel Nickolas Cazotto

ProofreadingMiriam Moreira SoaresSonia Hagemann

English versionUnitrad – Profissionais em tradução

LayoutMare Magnum

PhotographsWalter Craveiro (project official photographer)Bruno Carvalho (Eduardo Raffaini)Izilda França (Pedro Suarez) Régis Filho (Carlos Fadigas)

Collaboration (pictures)FiatMonsanto

PressIntergraf Ind. Gráfica Ltda.

Print run2,500 copies in Portuguese version500 copies in English version

Collaborating companies and entitiesAlstom BrazilBASF Braskem CNI Cummins BrazilDow EcoverdiFiat/Chrysler GM BrazilICC BrazilJacto Monsanto BrazilPositivo Rhodia Sanofi Group Brazil

The manufacturing industry in Brazil attracts both companies and investors from all over the world, particularly at this historical time of our development. More than ever, our country is a market of great opportunities. No multinational industry today can afford to ignore Brazil in its strategies of growth for the next years.

Nevertheless, domestic industry experiences today a series of major challenges as a result of both foreign competition and historical internal restraints. Deloitte believes that to meet these challenges, it is necessary to understand them deeply.

This collection of articles organized with contributions from some of the main executives in this market offers us a panoramic view of these exciting, stimulating and complex times we are experiencing, and that helps us to build new paths.

Starting its second century of operation in Brazil in 2012, Deloitte has a privileged vision to help business leaders define the most appropriate strategies to compete and prosper in the country.

We wish everyone an enjoyable read.

Juarez Lopes de AraújoPresident of Deloitte – Brazil

New paths for national industry

“Domestic industry experiences today a series of major challenges as a result of both foreign competition and historical internal restraints.Deloitte believes that to meet these challenges, it is necessary to understand them deeply.”

Guest authors

José Othon Tavares de AlmeidaDeloitte leader in Brazil for manufacturing industry

André DiasPresident of Monsanto Brazil

Deloitte•–•local•and•global•leadership

Craig Giffi Consumer and industrial products leader, Deloitte United States (Deloitte LLP)

André Luis RodriguesFormer Chief Financial Officer (CFO) of Rhodia and presently Financial Officer of JHSF

Alfred HackenbergerPresident of BASF for South America

Carlos FadigasPresident of Braskem

Cledorvino Belini President of the Fiat/Chrysler Group for Latin America

Hélio Bruck RotenbergCEO of Positivo Informática

Heraldo MarcheziniGeneral director of Sanofi Group – Brazil

José Augusto Coelho FernandesExecutive director of the National Confederation of Industry (CNI)

Joe VitaleGlobal automotive sector leader, Deloitte Touche Tohmatsu Limited (DTTL)

Eduardo Tavares RaffainiDeloitte leader in Brazil for mining segment

Luc BurtonFormer Chief Financial Officer (CFO) of Alstom Brazil and presently Financial Officer of Puma Energy

Luiz Eduardo TalibertiCEO of the Ecoverdi Group

Marcos da Cunha RibeiroAdministrative director of the Jacto Group

Sandra MarianiFormer CFO of GM Brazil

Tadashi YamashitaLatin America treasury director for Cummins Brazil

Pedro SuarezPresident of Dow for Latin America

Marcelo Drügg Barreto ViannaVice president of the International Chamber of Commerce (ICC Brazil)

Douglas Nogueira LopesPartner of Deloitte Brazil’s Tax area

Deloitte•–•industry•and•business•expertise

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For a greater BrazilOvercoming the current challenges of the manufacturing industry in the country will require a broad pact of all market agents. Initiatives such as the “Bigger Brazil Plan” signal some alternatives and invite us to build joint solutions to benefit our competitiveness, with innovation and sustainability.

The manufacturing industry’s current agenda in Brazil reflects opportunities that result from the special position

the country has been gaining in the international scenario. With one of the largest and most dynamic domestic markets in the world, with solid economic fundamentals and a perspective of sustainable long-term expansion, it would be natural for Brazil to become one of the most important destinations attracting investment from multinational companies in the most diverse industries.

At the same time, however, our ever increasing intense connection with an economy that has reached unprecedented levels of globalization also has its troublesome side, which presents a number of large challenges for local

production activities. Recent sluggishness in the more mature economies and the rise of other emerging nations intensify the competition Brazilian companies face, making their operation within and outside our market difficult. In addition, we are facing dilemmas that are now common to almost all countries, such as relative deceleration of industrial production, a reduced share of total generated wealth and, even, the risk of deindustrialization in important sectors.

Neither can we forget the historical obstacles that harm operation of national industry, such as the “Brazil Cost”, infrastructure deficiencies and low-skilled labor. Our industry’s current challenges lead to a simple question: how do we ensure conditions so that it can be competitive and sustainable in the new global reality?

Introduction

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By José Othon Tavares de AlmeidaDeloitte leader in Brazil for manufacturing industry

Times of great challenges usually awaken the Brazilian people’s creativity and determination. This, more than ever, is a time to rethink models, reinvent practices and, primarily, for private initiative, the government and all of civil society to unite to promote the development of industry. All market agents need to unite around this pact.

The“Bigger Brazil Plan” (PBM in Portuguese), instituted by the federal government in 2011 and expanded in 2012 with the objective of stimulating the economy and, in particular, national industry, is one of the initiatives that today try to express the changes needed for the resumption of growth in the productive sectors. The participation of private initiative in the program, by means of representatives of the so-called Competitiveness Councils, legitimates its

purpose and offers the business community another way to position itself to face a situation that seriously affects its business. With the motto “innovate to compete; compete to grow”, the PBM, to the extent it is supported by modern Brazilian corporate leadership, has full conditions to generate practical results to benefit its own development.

Therefore, it is evident that to meet the complexity of our challenges, Brazil needs structural reforms in the most diverse fields. Tax exemptions, foreign trade stimulus, expansion of corporate credit, trade protection measures and incentives for significant sectors are some of the timely measures established by the PBM that need to be incorporated into the essence of a national development strategy. Today, Brazil has the responsibility to preserve and promote one of its most significant

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Colonial•BrazilThe Portuguese metropolis used to prohibit the establishment of factories in the territory from 1500 to 1822.

economic frontiers: one of the largest and most diversified industrial parks in the world.

In the same way, it is up to the business community to continue its efforts to adopt better business practices and continuously foster innovation, within a social and economic environment increasingly based on the values of sustainability – of the planet, its relations with society and the business itself.

The collection of articles “Competitive Brazil – Challenges and strategies for the manufacturing industry” has the merit of comprehensively addressing a broad set of issues that characterize the dynamics of productive activity in the country. Deloitte, which with its clients daily builds solutions to address the challenges presented here, had the honor to put together in this book

End•of•the••19th•centuryIndustrial development begins in Brazil, with coffee growers starting to invest part of their profits to create factories of textiles, footwear and other manufactured goods.

The•decades•of•the•1930s•and•1940sIndustrialization gains strength during the Getúlio Vargas presidency, with protectionist measures, infrastructure investments and regulation of the labor market.

Periods and moments that mark the history of productive activity in Brazil

1956-1960The president Juscelino Kubitschek opens the economy to foreign capital, attracting multinational companies, and establishes measures to support local industry.

1962Electrobras is created during the João Goulart presidency, supporting the generation and distribution of electric power that significantly benefits some industrial sectors.

1969Embraer is created, raising the global status of Brazilian industry. Its first challenge was line production of the Bandeirante airplane.

A development trajectory

“Our industry’s current challenges lead to a simple question: how do we ensure conditions so that it can be competitive and sustainable in the new global reality?”

Sources: The National Confederation of Industry (CNI) and Deloitte (consolidation of public information)

1939Brazilian industry benefits from the Second World War. With the fall in imports, local development accelerates.

1942The Vale do Rio Doce company is founded. By the end of the decade it would be responsible for 80% of Brazilian iron ore exports.

1946The National Steel Company is created, significantly increasing steel production which would support development of several industrial segments in Brazil.

1952The National Bank of Economic and Social Development (BNDES) is created, supporting the financing of industrial enterprises.

1953Petrobras is created, driving segments connected to production of goods derived from oil.

1975The government creates the Pro-Alcohol program to reduce dependency on imported oil, forcing industry to adapt some of its models to the new fuel.

The•decade•of•the•1980sHigh inflation and successive failed economic plans make Brazil unattractive. A decade largely lost for industrial development.

The•decade•of•the•1990sThe Real Plan is implemented and economic stability again makes Brazil credible to foreign investors and multinational companies.

The•decade•of•the•2000sThe entry of less privileged classes into the consumer market changes the country, while international competition increases in industry.

2011/2012The “Bigger Brazil Plan” is launched, bringing new perspectives for a national industry trying to improve its competitiveness.

A development trajectory

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a group of exceptional business leaders and experts around the major issues that impact Brazilian industry today.

The articles presented in this publication are grouped around two large areas: the first, emphasizes competitiveness, examining the country’s historical dilemmas and current

“The collection of articles ‘Competitive Brazil – Challenges and strategies for the manufacturing industry’ has the merit of comprehensively addressing a broad set of issues that characterize the dynamics of productive activity in the country.”

opportunities; and the second, addresses the issues of innovation and sustainability, taking into account the role of industry in the construction of new development models. From the views expressed here, the reader can tap into reflections at the highest level to help in developing strategies to benefit Brazilian industry.

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The challenges faced by global manufacturers have no boundaries. Global economic uncertainty has become the new normal. Resource scarcity, new patterns of consumption, climate change, new patterns of mobility, and the convergence of new technologies are among the global megatrends reshaping the global manufacturing industry landscape.

These megatrends and challenges at the same time also provide opportunities for manufacturers. Staying competitive is about not being afraid to reinvent your company to adapt to new situations. Leading manufacturers achieve profitable growth by driving excellence in areas such as product development. They also harness the power of collaborative innovation and master the art of managing the complexities of their global value chain.

We hope that you enjoy this special collection of articles organized by Deloitte. The articles offer valuable insights on what it takes to compete in Brazil and how manufacturers can be successful in an ever-evolving global landscape.

Tim HanleyGlobal Leader, ManufacturingDeloitte Touche Tohmatsu Limited (DTTL)

Competing in an evolving landscape

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Contents

16 Brazil in the new world orderWith a privileged position in the global scenario, Brazil should focus development on three pillars: infrastructure, education and innovationJoe Vitale and Craig Giffi

20 New times and old challengesOpportunities and dilemmas in a country increasingly attractive to multinational companiesAndré Luis Rodrigues

26 Infrastructure for greater growthThe need to resume investments and face the “Brazil Cost”Luc Burton

28 In the eye of the multinationalsThe third wave of foreign investment in national industry Tadashi Yamashita

32 Together for changeThe importance of discussing our competitiveness in a country that has become expensiveAlfred Hackenberger

36 Facing the Chinese modelThe need to more broadly understand Chinese companies’ business model José Augusto Coelho Fernandes

42 Our challenges in the IT chainLessons of the Brazilian PC industry and the battle for fair competition within the country itselfHélio Bruck Rotenberg

46 A stronger link in the entire chainHow mining and steel can, together, face their own challenges and broaden their role in the country’s development even more Eduardo Tavares Raffaini

50 The country of the presentAn attractive domestic market and the challenge to conquer strategic sectors abroad are included in the agenda of the national automotive industryCledorvino Belini

54 The rise of automobilesStanding out in the global scenario, the great challenge of the sector in Brazil is now operational costsSandra Mariani

58 Challenges in tax controls The importance of good tax practices for industrial competitivenessDouglas Nogueira Lopes

Chapter 1The journey to competitivenessHow to face the country’s historical dilemmas and take advantage of current opportunities

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64 Limits and expectationsNew needs awaken a transformation in the essence of industry in the worldLuiz Eduardo Taliberti

68 Produce and conserve more Technology as a fundamental ally in the search for efficiency and sustainable practicesAndré Dias

72 Part of the solutionInnovation and collaboration as determinants of sustainable development of businessCarlos Fadigas

76 The role of life’s industryDialogue with stakeholders and the strengthening of corporative responsibility as essential for social and economic growthHeraldo Marchezini

80 The chemistry of innovationThe importance of the chemical industry for innovation and progress based on principles of sustainabilityPedro Suarez

84 Construction of a new futureAdoption of innovative and sustainable practices to influence operational and strategic business models Marcos da Cunha Ribeiro

90 Sustainability and social responsibilityNew challenges in managing the integration of organizational systems in search of industrial competitivenessMarcelo Drügg Barreto Vianna

Chapter 2For an innovative and sustainable futureThe role of the industry in a new model of development

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“Brazil Cost” • Infrastructure • Multinational presence • Manpower qualification • Foreign competition • Impacts of China • Internationalization • “Bigger Brazil Plan” • Cost management • Tax management • Basic industry

The journey to competitivenessHow to face the country’s historical dilemmas and take advantage of current opportunities

Chapter 1

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Brazil in the new world order

As a rising competitor, the country today has a strong position in the global scenario. To achieve its competitive potential viable in the new world order of the industry, Brazil needs to broaden its focus on the development of physical infrastructure and education, in addition to encouraging innovation.

For several years, Deloitte has collaborated with a number of organizations committed to manufacturing competitiveness at both a country and

international level. This past year, Deloitte served as Project Advisor to the World Economic Forum (the Forum) on a “Future of Manufacturing” project chartered to generate insights and a platform for informed dialogue between senior business leaders and policymakers about the pivotal drivers of change in the industry, today and in the future. Following the anticipated release of the Future of Manufacturing report in April 2012, the Forum with Deloitte will embark on the next phase of research on the topic of Manufacturing for Growth. The project is expected to provide CEO insights on how manufacturers are driving economic growth worldwide. Highlighting some of the perspectives from

these projects, this article provides a brief look at Brazil’s potential in a new world order of manufacturing competitiveness.

The manufacturing industry plays a vital role in the economic health of every country and has become increasingly more dynamic and competitive globally. As a resource rich nation with an attractive market for investment, Brazil has an opportunity to significantly increase its global manufacturing competitiveness by focusing efforts on developing the nation’s physical infrastructure and education system. Despite slowing growth figures, Brazil is seen as a strong competitor globally and is in a great position to create sustainable growth and prosperity.

Manufacturing•as•a•multiplierThe recent global economic downturn revealed the true value of the

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manufacturing sector in preserving and improving prosperity, supporting Gross Domestic Product (GDP) growth, and raising the standard of living. A globally competitive manufacturing industry can serve as a multiplier. It can create economic sustainability, fuel a country’s innovation, encourage more domestic and foreign direct investments (FDI) and most importantly, create jobs.

Understanding the breadth of today’s manufacturing industry and its multiplier effect on the domestic economy is essential. The multiplier effect not only creates jobs within the sector, but also creates jobs in areas such as financial services, infrastructure development and maintenance, customer support, logistics, information systems, education and training, research and development, healthcare, and real estate.1 In turn, this

drives the growth in demand for highly skilled workers and scientists, which underscores the importance of a strong education system. With manufacturing having the capability to create a positive cycle of prosperity for a country, it is important to understand the factors that enable the industry to remain competitive and thrive.

Top drivers associated with competitive manufacturing and deemed critical to a nation’s competitive position include labor and the availability of skilled talent, access to materials amid growing resource scarcity, energy and sustainability, the ability to innovate at an accelerated pace, and effective public policy that enables economic development around these factors. Out of all these factors, talent-driven innovation is viewed as the most important driver of competitiveness

By Joe VitaleGlobal automotive sector leader, Deloitte Touche Tohmatsu Limited (DTTL) Craig Giffi Consumer and industrial products leader, Deloitte United States (Deloitte LLP)

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Brazil’s•manufacturing•competitiveness•Three factors are likely to influence Brazil’s manufacturing industry competitiveness over the next several years1:

Physical infrastructure: the productivity of an industry in any country is directly related to the quality of its physical infrastructure for commerce. Reliable and efficient physical infrastructure such as roads, ports, electricity grids, and telecommunication networks play a vital role in logistics, moving raw materials and finished products on time and with minimum costs. Investing in effective infrastructure is essential. As host to the World Cup in 2014 and the Olympics in 2016, Brazil is expected to improve infrastructure and bring in foreign investment, which will likely also have a positive influence on improving the country’s manufacturing industry and competitive position.

Talent: the need to rapidly innovate and develop new products and processes has led to a growing skills gap. Shortages in skilled production jobs are taking their toll on manufacturers’ ability to expand operations, drive innovation, and improve productivity.3 In order for Brazil to sustain its competitive position and create a positive cycle of prosperity, the country will be as challenged as other nations to be a global leader in attracting, developing and retaining top science and engineering talent to drive world-class innovation, research and development, and close the skills gap.

Energy costs: clean, reliable energy directly influences production costs and is an increasingly important factor in determining global manufacturing competitiveness. Fortunately, Brazil is one of the few countries with a sufficiently large natural resource base coupled with a relatively advanced research infrastructure. This places the country in a unique position to capture more profitable stages of the value chain through alternative energies that are ecologically sustainable.

and is top-of-mind with manufacturing executives across the world.1

Talent-driven innovation comprises both the quality and availability of a country’s brain trust. This includes its skilled workers, such as scientists, researchers, engineers, and teachers, who collectively have the capacity to continuously innovate and, simultaneously, improve production efficiency. Talent has been described as both the key differentiator of a country’s competitive

edge in the 20th century and the most critical determinant of success in the 21st century.2

Competitive•positionBrazil continues to be viewed by manufacturing executives as a rising contender in the global manufacturing competitiveness race. Not unexpectedly, Asian giants like China, India, and the Republic of Korea are projected to dominate the scene over the next few years, out-positioning dominant

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manufacturing super powers of the late 20th century – the United States (U.S.), Japan, and Germany.

In order to remain competitive, Brazil will need to carefully navigate its position on foreign trade, exchange controls, and investments. Brazil’s pursuit of an industrialization policy centered on replacing imported manufactured products with domestically produced goods has yielded a highly diversified manufacturing sector.1 Although export promotion remains a policy priority, the current account deficit is expected to rise to an annual average of 4.0 percent in 2012 to 2016 as import growth exceeds that of exports.4 Concerns over a surge of Chinese imports has already led to some non-tariff barriers and protectionist measures particularly in the automotive and light manufacturing sectors.

With tax incentives for foreign and domestic investors, Brazil proves to be an attractive market for companies considering the country as an export base. Many manufacturers have already announced plans to expand operations, including Asian manufacturing newcomers who are installing facilities and/or distribution network channels in Brazil. An increase in foreign direct investment will likely create greater domestic competition and encourage government policy modifications to positively influence the state of Brazil’s manufacturing competitiveness.

The global manufacturing landscape continues to evolve and with this comes a shift in the drivers that enable manufacturers and nations to remain globally competitive. In less than a decade, a new world order for manufacturing competitiveness has emerged. Countries are placing greater emphasis on creating manufacturing- based economies that produce higher-value jobs, leveraging the multiplier effect, and rapidly growing their economic middle classes.3 As a rising global contender, Brazil has several factors that support a strong manufacturing competitive position. Building on the nation’s strengths while continuing to focus on developing physical infrastructure and education will enable Brazil to sustain manufacturing competitiveness and prosperity.

“As a resource rich nation with an attractive market for investment, Brazil has an opportunity to significantly increase its global manufacturing competitiveness by focusing efforts on developing the nation’s physical infrastructure and education system.”

1 “Global Manufacturing Competitiveness Index” (Deloitte Touche Tohmatsu Limited and the U.S. Council on Competitiveness, June 2010)2 “Ignite 2.0: Voices of American University Presidents and National Lab Directors on Manufacturing Competitiveness” (Deloitte Touche Tohmatsu Limited and the U.S. Council on Competitiveness, July 2011)3 “Boiling point? The skills gap in U.S. manufacturing” (Deloitte United States – Deloitte Consulting LLP – and the Manufacturing Institute, October 2011) 4 Economist Intelligence Unit (www.eiu.com)

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Since the term “emerging country” was defined, it has been associated with the word “opportunity”. It wasn’t long before a new acronym, BRIC1,

was created to designate the main players included in the group at the beginning: Brazil, Russia, India and China. Any novelty is bound to draw attention. From that point on, many companies and investors started a new adventure towards a future of enormous possibilities offered by each of these economies.

After working for a multinational operating in Brazil for 93 years, it was not difficult to sell our country during this exhilarating time. No one remembers any longer some words of the past that posed true ordeals for both Brazilian executives and foreign entrepreneurs, such as “hyperinflation” or “lost decade.”

New times and old challenges

Brazil offers great opportunities to multinational corporations today. Predictability, social mobility and cultural qualities justify the attractiveness. Some dilemmas, however, if not faced in time, may puzzle those that see us from outside.

The prognosis that this nation would someday be successful has proven true. The feeling that the right time and moment have arrived is a fact. Certainly, some investors on other continents regret not having believed that the prophecy would come true, since even with difficulties and complexities in the business environment, our future is quite different from the past.

Multinational•strategiesWhy Brazil should have already been, and today is and will definitely continue to be strategic for foreign multinationals? Being the sixth economy in the world, in and of itself, already makes this a country that deserves to be included, in a detailed way, in any strategic plan of successful enterprises. A new rhythm has started some years ago and we have perhaps arrived at the best economic moment of our history.

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By André Luis RodriguesFormer Chief Financial Officer (CFO) of Rhodia (until April, 2012) and presently Financial Officer of JHSF

We have slept long and have just woken up to a gigantic social mobility and a powerful market, which each year places millions of people at dynamic levels of consumption, soon to change classes and eager for goods and services, from food and home appliances, to cars and real estate. With that thus creating a virtuous cycle, with acceleration of formal employment, reduction of unemployment and healthy credit expansion.

When comparing the Brazilian reality to other emergent countries with the same potential, we may, in some cases, fall behind with regard to growth rate, but we definitely have significant qualities that position us in a particular way and which significantly favor us at the time investment decisions are made. We have a cultural affinity with most developed countries, a well-established democracy and

continually evolving governmental and administrative institutions.

After many attempts translated into reforms, our locomotive was put on track and advances broadly with well-defined macroeconomic fundamentals. Predictability has become part of our environment. All this allied with a pragmatic, well regulated, sophisticated and resilient financial and bank system. For those watching from outside, we have become a sound and reliable country, most significantly demonstrated by the positive way we coped with the recent world economic turbulence, coming out of it stronger and as a country more attractive to investors.

Privileged•qualitiesOur economy is well diversified and developed: agriculture, mining, manufacturing, services and a large

1 In 2011, the acronym was changed to BRICS with the entry of South Africa into the group

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industrial base. Brazil produces all that emerging nations need to grow. With the exportation of these products and the possibility to import what, in most of cases, the developed countries produce at low prices, our trade balance is attractive.

Our supply chain is also very privileged, due to our massive energy reserves, particularly those from renewable sources and minerals. We are practically self-sufficient in oil and world leaders in the development and production of biofuels. That is, sustainable development is a priority for any serious company and, in Brazil, we have countless conditions to develop these opportunities.

Equally, a multinational company is also attracted by the cultural qualities of our people. Brazilians have a strong enterprising spirit, are creative and skilled at working in teams – key components for innovation. They are open minded and can rapidly make changes, precisely correcting course when necessary, besides being strong as a result of the mixture of races and cultures, which creates an environment of respect for opinions, religions and beliefs.

In a country where it is possible to find the main global business megatrends, it is also possible to try all the growth processes: organic, given our economy’s growth rate; through innovation, given the rich raw materials base and trained teams; and through acquisitions, due to

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“After many attempts, translated into reforms, our locomotive was put on track and advances broadly with well-defined macroeconomic fundamentals. Predictability has become part of our environment. All this, allied with a pragmatic, well regulated, sophisticated and resilient financial and bank system.”

the varied conditions for consolidation of some sectors and other opportunities. The exploitation of oil in the pre-salt layer, the World Cup in 2014, the Rio de Janeiro Olympic Games in 2016, as well as important energy generation projects, already represent billions in investment and ensure continuity in the development of our economy.

To•compete•head-to-head•Since there is no easy competition, we face some challenges that may reduce our speed and raise some questions for those looking from outside. Our infrastructure, in some cases, is somewhat precarious, with a high number of blackouts in some regions, conservation of public highways far below that of private ones, airports that cannot handle the increasing number of passengers, and an incipient metro and railroad network, when compared to developed countries.

In the education field, we are unable to cover the demand for professionals that the expanding economy requires. Our education level is still lower than that of the majority of the emerging competition and, even with advancement in some of the rankings, we graduate doctors at a rate five times lower than developed countries, and we are still in the 24th position in volume of patents registered, according to the most recent findings available on these topics.

Actions are being taken and the solutions will come with time. Consequently, more companies will be attracted by these opportunities. What may really dissuade foreign companies are the factors that place us in a difficult competitive situation. We came in at a poor 53rd in the ranking of 142 countries released by the World Economic Forum in 2011. What is remarkable is the excessive bureaucracy in our business

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21.323.1 23.6

27.229.4

32.7

41.3 41.8 41.2

45.3

Credit volume(% of Gross Domestic Product – GDP)

Sources: Research – Deloitte (based on data from the Brazilian Institute of Geography and Statistics – IBGE and the Central Bank of Brazil – BC)

* Data related to the metropolitan areas of Salvador, Recife, Belo Horizonte, Rio de Janeiro, Porto Alegre and São Paulo

Optimism•justified•by•numbersBrazil is regarded as serious and reliable as a result of the country’s recent economic and social evolution

10.5 10.9

9.68.3 8.4

7.46.8 6.8

5.3 5.2

Unemployment rate* (In %)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Nominal average income*(In R$)

874 862 9081,011 1,086 1,162

1,282 1,3441,515 1,623

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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“Actions are being taken and the solutions will come with time. Consequently, more companies will be attracted by these opportunities. What may really dissuade foreign companies are the factors that place us in a difficult competitive situation.”

environment, an inefficient and complex system, with close to one hundred taxes, resulting in a very high tax proportion in relation to company profits. The two issues make it difficult for private initiative to decide to play a role in solving these dilemmas.

We cannot miss the opportunity available at this time. To ensure a successful future, it is now time to have a State program addressed to the bottlenecks that undermine our competitiveness, having in mind that, if with so many difficulties we were able to attract the largest companies in the world, with implementation of the reforms already understood as necessary, Brazil would soon occupy a better position among the largest world economies.

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Infrastructure for greater growth

To realize its potential for economic expansion, the country needs to confront its “Brazil Cost” and invest strongly in infrastructure, ensuring the global competitiveness of its domestic industry.

The last 60 years of Alstom’s and Brazil’s shared history are witness to a stable and mutually beneficial collaboration. Alstom has

been active – and continues to be – in all the large Brazilian projects, bringing the country innovative and cutting-edge technology in the energy and transportation sectors. Its financial partners – French and those of other countries – contribute equally to make a large number of these projects possible. During this process, Alstom has learned much from its activity in Brazil and has a clear vision of what the country strategically represents today.

Brazil is an important country today whose weight should grow. This trend is strengthened by the growth potential of the so-called “emerging” countries. In addition, due to its cultural characteristics – openness

to new initiatives, a dynamics of sustainable implementation and creativity – Brazil should increasingly confirm its role as a “laboratory of good practices,” whether of a technical or managerial nature.

The country’s growth path is wide and the infrastructure area is one of the great drivers of this expansion. We are experiencing a decisive moment in this environment and the investment possibilities are limitless. The infrastructure bottlenecks must be overcome so that we can reach all the potential of a country of continental dimensions. The economy is growing and Brazil is becoming a power of the 21st century, attracting direct investment and intensifying local sales.

Invest•to•competeThis picture is only clouded by the “Brazil Cost”, this set of obstacles of a fiscal, legal,

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financial and logistic nature that undermines the competitiveness of Brazilian companies, as well as, certainly, the competitiveness of the entire domestic market in relation to the ability of importers and exporters to deal with international competition.

Therefore, even more investment in local industry is needed in order to create significant turnover in the domestic economy. It is important to recognize that attracting new technologies or importing solutions is not enough. Increasing investment is needed to generate jobs, income and demand.

We have a wealth of natural resources and growing manpower. With the correct public and private initiatives it is possible to guarantee the high expectations placed on us, and infrastructure is an essential aspect of the development of all this potential.

By Luc BurtonFormer Chief Financial Officer (CFO) of Alstom Brazil and presently Financial Officer of Puma Energy

Investment•lower•than•growthReturning to the 1970s levels of investment in infrastructure is essential to lowering the “Brazil Cost” for companies that operate in the country.

0

1

2

3

4

5

6

1970 1980 1990

Water and sanitation Telecommunications Transportation Electricity

Investments in large areas of infrastructure made in recent decades (% of GDP)

Sources: consolidated using numbers from the World Bank, the Institute of Applied Economic Research (IPEA) and the National Bank of Social and Economic Develop-ment (BNDES)

2000

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In the eye of the multinationals

The growth of direct foreign investment entering Brazil shows its significance in the revenues generated by subsidiaries established in the country. In its third major wave of attracting international capital at the moment, the country should make efforts to gradually reduce the “Brazil Cost”.

The first wave of foreign investment in Brazil occurred during President Juscelino Kubitschek’s Financial Plan in the second half of

the 1950s, led primarily by companies in the automotive sector. At the time, multinational subsidiaries established in Brazil represented little in the global sales and profits of their companies.

Cummins, the largest independent manufacturer of diesel engines in the world, entered the country at that time through an independent distributor. The first factory was launched in 1971 attracted by the low-cost labor and abundance of raw material. Its production was directed basically to the foreign market. It was during the 1980s that the company’s business took form, driven by tax incentives such as the Befiex Program through which export companies

were immediately credited 14% of their transactions value. It was an incentive that could not be passed up. With it, Brazil significantly raised its exports, contributing to the trade balance.

The end of the Befiex Program in 1989 caused companies to turn back to the domestic market, gradually reducing exports and increasing domestic sales. In the first years of the 1990s, despite the opening of markets by the Collor administration, foreign capital continued to arrive as Foreign Direct Investment (FDI), however, at a historical average of around US$ 2 billion per year (current value), according to Brazilian Central Bank sources..

Many foreign companies were hesitant to making large investments in the country, mainly as a result of the high inflation level, which reached 3% per day at the

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time. The inflationary environment and the exchange rate volatility kept many businessmen and financial executives up at night, spending hours on end reasoning on how to explain their effects on the subsidiaries’ results. Many of them prepared feasibility studies to decide whether to stay in the country. It was then that multinationals started to invest heavily in systems of total quality, employing tools unknown at the time in the country, such as Kaizen, the Total Quality System, and the Failure Model and Effect Analysis (FMEA), among others.

The second wave of foreign investments, from my perspective, occurred at the end of the 1990s, more precisely in 1997, with Foreign Direct Investment (FDI) reaching US$ 18.9 billion. With the maxi-devaluation of the real during this period, foreign investments surpassed US$ 30 billion.

By Tadashi YamashitaLatin America treasury director for Cummins Brazil

With a devalued exchange rate, there was an opportunity to raise international capital to increase investments in Brazil. Privatization of companies in the energy and telecommunications sectors also attracted new interest. However, although the exchange rate favored investment, uncertainties caused at the time by the 2002 presidential election ended up driving away foreign investors and significantly reducing FDI from 2001 on.

With the continuation of the prior administration’s economic policy and the promotion of political stability by president Luiz Inácio Lula da Silva, foreign multinationals and investors saw that the new administration was not the threat that had been imagined before the elections and they resumed investment in the country. Starting in 2004, multinational companies also began to consolidate their operations

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in Brazil. Many of them made the country their regional headquarters for Latin America.

Modern•practicesIn addition to these facts, still at the end of the 1990s, many multinational companies brought their model of quality management, known as Six Sigma, to Brazil. Its concept is the reduction of variations in the process, increasing productivity and raising companies’ profits. All the companies that adopted the model were successful, both in the

international and domestic environments. Another important fact worth mentioning is that the products manufactured in Brazil started to strictly follow the international quality standards practiced by their parent companies. In addition, the companies modernized their industrial parks, globalizing products and using cutting-edge technology. With the globalization of products, the Brazilian subsidiaries were able to supply foreign customers, particularly in the case of production stoppages of units in other countries.

Given that Brazil has great mineral reserves and suppliers of primary products, the majority of multinational companies make the country an important base for supply of raw materials. Many of them continue to invest heavily and open new factories throughout the country. Chinese, Korean and North American companies, particularly in the automotive and construction machinery sectors, are arriving and establishing new factories, mainly because of the 2014 World Cup and the 2016 Olympic Games, events that are attracting the third wave of productive capital. US$ 66.6 billion were invested in Brazil in 2011 alone (see chart on page 31).

The revenues of subsidiaries established in the country are significant today in the global context of multinationals. In the case of Cummins, for instance, sales outside the United States have already reached 60%.

“It is now up to the Brazilian government to do its part, by maintaining political and economic stability and gradually reducing the “Brazil Cost” and the level of bureaucracy, in addition to continuing to make important investments in the educational area to prepare professional and skilled manpower.”

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The Brazilian subsidiary now represents around 10% of global sales, compared to 4% at the beginning of the 1990s, contributing significantly to the process of exponential growth of the company. The subsidiary that once exported almost its total production is today focused on the domestic market.

It’s now up to the Brazilian government to do its part, by maintaining political and economic stability and gradually reducing the “Brazil Cost” and the level

of bureaucracy, in addition to continuing to make important investments in the educational area to prepare professional and skilled manpower, already scarce in our country. It is also up to the government to maintain the balance between domestic production and the foreign sector and avoid any surprises in the conduct of economic policy. With all these ingredients, Brazil, together with the other simmering emerging economies, will continue to be seen by multinational companies as a strategic and important country.

Brazil,•destination•of•the•worldEvolution of the flow of Foreign Direct Investment (FDI) in Brazil (In US$ billions)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

32.8

22.5

16.6

10.1

18.115.1

18.8

45.1

25.9

48.4

66.6

Political and economic stability favoring the attraction of FDI

Effect of the global

crisis

Historical record

Source: Research – Deloitte (based on Central Bank of Brazil data)

34.6

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Together for changeToday Brazil presents opportunities for local and foreign companies, but it has become an expensive country. The solution requires initiatives like the Competitiveness Council, part of the “Bigger Brazil Plan”, which enables the discussion and development of material actions to deal with loss of competitiveness in the industrial sector.

Close to fifty years ago, a BASF professional in Germany came to Brazil to help select a site for construction of a plant in Guaratinguetá

(SP) – still our largest industrial complex in the country. Upon his return to Europe, he noted: “Brazil is and will continue to be the country of the future”. Today, however, I must correct this: Brazil is already the country of the present.

This observation is not just the view of a foreigner seeing the wealth of natural resources and enterprising people. One can say Brazil is one of the main global markets based on the positive results of recent decades. The nation is experiencing an auspicious moment. It attained economic stability and is a power in agribusiness – the second largest exporter of grains after only the United States – with the potential to

expand its agricultural production without damaging the environment, thanks to the technology applied and the natural resources available.

In recent years it has also seen rapid growth in the mobility of the social classes, increasing the number of consumers with considerable purchasing power. Over the last 20 years, it has further benefitted from another competitive advantage: the demographic bonus – the country already has, and should continue to have over the next two decades, two workers for each retiree or child. This provides a favorable environment for economic development.

This scenario provides opportunities for both domestic and foreign companies. The country is considered one of the levers of the emerging markets, which are showing

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greater growth than the developed nations. In 2020, the emerging countries will be responsible for more than a third of the global Gross Domestic Product and will contribute with close to 60% of all global chemical production. In Brazil, data released by the Brazilian Chemical Industry Association (ABIQUIM) indicate that market growth in 2011 was close to 10%.

The chemical industry will play a particularly important role in market growth by driving innovation and contributing to sustainability in aspects related to natural resources, the environment, the climate, the area of food and nutrition and the quality of life.

In this context, BASF has defined seven strategic sectors in which it intends to contribute with solutions, helping the country capture value from the opportunities linked to global megatrends:

Together for change

transportation, construction, consumer goods, health and nutrition, electronics, agriculture, energy and natural resources.

A•more•expensive•countryThe promising portrait for the next years, however, is compromised by the structural challenges that over many decades have been slowing the full development of Brazilian industry, undermining the competitiveness of domestic production and threatening the sustainable growth of the economy.

The high tax load that burdens the purchase of machinery and equipment and the contracting of engineering services has been a constant inhibitor of productive investments. The tax incentives granted by the government are almost always short-term and they deter broader planning by businessmen. The high social

By Alfred HackenbergerPresident of BASF for South America

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Stimulus•to•competitiveness

With the “Bigger Brazil Plan”, started in 2011 and expected to run through 2014, the federal government intends to promote measures that bring more efficiency to the productive environment of the country. In the first half of 2012, a new package of goals and measures was announced to achieve the program objectives.

Goals• Encourage public and private investment;

• Increase competitiveness in Brazilian industry through productivity and innovation;

• Reduce tax, economic and financial costs.

Measures• Exchange rate: continuity of timely actions

on the exchange rate;

• Taxing: a continuous process of relaxation;

• Production: promote domestic production;

• Development: foreign trade financing;

• Trade protection: respond to international competition;

• Technological: incentives to the information and communications industry;

• Credit: Investment Support Program (PSI in Portuguese);

• Automotive: expand procurement of domestic components and ensure investment in research and development (R&D).

Source: Research – Deloitte (from consolidation of public data of April 5, 2012)

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“The chemical industry will play a particularly important role in market growth by driving innovation and contributing to sustainability in aspects related to natural resources, the environment, the climate, the area of food and nutrition and the quality of life.”

to more openly and constructively discuss the problems that affect each segment.

In the chemicals area, we expect that critical questions, as the cost of raw materials and energy, will be raised and addressed, in addition to effective and ongoing support for research and development (R&D). Bringing academia, the government and industry together is an initiative essential for improving Brazilian competitiveness.

We are optimistic that this joining of forces will result in effective changes and concrete actions to confront the loss of competitiveness in the industrial sector. And, the confidence of entrepreneurs and investors under a sustainable “Bigger Brazil” scenario will result in even more investment, compatible with the country’s potential, ensuring that this prosperity will be maintained today and always.

charges, that burden production, and the precarious logistical structure, that makes exports difficult, are other obstacles to development. Energy costs are the fourth highest in the world, seriously harming some industrial sectors, such as chemicals. Brazil has become expensive, very expensive.

Faced with these and other factors, it is not surprising that the Brazilian industrial GDP has shown only modest growth – the worst result among the BRICS. Some analysts have already begun talking about a process of deindustrialization. It is necessary to reverse the situation. We believe that the Competitiveness Council, which is part of the “Bigger Brazil Plan” (see chart on page 34) and whose purpose is to analyze the factors affecting the efficiency of Brazilian industry and propose measures to counteract them, will allow the government, workers and businessmen

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Facing the Chinese model

To deal with the challenges presented by the Asian giant, Brazilian industry needs a strategy on two levels: that of the country and that of companies. Understanding the government policies is not enough. It is necessary to understand the Chinese company, its business model and the process of globalizing its production chains.

The emergence of China presents new challenges for Brazilian industry and the country as a whole. The oriental megapower’s

process of growth and diversification of its industrial production has brought opportunities and, on a larger scale, challenges for practically all elements of Brazil’s productive sectors, which have seen their positions in the foreign and domestic markets affected.

Brazil’s ability to deal with the challenges presented by China requires strategy changes on two levels: that of companies and that of the country. Research by the National Confederation of Industry (CNI) has monitored China’s impact on Brazilian companies and how the local industry has reacted (see chart on page 40). In general, the conclusions of this research show that the companies

that intend to survive these generalized impacts have to evaluate their weaknesses and strengths with regard to Chinese competition. This requires identification of competitive advantages, both in their operation as well as in relation to the institutional and market environments in which they operate, including an evaluation of where China closes or opens possibilities for insertion in global production chains.

For formation of a strategy, it is important to understand the connections between insertion patterns in global chains, engineering and business models. The risk of focusing all our attention to the “Brazil Cost” issue and unfair competition lies in that we can lose sight of the size of the challenges that must be faced.

The case of the United States is illustrative. There are many explanations for North

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American loss of manufacturing leadership in many industries, but the fact is that some countries now have more efficient production. This can be objectively verified: the number of hours to produce a product, the number of years to move from the research phase to production and the accuracy of machinery, for example.

The lessons of demobilization of manufacturing in the United States and of manufacturing growth in other countries relates to productivity, innovation and the understanding of the involvement of different industries in global production chains. This agenda will determine Brazil’s ability to develop its new industrial base. The center of reaction policy is in the companies. It is their reaction that will, in fact, provide support.

Understanding•local•companiesTo understand China, it is important to understand its companies’ business model and how they integrate with global production chains. They take advantage of the fragmentation of production on a global scale, stimulated by gains in economies of scale and helped by the development of the container in transporting cargos and its corresponding logistics infrastructure, as well as by the significant drop in the cost of data transmission networks and by industrial policies consistent with this environment of fragmented production.

China was a major beneficiary of the process of globalization that occurred at the end of the 20th century and start of the 21st. The ability to connect to this new environment explains one important source of its growth and its transformation

By José Augusto Coelho FernandesExecutive Director of the National Confederation of Industry (CNI)

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rapidly into new niches after having a clear vision of the profitability of the original invention.”1

Beyond•the•public•policiesChina as an industrial platform benefits from a geographic advantage: its location in an area favored by a network of super ports that connect different countries – Japan, South Korea, Malaysia, Singapore and Thailand, among others – in a strong productive integration of a wide base of suppliers located in the various markets of the region. This productive base, a true industrial ecosystem, has also developed an extraordinary capacity to produce with flexibility and reconfigure processes to supply large quantities and a varied mix of products.

The key issue is that, to build a Brazilian industrial strategy with respect to China, the understanding of its public policies is not enough. The starting point for developing a long-lasting strategy is to understand the Chinese company, its business model and the evolution of the process of globalization of production chains.

in the center of the production networks of practically all industrial sectors.

As it captures portions of the fragmentation of production on a global scale, China is gaining basic advantages associated with economies of scale and of scope, and learning born from specialization. These economies lead to a system that operates with margins much lower than those of more vertical industrial systems. This is the primary source of Chinese competitiveness.

Specialization strengthens this movement by encouraging focus, efficiency and the development of specific knowledge, more difficult to achieve in less specialized industrial structures. In one of their books, the authors Dan Breznitz and Michael Murphree, academics from the Georgia Institute of Technology, synthesize the Chinese model: “China’s capacity for innovation is not only in the process (or increase) of innovation, but also in the organization of production, manufacturing techniques, technologies, delivery, design and in the second innovation cycle. This structure allows China to move more

“The risk of looking only for the problems of ‘Brazil Cost’ and unfair competition is to lose perspective on the scale of the challenges that must be faced.”

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Production chains are not static. They evolve due to changes in relative prices, technological transformations, logistics, evaluations of risk, the profile of demand, societal values – such as sustainability – and management models.

Production chains may be entering a new phase: from a focus on uniting multiple links of low cost to one of shorter chains structured in regional manufacturing networks. If this trend continues, the chances increase for Brazil to capture manufacturing opportunities. This potential will be greater and better if the country is prepared to offer efficient logistics, adequate communication systems, and business models open to integration and information sharing. No less important, to create a point-to-point strategy, the existence of innovative manufacturing companies with the ability to adapt will always be essential in our country.

Strategic•initiativesIn structuring a strategy for Brazilian industry to adapt to the impacts generated by China, the company is the starting point. However, there is a set of equally important actions that require joint public and private action. To better position national manufacturing with respect to the Chinese model:•• Increase the competitiveness of companies in the country: regardless of the scenario, Brazil needs to raise its competitiveness. China increases the

sense of urgency. Brazil today has an economy of high costs: taxation, logistics, infrastructure, wages, energy and credit. And all within an environment with an overvalued exchange rate. ••Strengthen the opening of the Chinese market: through its tariff schedule and non-tariff barriers, China makes import of Brazilian industrial products difficult. Brazil should have a strategy and action plan to deal with those problems identified. This is particularly important for agribusiness products, for which Brazil has clear competitive advantages. The action developed in favor of pork is an example of initiative that should be repeated.••Consolidate the strategy for natural resource intensive products: Brazil needs to build a strategy that exploits China’s dependency on natural products in order to maximize the benefits of this relationship. This approach involves actions in infrastructure, logistics and research and development (R&D).••Educate the market to identify niches and opportunities: the size of the Chinese market and its development perspectives require systematic work of prospecting, identification of opportunities and business promotion actions. ••Consider the opportunities for integrating with value chains: in fragmented chains, Brazil needs to identify the links in which the country can sustain competitive positions by means of economies of scope and scale,

1 “Run of the Red Queen: government, innovation, globalization, and economic growth in China”

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and the ability to innovate. Multinational companies have taken steps to avoid concentrating their inputs and raw materials in a few suppliers due to the risk of being without supplies in the event of natural disasters or political crises. This strategy represents an opportunity

for Brazilian companies to capture investment and integrate with global production chains. In other cases, due to China’s high level of competitiveness, the best strategy for Brazil is to maintain competitiveness by integrating with parts of the Chinese supply value chain. This is a step that is being taken by several Brazilian companies, both in connection with importation and investment in China.••Facilitate the structural transformation of Brazilian industry: China and Asia as a whole impose structural modifications on Brazilian industry. The critical question is whether the country has the capacity to develop new sectors and products that take advantage of good competitive conditions and meet the challenges of change, both global and of its industries. The size of the Brazilian market and its area of influence, as well as the opportunities related to pre-salt, renewable energy, products derived from ethanol and exploitation of biodiversity are vectors of this process of transformation.••Attract Chinese direct investment: China has become an important global investor. It is up to Brazil to develop strategies to capture Chinese Foreign Direct Investment (FDI). One area has become especially promising: infrastructure. Funds recently created for the sector, currently in the regulation phase, should be a powerful instrument

Action•and•reactionHow China impacts Brazilian industry and how it positions itself

Research conducted by the National Confederation of Industry (CNI) on the impact of the Chinese competition model on Brazilian companies points to a number of findings:

• Competition from Chinese products in the domestic market affects one in every four industrial companies and the exposure to competition increases in accordance with the size of the organization;

• The intensity of the competition varies by industry – those most affected are electronic and communication material, textiles, hospital and precision equipment, footwear and machinery and equipment;

• Competition with the Chinese is even more intense in the international market than it is in the domestic market;

• The number of companies that import raw material, final products or machinery and equipment has increased over time.

In reviewing Brazilian companies’ strategies to deal with this competition, the following patterns of reaction stand out:

• Half of the companies have already developed a strategy to deal with the competition (the rate varies in accordance with the size of the organization);

• The main actions involve investment in the quality and/or design of products and reduction of costs and/or gains in productivity;

• The portion of large companies that already have their own production facilities in China is 10%, concentrated in four industries: automotive vehicles, machinery and equipment, electrical machinery and materials and electronic and communication material.

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for achieving this objective. Note that Chinese investment has increased in Brazil and, more recently, it has also begun competing in the manufacturing industry.••Develop a trade strategy focused on the interests of industry: one of the paths toward confronting the Chinese challenge is to develop a network of trade agreements in markets significant for Brazilian industry. Free trade agreements result in the establishment of preferences. To the extent that Brazil can succeed in developing these agreements and China has difficulty doing so, our competitive capacity increases. For Brazil, it is especially important to maintain preferential margins in the Americas, where Mexico is the primary priority, and consolidate the penetration of Africa.••Coordinate international actions: undervaluation of the Chinese currency and the problems associated with China’s

trade and industrial policy – considering its conformance with the World Trade Organization (WTO) –, depend on coordinated actions in international forums.••Strengthen the trade protection system: it should be ready to use the mechanisms provided for by the WTO efficiently, competently and in a timely manner.••Monitor China’s economic evolution: Brazilian corporate and public policies in relation to China cannot be based on ignorance. Monitoring is important to identify how China will adapt to the challenges of strengthening its domestic economy and increasing its role in the international financial system. The probable increase in domestic consumption, the process of capital liberalization and appreciation of the yuan, the evolution of domestic costs and industrial policies deserve special attention.

“The lessons of demobilization of manufacturing in the United States and of manufacturing growth in other countries relates to productivity, innovation and the understanding of the involvement of different industries in global production chains. This agenda will determine Brazil’s ability to develop its new industrial base.”

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Our challenges in the IT chain

The success of the Brazilian PC industry, with the introduction of good public policies, has been supporting the growth of the official market. To ensure the ability to compete with large international groups, Brazil will now need increased surveillance to prevent unfair competition and to enforce clear rules to be applied to all.

The Brazilian personal computer industry can be considered a success case for the introduction of public policies focused on economic

and social development. The framework of incentives for personal computer (PC) production encompasses not only local manufacture of computers but also the development of a chain of inputs, such as motherboards, monitors, memory and hard disks, in addition to investments in research and development, nationally.

Consequently, the information technology sector generates jobs and fosters researches, creating a virtuous cycle for the country in terms of income and technology. Above all, the Brazilian model is fair, since it grants similar incentives to all manufactures, independently of their origins. This is

the reason why practically all significant multinational groups have a Brazilian production, providing consumers with access to a large range of brands.

The success of the Brazilian model has contributed to the growth of the official market in recent years. Before 2005, approximately 80% of the PCs sold in the country were offered by the so called “grey market” (those with some level of illegality in their chain). Currently, it is the official market that accounts for close to 80% of the amount sold in Brazil, according to International Data Corporation (IDC). In an increasing legalized manner, the Brazilian market has been expanding at a rapid pace, surpassing more mature economies such as those of the United Kingdom and Japan, to become the third largest global market for PCs. This is an irrefutable proof

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that the local production model does not pose any obstacle to market development.

The•international•competitionOne of the consequences of the successful development of the domestic market is that the good opportunities have encouraged multinationals – both North American and Asian companies – to increase their focus on our territory in recent years. As a result, the increased competition in Brazil has changed the industry’s levels of profitability, contributing to a convergence with levels close to those realized by developed countries. Although accelerated by the weak demand in the more mature economies, it can be understood as a natural process.

The episodes of unfair competition related to imported notebooks, a recurrent

problem in the country, are worrisome. Large volumes of PCs manufactures in Asia have entered the local market at quite reduced prices. This process has occurred with signs of under invoicing, since there is a tax burden of over 40% over imports of this kind, which theoretically would be sufficient to make the entry of finished computers into Brazil inviable. Deficiencies in our customs inspection system have allowed such imports, harming the domestic industry as a whole. The impacts have continued to the present, even after the implementation of inspection improvements by the government, since it is hard for computer prices to return to their previous level after having been strongly reduced in the market. The lesson serves as a warning to the government, that it should ensure equal competitive conditions in the official computer industry.

By Hélio Bruck RotenbergCEO of Positivo Informática

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Besides greater market oversight efforts, another point that deserves attention from development policymakers is the exemption of taxes on revenue (PIS) and contributions for social security funding (COFINS) levied on imported PCs. It does not make sense to maintain such a benefit to foreign manufactures when we have already developed a local industry with production capacity well

matched to demand. This would not be protectionism, given the increasing participation of foreign companies with local production in the Brazilian PC market.

Market data support this thesis. Presently, the sales ranking of the five largest manufacturers already includes four multinational groups. Two years ago, Brazilian companies dominated this list. Positivo Informática is the only domestic manufacturer that has maintained a solid position in the Brazilian market, a sales leader for the past six years according to International Data Corporation (IDC).

It is possible to operate in this market and compete with large international groups. Our leadership in the market evidences that, a natural consequence of a formula that generates value for customers, nimble management, and a rigorous search for competitive costs. It is fundamental to have clear rules applied to all to enable the Brazilian market to maintain its growth trajectory, contributing to the technological development of the country.

“Above all, the Brazilian model is fair, since it grants similar incentives to all manufactures, independently of their origins. This is the reason why practically all significant multinational groups have a Brazilian production.”

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“It is fundamental to have clear rules applied to all to enable the Brazilian market to maintain its growth trajectory, contributing to the technological development of the country.”

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A stronger link in the entire chain

As essential bases of the manufacturing industry chain, mining and steel can, together, starting with more cooperative actions between them, better meet their own challenges and expand their role in the country’s development even more.

The mining and steel sectors are at the base that supports the industrial development of the country. By

understanding the challenges that both currently face and evaluating the ways to meet them, in reality we are actually discussing ways to expand competitiveness in all sectors of the manufacturing industry. And this is exactly what we need at this time.

In analyzing the proximity and interconnection between these two sectors, greater collaboration between their respective agents can be seen as a trend, both emerging and necessary. In spite of the numerous challenges the mining sector faces – new sources of financing, increased costs and competition for resources from the energy

and infrastructure sectors – and in the steel sector – always looking for ways to protect itself from commodity price volatility, starting, for example, with hedge operations by participating directly in financing the mining sector –, there is still room to make progress in the two areas. The growing number of joint ventures between companies in the two sectors to optimize their operations already shows this movement of greater cooperation, which can only grow.

Volatility•and•other•issuesIn mining, the main issues that affect the sector should continue practically unchanged over the next years. However, from a macroeconomic and geopolitical viewpoint, it becomes clear that the difficulties that plague the industry are rapidly reaching an extreme and unprecedented level.

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By Eduardo Tavares RaffainiDeloitte leader in Brazil for mining segment

Cost increases are not new, but they are larger. Changes in fiscal and government policies have been taking place for years, but the associated costs and their unpredictability have increased. The price volatility of commodities is greater than ever, in part, due to market uncertainty and the unprecedented demand from governments and companies in Asia. Issues related to sustainability, which involve conservation of the environment and the guarantee of human rights in work practices, have frequently been transformed into cases of community activism and social unrest.

The shortage of labor, on the other hand, continues to increase. Companies’ cash on hand has increased, resulting in growing expectations on the part of shareholders. Investment project portfolios have assumed an increasingly significant

role. And, in addition to all this, the regulatory environment continues to be restrictive.

Events that normally occur every 100 years are also taking place with an alarming regularity. In addition to the long-term effects of the global financial crisis that continue to reverberate, primarily in Europe, destructive weather phenomena are taking a toll.

To the extent that these global forces converge, the leaders of mining companies must look beyond the traditional scenarios used in their planning. To prepare themselves for the risks not previously predicted, companies must begin to incorporate more complex scenarios into their strategic planning. They must also be ready to look for nonconventional solutions to conventional

48

challenges if they really expect to resolve some of the sector’s most endemic issues.

Steel•and•synergyIn steel, global competition is even stronger. The steel produced in countries such as China and India is able to enter the country at competitive prices, strongly affecting local suppliers. In the largest

competitors in the sector, at least those that have attractive prices – again, the Chinese and Indians –, greater synergy can be seen between mining and steel, which leads to competitive gains in the global area and offers a better base for sustaining industry. Might this be an interesting path for Brazil? Possibly. This is a factor that depends on dialogue and the cooperation of the government as leader of the debate.

Brazil is one of the largest producers of iron ore in the world and also has an important position in other minerals. In steel, we are one of the ten largest. Shouldn’t the manufacturing industry have a competitive advantage as a result of these positions?

Reflection on the role of basic industry in supporting the manufacturing chain cannot be occasional. Various elements that are directly related to the challenges of steel and mining should be brought into the debate so the country can take care of the manufacturing industry chain as a whole, considering all its links and each one individually, focusing on competitiveness and the best cost-benefit of the products that reach the final consumer – whether in the form of a car, a refrigerator or a computer.

“Reflection on the role of basic industry in supporting the manufacturing chain cannot be occasional. Various elements that are directly related to the challenges of steel and mining should be brought into the debate so the country can take care of the manufacturing industry chain as a whole.”

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The•ten•main•points•of•concernTo strengthen its operational model and deal with market volatility, companies in the mining sector, in Brazil and globally, must pay attention to some dilemmas that directly impact their operations. As the initial stage of the entire production chain and directly linked to steel, any problem present in mining has repercussions on the performance of the entire manufacturing industry.

1. The cost of conducting business: companies need to work to reduce costs, mainly, those related to capital projects, inputs and energy.

2. Chaos in commodity prices: the volatility requires strong preparation due to the uncertainty of Chinese demand and the crisis in the European Union.

3. The battle to maintain profits: the good results of the mining companies have led to changes in the regulatory environment, such as changes in royalty payments and taxes on profits, requiring a more structured financial model.

4. The restlessness of stakeholders: sustainability and corporate social responsibility are already mandatory elements just as important as production. Even more in an activity that so strongly impacts society.

5. The pains of the work market: the lack of talent to manage projects is growing around the world.

6. Dilemmas for investment projects: competition with other rising sectors for financing and labor increases risks and costs.

7. Nonconventional financing: the capital market is not the best option when mineral volatility is intense.

8. Large companies are getting larger: in expanding the range of investments worldwide, adoption of controls and systems capable of monitoring foreign investments is essential.

9. Volatility is the new stability: critical cycles are occurring in increasingly short periods of time. Mining companies must develop operational plans to prevent the chain reaction even before the cycles are triggered.

10. The regulatory rush: throughout the world, laws are becoming stricter to avoid economic crises such as that of 2008. There will be increasing pressure to review the degree of regulatory compliance.

Source: “Tracking the trends – The top ten issues mining companies may face in the coming year” (Deloitte, 2012)

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The country of the present

The numbers for the Brazilian economy show a promising future in which the automotive industry has opportunities and challenges. Such an attractive market attracts global attention and forces the Brazilian product to compete domestically and cross borders, winning strategic sectors.

There are times in history when reevaluating the past and reviewing strategies, lessons and concepts can be quite an enriching and

surprising experience. Fiat itself, in a successful advertising campaign, has once used the slogan: “It’s time to review your concepts”. We proposed this change of vision at the time Brazil was still considered by many to be the “country of the future” – of a future that did not seem to want to arrive.

A little more than a decade after the campaign, it is both ironic and natural to see the robust numbers for the Brazilian economy printed in the media. Its performance quickly overcame the effects of the storms and uncertainties that transformed the global scenario starting in 2008 and made the country a good

destination for capital coming from several financial centers. According to the Central Bank (BC), Direct Foreign Investment (FDI) totaled more than US$ 66 billion in 2011, equal to 2.7% of the Gross Domestic Product (GDP) for the same period.

Even with the crisis in Europe and the international economic and political uncertainties, investor optimism with respect to Brazil was not hurt and is a consequence of the large driving forces of our economy: the size and the growing quality of the domestic market. This is a consequence of the virtuous cycle that was triggered by stabilization of the economy in the first half of the 1990s and which was consolidated in subsequent years by the good economic fundamentals and the combination of “development” and “social inclusion” which have guided economic strategy over the last decade.

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The researcher Alan Kay, one of the pioneers of personal computing, said that “the best way to predict the future is to create it”. In the recent past, Brazil knew how to develop its large domestic market and, thus, project its future. Policies to reduce inequality helped almost 50 million people join the middle class over the first decade of the new century and in following years, according to the Getulio Vargas Foundation (FGV). Who would have imagined this in Brazil during the 1980s, the “lost decade”?

The repeated desire of the government to maintain the level of consumption through stimulus mechanisms, to reduce interest rates, to preserve economic fundamentals, and to increase the minimum salary, among other factors, contributed to strengthening the domestic market. By the end of 2011, while European countries were suffering

from high unemployment rates, Brazil again showed that it was a nation that advances and surprises. The upcoming events that require infrastructure works, such as the 2014 World Cup and the 2016 Olympic Games, are also a stimulus factor for creating jobs.

Challenges•for•the•automotive•sectorFor the automotive industry, the Brazilian scenario is one of opportunities and challenges. In the first place, there is much room for growth. While, in Europe, the automobile market is practically one of replacement since the rate of motorization has already reached two people per vehicle on average, and, in the United States, this number has reached 1.2 vehicles per person, in Brazil, there is great demand to be met. The country has one car for every 6.4 people. If we wished, for example, to bring our rate of motorization up to

By Cledorvino Belini President of the Fiat/Chrysler Group for Latin America

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that of Argentina, we would need to add a national fleet of another 17 million automobiles. This amounts to five years of domestic production.

This scenario of vast opportunity also brings the challenge of growing global attention to such an attractive market.

The recession in the more developed economies led to large surpluses of manufactured goods globally, and this offer is being directed toward the emerging countries, strongly impacting the industrialized product import agenda. The domestic productive sectors and the government are working to develop an industrial policy that strengthens the Brazilian product, encouraging innovation and strengthening production chains, in order to regain competitiveness.

Our challenge is not only to be able to compete with imported products in the domestic market, but to cross borders, to confront the competition in global markets and gain technological leadership in strategic sectors. The automotive industry, which represents 23% of the industrial Gross Domestic Product (GDP) of the country and a little more than 5% of total GDP, taking into account the production chain, is strongly engaged in this effort, particularly due to the impact its operations have on the entire Brazilian economy.

The•education•factorIt is important to emphasize that success in overcoming several domestic challenges, such as the search for systemic competitiveness and the sustainability of the vitality of the Brazilian domestic market, all depends on the same crucial point: education. The country has made advances in providing education for social

“The country has a privileged position in the international scenario, a diversified and technologically up-to-date industrial park, a financial system recognized for its soundness and good practices, a population keen on innovation and a powerful and young domestic market in its favor.”

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sectors previously excluded, but investment in the quality of public education is needed.

Higher education is a priority since it is responsible for the training of technicians, managers and leaders who will guide the productive processes and technological and social development. However, it is essential to universalize the quality of basic public education in order to strengthen citizenship, offer equal opportunities and ensure workers who can absorb, at a higher level, the knowledge that we need to achieve our potential as a nation.

Brazil can go much farther than it ever dreamed. The country has a privileged position in the international scenario, a diversified and technologically up-to-date industrial park, a financial system recognized for its soundness and good practices, a population keen on innovation and a vigorous and young domestic market in its favor. But we cannot lose sight of

“The best path is to optimize the capacity for investment in infrastructure, technology and education, without pressing the public accounts. These investments are the essential pillars for sustainable Brazilian development.”

the fact that the relative comfort of the emerging countries with respect to the crisis that persists in the more developed countries does not mean that we are immune from storms. In an interconnected world with completely interrelated markets, there is no place to hide.

The best path is to optimize the capacity for investment in infrastructure, technology and education, without pressing the public accounts. These investments are the essential pillars for sustainable Brazilian development since they signify the elimination of logistic and supply bottlenecks and the definitive inclusion of Brazilians in the process of producing economic goods and knowledge. The new span of the country and its ability to deal with uncertain times, supported by the strength of its domestic market and its investment capacity, is a reassuring vision, but it increases our responsibility to do the best we can based on our abilities.

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The rise of automobilesStanding out in the global ranking, Brazilian automobile industry has recorded good performance in the first decade of the new century, even in the aftermath of the global crisis. The industry now needs to face the challenge of operational costs to take better advantage of opportunities in such an attractive domestic market.

A few years ago, not even the most optimistic economists and futurologists could have predicted the real potential

of the Brazilian automobile industry. There was consensus on the country’s potential, but such a meteoric rise of the local automotive market within the global scenario was not expected. In 2006, Brazil occupied only the tenth position in the global automotive ranking. By the end of 2010, it had jumped to the impressive fourth position, behind only China, the United States and Japan, when considering unit sales (see chart on page 56).

In the first decade of the new century, the Brazilian automotive industry’s greatest achievement was the consolidation of a strong industrial park, supported by an excellent supply chain with a current

installed production capacity of up to 5 million vehicles per year. A picture that will continue to grow leveraged by companies’ new investment plans. Such perspective is based on existing and not yet exploited characteristics or on new events. Below, some factors that demonstrate this trend.

We have a population of almost 200 million inhabitants and one of the lowest ratios of inhabitant per vehicle on the planet – around seven, behind Mexico, Germany, United Kingdom, France, Japan, Italy and the United States.

The growth of the so-called “C” class that jumped from 63 million people in 2005 to more than 100 million in 2010 is an extremely impressive aspect of the Brazilian economy. It is a huge contingent of consumers eager for products such as

* Sandra Mariani has wide experience in the automotive sector, having worked at GM Brazil for more than a decade, holding the position of Chief Financial Officer (CFO) from 2009 to 2011

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automobiles. The Brazilians are supported by a sound and expanded access to solid, long-term credit, although interest rates continue to be very high. It’s also worth pointing out that default levels remain relatively low.

Prior events led to the consolidation of the domestic market, helping to lower dependency on the foreign market. Automotive industry export revenue continues to be significant, although restrained on due to the excessive appreciation of the real.

The Brazilian automobile industry has recorded successive growth in recent years, although it reached a more restrained level of growth in 2011. Within the context of the 2008 international crisis, the Brazilian automobile sector performed well in

comparison to other countries. Even considering the uncertainty of the current scenario, the industry in Brazil is expected to continue delivering sound performance in the mid to long term.

For those whose task is to plan investments in search of basic returns for shareholders, Brazil shows that it has eluded the perverse logic expressed in the economic jargon as stop and go, thus moving forward toward sustainable development.

Efficiency•in•cost•managementCompanies established in Brazil still face quite high operational costs. The situation has been made even more challenging by the relationship of the exchange ratio – with the appreciation of the real – and the increase in salaries. There is no doubt that the fierce competition between the traditional automakers and those recently

By Sandra Mariani*Former CFO of GM Brazil

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“In the current business environment, it is almost impossible to pass along the effective increases in the cost of inputs and in the production of cars. Therefore, efficiency is an increasingly essential condition to compete in the Brazilian market.”

Rapid•evolutionAutomobile sales in the 20 major marketsIn thousands of units sold

Country 2008 2011 Var. % (08/11)

China 6,529 14,234 118

United States 13,222 12,778 -3

Japan 5,032 4,170 -17

Brazil 2,671 3,425 28

Germany 3,318 3,403 3

India 1,657 2,800 67

Russia 2,925 2,653 -9

Source: Deloitte – Research (data from Jato Dynamics and Anfavea)

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entering the domestic market will demand not only an intelligent strategy, but a greater effort by all of us to control costs, eliminate wastes and simplify the how we approach all aspects of the business. In the current business environment, it is almost impossible to pass along the effective increases in the cost of inputs and in the production of cars. Therefore, efficiency is an increasingly essential condition to compete in the Brazilian market.

The big challenge is, in part, counterbalanced by the perspective that the country will continue to enjoy political stability, supported by factors such as sound macroeconomic fundamentals,

increase in family income, maintenance of credit and strong global demand determined by China and the other emerging markets, in addition to the likelihood that commodities prices will remain at a high level.

Added to that are elements such as the start of pre-salt oil exploitation and the holding of mega-events such as the World Cup and the Olympic Games, which will require large investments in logistics and infrastructure. That is, we have many reasons to continue believing in the growth potential of Brazil’s economy and industry, as well as in new opportunities for those intending to invest in the country.

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Challenges in tax controls

The growing evolution of the tax system in the country shows the need for good practices in managing company taxes, a critical point for ensuring industrial competitiveness.

In the field of tax controls, there are still many challenges for Brazilian companies to tackle. Even with the advances provided by adoption of a system that

allows presentation of electronic files to the tax authorities – given the ease of verifications and testing information –, there is a long road to be traveled to ensure more efficiency in companies’ daily lives. Statistics show, for example, in the light of the effects of tax deficiency notices, that electronic cross-checking of information has led to increased government revenue, demonstrating various levels of errors and weaknesses in the management of company risk.

By adopting an electronic system for sending information to the tax authorities, Brazil has jumped ahead of other countries. The era of information

technology and the concrete effects of electronic inspections are undisputed. There were concerns about the program when it was first announced, due to its extremely large scale. However, its implementation and operation took place in a relatively short period of time, proving that the forces that advance or hold back social and economic changes really result from the priorities that each receive from the government. The Public Digital Record-keeping System (SPED) is one of the programs that shows this advance.

In this context, it is necessary to rethink some company processes and needs to adapt to this new tax authority era, highlighting the importance of training professionals in the area to use appropriate technological resources and support decision making in the best ways. Starting

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from these points, we can make some observations about the Brazilian tax model, which is both one of the most sophisticated in the world and one based on a rat’s nest of taxes, fees and contributions distributed among the three levels of government.

Professionals dedicated to the tax practice must simultaneously develop their technical knowledge and their practical experience in law, accounting and technology. However, practice itself has shown that this mix of affinities is not easy to find. In addition to these capabilities, the new technological era also requires a considerable change in professional behavior.

This era results from the urgent need for cultural change so that the new demands can be met. Aspects that were previously “less important”, that did

not get the proper attention of those responsible, are currently essential to activate the correct fields of electronic files. Among them, we can mention codes and tax substitution.

Because of the demand that tax control by the fiscal authorities operate at a high level of sophistication, technological resource compatibility in companies is also an extremely important point. Sometimes, multinationals operate with global contracts for technology management, which limits local operations and results in difficulties and additional costs when complying with tax obligations.

To better support decision making, information sharing is becoming increasingly essential. More than before and less than will be the case in the future, procedures related to debatable issues are visible

By Douglas Nogueira LopesPartner of Deloitte’s Tax area

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“Now that the race to meet the electronic requirements on time has passed – this aspect received much attention at the end of the first decade of the 21st century –, today the time is right for more rational planning to deal with the new reality.”

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and comparable among taxpayers. Consequently, the sharing of experience and opinions by taxpayers, through trade associations, technical committees, consultants and legal advisors, is increasingly more necessary than in the past.

Good•practicesOne may say that the demonstrated efficiency of the tax authorities in controlling taxpayers is not likely to change. On the contrary, the investments already made and the good results achieved tend to increase the tax authorities’ commitment to this new model.

The new reality requires good practices. Companies would be advised to anticipate possible information verifications and the total control of their risks. Nevertheless, practical implementation of the ideal situation is difficult and may involve major efforts – in terms of money and people –, and, in spite of its direct connection with profitability, the tax area is still subsidiary to others directly connected to companies’ actual business. In any event, a satisfactory level can be pursued that does not require much more than planning activities, monitoring and compliance – steps that are great allies in any management activity.

1 Blue Line is a customs regime that allows companies to complete the requirements necessary for export and import operations and, in this way, operate through a special channel for express treatment of customs clearance (Green Channel)

Now that the race to meet the electronic requirements on time has passed – this aspect received much attention at the end of the first decade of the 21st century –, today the time is right for more rational planning to deal with the new reality. For this, it is essential to review the internal processes related to taxes. It is most interesting that the initiative to rectify deficiencies can provide, in itself, a chance to rethink the business model by evaluating its efficiency from the tax point of view.

For a long time, the market did not adequately see the importance of indirect taxation. This amounted to 48% of Brazilian tax revenue in 2011 alone. Just in the area of customs, based on the regime called Blue Line1, one can see an opportunity that industrial manufacturers are not fully taking advantage of. Certainly, there is room to plan business in a more structured manner and legally manage the tax burden more efficiently to achieve desired profitability. To identify opportunities, however, we need to put the topics presented here on the relevant agenda of companies. Rethinking is needed and this seems to be a good time to put this into practice.

Innovation • Sustainability • Cooperation • Modern management • Technology • Efficiency • Green economy

For an innovative and sustainable futureThe role of the industry in a new model of development

Chapter 2

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Limits and expectations

More than ever, modern industry will need to obey the limits of natural resources and environmental impacts in meeting people’s expectations for products and services. For this, transformation of the world’s industrial essence will be needed.

The importance of industry in society always comes tied to expectations that products and services will be generated, essentially, for the

well-being of humanity and, at the same time, to contribute to social sustainability through the economic distribution of the resources produced.

Over time, industrialization was established as the great milestone for improving people’s living conditions by making more products available with significant gains in quality and a considerable improvement in the daily routines of an increasing number of people.

At the time of the Industrial Revolution, the changes were, in many aspects, an extraordinary evolution in the consumer market and in the opportunities offered.

All the components to attain this objective were implemented without any type of questioning, permitting workers and nature to be exploited in a compulsive manner.

The new products and the enormous evolution provided to humanity as a whole justified all the models applied at the time in relation to the worker, the factory employee and nature. A polluting chimney was something to be proud of. Movement from rural areas to the cities and the opportunity to enjoy, even if in a minimal way, situations absolutely unimaginable in their places of origin made this sub-human system present in the routine of the workplaces viable.

On the other hand, it was also the opportunity to learn a new skill, to operate new machines and make new products with enormous impact on society. The

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possibility of entering a new socioeconomic class was then opened, leading, if only timidly, to social progress. The unfolding of this movement brought with it a high cost for workers, with conditions that would be unacceptable to us today, but at the same time an opportunity that did not exist before, was born. The extremely difficult conditions generated great opportunity for the future generations of the families that were subject to the degrading conditions of that situation. Everything appeared, at the start, better than could possibly be imagined.

Industry played, thus, a determining role in the evolution of society and the global economy. The assumption that resources were abundant, the effects of the new era on people and the environment – due to their complete ignorance of their relationship with the world – and the

Limits and expectations

visible improvement in humanity’s day-to-day life, defined the role of industry for the greater part of the 20th century: generate wealth and products that everyone desired. Nothing else was of interest or concern.

Access to consumer goods and innovative products and the chance to realize one’s dreams were the great direct and indirect drivers of industry at that time. This was successful as long as it was limited to a few developed countries. The natural resources obtained from poor countries at low prices were destined to supply only the rich economies. The economy was dominated by those nations that controlled the process of transforming resources into consumer products destined primarily at that time for the nations defined as rich and developed. A small part of the global population benefitted and the entire world contributed

By Luiz Eduardo TalibertiCEO of the Ecoverdi Group

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products and services within the limits of natural resources and impacts on the environment. The effects caused by the Industrial Revolution are continuing in the poor countries which have not yet passed through the same evolutionary process. The only difference is that they are happening in significantly shorter time periods.

China is no doubt the most important example of this 21st century industrial revolution with the same characteristics as those at the start of the 20th century. This means a significant increase in people with the same consumption expectations as those in the developed countries, living, at the same time, with the need to reduce consumption of natural resources while drastically reducing the impacts on the environment.

Today, industry’s ability to be a driver of human well-being continues, but on another basis. Under the current model of production and services, we do not have

with unscrupulous and uncontrolled exploitation.

By the end of the 20th century the limitations of the economic development model became evident due to the enormous social and environmental damage, the limited natural resources and the explosive population growth. The exuberance of the rich nations resulted in a high cost to the environment, with effects on all nations. An intense debate is underway, but a quick potential solution is not apparent.

A•new•social•roleThe major effects occur in industry and in the goods it produces. After all, those most responsible for the damage caused result from industrialization and the use of natural resources for the products destined for current society. Those that we consider indispensable.

Industry’s challenge within society is to continue to increase the availability of

“Today, industry’s ability to be a driver of human well-being continues, but on another basis. Under the current model of production and services, we do not have the natural resources to equally meet all the population’s expectations.”

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the natural resources to equally meet all the expectations of the current population.

Development•and•expectationsThe base for development of nations continues to be very close to what existed at the start of the last century – products such as cars, domestic appliances and energy continue to be the main economic indicators for all countries. Nevertheless, we no longer are able to meet the demands with the prior model. Transformation of the world’s industrial essence is necessary.

Our base of personal expectations has not changed over the years. We have the same dreams of well-being that our grandparents had, with greater technological demands, however, conceptually equal. Independent transportation, easy communication and the reduction of work in our daily lives will always be part of the dreams of each inhabitant of the world. Add to that, complete economic disparity and inequality, with some having abundance and others with absolute restrictions, and we can be sure that the search for these objectives, focused on products and services, will continue to exist forever. The challenge is how to meet all the current expectations.

It is up to industry then to develop new technologies and products that can satisfy all our desires, taking the limits of nature into account , whether in resources

or in the capacity to absorb the resulting products and byproducts. We can no longer continue to follow the model of the 20th century. We need to be prepared to satisfy a significantly higher number of people with the same level of well-being that exists in the countries we currently call rich. In practice, the role of industry continues unchanged, although a little less important than previously, as the main driver of people’s well-being.

The way this is accomplished, however, must be completely different. Sustainability starts projects and guides products, requiring new qualifications and attitudes of professionals for the success of industry. This principle will allow us to accomplish and satisfy needs with perfect balance between the limits of nature and human expectations.

“Sustainability starts projects and guides products, requiring new qualifications and attitudes of professionals for the success of industry.”

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The agribusiness challenge to produce more and with less resources, in response to increasing world demand, is a barrier that will only be overcome with the help of technology. The search for efficiency and sustainable practices is vital for a planet that will shelter 9 billion people by mid-century.

Produce and conserve more

Our world grows despite all recent economic crises and difficulties. It is a planet that advances in a hurry and, not always,

fairly. Today we are a little more than 7 billion people. Regardless of the source or estimate used, we will be something around 9 billion inhabitants in 2050. As one should expect, the major part of this growth will not occur in developed countries, but in those under development, where, for various reasons, birth rates are higher.

At the same time, with greater economic affluence in many developing countries, we see a dietary change, with increasing consumption of animal protein. The impact of this transformation is clear, since several units of vegetal protein are needed for the production of only one unit of animal protein.

This scenario leads to the estimate that we will have to double the production of grains on the planet in the next 40 years. Paradoxically, according to the U.N. Food and Agriculture Organization (FAO), the number of hungry people worldwide is not diminishing, but increasing, reaching 1 billion persons today. This does not seem like a good start.

Still on the demand side, agriculture has increasingly been used as an alternative source of energy, not only for ethanol (sugar cane and corn), but also for biodiesel. Not to mention other potential uses, such as for other products that are currently produced from petroleum.

On the offer hand, there are a lot of limitations. In many parts of the planet, we see a reduction in planted area, both due to increased urbanization and industrialization

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By André DiasPresident of Monsanto Brazil

and the exhaustion of soils and water resources. In the same way, the productivity growth rate of many crops has been lower in recent years. Finally, climate phenomena have reduced various countries’ production and affected the availability of supplies for consumption.

On top of all this stands the real need to preserve our natural resources and not mortgage our children’s and grandchildren’s future in order to meet our needs today. We need to do even more with even less. Produce and conserve more. Sustainability. Brazil has a key role to play in this challenge. From the beginning of the 1970s to the start of the second half of the 21 century we have gone from a food importer country to one of the world major producers and an essential supplier of various items. How we have done that over this time

provides indications of how the world may solve this problem of feeding 9 billion people.

Only with the help of technology will we be able to solve the challenge of producing even more and, at the same time, conserving efficiently. Only by helping farmers of all sizes to gradually produce more on the same hectare while using less resources like water and energy, will we be able to build a sustainable future. This increase in productivity will, necessarily, require intensive adoption of technology.

Our country has made great strides in this direction. Economic and institutional stabilization, respect for intellectual property and a stable regulatory environment have encouraged companies to invest in research and development

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(R&D), training and continuing education, which, in turn, have a multiplier effect and, once again, are sustainable in the field.

Unfortunately, there is still a vigorous debate that divides sides that should be working together for construction of a better future for Brazil and the world. Conservationists, farmers, companies and non-governmental organizations (NGOs) have the chance to build a very positive

environment. Wasting this opportunity is unforgivable.

At Monsanto, we believe we are contributing with part of the solution for this challenge. Our mission: produce more, conserve more and improve lives, with technology applied to agriculture. Taking this path we will indeed be able to not only feed but also dress and move 9 billion people in the next decades.

“We need to do even more with even less. Produce and conserve more. Sustainability. Brazil has a key role to play in this challenge.”

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People,•many•peopleThe world population jumped from 1 to 7 billion people in a little more than 200 years (1804 to 2011). It is predicted that the planet will hold, feed, dress and transport 9 billion inhabitants by the middle of the 21 century. From the 1960s through the 2000s, the life expectancy of the global population grew from 48 to 68 years of age.

* EstimativeSource: UN Population Fund

1 billion

2 billions

3 billions

4 billions

5 billions

6 billions

7 billions

9 billions

1804 1927 1959 1974 1987 1999 2011 2050*

Evolution in the number of inhabitants on the planet

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Part of the solution

Industry needs to see itself as involved in building sustainable development and understand this as a business opportunity. In this process of searching for sustainable solutions, innovation and collaboration will always be determining factors.

There are several aspects related to the role of industry in an innovative and sustainable future, but all are linked to integration of the

principles of sustainability with the business strategy. Sustainability involves much more than just taking care of the environmental impacts associated with each company’s operations, which is nothing more than the normal way of dealing with the matter, “business as usual” as they say in corporate jargon. A posture based on business opportunities is, no doubt, more attractive and strategic.

It is a fact that attention to the impacts of each operation should not be neglected. On the contrary, they become sanitary, basic to strategic management. In fact, one should start with them. That is what we do at Braskem. We are proud of the

results achieved. From the 2002 launch of Braskem through 2011, we have significantly improved our performance. Our rates of personnel accidents fell more than 80% and are at levels comparable with those reached by the sector in the more developed countries. The rate of waste by unit of product fell more than 60% and those for wastewater by more than 35%. With regard to greenhouse gas emissions, we amended the intensity of emissions by more than 13% from 2006 – the year we began to conduct our inventory – to 2010. Just to mention some numbers.

Nevertheless, this is insufficient for the challenge of sustainability. In Brazil and in the world, advances occur, no doubt, but the global and local numbers show that there are still many challenges to reaching a stage of development minimally adequate for all. There are still more than 1.6 billion

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people without water and more than 900 million undernourished in the world1. There are clear signs of depletion of some natural resources, as sources of energy or materials, or even as destinations for our wastes. The average global temperature continues to rise. In Brazil, in 2009, we still had more than 15 million families living on less than one half of one minimum salary per capita per month and close to 10% of our population over 15 years of age was illiterate. Furthermore, in 2008, more than 40% of urban residences did not have access to sewage treatment systems2. Therefore, more needs to be done. This is where the opportunities come in.

Innovative•responsesEach company can ask itself: how can my business contribute to sustainability? Or how can my company drastically increase its contribution to attain this objective? What

revolutionary solution can we introduce? The answers will come and, no doubt, innovation will be a key factor if those answers are, in fact, to provide a distinctive position.

At Braskem, fortunately, we have found a local aspect that can differentiate us from the rest of the world. Production of chemical products from renewable raw materials has great potential in Brazil. Two aspects can be emphasized: ••The installed base for ethanol production and its better energy efficiency;••The better productivity of the ethanol produced from sugarcane compared to its corn (in the United States) and sugar beet (in Europe) competitors.

We are investing in this technology and risking introduction of the largest factory in the world for production of a biopolymer

By Carlos FadigasPresident of Braskem

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that we call “green polyethylene”. In all, more than R$500 million has been invested. There is great satisfaction in seeing that several companies view this product as a solution for increasing their contribution to sustainability. For this reason, we have decided to continue investing more than R$50 million per year in technology, in search of new solutions. We have already announced our intention to build a pilot plant to produce a new biopolymer, a polymer made from renewable resources, and we continue to study new technological paths.

In addition to innovation, this movement toward increasingly sustainable solutions is characterized by a very significant factor that mitigates its risks: collaboration. In the case of green polyethylene, Toyota Tsusho – the trading company of Toyota Corporation, in the automotive industry – was the first client to support our first steps in technology investment. Subsequently, new partners appeared. On the supply side, we created a code of conduct to guide our choices of ethanol supplier partners who adequately deal

with the environmental and social aspects of their production chains. This code even had the support of the ProForest nongovernmental organization. The government of Rio Grande do Sul also collaborated to make construction of the industrial unit viable in its state. In other words, collaboration was fundamental for the realization of this investment.

Competition•and•cooperationIn conclusion, I would like to question what I consider to be a false dilemma: the idea that competition is counter to sustainability. Although I know that cooperation has been one of the main success factors for Braskem and that it is also one of the basic values of sustainability, I understand that it is the competition, the competitors and the desire to differentiate that drives the businessman. In other words, collaboration and competition can coexist in search of a solution that attracts society’s attention and allows the earning of profits in a sustainable way. Companies cannot survive without profits; however, the economic variable is inherent to corporate

“Collaboration and competition can coexist in search of a solution that attracts society’s attention and allows the earning of profits in a sustainable way.”

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sustainability which, in turn, is inherent to global sustainability.

It is no surprise that one of the main topics of the United Nations (UN) Conference on Sustainable Development, the Rio+20, held in Brazil in 2012, deals with “The Green Economy in the Context of Sustainable Development and the Eradication of Poverty”. There will be no sustainability if the main economic points are not included. There will be no sustainability without the participation of companies and industry. And their participation will not be sufficient until they all see themselves as part of the solution and start applying the principles of sustainable development in their business strategies.

1 Report of the United Nations Environment Programme “Towards a Green Economy” (2011)

2 Reports of the Brazilian Institute of Geography and Statistics (IBGE) “Sustainable Development Indicators” (2010) and “Synthesis of Social Indicators for the Brazilian Population” (2010)

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The role of life’s industry

How can a company in the health industry promote economic and social growth, harmony with the environment and business continuity? The solution will come from structured dialogues with its publics and the strengthening of corporate and social responsibility.

In this “global village”1, where people from opposite ends of the world are increasingly connected and interdependent, the shared responsibility and the

obligation to contribute to a sustainable world can no longer be ignored. This urgency demands, from both individuals and companies, broader understanding of the changes occurring on our planet, and more creativity in the development of alternatives that can, at least, decelerate its degradation. The choices we still have time to make can deeply influence our own future and that of future generations. And, they will certainly reveal the companies that learn how to extract competitive differences from this situation.

Companies today are much more exposed to public scrutiny by the way they deal

with environmental and social issues, with direct impact on the image of the products they manufacture or services they provide. Consequently, their participation in international corporate social responsibility indexes is no longer merely embellishment of the institutional brand; it has become an attribute as important as quality or price, with increasing influence on purchasing decisions.

Dialogue•as•solutionHow can a global company in the healthy industry balance the challenges of promoting economic and social growth, maintaining harmony with the environment and ensuring the continuity of its business, particularly when its future is so intrinsically connected to its own capacity to contribute to the very sustainability of human existence?

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By engaging in ongoing, constructive dialogue and staying close to its publics in all markets it operates in. There are no short cuts when the ambition is to focus on the needs of patients, supply innovative solutions for the medical demands still not met, and meet the expectations of an emerging society – that demands more access to health care – and committed employees who do not separate professional achievement from human development.

At Sanofi, corporate social responsibility has increasingly become a tangible and structured means – mainly with the development of recognized global standards – to gain more efficiency and promote the sustainable development of the company. Encouraged to continuously innovate, our target is to meet not only today’s challenges, but to

anticipate the development of a segment in which there is no room for irrelevance.

However, for social and environmental responsibility to perform a transformational role in all levels of the company – and be clearly perceived externally – Sanofi Group (Brazil) places the set of social, financial and environmental performance indicators in a perspective more integrated and shared by its branches in the country. The aim is to broaden the field of view of potential improvements and opportunities to add value.

The first corporate report on social responsibility released by the Brazilian subsidiary in 2011 launched a virtuous cycle of debates in the organization. These targets direct the efforts of the branches in constructing individual agendas in

By Heraldo MarcheziniGeneral director of Sanofi Group – Brazil

1 The term was defined by the philosopher Marshall MacLuhan, a communications scholar in the 1960’s

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tune with the corporation, but consistent with local demands. They also reveal the legitimate ambition to increase and protect the trust of consumers, the medical class and the other interested parties accrued over decades in the country.

To develop a portfolio of products adapted to the Brazilian reality, to have the largest industrial platform outside

France, to be one of the largest employers in the pharmaceutical segment in Brazil – generating more than 5,200 direct and 2,000 indirect jobs are only some of the links Sanofi has with the country.

Research is another powerful link, established long ago with the Brazilian scientific community. Ranking 7th in the Group in the number of patients that

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participate in clinical trials, Sanofi Brazil is responsible for the BRICS, promoting significant funding and new research technology. Recently, the decision to deepen this interaction with Brazilian centers of innovation has brought Sanofi and the Biominas Foundation together in a program organized to look for projects in their early phases – developed by private initiative or Brazilian public entities – with potential for future development with the corporation.

In the field of vaccines, innovative partnerships, such as those with the Butantan Institute and the Oswaldo Cruz Foundation, also show the Group’s willingness to collaborate with some of the main players in Brazilian public health.

The Sanofi Group manufactures 95% of the drugs it sell in the country at Sanofi Farma and Medley factories, contributing

to the development of hundreds of local suppliers, the strengthening of domestic production and generation of millions of jobs in the value chain. The awareness of employees and the improvement of productive and environmental efficiency levels are the basis for the sustainability agenda of the company’s industrial sites.

To build a really long-lasting development model for the country, Sanofi could not do without a comprehensive and sustained program of professional training. In challenging vertically structured organizations to make them more matrix-like and collaborative, we were challenged to provide our employees with a more cross-sectional view of the evolution of the Brazilian health market, preparing them to understand the demands of the different segments and offer customized solutions for their needs.

“Participation in the international corporate social responsibility indexes is no longer merely embellishment of the institutional brand; it has become an attribute as important as quality or price, with increasing influence on purchasing decisions.”

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The chemical industry has a key role to play in the creation of a more sustainable future. By stimulating the whole market value chain it works as a driver for generating innovative solutions towards a progress increasingly based on the principles of sustainability.

The chemistry of innovation

Working with chemistry means to be part of life in all senses. The activity is

as noble as it is delicate because as our operations expand, our power to interfere in the people’s routine and that of the planet also grows, significantly increasing responsibility.

I would like to linger over this issue a little longer. Applied chemistry leads to transformation in many industries through the offer of innovative solutions that contribute to human progress. This strategic position makes a solution implemented at the beginning of a value chain stimulate better results with less impact on the environment and other stages of production. There are solutions in the chemical industry which go

through up to nine stages before the product is effectively delivered to the final consumer.

It’s worth emphasizing that the chemical industry is one of the most important sectors of the Brazilian economy. The sector’s industrial Gross Domestic Product (GDP) is fourth in the ranking, which shows how strategic the chemical segment is for the country, particularly to raise Brazilian competitiveness abroad.

Innovation is essential in this sense. Opportunities for development of a chemical industry that drives innovation are translated into increasing demand for research and creation of new and increasingly advanced products and processes. The support of a dedicated industrial and innovation development

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By Pedro SuarezPresident of Dow for Latin America

policy for the sector, in recognition of its strategic importance and transformational potential is fundamental to take full advantage of these opportunities.

Priority•frontsDow understands that in the search for innovative solutions, the chemical industry’s best practices should focus efforts on four separate fronts:••Culture of innovation: it is based on a clear vision that innovation is not just something that occurs within labs, but something that has an essential value that permeates the whole business strategy and is connected to all within an organization.••People, performance and partnerships: innovation begins with highly educated – and above all – energized people, with full access to resources and technologies.

••Research and Development (R&D): innovation of products and processes should be understood as the basis for a transformational approach in the search of solutions, as well as for the ability to form partnerships. •• Important solutions for human progress: the development of businesses, organizations and technological advances needs to focus on the transformation of the human condition, helping to construct a future focused on four main megatrends (see chart on page 82).

Science•for•a•sustainable•planetThe world needs solutions for great challenges in the most varied areas, such as energy, climate change, water, food, housing and health. That is why, in Brazil, Dow has some of the best scientists and engineers

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“Opportunities for development of a chemical industry that drives innovation are translated into increasing demand for research and creation of new and increasingly advanced products and processes.”

Megatrends•in•the•eyes•of•the•chemical•industry•

Energy: Brazil is a pioneer in creating sustainable solutions for the most varied industries, leveraging its natural resources and biodiversity through innovation. Brazilian differentials in the green economy provide unrivalled competitive potential in the new world outlined for the 21st century, which should allow the country to rise in the global ranking of the World Economic Forum (WEF) – today we are the 53rd most competitive economy on the planet. Within this scenario, the sustainable production of plastics for the packaging market is expanding, not only in Brazil – powered by the recent access of millions of people to the consumer market –, but throughout Latin America and all other countries around the world, demanding sustainable solutions. Estimates show that the global production capacity for bioplastics, forecast at 1 million tons in 2011, is expected to rise to 1.7 million tons in 2015.

Health and nutrition: the world today needs solutions for food safety through increase of agricultural productivity, development of functional foods and products for dieting and weight control.

Transport and infrastructure: the world today needs sustainable solutions for the civil construction, the transport industry and water treatment.

Consumer goods – electronics and communication, home appliances and personal care articles: population growth leads to more consumption. To meet this demand, it is necessary to produce the goods most desired by people around the world, without losing focus on sustainability by supplying energy-efficient home appliances, advanced electronics, and personal care articles of high quality.

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dedicated to resolving such challenges through innovation. All we do, and how we do it, is important. This way we invest not only in the planet, but also in business.

The chemical industry plays a fundamental role in the creation of this more sustainable future. We accept the responsibility and the challenge – and work hard to contribute to the legacy of future generations.

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Building a new future

Building an innovative and sustainable future for Brazilian industry will depend on the growing incorporation of best practices on the part of companies, influencing their operational and strategic way of thinking.

What does industry have to do with an innovative and sustainable future? Isn’t

this just a topic for academics, research institutes, government agencies and some gurus? Let’s discuss below some ideas and concepts about the manufacturing industry in Brazil, considering the current context, which is increasingly complex due to a number of consequences of movements in the recent past.

Innovation, understood as an action to make something new, or fresh, or even make it in a different way than it was made in the past, is in fashion and is the focal point for discussions about management and success in business. But this topic is not really so new. For many

years now, innovation has been given many names, especially, starting in the 1980s, when the scenario of globalization and still vigorous growth in the western nations in the Northern Hemisphere was a reason for security, on one side, and demands for growing quarterly results, on the other.

And, due to this situation, aggravated by the strong changes in the financial markets during those years, new initiatives and modeling began to be demanded, focusing on cost reductions, business and company reinvention and reengineering and so many names for an effort to achieve continuous, or even radical, improvement, to sustain growing, stable, predictable and guaranteed earnings per share, ensuring the attractiveness of shares in the capital markets.

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The topic became even more complex in the 1990s. From that point on, the challenge was to be innovative and, at the same time, sustainable. The concept of “sustainability” here, refers, in principle, to that most adopted currently, which is the triple bottom line, a term coined since the end of the 1990s by John Eikington in his book, “Cannibals with Forks”. Sustainability supported by three pillars – people (social), the environment (the planet) and financial resources (the economy-results) – has, in fact, promoted a better understanding of the role of industry for many decades.

A•critical•viewWe are living at a crucial time for industry in Brazil. Grey clouds are taken as certain in a context of an overvalued real, expanding commerce and an economy that is generally growing,

while the industrial sector moves at rates below 2.5% for years on end, with a downward trend.

We need, however, to expand our point of view. The diagnoses and the evaluations of the performance, the results and the stages of evolution of industry are made today, for the most part, based on a sample of the 500 largest companies, the 1,000 largest companies or of the little more than 600 companies with shares traded on the Bovespa. But, according to the Brazilian Institute of Geography and Statistics (IBGE), we certainly have more than 300 thousand companies in Brazil, from micro to mega companies.

Therefore, based on what reality do we want to build the future of Brazilian industry as an agent of innovation and sustainability? The best practices will

By Marcos da Cunha RibeiroAdministrative director of the Jacto Group

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certainly come from the large successful companies, but the new reality will only be consolidated in the future if the majority of the large, medium-large, medium and small companies are also agents aware of this process of fostering innovation. They need to act as the driving force for success and self-sustained growth, based on appropriate actions to maintain results, with the proper counterpart for society and with responsible use of environmental resources in social relations, commercial and economic, local and global.

Weights•and•mesuresHere is the first critical point. Demming and Juran, back in the 1950s, already asserted that I can only improve that which I am able to measure. So, we have the famous indicator of utilized capacity of Brazilian industry, which has not been renewed, reviewed or updated in more than 30 years and which, between periods of deep recession and high expansion of consumption, has always varied between 78% and 85%. Thus, this implies that Brazil is always likely to suffer from demand

inflation, that the government is always expected to provide subsidies or lines of financing to expand capacity and that the capital goods industry and the alternative import of means of production should, every year, have an average minimum movement greater than the growth of industrial production itself. This does not seem true to me, but, no doubt, it is an accepted point, to be questioned by industry, which intends to be an agent of change for a future of innovation and sustainability.

A second critical point is that productivity criteria are still rudimentary for the majority of our industrial companies. The concept of “operational excellence” has reached the level of corporate awareness, however, what we still frequently see is a number of short-term solutions and extreme emotional influence. All that is needed is for the dollar to devalue and financing to ease providing greater momentary liquidity in the world, and we see the trade balance become unbalanced with regard to the import of new capacity. In general, without an adequate market

“The process of building the future is not only for companies of a certain size and age, but for those companies that apply the minimum effort and investment in a consistent and ongoing manner.”

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analysis and a sales and marketing plan that justify an investment in assets, the rebound comes quickly, with insufficient net generation of cash flow and, therefore, an inability to sustain the consequent growth of working capital.

The systemic view of the processes is today clouded by acronyms and labels, without the needed consistency: TQM, Q circles, A Target, 6 Sigma, Lean, Kaizen, Just in Time, Total Cycle Time, etc. Each of these methodologies brings an extremely valid set of excellent concepts, most of which are complementary and supplementary to each other. What is the problem? The problem is implementation and the lack of perseverance and consistency. In this case, “consistency” is understood as permanent coherence, over the long-term – coherence of actions, decisions, investments, attitudes, leadership and objectives. And why is coherence lacking? Basically because of the existence of a system of labor laws more than 60 years old, with little innovation and flexibility for current times and international competition.

Rudimentary•R&DR&D investment in Brazil is still rudimentary. Even more so if we consider only that focused on industrial activity. Innovation has a significant component of R&D, especially when applied to products and solutions, but the rates of investment in Brazil are still much lower than those of our global

competitors. Even after the advent of the Good Law, we have a paradox to deal with regarding R&D efforts.

One of the characteristics of industrial management in Brazil has historically been to try to copy imported models without due consideration of the differences in scenarios and contexts. Rarely have there been discussions focused on business management from the economic and financial point of view. In part, because the government is always expected to come to the rescue, with barriers to foreign competition or subsidized financing for investments in capacity or even to support working capital, and so on.

For a long time there was apparently the illusion that the models of the more developed nations could be copied. Initially, planning and strategy were poor or neglected and only improved substantially over time. Today, unfortunately, implementation of strategy continues to be poor and only tolerable.

The•economic•and•financial•viewThe cost of capital in our country is still one of the highest in the world, in spite of the fact that credit has improved and become more available. What have the development banks and market investors complained about in the last ten years? That we do not have projects good enough for the investment capital and credit available for investment in production.

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Nevertheless, if the cost of capital is still among the highest, the working capital and financial turnover of production and distribution operations are critical and important. This is where industrial sustainability starts on the economic and social level. One cannot expect to grow and deal with normal fluctuations of demand by leveraging working capital based on bank credit and/or discounted trade bills. The total cycle of the business cannot be sustained and the impact is direct on the company with cyclical hiring and firing. Self-sustained growth, with self-financing of working capital, is key to the longevity of an enterprise. And the turnover of this capital in the company’s value and supply chain is the most efficient way to maintain healthy profitability, permitting reinvestment in growth.

If the industrial Gross Domestic Product (GDP) represented more than 38% of total Brazilian GDP in the past and today represents less than 32%, and is trending downward, we cannot, just because of this, conclude that deindustrialization is taking place in the country. We must consider that, after the 1970s, GDP growth in the service sector followed the modern global trend of growing at higher rates. It should also be noted that Brazil’s agribusiness, which is growing and is important for the country’s trade balance, maintains a substantial participation in total GDP. Therefore, this is not how we should verify deindustrialization.

Merger and acquisition activity in the manufacturing industry was stronger in the recent past, but, in the majority of investments, the industrial park and the level of production was maintained, accompanying the consumption sector, the greatest driver of growth in the past ten years. The exchange rate has been made the scapegoat for the process of deindustrialization, but let’s agree, it is not the role of industry to demand intervention in this area, but to plan and execute effective competitive projects in a scenario and context already known since 2004, strongly expected to remain at levels that will never be sufficient to compensate for our competitive inefficiencies and the persistent and anachronistic “Brazil Cost”.

The greatest risk we have today in the industrial sector, in addition to the already established labor costs and the renewed enforcement of archaic laws and norms, is the growing cost of investment in education, training and improvement of direct, indirect and technical manpower. This is because the serious shortage of manpower due to current full employment is accompanied by an also anachronistic process of declining quality in the education system, in addition to a certain stimulus to continue temporary informal work, supported by assistance programs. No doubt, the “S” system, also continued by companies, is still a positive, but insufficient, exception on the educational scene.

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Examples•of•successIt is certainly not possible to exhaust the alternative paths for Brazilian industrial success. Today, we can easily find exemplary cases. Brazilian multinationals growing globally are good examples that all this is possible. But let’s not deceive ourselves into thinking this is easy. None of this happens without less than 3 to 4 years of real perseverance and consistency and with some suffering due to the decision to be innovative and sustainable.

On the other hand, we should keep in mind that the process of building the future is not only for companies of a certain size and age, but for those companies that apply the minimum effort and investment in a consistent and ongoing manner. Brazilian industry should not worry about whether it represents 30% or 40% of GDP in the next 10 or

20 years, but whether it continues to generate value for customers and wealth for the country, growing domestically in proportion to demand and internationally because its own value makes it competitive.

The external social role of industry in an innovative and sustainable future will only be seen once good practices are firmly incorporated into companies, influencing their operational and strategic way of thinking. To involve Brazilian society and also make it innovative and sustainable, we should reach a point where most of industry expands its planned evolution and shares knowledge, together with voluntary and nonpolitical action and real investment, as a few foundations have shown is possible to do in defense of ethics, social and environmental sustainability and education.

“Brazilian industry should not worry about whether it represents 30% or 40% of GDP in the next 10 or 20 years, but whether it continues to generate value for customers and wealth for the country, growing domestically in proportion to demand and internationally because its own value makes it competitive.”

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Sustainability and social responsibilityThe new times present diverse challenges for establishing sustainability and social responsibility strategies and their integration into companies’ businesses. They have, however, become indispensable in the search for competitiveness.

At the time that concepts of sustainable development and the “green economy” model proposed by the United Nations (UN) are

being reconsidered, it has also become necessary to think about what the management model for sustainability and social responsibility in the manufacturing industry should be for the next decades.

The “green economy” model is, together with the global institutional structure for sustainable development, one of the main items in the agenda for the UN conference on sustainable development, the Rio+20, to be held in Brazil in 2012. The result of the meeting establishes a new international agenda for sustainable development.

The establishment of sustainability and social responsibility strategies and their

integration into companies’ businesses, particularly in the manufacturing industry, has become an indispensable condition for success and the search for business competitiveness.

In the broad discussion of topics related to sustainable development and social responsibility, one of the important aspects is the definition of the role of the business sector in establishing and implementing concrete and pragmatic actions in businesses and processes – industrialization, distribution and sales –, taking the changes needed for adapting to a “green economy” into account, together with the new concepts proposed by the UN.  

The business community, in particular the manufacturing sector and its segments, should be part of the solution of the

*Marcelo Drügg Barreto Vianna is a civil engineer, M.Sc and Ph.D from the University of Birmingham, in England, vice president of the International Chamber of Commerce (ICC Brazil) and president of its Sustainable Development and Energy Committee; he is also a board member of several companies and institutions, including the Alcoa Institute and the Cancer Institute of the State of São Paulo; he is a consultant/advisor of the Inter-American Development Bank (IDB)

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environmental, sustainable development and social responsibility issues and it should be proactive and pragmatic in making concrete efforts that include: the reduction and elimination of the social and environmental impacts of its operations and processes, the continuous improvement of energy efficiency, the reduction of carbon emissions using renewable energy in its processes and operations, the efficient use of water and the reduction of wastes, among other important actions (see details on page 93).

The International Chamber of Commerce (ICC), representing the global business community and as the result of consultations with the executives of its member companies, prepared the document “Ten Conditions for a Transition to a Green Economy”, which highlights important points that should be part of

the business strategy of companies in the manufacturing sector and in all its segments. They are:

••Awareness;••Education and skills;••Employment;••Resource efficiency;••Product life cycle;•• Innovation and savings;••Metrics and reporting formats;•• Finance and investment;••Governance and partnerships with stakeholders; and••Business integration of the environmental, social and sustainability aspects.

The green economy requires three pillars: economic, social and environmental, for an effective transition that enables sustainable development. Economic and social growth is indispensable and needed for the transition to a “green economy”,

By Marcelo Drügg Barreto Vianna*Vice president of the International Chamber of Commerce (ICC Brazil) and president of its Sustainable Development and Energy Committee

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as proposed by the UN, taking human and financial resources into account, as well as short, medium and long-term planning, involving all society stakeholders.

The new concepts of corporate sustainability and social responsibility management require that issues of innovation, technology, environmental management and work safety, in addition to quality and concern for social issues be part of all efforts and actions of business management and of all its employees – not only to comply with legal requirements, but primarily as a matter of awareness and responsibility to all of society, in searching for sustainable development, increased efficiency and business competitiveness in the short, medium and long-term.

A•challenge•for•the•entire•companyOne of the important factors in the success of sustainability management involving environmental, work safety, health and social issues is the commitment of upper management and, consequently, all levels of the company. This commitment should be expressed by means of a sustainability policy that integrates all these issues, clearly written to be followed, implemented and observed by the entire company. Line management is responsible for ensuring compliance with this policy, starting with the highest levels of the company and extending to all levels of the organization.

Lack of planning for potential social and environmental changes and their repercussions, as well as unfamiliarity with the issues and aspects of sustainability in the implementation and operation of enterprises in the manufacturing sector – including in their products and services –, could cause adverse consequences that, subsequently, will require human, financial and material resources to deal with them.

The relationship of businessmen with stakeholders in the government, civil society and the academic community is a need that should be addressed in a company’s business strategy, in the search for sustainable development.

In managing the manufacturing industry in the next decades, the need to incorporate issues of sustainability and

“The new concepts of corporate sustainability and social responsibility management require that issues of innovation, technology, environmental management and work safety, in addition to quality and concern for social issues be part of all efforts and actions of business management and of all its employees.”

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social responsibility into companies’ businesses should be considered a premise, not only in the company, but also in the entire community where it operates and participates, involving the greatest number of stakeholders in the process of increasing awareness for the sake of sustainable development.

Upon analysis of the various models for management of sustainability and social responsibility – as well as environmental, work safety, social, quality, technology and innovation policies – of model and successful companies in the international environment focused on sustainable development, it can be seen that the main objectives and guidelines are focused on: ••Preventing and controlling pollution and the environmental impacts resulting from industrial operations, their products and services;••Acting in a sustainable manner in environmental control and in the health of employees an citizens of the communities where the company operates;••Obeying and complying with the environmental, work safety, health and social laws and regulations whenever necessary, and adopting more stringent internal standards;••Anticipating sustainability, environmental, work safety, health and social issues, respecting the environment, the health of employees, customers and consumers;

••Working with the government, nongovernmental organizations, civil society and independent entities – academia, associations and society in general –, at all levels, in the search for transparency and shared sustainable development;••Recognizing the importance of the continuous and ongoing involvement of employees and of the commitment of management, ensuring that they have the necessary support and training with regard to environmental, work safety, health and social issues; ••Preparing inventories of greenhouse gas emissions and adopting mechanisms to reduce emissions;

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••Preparing emergency and contingency plans to be implemented in situations that may compromise industrial, distribution and sales operations of products and services in relation to employees, society, the environment, consumers and customers;•• Identifying situations that could expose the company to material loss, environmental and labor liabilities, risks and future contingencies;••Conducting life cycle analysis, as well as studies of the social and environmental impacts and risks inherent to its industrial processes, products and services;

••Developing energy efficiency, natural resource conservation, and water use and waste reduction programs, in search of efficient means of using raw materials, recycling materials throughout the product manufacturing and distribution chain, fighting waste and establishing more rational and sustainable forms of consumption;••Establishing criteria and norms to prohibit child or forced labor, fight discrimination and corruption in its industrial, distribution and sales operations, as well as in those of its suppliers and customers, and continue the monitoring and verification of suppliers of goods, services and products;

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••Adopting clean technologies that enable the reduction of wastes by using energy and raw materials more efficiently and, consequently, minimizing, recycling and reusing wastes;••Ensuring the implementation of social and poverty-reduction practices in the communities where the company operates;•• Implementing mechanisms for auditing, process monitoring, legal compliance verification, internal company rules and standards, and adherence and achievement of goals, objectives, metrics and sustainability indicators established in planning and implementation of corporate actions and activities;

••Adopting mechanisms of transparency to fight corruption, respecting human rights and social inclusion and promoting these strategies with its customers, suppliers and the community where the company operates.

For business in the next decade, the incorporation of sustainability models in accordance with the concepts of the “green economy” model will become both necessary and essential. In the future, the manufacturing industry will need to adjust its policies, its procedures and i ts norms to address the issues of sustainability and social responsibility, if it is to become competitive in the global arena.

“For business in the next decade, the incorporation of sustainability models in accordance with the concepts of the ‘green economy’ model will become both necessary and essential.”

Juarez Lopes de AraújoPresident of Deloitte – Brazil

Deloitte wishes to thank all the companies and institutions represented in this work by their executives for making the collection of these articles possible.

José Othon Tavares de AlmeidaDeloitte leader in Brazil for manufacturing industry

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In the first year of its second century of operation in Brazil Deloitte, an ever active participant in the local business environment, is pleased to put together in this publication an exceptional group of decision-makers representing the most important companies in the country’s manufacturing industry.

The result of this work, expressed in a collection of never before published articles, is translated here through a set of comprehensive and, at the same time, deep reflections with respect to the major issues of national development.

“Competitive Brazil – Challenges and strategies for the manufacturing industry” is an essential read for all those intending to understand and deal with the complex situation that companies operating in one of the most dynamic and emerging markets in the world face today.