BRAZIL Archives

27/08/2013by EOS Intelligence EOS Intelligence No Comments

E-commerce in Brazil – Marred By Political and Social Influences

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The opportunities for e-commerce offered by several emerging countries, such as the BRIC, has been analyzed at length, and quite rightfully so, given their expanding economies, growing middle class, soaring disposable incomes, paired with higher internet and mobile penetration. While the opportunities coming from these transformations are plentiful, e-commerce markets in the BRIC countries also face serious challenges to their development, some of them common across all four countries, some unique to single markets.

We explore these challenges in a four-part series to understand the major roadblocks influencing growth of the e-commerce industries across Brazil, Russia, India and China.

Brazilian consumers are still relatively new to e-commerce, with current propensity to shop online often compared with the penetration rate witnessed in the US market in 2000-2001. This might seem like a small market, however, the e-commerce growth in Brazil is strong, estimated at 21% during the first half of 2012. According to AT Kearney, Brazil’s 80 million Internet users spend about US$10.6 billion online annually, the largest online spending across Latin American markets. Brazilians are expected to spend US$18.7 billion per year by 2017. These might be modest estimates, considering that eMarketer, a digital marketing portal, already forecasts that retail e-commerce sales in Brazil will grow by 14.8% in 2013, to reach US$13.26 billion. While the market appears to be poised for a very promising growth period, several challenges will continue to put a break on sudden growth.

The Challenges

Troublesome and bureaucratic procedures to set up and run e-commerce business – these structural problems make it difficult for local and foreign players to enter the e-commerce market (or set up a business entity in Brazil in general). Burdensome regulations and procedures mean that it might take even 6 months to establish an e-commerce entity. Further, while operating, the entities are often challenged by frequent litigations and lawsuits over variety of issues (e.g. the domain used). Even with no litigations, Brazil has a generally paperwork-heavy business environment, and this is particularly challenging in a relatively new industry such as e-commerce. All these difficulties have led to Brazil being placed at 130 (out of 150) rank in World Bank’s Ease of Doing Business in 2013 (behind countries such as Ethiopia, Yemen, Uganda, or Pakistan).
Inadequate e-commerce regulations – while setting up a business appears overly bureaucratic and regulated, several aspects of e-commerce operations are under-regulated, affecting clarity and smoothness of operation as well as consumer trust. Legislation is slowly, yet gradually being introduced, e.g. only in mid-2013, a seemingly basic and obvious requirement was introduced for e-commerce entities to clearly and visibly display their registration numbers, contact details, purchase terms and conditions, and customer’s rights. While this step is likely to help build customer trust, it covers just a tip of regulations necessary in the market.
Inadequate infrastructure affecting order delivery – the country’s weak and immature infrastructure has a negative impact on orders shipping. Brazil is a country with vast territory, and majority of transportation is done by road. The country’s road infrastructure (both city streets and highways) are in poor condition, many of them unpaved, affecting safety, delivery time as well as damaging the cargo and trucks. Overall, receiving a delivery package by a customer located outside of major Brazilian cities stretches to a week at a minimum, with frequent cases of customer complaints about packages not arriving within two weeks or more.
Underdeveloped shipping and delivery services – while delivery services are available, many of them are provided by small, often family owned companies, that have limited coverage area and lack parcel tracking systems, thus there is generally inadequate availability of reliable courier services. The government-owned national post, (Empresa Brasileira de Correios e Telegrafosand), does not commonly offer parcel tracking options, inviting fraud, and is considered unreliable and slow.
High taxes and complicated tax structure – issues with taxes are often placed amongst top challenges of e-commerce in Brazil. Taxes are high and numerous, which significantly increases overall costs – duties, taxes and fees can double the original price of a product, and can vary considerably depending on product category. Payroll taxes in business innovation sectors reach even 80%. It is estimated that on average, business owners and executives spend 30% of money and 50% of time on dealing with tax-related issues. Further, complex tax structure drives added costs for lawyers and accountants compensation in order to navigate through various issues with the tax regulators and facilitating tax differences between Brazilian states (as there is no uniform tax across the country).
Insufficient talent availability – Brazil’s expanding e-commerce market creates jobs that are difficult to fill, given the shortage of qualified workers, people with e-commerce experience or at least an understanding what a particular e-commerce job entails, e.g. e-commerce web designers, experienced IT and business process professionals or high-quality, competent customer service specialists. The lack of good customer service acts as a deterrent to customer base growth, as according to McKinsey’s Consumer and Shopper Insights from July 2012, Brazilian shoppers who no longer shopped online listed previous bad experience with customer service amongst key reasons for turning away from online purchases.
Online payment security concerns – the lack of trust amongst Brazilian consumers towards safety of online purchases and transactions, deters many of them from buying online and using internet banking in general. Therefore, the predominant payment option that is currently used and preferred by customers is the ‘boleto bancario’, a code receipt that is generated on the website during the purchase, printed by the online shopper and later taken physically to a bank or a post office where the payment for the purchase is made. On the one hand it allows to satisfy consumers concerns about payment safety and to tackle the issue of many users not having credit cards or internet-purchases enabled debit cards. On the other hand, however, it is contrary to the very concept of shopping online (i.e. without the need to physically go to the shop), and extends the entire process of completing the purchase. Further, in order for e-commerce entity to offer ‘boleto bancario’, it should be led by a Brazilian citizen or at least in partnership with a Brazilian citizen. While foreigners can fulfil prerequisites of offering ‘boleto bancario’, the process of filling those requirements is lengthy and difficult, especially when compared with PayPal functioning in several other markets.
Installments shopping culture – Brazilian customers are used to, and hence expect payment options that allow for multiple and no-interest instalments or delayed payment options, resulting in e-commerce entities requiring higher working capital to finance purchases while the customers’ payments for current purchases are received after several weeks. Further, bank involvement to handle the instalments increases costs for online retailers, since bank receives a commission (which is not paid by customers as their instalments are zero-interest).
Language barrier – while this challenge might not be of particular relevance to domestic start-ups, international online retailers find it demanding that the entire e-commerce experience must be provided in Portuguese, and that having previous experience in Spanish-speaking market does not automatically make it easy in Portuguese, as these are two different languages (though western parts of the country have considerable base of Spanish-speaking consumers). This pertains to everything from language used on the online store interface, entire customer service, as well as the fact that many local IT and programming specialist speak only Portuguese (with extremely limited English), making it difficult for foreign start-ups to simply copy their experience and solutions to the Brazilian market.

While there are several challenges that currently undermine the growth potential of e-commerce in Brazil, the gradual changes in regulatory environment, customer service and improvement in infrastructure should positively influence the demand for e-commerce services in the future.

12/06/2013by EOS Intelligence EOS Intelligence No Comments

Is New Legislation Enough To Transform Mexico’s Telecom Market?

When Mexico’s telecommunication market is under discussion, one name is sure to pop out – that of the world’s richest man, Carlos Slim, who through his companies (America Movil Telcel and America Movil Telmex), controls majority of the market. But now, with the government determined to break open this tightly-held market, it gave a first-ever nod to game-changing reforms that can boost foreign investment and competition. The question, however, remains whether the country is mature enough to take these reforms till the finish line.

In July 2012, when after 12 years the PRI Party (Institutional Revolutionary party) bounced back to power in Mexico under the leadership of Enrique Pena Nieto, there was little hope for any reforms in the country. This assumption was based on the party’s actions during its previous tenures, which were marked by electoral frauds, widespread corruption, economic mismanagement, and its success in blocking attempts at reforms proposed by previous presidents: Vicente Fox (2000-2006) and Felipe Calderón (2006-2012).

However, remaining under a growing pressure of frustrated and agitated general public asking for reforms and solutions the widespread mafia problem, PRI was forced to offer several promises during the electoral campaign. These included addressing the problem of unwarranted concentration and lack of competition in many sectors of the economy, and post election PRI had no choice but go ahead with at least some of its promised reforms. PRI’s-led government entered into an alliance, called the ‘Pact for Mexico’, with its opposition – National Action Party and the Democratic Revolution Party, to push reforms and encourage competition. After the overhaul in the labor laws and the education system, this Pact has been pushing for reforms in the country’s telecommunication and broadcast industry. These reforms look to provide a makeover to this previously quasi-monopolistic and inefficient sector, introducing several fundamental changes:

Firstly, opening the market to new international players by allowing 100% foreign ownership in the telecom sector (a rise from the existing 49% FDI limit)
Secondly, forming two new independent regulatory commissions to regularize the industry

Federal Telecommunications Institute, with profile similar to the U.S. Federal Communications Commission, to have the authority to check and punish non-competitive practices to the extent of withdrawing company licenses
Federal Competition Commission, created to fight monopolistic practices by ordering companies that control more than 50% of the market to sell off assets to reduce market dominance

The reforms also encompass the creation of a specialized court to oversee all competition, telecom, and media rulings
The previously existing Mexican law allowed companies to file private injunctions in order to block the regulator’s rulings aimed at improving competition in the market (while appeals were in progress); this loophole in law, which was misused by companies to indefinitely freeze inconvenient regulatory decisions, has been removed under the new legislation

Recently, Mexico’s Senate approved these changes, and passed legislation aiming at improving competitiveness in the telecom sector. While few key changes brought about by these reforms still need to be ratified by two-thirds of Mexico’s 31 states in order to become a law, this seems like a mere formality considering PRI’s dominance in provincial legislatures, as well as complete support from the opposition through the ‘Pact for Mexico’. The legislation is thus expected to go into effect by early 2014.

These reforms aim primarily at improving market dynamics in this $30billion annually industry, by facilitating competition, encouraging foreign investments, pushing down prices, and increasing mobile penetration, which (currently at 85.7%) stands much lower than 100%+ penetration in its neighboring Argentina and Brazil. However, the new legislation spells trouble for the current monopolies in this sector – America Movil Telcel (that accounts for 70% of the mobile market) and America Movil Telmex (that accounts for 80% of landline market). Both these companies operate as subsidiaries of America Movil, which is owned by world’s richest man, Carlos Slim.

The reforms seem to be particularly beneficial for international telecom companies operating in neighboring lands, who have been shy of entering the Mexican arena owing to the 49% limit on foreign investments. These players can look to buy companies such as Axtel and Maxcom Telecommunications, to get their hands on the fiber-optic cables placed across Mexico, thus hinting towards a wave of consolidation activities in the medium term.

However, despite ongoing efforts by the government, the success in this industry is not guaranteed. Firstly, the fixed line market is expected to remain devoid of foreign investment, owing to the overall decline of the industry globally, and the local Telmex’s 80% share in the market. Moreover, the impact of the reform would only be assessed on how it is brought to force (i.e. if it is implemented in its current form by the legislatures of the 31-states) and also upon how well is it enforced by the independent bodies (Federal Telecommunications Institute and Federal Competition Commission), as previously the industry suffered mostly due to law loopholes and poor implementation of these laws by authorities.

Moreover, reforms similar to those in the telecom industry have been implemented in the television industry, where Televista holds 70% market share. While these reforms (in both the telecom and the television industry) are expected to weaken the hold of the monopolies in their respective markets, it provides them with an opportunity to strengthen their existing presence in each other’s market. (Carlos Slim’s America Movil is a leading player in the pay-TV sector in Latin America, having a subscriber-base of 15million viewers and Televista, along with Azteca, owns Lusacell, the third largest mobile network in Mexico.) Thus, it is feared that instead of stirring foreign investments and competition, these reforms might just result in these incumbent monopolies swapping market share among themselves.

While the majority of the nation rejoices at these reforms and eagerly awaits an influx of investment and increase of competition that could push down the prices, it is premature to predict the long-term outcome of the new legislation. The country is on a correct path to build competitiveness in the telecom sector, but considering the level of corruption and red-tapism in the nation, it seems clear that what matters even more than the reforms themselves, is the way they are implemented.

08/03/2013by EOS Intelligence EOS Intelligence No Comments

South Korea – At the Crossroads!

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South Korea is the world’s fifth largest automobile manufacturer, behind China, Japan, the US and Germany. Automobile sales in South Korea breached the 8 million units mark for the first time in its history in 2012. The surge was mainly on account of strong overseas demand for locally-made models – exports accounted for 82% of these sales while domestic sales (accounting for the remaining 18%) actually contracted 4.2% to 1.4 million units in 2012.

Contracting domestic demand for local companies is mainly due to lack of real income growth, increased debt repayment burden and slump in the housing market in Seoul Special City (houses are often bought in South Korea for investment purposes). Meanwhile, overseas sales, cars exported from South Korea and vehicles assembled in overseas plants, expanded 7.9% to 6.8 million units in the same year.

The South Korean market is dominated by Hyundai Kia Automotive Group which accounted for 82% of domestic sales and 81% of exports in 2012. GM Korea, Renault Samsung and Ssangyong (acquired by Indian company Mahindra and Mahindra in 2011) account for 10% of the domestic sales while rest of the market is catered to by imports. BMW, Daimler (Mercedez-Benz), VW, Audi, Toyota, Chrsyler and Ford are the leading importers.

Free Trade Agreements

South Korea has aggressively pursued FTAs, with the provisional enforcement of an FTA with the EU from July 2011 and the full enforcement of an FTA with the US from March 2012. In the automotive industry, tariffs on parts and components were abolished as soon as the agreements came into force, whereas tariffs on vehicles will be abolished between South Korea and the EU over a three-to-five-year period and those with the US in the fifth year after enforcement of the agreement.

As a result of the FTA, exports to the EU sky-rocketed and the double-digit growth trend continued until March 2012. However, as the EU economy weakened, exports declined and returned to pre-FTA levels. In case of the US, exports surged around the time of the enforcement of the FTA in March, even though the tariffs on vehicles are yet to be scaled down. This phenomenon was labelled as ‘announcement effect’.

An interesting trend that has emerged is that whereas the domestic sales of South Korean cars declined by about 6.3% in 2012, domestic sales of imported cars increased by 24.6% in the same year. Moreover, for the first time, imports accounted for 10% of domestic sales, which is in sharp contrast to the 2% share about a decade back. European automotive OEMs have benefitted the most from this surge in demand for vehicles. This increased market share for European vehicles is mainly due to the fall in prices; as part of FTA between South Korea and the EU, the tariffs on large vehicles reduced from 8% to 5.6%.

Thus it can be said that while the enforcement of FTAs has been effective in boosting exports, it has brought about structural changes in South Korea’s domestic market.

Labour Strife

After an almost 4-year gap, strikes by the labor union returned to plague automotive manufacturing in South Korea in the summer of 2012. The industrial action, which also hit car parts manufacturers and some other industries, revived memories of the days when strikes were chronic in South Korea. Workers went on strike in 21 of the first 22 years since the unions’ formation in 1987; however, unions’ political influence has dimmed in recent years with declining memberships.

Hyundai, Kia and GM Korea were affected by the strikes and suffered record losses – Hyundai alone is estimated to have lost more than USD 1 billion. The main points of contention were the abolition of graveyard shift, wage increase and to confirming of permanent positions to the high proportion of contract workers. Although the companies agreed to most of the demands of regular workers, discussions with contract workers are still ongoing.

To offset the loss suffered from such strikes, OEMs are diversifying their production bases. Hyundai for one has moved to reduce the dependence on domestic manufacturing plants by expanding production in the US, China, India, Brazil and Turkey during the last decade. South Korean plants accounted for 46% of Hyundai’s capacity in 2011, down from 60% in 2008, when the last strike took place and 93% in 2000. Although another objective for establishing a global production network is to make inroads into the global markets.

Another consequence of strikes is that production costs are expected to shoot up, mainly on account of increased wages and also due to the additional investments that the OEMs will now have to undertake to make up for the reduced working hours per day; along with the abolition of the graveyard shift, another demand of the workers was to reduce the number of hours being worked in the two shifts from 20 to 17 hours.

Currency Uncertainties

The Won has been strengthening against the Yen and the US dollar since mid-2012, increasing production costs while adding to currency conversion losses, as sales in foreign markets translate into fewer Won. This has significantly eroded South Korean automotive OEMs competitiveness; companies such as Hyundai and Kia have consequently ceded market share to Japanese OEMs which are enjoying resurgence on the back of a brightening export outlook.

The Yen is also on a two-year low against the US dollar while the Won was at the highest level against the dollar since August 2011 in January 2013. Toyota can now in principle offer a discount of more than 10% to its US customers whereas South Korea’s Hyundai Motor has to raise the dollar price by over 5% to keep up with the Won.

A December report by the Korean Automotive Research Institute (KARI) states that South Korean export would shrink by 1.2% annually for every 1% drop in the Yen against the Won.

Over the years, the strategy of the South Korean Automotive OEMs has revolved around exports and the companies have established global production network to cater to geographies around the world. However, the recent upheaval in the foreign exchange markets have raised serious doubts about the company’s short-medium term prospects.

With increasing competition from global OEMs both in the domestic and global markets (resulting from FTAs) and currency uncertainties nullifying cost advantages that the Korean car makers have traditionally relied on, it is perhaps time for country’s OEMs to shift focus from quantity to quality – stressing superior design and engineering over sales growth.

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In our fourth discussion in this series, we understand the automotive market dynamics of Turkey. Its proximity to Europe and cultural affinity to Asia has seen a growing presence of both European and Asian OEMs. Is Turkey a long-term growth market for automotive OEMs, or is the market as developed as most western countries?

Part I of the series – Mexico – The Next Automotive Production Powerhouse?
Part II of the series – Indonesia – Is The Consecutive Years Of Record Sales For Real Or Is It The Storm Before The Lull?

08/02/2013by EOS Intelligence EOS Intelligence No Comments

Mexico – The Next Automotive Production Powerhouse?

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As the first of our five part automotive market assessment of the MIST countries – Mexico, Indonesia, South Korea and Turkey, we discuss the strengths and weaknesses of Mexico as an emerging automotive hub, and the underlying potential in this strategically located gateway to both North and South America.

Emergence of Mexico as a major automotive production hub is the result of a series of events and transformations over the past decade. The most important of which is the growing trend among automotive OEMs and auto part producers to have production bases in emerging economies. And the earthquake in Japan in 2011 tilted the tide in favour of Mexico just as ‘near-shoring’ was already becoming a key automotive strategy in 2011.

Automotive production in Mexico increased by 80% from 1.5 million in 1999 to 2.7 million units per year in 2011, largely thanks to a significant boost in investment in the sector.

Between 2005 and 2011, cumulative foreign direct investment (FDI) in the automotive sector amounted to USD10.3 billion. In the last year, several automotive OEMs have initiated large scale projects in Mexico; some of these projects include

Nissan – building a USD2 billion plant in Aguascalientes; this was the single largest investment in the country in 2012 and should help secure the country’s position as the eighth largest car manufacturer and sixth largest car exporter in the world
Ford – investing USD1.3 billion in a new stamping and assembly plant in Hermosillo, New Mexico
Honda – investing USD800 million in a new production plant in Celaya, Guanajuato
GM – investing USD420 million at plants in Guanajuato and San Luis Potosi
Daimler Trucks – investing USD300 million in a new plant to manufacture new heavy trucks’ transmissions
Audi – has decided to set-up its first production facility across the Atlantic in Mexico; with planned investment outlay of about USD2 billion, this move by Audi represents a significant show of trust by one of the world’s leading premium car brands
Mazda – building a USD500 million plant in Guanajuato; it has reached an agreement to build a Toyota-branded sub-compact car at this facility and will supply Toyota with 50,000 units of the vehicle annually once production begins in mid-2015

Bolstered by this new wave of investment, Mexico’s vehicle production capacity is expected to rise to 3.83 million units by 2017, at an impressive CAGR of 6% during 2011-2017.

Why is Mexico attracting such large levels of investment from global automotive OEMs? Which factors have positively influenced these decisions and what concerns other OEMs have in investing in this North American country?

So, What Makes Mexico A Favourable Destination?

Trade Agreements – Mexico has Free Trade Agreements (FTAs) with about 44 countries that provide preferential access to markets across three continents, covering North America and parts of South America and Europe. Mexico has more FTAs than the US. The FTA with the EU, for instance, saves Mexico a 10% tariff that’s applied to US-built vehicles, thereby providing OEMs with an incentive to shift production from the US to Mexico.
Geographic Access – Mexico provides easy geographical access to the US and Latin American markets, thereby providing savings through reduced inventory as well as lower transportation and logistics costs. This is evident from the fact that auto exports grew by 12% in the first ten months of 2012 to a record 1.98 million units; the US accounted for 63% of these exports, while Latin America and Europe accounted for 16% and 9%, respectively (Source – Mexican Automobile Industry Association).
Established Manufacturing Hub – 19 of the world’s major manufacturing companies, such as Siemens, GE, Samsung, LG and Whirlpool, have assembly plants in Mexico; additionally, over 300 major Tier-1 global suppliers have presence in the country, with a well-structured value chain organized in dynamic and competitive clusters.

The Challenges

Heavy Dependence on USA – While it is good that Mexico has established strong relations with American OEMs, it cannot ignore the fact that with more than 60% share of its exports, the country is heavily dependent on the US. The country needs to grow its export markets to other countries and geographies to hedge against a downturn in the American economy. For instance, during the downturn in the US economy in 2008 and 2009, due to decline in sales in the US, automotive production in Mexico declined by 20% from 2.17 million in 2008 to 1.56 million in 2009. Mexico has trade agreements with 44 countries (more than the USA and double that of China) and it needs to leverage these better to promote itself as an attractive export platform for automotives.
Regional Politics – Mexico is walking a tight rope when it comes to protecting the interests of OEMs producing vehicles in the country. In 2011, Mexican automotive exports caused widespread damage to the automotive industries in Brazil and Argentina and in a bid to save their domestic markets, both the countries briefly banned Mexican auto imports altogether in 2012. Although, later in the year, Mexico thrashed out a deal that restricts automotive imports (without tariffs) to its two South American neighbours rather than completely banning them, it does not augur well for the future prospects of automotive production in Mexico. One of the reasons automotive OEMs were expanding their capacity in the country was to be able to cater to the important markets in Latin America, particularly Brazil and Argentina. Now the Mexican government has the challenge of trying to keep everyone happy – its neighbours, the automotive OEMs and most importantly its own people for whom it might mean loss of jobs and income.
Stringent Regulatory Environment – The Mexican government, the Mexican Auto Industry Association and International Automotive OEMs are locked in a tussle over the government’s attempts to implement fuel efficiency rules to curb carbon emissions. Mexico has an ambitious target of cutting greenhouse gas emissions by 30% by 2020, and 50% by 2050. The regulations are similar to the ones being implemented in the USA and Canada, however, the association has complained that the proposal is stricter than the US version. Toyota went as far as filing a legal appeal against the government protesting the proposed fuel economy standard. Although the government eased the regulations to appease the automotive OEMs in January 2013, the controversy highlights resistance by the country’s manufacturing sector to the low-carbon regulations the government has been trying to introduce over the past few years. Such issues send out wrong signals to potential investors.

So, does Mexico provide an attractive platform for automotive OEMs? From the spate of investments in the country so far, it seems so – over the past few years, the country has finally begun to fulfil that potential and is now a key driver in the ‘spreading production across emerging economies’ strategy of companies looking to make it big in the global automotive market. However, there are still a few concerns that need to be addressed in order for Mexico to become ‘the’ automotive manufacturing hub in the Americas.

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In our next discussion, we will assess the opportunities and challenges faced by both established and emerging automotive OEMs in Indonesia. Does Indonesia continue to be one of the key emerging markets of interest for automotive OEMs or do the challenges outweigh the opportunities?

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