In order of our visits, the organizations we met with included:
- Tekoha - a startup business that buys handcrafts from rural Brazil and sells them into the cities
- Grupo Orsa - one of the largest paper products companies in Brazil; owns land in the Amazon the size of Connecticut and is recognized by environmental organizations as a green/sustainable logger.
- Sherwin-Williams - with a strong tie to Cleveland and Case, Sherwin-Williams hosted our group in their Sao Paulo paint production site. The location sells to the South America region, mostly Brazil.
- Developers Diversified Realty - the Cleveland company founded by Scott Wolstein has just entered the Brazilian shopping center market through a joint venture with a Brazilian development firm. We toured one of their shopping centers and heard from the operations manager, executives from Sonae Sierra (their Brazilian partner), and the DDR liaison who communicates back with headquarters.
- Petrobras - The third largest company in the Americas, formerly the monopoly oil company in Brazil, and now the largest oil producer in their competitive market. The firm was partially privatized 10 years ago, with the government still holding 55% voting power of the $100 billion company.
- Banco Central do Brasil - Brazil's central bank, operationally but not organizationally autonomous from the national government.
- O Globo - the largest newspaper in Brazil, provided us with a presentation and tour of their production facility in Rio.
My major conclusion from the visits is that Brazil stands better positioned to weather the financial storm than any other country I've recently studied. While poverty still remains an issue, the country has a growing middle class that lacks the attitude of entitlement present in the U.S. I didn't realize the vast amount of resources Brazil has access to, including the highest amount of undeveloped arable land in the world and substantial oil reserves, nor the self-sufficiency of the economy. Real estate prices have not been impacted at all, and banks remain well capitalized, well above capital limits imposed by Basel. Lower prices are impacting manufacturers, but overall the economy continues to grow.
How has the economy fared so well? As a finance guy, the most important policy-related takeaway from the trip was Brazil's treatment of interest expense. Consumers receive absolutely zero tax breaks from mortgage payments, and companies cannot deduct interest expense from their Brazilian taxes. This may seem mundane at first, but think of the massive impact such a small policy change would have on the U.S. economy. We have too much debt, yet we subsidize debt over equity... it should be the opposite!
Another important financial highlight: banks are required to keep Collateralized Debt Oligations on their books for the purpose of measuring capitalization. While I do not know the specifics of the regulation, our presenter at the BCB, Renato Rosek, emphasized how this policy has protected the Brazilian financial system from the problems U.S. banks have experienced. It's a topic I will be looking at in more detail in the near future.
Green and sustainable development seems to be much more present in Brazil than in the U.S. Although we did look specifically for sustainable companies due to the importance of Case's sustainability MBA program, even the companies that were unrelated seemed to stress their environmental and social commitments. Petrobras and Grupo Orsa, two companies whose operations one would expect could be very damaging to the environment, demonstrated these commitments through specific programs, extra R&D spending on environmental issues, and donations to nonprofit organizations. More specifically, Grupo Orsa donates 1% of gross revenues to their non-profit arm, Fundação Orsa.
I was amused by our first visit, Tekoha. The entrepreneur who spoke to us spent one year as an investment banking analyst at JP Morgan before deciding that he needed more meaning in his work and left to start several companies. Certainly his story was a reflection of my own, a South American reaffirmation of my plans and decisions.
Kyle, I thoroughly enjoyed your synopsis of your Brazil trip. One question I have is you mentioned sustainability and commitments of businesses to sustainable goals. But, what are they? How do those goals impact jobs? Or maybe they don't. Just curious! Hey didn't you think Sao Paolo had a little too much 'cement' and not enough nature around? Look forward to seeing you in June!!!