Brazil: Confronting the Productivity Challenge

Brazil: Confronting the Productivity Challenge

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Brazil: Confronting the Productivity Challenge

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  • A Call to Action

    To adjust to the new environment, most companies that operate in Brazil or that have plans to enter the market will need to consider two main priorities to create value. (See Exhibit 10.)

    Defining Where to “Play”

    Companies need to reevaluate which businesses and markets to pursue. Future growth may be very different from that of the past decade. While high growth may be in the past for some industries, it is still in the future for others. There are several reasons for this: for example, the consumption gap between Brazil and developed markets has narrowed in many industries, the growth of consumer credit is expected to slow, families that recently entered the middle class are redefining their consumption patterns, infrastructure investments are expected to rise, and growth expectations for the international economy have declined.

    In this context, companies in Brazil should evaluate—and, where necessary, adjust—their business portfolios to make sure that they direct future investments at high-potential businesses and that they deprioritize or divest businesses with limited potential. Additionally, many companies based in Brazil should take advantage of opportunities to further explore international markets through exports or through the establishment of international production, leveraging internal competencies and Brazil’s advantaged position in natural resources.

    Enhancing Productivity

    The second priority is to gain competitive advantage by enhancing productivity.

    A focus on growth at the expense of efficiency has left many companies in Brazil suffering from a “growth hangover.” For example, significant numbers of companies trail their international peers in the adoption of lean techniques. Surging labor costs and lower interest rates make the case for increasing investments in automation. Companies should reassess their product mix, innovate, and explore opportunities to move to higher-value segments.

    The appreciation of the Brazilian real—which has gained approximately 70 percent in real terms against the U.S. dollar since 2001—makes gains in productivity critically important for companies looking to export and for local companies facing competition from imports.

    Enhanced productivity can be achieved by a variety of methods. Although this is a challenge primarily for companies, government can play an important supporting role. Singapore provides a specific example of how government can help companies become more productive. (See “A National Productivity and Continuing Education Council.”)

    A National Productivity and Continuing Education Council

    The government of Singapore has fully embraced a productivity agenda, setting up a National Productivity and Continuing Education Council despite the fact that the country already boasts one of the world’s highest productivity levels. Meeting its goal—to achieve an average 2 to 3 percent growth in labor yield over the next ten years—will enable the country to sustain its impressive growth record.

    The tripartite council connected members of the public, government, and business, asking them to define high-growth priority sectors and identify the skill sets needed to be competitive in these industries. To support productivity growth, the government has established four approaches:

    • Productivity roadmaps with industry-specific targets and initiatives

    • A comprehensive system for continuing education and training to meet demand in new growth sectors

    • A tax deduction for investment in activities along the innovation value chain, including R&D, intellectual-property registration and acquisition, automation, and workforce training

    • Industry-specific grants to fund productivity-enhancing initiatives

    Talent Management. The severe talent shortage in Brazil is a challenge for most companies, but it can also be a source of sustainable competitive advantage for those able to deal with it effectively. Our experience shows that leaders in talent management take a long-term approach and look at the issue from end to end: identifying current and future talent needs, assessing and developing talent within the organization, building a strong employee proposition to attract and retain top talent, and engaging and increasing the affiliation of the team.

    Lean Processes and Technology. Many Brazilian companies are far behind their international peers in the adoption of lean processes, which means lower utilization of assets and labor, more waste, longer lead times, greater working-capital needs, and lower quality. Automation is another powerful productivity tool that is significantly underutilized in most Brazilian companies. Surging labor costs and lower interest rates make the business case for automation even stronger. Furthermore, R&D investments can be key drivers of productivity. An example is the development by state-owned Embrapa, the Brazilian Enterprise for Agricultural Research, of seeds adapted to the country’s Cerrado region. This and investments in other technologies have led to steady productivity gains, and Brazil’s production of sugar cane and soybeans has risen to world-class levels.

    Product Value Management. Productivity can also be enhanced by increasing the value of each product or service sold. One way to do this is to move to higher-premium segments of the market through product innovation and brand positioning. Once a product for the low-income market, Havaianas flip-flop sandals have successfully moved into the premium segment, and today they are must-haves in the wardrobes of the rich and trendy in Brazil and beyond.

    Product value can also be raised through reengineering that reduces costs. This is a particularly important option for companies that have grown by serving Brazil’s emerging middle class with low-price products. Many such companies have cut prices without reducing product costs at the same rate. For example, a study of the low-end line of a consumer goods company showed that although the line was generating most of the company’s revenue growth, future growth would destroy value because the additional margin was not sufficient to cover the necessary investments. In fact, the only low-end aspects of the line were its brand and price: the products and their production process were almost identical to those of the company’s premium line.

    A third way to manage product value is through reassessment of in-house versus outsourced or offshored production. Changes in labor costs and exchange rates can have distinct effects on the competitiveness of different elements of the product or the value chain. By focusing on places where they have remained competitive and reducing costs (by, for example, discontinuing local production of simple components that can be cheaply sourced from abroad), companies can, in many cases, increase their return on investment.

    Value Chain Efficiency. For many Brazilian companies, becoming more productive will not be enough to succeed in the new context: competitive advantage requires being part of a productive value chain. Companies that lead in value chain efficiency take an active role in shaping their ecosystem (by, for example, selecting and nurturing their partners) and in supporting weaker links in that system (by, for instance, acting as guarantors to lower the cost of loans, providing technical assistance, and opening access to their own training programs).

    Investments in infrastructure limitations upstream and downstream also help increase value chain efficiency. This is relevant particularly for natural-resource companies that have been actively investing in infrastructure either directly or through partnerships.

    A Holistic Program. The four levers discussed above, as well as the mix of businesses and new markets, are interdependent and should be approached as a holistic program. Consider, for example, the interdependency of automation and talent. A talent shortage and rising costs are key reasons to increase automation, but more automation requires more skilled labor and demands longer learning curves of new employees. This implies that efforts to increase automation may need to be coupled with programs for changing a company’s skill profile and reducing churn in the workforce. (See “Key Success Factors for Multinational Companies Entering Brazil” for a discussion of four concerns that should be considered by international companies entering the Brazilian market.)

    Key Success Factors for Multinational Companies Entering Brazil

    Multinational companies need to deal with characteristics specific to operating in Brazil.

    Regulatory Tax Expertise. Brazil has a very complex tax structure that seems to encourage competition from the informal sector in some industries. MNCs should consider hiring top legal and tax experts to help them monitor and navigate these complexities and any informal-sector challenges to their business.

    Supply Base Approach. Supply bases in Brazil can be undependable and inefficient, particularly in remote areas of the country. MNCs should carefully assess what they should import and what they should source locally, considering whether they ought to rely more on in-house production in Brazil than they would in other markets. MNCs entering Brazil should include, as part of their plans, programs for developing local suppliers.

    Logistics. Companies planning to enter Brazil should not underestimate the logistical challenges they might encounter. In addition to higher transportation costs, companies should anticipate that logistics limitations will add business complexity and the need for higher levels of stock and working capital. In industries with high product-innovation rates, logistics problems can lead to obsolescence. MNCs should consider building their own infrastructure where necessary—on their own or in partnership—and ensuring that their business plans account for Brazil’s logistics reality.

    Production Methods. MNCs entering Brazil have the opportunity to differentiate themselves from local competitors by leveraging international experience and starting operations with a higher level of automation and better use of lean techniques. To achieve this, they must ensure that their production methods are suited to the available talent. MNCs need to be realistic about talent needs and availability for key roles—particularly those roles that require technical expertise.

    Reassessing the role of growth in value creation will present significant challenges to companies in Brazil. Those companies able to meet these challenges—particularly by boosting their productivity—will be better positioned to serve the sizable domestic market, take advantage of Brazil’s advantaged position in natural resources, and continue to create value.

    The right value-creation path will be different for each company. For many, it will involve focusing on productivity and returning cash to shareholders. For others, value will come from investing to establish defendable positions in new growth areas such as infrastructure. Many companies will need to adjust their mix of businesses to succeed in the new environment. The right path for each company will depend on its starting competitive position, the growth potential of its markets, its ability to respond to Brazil’s productivity challenge, the attractiveness of available investment opportunities, and ultimately, its ambitions.

    The opportunity is clear, but so are the challenges.