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Brazil strategy lecture Copenhagen Business School
1. Jens Lage Hansen
BRAZIL
GRADUATE COURSE:
FOREIGN DIRECT INVESTMENT STRATEGIES
COPENHAGEN BUSINESS SCHOOL
4.4.2013
14-4-2013 JensLageHansen@mail.dk
2. Jens Lage Hansen
My background
• Danish and Brazilian citizenship
• Lived in Brazil, Argentina, Spain, U.S. Virgin Islands and
Denmark
• MSc in Electrical Engineering (DTU) and Bcom (CBS)
• International career with marketing, general management
and board responsibilities at Novo Nordisk, Novozymes, Foss,
Danisco and Grundfos
• Board member in two biotech startups: Aquaporin A/S (from
1995) and Intomics A/S (from 2009)
• Adjunct associate professor at CBS
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3. Jens Lage Hansen
Agenda
• The countries
– BRICS
– South America
– Brazil
• The case
– Grundfos
• The decisions
– Question 1: Should Grundfos enter Brazil?
– Question 2: How should Grundfos enter?
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5. Jens Lage Hansen
Isn’t it an odd group?
The BRIC(S) countries
• The BRIC acronym coined in 2001 by John O’Neill a strategist
at Goldman Sachs
• South Africa joined in 2010 and it became BRICS
• Institutionalized with summits between leaders from 2009
– Politically motivated to counter developed countries dominance
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6. Jens Lage Hansen
BRIC countries. What crisis?
World GDP growth 2007 - 2012
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7. Jens Lage Hansen
Big differences within the group
GDP growth in the BRICs
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The Economist
8. Jens Lage Hansen
Where are they right now?
BRICS countries economy, population and risks
2012
CIA factbook
POPULATION
(MIO)
GNP at PPP
(billion US$)
GNP per capita
(US$)
Political Risk *
Brazil 201 2,362 12,000 2,0 (Low)
Russia 143 2,509 17,700 3,3 (Significant)
India 1,221 4,735 3,900 2,7 (Medium)
China 1,350 12,380 9,100 2,3 (Moderate)
South Africa 49 579 11,300 2,7 (Medium)
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* Lasserre (2007)2nd ed. pg. 179
1: Insignificant risk
5: Extreme risk
BRIC countries all have Medium economical risk
SA has Low economical risk
Lasserre
10. Jens Lage Hansen
The giant and the rest
Map of South America
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11. Jens Lage Hansen
Biggest economies of South America
Brazil, Argentina, Venezuela, Colombia and Peru
2012
CIA factbook
POPULATION
(MIO)
GNP at PPP
(billion US$)
GNP per capita
(US$)
Political Risk
Brazil 205 2,282 11,600 Low
Argentina 43 747 18,200 Significant
Columbia 46 500 10,700 Medium*
Venezuela 28 402 13,200 Significant*
Peru 30 325 10,700 Medium*
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* Lecturers subjective assesment
12. Jens Lage Hansen
Don’t they like their neighbors?
Intraregional exports in Latin America
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The Economist
13. Jens Lage Hansen
Trading blocks
• Mercosur
– Brazil
– Argentina
– Uruguay
– Venezuela (admitted 2012)
– Paraguay (expelled 2012)
• The Pacific alliance
– Mexico
– Columbia
– Peru
– Chile
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17. Jens Lage Hansen
The Academic
President Fernando Henriques Cardoso 1995 – 2002
• Tamed inflation in 1994 as
finance minister
• Introduced sound macro
economical policies
• Limited and reduced states
and governments deficits
and huge debts
• Opened economy
• Began social programs
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18. Jens Lage Hansen
The Union Man
President Luiz Lula da Silva 2003 – 2010
• Won for the first time in 4
elections by moving to the
center
• Continued sound macro
economical policies
• Boosted social programs
• Pursued South – South ties
• Increased state intervention
in economy
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19. Jens Lage Hansen
The Efficient Bureaucrat
President Dilma Rousseff 2011 –
• Lula’s choice, and that was enough
• Continued sound macro
economical policies
• Fights corruption
– 7 ministers out in first year
• Promotes meritocracy
• Boosts education and
infrastructure investments
• Meddles in economy and increases
protectionism
• Personal approval rating march
2013: 79%
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20. Jens Lage Hansen
Brazil’s extraordinary energy mix
Domestic energy supply in Brazil
SOURCE BRAZIL
(% in 2007)
OECD
(% in 2005)
Oil 37.4 40.6
Gas 9.3 21.8
Coal 6.0 20.4
Uranium 1.4 11.0
Hydro 14.9 2.0
Biomass 30.9 4.2
Total 100.0 100.0
Renewable 45.8 6.2
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21. Jens Lage Hansen
Just start digging
Reserves of natural resources. World ranking
• Bauxite no. 3
• Iron ore no. 5
• Nickel no. 3
• Tin no. 3
• Uranium no. 6
• Oil no. 10
• Forests no. 2
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22. Jens Lage Hansen
How on earth are we going to match this?
Brazilian agriculture has world class efficiencies
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23. Jens Lage Hansen
Feeding the world
Agribusiness production. World ranking
• World class Brazilian institute for agro research
• Orange juice no. 1
• Sugar no. 1
• Fuel-ethanol no. 2
• Soybeans no. 2
• Chickens no. 3
• Coffee no. 1
• Beef no. 2
• Pork no. 4
• Maize no. 4
• Cotton no. 5
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24. Jens Lage Hansen
What markets are interesting?
Some business opportunities as seen from Denmark
• Vastly expanding middle class moving up the consumption chain
• Environmental technologies
– Supply of potable water
– Effluent treatment. Industrial and domestic
– Reducing air pollution
– Energy saving
• Oil and gas exploration
• Food processing technology
• Bioethanol production
• Fashion, design and clothes
• Pharmaceutical equipment
• Medico technical products
• Information and communication technology in health care
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25. Jens Lage Hansen
The Brazil cost
• High interest rates
– SELIC 7.25 %
• High taxes
– Brazil 34.4 % of GDP
– Russia 36.9, India 17.7 %, China 17.0 %, Denmark 48.2 %
• Complicated tax system
• Bureaucracy
• Poor physical infrastructure
• Inflexible labour market with untouchable employees
– Cost of employees double up because of taxes, social contributions
and mandatory benefits (transport, meals, vacation bonus, extra
salary)
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27. Jens Lage Hansen
Do you want to move water?
Some examples from Grundfos product range
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How do you make that work?
Grundfos matrix organization around 2000
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Corporate Management (CEO, CFO, CPO)
Businesses
Regions
Ground water Industry Building services
Europe
North America
South America (JLH)
Asia
Group Executive council:
Corporate management, business managers, regional managers
29. Jens Lage Hansen
Strategy Hierarchy
• Mission (Why we exist)
• Values (What we believe in and how we will behave)
• Vision (What we want to be)
• Strategy (What our competitive game plan will be)
–Objective (Specific, measurable, time bound)
–Scope
• Customer or offering
• Geographic location
• Vertical integration
–Advantage
• Value proposition
• Unique activities combination
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Colis and Rukstad (2008): Can you say what your strategy is? HBR April.
30. Jens Lage Hansen
Where were we heading and how?
Grundfos strategy
• Purpose
– Grundfos is a global leader in advanced pump solutions and a
trendsetter in water technology. We contribute to global sustainability
by pioneering technologies that improve quality of life for people and
care for the planet.
• Values
– Sustainable
– Open and trustworthy
– Focused on people
– Independent
– Partnership
– Relentlessly ambitious
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31. Jens Lage Hansen
Grundfos strategy (cont.)
• Scope in 1998
– Pump systems for water supply, water movement and water treatment
– In house R&D, Production and Sales
– Sales and service companies in most important global markets
– Traditionally only production in Denmark, Germany and USA with
Denmark being the dominant supplier
– Recently established sales and service companies in Russia, China and
India
• Advantage
– Value proposition
• The most sustainable, advanced and efficient pumps and pumping
systems in the world
– Unique activities system
• Customer interaction
• Technology
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32. Jens Lage Hansen
What were we looking at?
Brazilian market
• Huge geographical territory
• Big billion dollar pump market
• Vast variety of products to cover every application
• Products low to medium end
• Intense rivalry with focus on price
• Low to no profitability amongst pump suppliers
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33. Jens Lage Hansen
Who were the customers?
Customer needs and segments
• Customer needs
– Low prices
– Short delivery times
– Technical advice in choosing product
– Reliable technical after sales service
• Groundwater segment
– Public and corrupt
• Industry segment
– Technical oriented buyers
• Building segment
– Fragmented with many competitors
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34. Jens Lage Hansen
How about competition?
Competitors in Brazilian market
• Leao
– Brazilian competitor with plant in Sao Paulo state
– Dominated groundwater segment
• KSB
– German multinational
– Plant in Sao Paulo city
– Strong in industry segment
• Smaller local outfits
– Producing or importing
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35. Jens Lage Hansen
High value of Reais gave favorable COG
Average price and cost of goods
Thousand Reais
0
0.5
1
1.5
2
2.5
1994 1995 1996 1997
Average COG
Average selling price
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36. Jens Lage Hansen
CASE QUESTIONS 1
1. Should Grundfos enter Brazil?
2. Why?
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37. Jens Lage Hansen
What should we look at?
Country attractiveness
1. Market opportunities and competitive situation
2. Country risk
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Is it going to be easy?
1. Market opportunities and competitive situation
• Market
– Big market and growing for Grundfos Products
– Customer quality
• Price
• Some small quality segments (BOT groundwater, industry high emery users)
• Competition
– High intensity of rivalry
– High entry barriers
• Established relationships and trust
– Bargaining power
• Suppliers: Low
• Customers: High
– Industry profitability low
• Incentives
– Government protection of local production and jobs
– Presence does not increase Grundfos ‘ competitiveness
• Brazil is not a critical source of resources4-4-2013 JensLageHansen@mail.dk 38
Lasserre 2nd ed. pg. 165
39. Jens Lage Hansen
What is the country like?
2. Country risk
• Political risks were low
– Shareholder exposure
– Employees exposure
– Operational exposure
• Economic risks were significant – a fact we underestimated
– Economic growth but high variability
– Inflation under control
– Cost of inputs risky
– Exchange rates
• The Devil is in the detail Lasserre 2nd ed. pg. 165
• Next slide
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40. Jens Lage Hansen
Who said economical risk?
Average price and cost of goods
Thousand Reais
0
0.5
1
1.5
2
2.5
3
3.5
1994 1995 1996 1997 1998 1999 2000 2001
Average COG
Average selling price
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41. Jens Lage Hansen
Country risk (cont.)
• Competitive risk
– Public contracts influenced by some corruption
– Cartels and networks working against Grundfos not evident
• Operational risk
– Infrastructure
• Power, telecommunication, transport low risk
• Suppliers secure
– Regulations
• Nationalistic preferences very much in evidence. High risk
• Constraints on local capital, local content, local employment a factor
• Taxes on imports to protect local production
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42. Jens Lage Hansen
How did it work out?
Hindsight after 15 years
• 1998 start in Curitiba
• 2004 acquisition of local pump manufacturer Mark in Sao
Paulo
• Today a turnover of 150 mio.kr. , market share of 5% and 120
employees, of which 5 are Danes
• Loss every year since start
• Børsen article 18.1.13:
– Pumpegigant retter fejlslagen Brasilien-strategi (pump giant corrects
unsuccessful strategy in Brazil)
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43. Jens Lage Hansen
CASE QUESTIONS 2
1. What should Grundfos objectives for entry be?
2. What phase is the Brazilian pump market in?
3. What entry mode would you recommend?
4. Why?
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44. Jens Lage Hansen
Why do we want to do it?
Strategic objectives for entering a country
• Market development
• Resources access
• Learning
• Co-ordination
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45. Jens Lage Hansen
How developed was the market?
Phases in entry markets
1. Premature phase
2. Window phase
3. Competitive growth phase
4. Mature phase
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46. Jens Lage Hansen
Factors influencing entry modes
• Government requirements
• Country risks
• Market attractiveness
• Strategic objectives
• Companies internal capabilities
• Time pressure
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47. Jens Lage Hansen
Entry modes
Limited control Full control
High investment
• JV without control (50% or
below)
• Wholly owned subsidiary by
greenfield investment
• Full aquisition
• JV with absolute control (above
66%)
Low investment
Arms lenght agreements
• Distributor
• Agent
• Representative
• Franchisee
• Licensing
• Marketing subsidiary
• Regional headquarters
• Pocurement office
• Representative office
• Technial observatory
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48. Jens Lage Hansen
What am I missing?
Open session
• Questions?
• Comments?
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