Thanks to the Internet, it has truly become a small world. We can communicate with anyone, anywhere, anytime. But does that mean growth opportunities are available for printing owners internationally as well – particularly in the emerging economy of Brazil?
Latin America is often mentioned as a hotbed for growth. According to Alexander Watson Associates, the region represents around 6% of global GDP and Brazil in particular is the world’s 6th largest economy, ranking 4th in terms of Foreign Direct Investment.
But how does an American business expand into this hot market? I posed the question to Hamilton Costa, the General Manager at ANconsulting, an international consulting company focused on the graphic communication market. Hamilton works with customers in USA, Canada, Colombia, Argentina and Brazil, and is an expert on the Latin American market.
According to Costa, the reason for Brazil’s growth is the “new middle class.” In the last 15 years, more than 30 to 40 million people have become part of the middle class. People who were poor are now starting to generate income. “We’re getting to a level where people can start buying things they couldn’t buy before,” Costa said.
Photo by gracey
A new middle class means new consumption. People will start buying cars, getting bank accounts and credit cards, and owning cell phones. Cities are beginning to expand, beyond just the large metropolitan areas like Rio and San Paulo.
“We’re seeing a growth of supermarkets, and new distribution channels,” Costa said. “That means more opportunities for new products, such as beauty products and hygienic products. More products means an increased need for logistics, such as label printing.
So does this mean that prospecting printing owners should hitch up the wagon and see if there’s gold in them thar hills?
While it’s exciting to talk about expanding internationally, it’s generally a game reserved for the big players, especially those looking to start from scratch. But even the big players quickly learn that the best way to expand into a new culture and economy is to play by the country’s rules.
Fragmented Markets Means Baby Steps
One of the primary reasons companies expand into foreign countries is to gain logistical footholds in new markets. It’s simply not as cost-effective to ship printed materials as it is to print in close proximity to your customers, so bigger players look to defray costs by building up a network of local companies.
It would be extremely convenient to find large companies with multiple outlets, but that’s not the case in Latin America. Like America, the printing marketplace – particularly label printers – is fragmented. Small and mid-sized businesses (many run by families) provide printing services to nearby geographical areas.
To expand, a winning strategy involves acquiring a small to mid-sized company in the region, and using that as the basis for future acquisitions and outward growth.
Are Latin American companies open to this type of arrangement? “Generally, yes,” Costa said. But there are a number of obstacles.
1. Inaccurate valuation. But much like America, many of the owners of these family-run companies believe their organization is worth more than it truly is – a bitter pill for an owner anywhere to swallow. This is an international sticking point for an M&A.
2. Brazil’s tax system. The Brazilian tax system can be extremely difficult to work around. A huge mountain of laws and procedures make accounting difficult, and force some rather unusual steps on the part of an investor. “The buyer generally has to create some sort of reserve in value that can prevent losses that might result from the tax issue,” Costa said.
3. Brazilian bureaucracy. As much as American businesspeople like to gripe about bureaucrats and red tape, Costa believes we’re a model of efficiency compared to Brazilian’s powers-that-be. “Here you get the sense that everything is being done to create barriers for doing business,” Costa said. “For an American business to actually open a company, with the right licenses and documents, would be a huge cost.”
The devil’s in the details, and despite the growth potential in the region, they give investors pause. But Costa believes the right approach can overcome some of these barriers.
- Partner, don’t acquire. Instead of trying to acquire or open a new company in a region, expansion starts by partnering with the right people. The best move is to find a local partner who really understands the way of doing business,” Costa said. “You can then build from there.”
- Understand how business is done. Costa stresses how important interpersonal relationships are in Brazil. While all the business formalities are necessary, “You have to develop the right kind of trust,” he said. “You have to be able to look them in the eye and assure them you are not going to fail.”
I asked Costa how do you even make first contact with a company in Brazil? He recommended looking for consultants and banks who work in the area, but be sure to do your due diligence on them.
Don’t underestimate the important of one-on-one contact, however. The Internet is a great way to establish a relationship with a Brazilian company, but at some point, face-to-face contact will be essential. So get that passport ready – your Latin American adventure is about to begin.
Cover Photo by npclark2k.