And Now the World

    And Now the World

    Increased liberalization of economic policy in Brazil is creating
    new threats and opportunities for domestic firms. Within Brazil’s top firms, these changes
    have prompted shifts in strategies signaling their willingness to participate in the
    global economy. This report surveyed the top ten firms in Brazil according to market
    capitalization as of June 1998.
    By Arnoldo Fonseca

    While Brazil began its political journey to democracy in the 1970s, its economy
    remained insulated during a large part of the twentieth century. Like many Latin American
    countries during the mid to late half of the twentieth century, Brazil subscribed to
    economic policies based on ideas by Raul Prebisch and the United Nations’ Economic
    Commission for Latin America, which stressed protectionist, import-substitution based
    policies as a means to induce growth and infrastructural development.

    Large state monopolies were created to reach this end, and private firms were able to
    compete or, usually, oligopolize, in the domestic arena without a high level of foreign
    competition. These conditions created a dualism in management and operating practices
    within Brazil; state monopolies tended to be bureaucratic and inefficient while private,
    export-oriented firms were more able to appropriate some of the same management practices
    found within developed nations.

    Large private, export-oriented firms tended to be in industries where Brazil had a
    distinct comparative resource advantage with respect to other countries. Brazil had a
    resource advantage in minerals and paper-related products. Since the role of foreign and
    domestic investment capital was limited in Brazil, domestic banks became important
    financing vehicles for several firms, leading to the growth of banking as a substantial
    sector of the economy.

    and Privatization

    Threat of foreign competition and an increasingly market-aware public is driving change
    in Brazil’s economy. Aside from internal income inequalities, consumer consumption has
    increased and consumers are learning how a competitive market should function. More
    imports are streaming into Brazil as a result of lower tariffs. A more open economy is
    empowering people with choice, both of domestic and international products; this is in
    turn driving vast restructuring within Brazilian firms.

    Some changes are being driven by fear of foreign takeovers; several major firms
    including food processor giant Ceval Alimentos and steel producer Coafb have been absorbed
    by international firms. Foreign inflows of capital were quite significant last year,
    especially in the form of portfolio and direct investment. This phenomenon is likely to
    continue as foreign firms build positions in the Brazilian market. South African firm,
    Anglo American Corp., for example, purchased 28% of Aracruz stock in 1996. With over $60
    billion in assets, domestic pension funds have also become heavy investors in many firms.

    Restructuring and reorganization are underway throughout the economy. Within
    state-owned monopolies, restructuring and rationalization of operations has recently led
    to revenue levels that pushed these historically docile firms up the Global Fortune 500
    rankings. Most restructuring in state-owned firms has been a consequence of government
    mandated privatization, but many private firms are also following suit.

    Several divestitures of subsidiaries, such as those by Suzano and Klabin, and
    acquisitions, such as Banco Itaú’s acquisition of Banespa ($13 billion in deposits), have
    already taken place and more are likely to follow. In addition, there has been large
    activity in capacity building within firms as they expand exportation to foreign markets.

    Top Management

    Top management in many Brazilian companies has traditionally been composed of long
    standing employees of the firm. Although privatization is introducing outsiders to top
    ranks, leaders in firms like Aracruz and Vale do Rio Doce have been within the
    organization for an average of 13 years. This phenomenon is not uncommon in other
    countries, and in some Brazilian firms it is explicitly encouraged.

    Banco Bradesco prides itself on the fact that many top managers started at lower ranks,
    and its corporate culture favors the "work-your-way up" attitude. In other
    cases, this practice has been influenced by the firm’s control structures. Familial
    relations and ties in the ownership of firms are not uncommon in Brazil. The Marinho
    family, which owns media firm Globo, are among the more visible. Less visible are groups
    like the Ioschpe family which has stakes in the firm bearing their name, or the Setúbal,
    and Villela families which have stakes in Banco Itaú.

    The Klabin family, which own Indústrias Klabin, for instance, uses an organizational
    vehicle, Klabin Irmãos & Cia (Klabin Brothers & Co), in order to hold majority
    stock control. A large stake of Aracruz S.A. is owned by Arapar, a firm affiliated with
    chairman of the board of Aracruz, Erling Sven Lorentzen.

    Aside from voting shares, families also exert control by participating as members of
    the board like in Klabin and Banco Itaú, or being involved in more operational aspects,
    like Mr. Olavo E. Setúbal who is president of Itaú S.A. and Banco Itaú. Familial
    control and internal executive succession seem to have been shaped in large measure by the
    development of Brazil’s governmental and commercial law structures. Brazil had highly
    interventionist government regulations rooted in laws that stem back to Portuguese and
    even Roman law. The path of least resistance for commercial development came through close
    ties with law makers, which came in the form of bribery or familial relations.

    In some instances, "political entrepreneurs," as Joseph Schumpeter called
    them, used their political office as means to benefit their own commercial endeavors. In
    this environment, the closed family circle or long-standing insider relationships were the
    most efficient mechanisms for trust and empowerment in private commercial activity. In
    large, state-owned firms, relationships between managers and politicians were a basis upon
    which job longevity and succession could be achieved.

    The dynamics of governance and ownership are nonetheless changing within some firms.
    The investment boom by foreigners and domestic pension funds in particular, are upsetting
    traditional proportions of voting shares. Previ, Brazil’s largest pension firm with $14
    billion in assets and a subsidiary of Banco do Brasil, has been active in gaining majority
    or sizable minority shares of over 35 companies, muscling its way into board room
    representation in each one. Aggressive entrepreneurs like Benjamin Steinbruch are also
    forcing changes.

    Using their work experiences from abroad and within Brazil, these business people are
    either taking the helms of some firms or forcing better returns from others. Steinbruch,
    who studied at Harvard and worked in Brazil for several years, helped engineer a takeover
    of Vale do Rio de Doce and acting as executive chairman has helped to privatize and
    rationalize some of its operations, reducing costs by over 23%. Other executives, like
    former CEO of Aracruz Luiz Kaufmann, are also bringing management lessons from other
    foreign firms (Kaufmann worked from Arthur D. Little in Chicago). Even Olavo Setúbal, who
    has been with Banco Itaú since 1984, comes with work experience at Citibank.


    Eyeing global markets is not something new to firms in Brazil. For the past four years
    Aracruz has exported ten times more eucalyptus pulp, their main product, than sold it
    domestically. The impact of the recent Asian crisis on these firms’ balance sheets is an
    indicator of their global dependence. Annual reports of Aracruz, Suzano, and Klabin all
    attribute lower sales in 1997 to decreased foreign demand stemming from the crisis.

    Banco Itaú, Banco Bradesco, and Banco do Brasil were all spared significant exposure
    due to the government’s quick monetary response to the crisis and the fact that most of
    their investments were focused in Brazil and Latin America. Another indicator involves the
    availability of firms’ securities abroad and use of global financing avenues by these
    firms. Companies like Vale do Rio Doce and Banco Itaú are cross listed in the New York
    Stock Exchange while others like Banco Bradesco use American Depository Receipts (ADRs).

    The use of international financial firms to acquire funds is also common, with Aracruz
    using Merrill Lynch to issue $125 in bonds and Suzano using Chase Manhattan in a similar
    deal. Foreign financial houses are having an integral role in privatization efforts of
    some firms like Eletrobrás. Credit Swiss First Boston has been charged with being the
    lead manager for Eletrobrás’ securitization program, playing an important decision making
    role in, when and how Eletrobrás privatizes.

    Most of the top ten firms are expanding abroad and domestically. Some are undertaking
    these efforts through joint ventures with foreign firms or through outright acquisitions.
    Manufacturing firms like Aracruz, Suzano, and Klabin at this point are focusing more
    heavily on restructuring internal operations in hopes to gain efficiencies. Investments in
    projects within Brazil are strong and are likely to continue.

    Building capacity and scales has become important as it has become easier for domestic
    firms to export goods. Historically, exports were looked down upon as a means for domestic
    growth; they were believed to be risky and unstable sources of income. Exchange rates and
    other monetary instruments were commonly used with ends like inflation control in mind,
    sometimes diminishing the ability of producers to export. Changes in government policy in
    these areas are making exportation more attractive to producers.

    A common thread in all these firms is the recognition of the importance of
    technological concurrency with foreign competitors. Many of the restructuring efforts aim
    at introducing and streamlining operations with new technologies. The inability to
    modernize and expand capacity in existing plants, like those in and around the Santana,
    São Paulo area, has been a main justification for plant closings by Klabin.

    Suzano has recently installed a SAP R/3 business management system, and Banco do Brasil
    spent $1.8 billion last year in acquisition of networking and information technologies.
    Banco Itaú has spent over $160 million annually over the past five years to increase
    automation technology, while Klabin is importing million dollar equipment from US
    manufacturers to improve their processes. ISO (International Organization for
    Standardization) certification has also been a goal or recent achievement of all top ten
    firms as has been the implementation of employee training programs.

    Some firms are even moving beyond technological adoption and towards innovation. Both
    Suzano and Klabin have increased research in improving forestry product yields and
    processing. Suzano has had success with its genetics research, while Klabin has been
    recognized worldwide for its superior Indrovent DSD tissue forming felt system. Many firms
    in Brazil, from telecom giant Telebrás to mineral concerns like Cia Siderúrgica
    Nacional, are improving upon current technology to gain a competitive edge.

    The Top Ten

    Brazil’s top companies are positioning themselves to be players in the international
    market. While governance and top management are tightly controlled, these firms are
    adopting technological and organizational ideas that are pushing restructuring, education
    of their work force, and greater competitive efficiency. It is not clear if firm control
    by small groups like families will hinder growth or whether this will ever change, but at
    this point, this factor does not seem to pose significant problems.

    Unlike multinationals composed of a patchwork from many countries, Brazil’s top firms
    remain distinctly Brazilian. The vast majority of workers are domestic laborers and much
    of the production and value-added is done within national borders. At this stage, these
    firms are for the most part limiting international activities to exportation of goods,
    especially since their competitive advantage derives in large measure from Brazil’s
    natural resources.

    Joint ventures and some operations abroad do signal a willingness to expand, but such
    steps will have to be progressive as both management and operations learn to fully adapt
    to the new rules of the market. Perhaps it is this interaction with foreign firms and
    institutions that best signal the international nature of Brazil’s top ten; they are
    tapping into the global economy to find new opportunities for cooperation, expansion, and

    Arnoldo Fonseca is a student of Management and Information Systems at
    the Wharton School of the University of Pennsylvania. He is very interested in development
    issues within Brazil, including knowledge transfer and market efficiency. You can contact
    him at: 

    Top Ten Brazilian Firms by Market Capitalization, June 1998

    NameMkt Cap
    1998.  ($US
    Net Sales
    1997 ($US millions)
    of Activities
    Petrobrás$34,630.0$8,663Distribution and trade of oil and
    petrochemical derivative products throughout all of Brazil
    Banco do Brasil$21,213.0$21,888The largest financial institution in Latin
    America, it deals with various aspects of banking and insurance. It is a federally owned
    Companhia Vale do Rio Doce$11,991.8$5,255Recently privatized mining-industrial concern
    with activities ranging from exporting iron ore to transoceanic shipping and technological
    Banco Bradesco$7,887.4$13,622Deals with various aspects of banking
    including more of a consumer focus
    Aracruz Celulose S.A.$7,791.4$536World’s largest supplier of eucalyptus
    pulp and manufactures several paper and tissue products
    Companhia Suzano de Papel e Celulose$7,015.7$1,384A conglomerate focusing on production and
    sales of eucalyptus pulp and other paper-based products
    Indústrias Klabin de Papel e Celulose$6,190.2$1,153Largest integrated manufacturer of forest
    products in Latin America
    Banco Itaú$6,090.2$10,908Deals with various aspects of banking
    Itaú S.A. – Investimentos Itaú$4,968.7$10,450Brazil’s largest holding company of
    approximately 70 multi-industry firms, including Banco Itaú.
    Electrobrás$4,716.5$6,447Responsible for Brazil’s electric power
    generation, transmission, and policy

    Source: "Top 100
    Equities 1988 vs. 1998". LatinFinance. July 1998.

    Net Sales Figures from Disclosure Information Services.


    Brazil Development Profile (1995)

    Per Capita GNP (US$)$3,640Average Annual Inflation875.3%




    Population (1995)159.0 MillionPer Capita Energy Use




    Projected Growth Rate (1995-2015)1.1%Commercial Energy Use (1,000
    m. tons of oil equivalent)




    Urban Population (% of total in 1995)78%   
    Net Foreign Direct Investment (% of GDP
    0.7%Radios (per 1000 people
    Televisions (per 1000 people
    Personal Computers (per 1000
    people 1995)
    Trade (% of GDP 1993-95)16%39927813.0
    Export-Import Ratio (exports as % of imports

    Source: Human
    Development Report 1998.

    United Nations Development Program


    Import Tariffs



    Std. Deviation



















    Source: Silber, Simão Davi.
    "The External Sector of the Brazilian Economy."

    (see Endnotes for full citation)


    Gross Inflows of Foreign Capital,

    Jan – Sept. 1997 (US$

















    Source: EIU Country Report
    4th Quarter 1997.

    The Economist Intelligence Unit Limited, 1997


    Changes in Ranking of Brazil’s Global Fortune 500 Firms

    Firm Name

    1996 Rank

    1997 Rank


    223 (G)

    202 (G)


    500 (G)


    Banco do Brasil

    182 (G)

    256 (G)

    Itaú S.A. – Investimentos Itaú



    Banco Bradesco


    (G) – Indicates
    Government Owned Firm

    Source: Fortune Magazine, August 4, 1997 v136 and August 5, 1996 v134


    Indústrias Klabin’s Board Members

    Armando Klabin – President



    Israel KlabinDaniel Miguel KlabinVera LaferRoberto Luiz Leme Klabin
    Alfred landauEliezer Batista da SilvaPedro Franco PivaMiguel Lafer
    Olavo Egydio Monteiro de Carvalho

    Source: 1997
    Annual Report


    Banco Itaú Board Members

    Olavo Egydio Setúbal –

    Vice Chairman:

    Eudoro Villela

    José Carlos Moraes Abreu


    Maurício VillelaAna Lúcia de M. B. VillelaMaria de L. E. VillelaRoberto E. Setúbal
    Sérgio S. de FreitasOlavo F. Bueno JúniorLuiz Moraes BarrosJairo Cupertino
    Aloysia FozAntônio Gomes de CostaCarlos de C. PestanaAntônio T. Correia
    Luiz A. Queiroz Guimarães

    Source: 1997
    Annual Report


    Sample of Top Brazilian Firms’ Foreign and Domestic Expansion


    Increasing speculation in Campos basin off Rio de Janeiro state
    Potentially many joint ventures with domestic and foreign oil producers in drilling
    projects, esp. as oil industry is opened by government
    In consortium with Shell and India’s Oil and Natural Gas Corp. (ONGC) to undertake
    deepwater exploration off India
    Building Bolivia-Brazil natural gas pipeline to import the resource into Brazil
    Acquired stakes in Colombian oil field previously owned by British firm Lasmo

    Banco do Brasil

    Building relationships with Top Financial firms abroad to facilitate exportation
    process/financing for customers

    Companhia Vale do Rio Doce

    Finding new foreign buyers for their products
    Owns 50% California Steel Industries and firms in Argentina
    Constructing $438-million iron pellet in northern Brazil
    Bought significant stake in domestic industry related firm, Usinas Siderúrgicas de
    Minas Gerais SA (USIMINAS)
    Joint venture with Kawasaki Steel Corp to develop a new mine in Brazil

    Banco Bradesco

    Acquired Banco de Crédito Real de Minas Gerais
    Acquired Banco de Crédito Nacional
    Acquired Cia União de Seguros insurance firm
    Expanding into insurance and pension fund management
    Strengthening import-export services
    Joint venture between subsidiary Bradesco Seguros and Prudential Insurance Co. in
    selling insurance in Brazil
    Joint venture with Templeton International, Inc. (US) to form asset management firm in

    Aracruz Celulose S.A.

    Joint Venture with Gutchess International Group(US) to manufacture wood-based products
    Shoring up distribution methods by contracts with CXS Transportation and the Port of
    Jacksonville in the US

    Companhia Suzano de Papel e Celulose

    Joint ventures with Riverwood and Igras (domestic-based firms) in packaging machinery
    Acquired Polipropfieno S.A. and Koppol Fums S.A in consortium with other paper and
    chemical firms

    Indústrias Klabin de Papel e Celulose

    Expansion of manufacturing activities in Argentina
    Joint Venture with Kimberly-Clark in Argentina
    Informal relationship with Swedish firm Tetra Pak for providing materials supplies

    Banco Itaú

    Acquired Banrj (Banco Nacional do Rio de Janeiro) and currently eyeing Banesp (Banco
    Nacional de São Paulo)
    Created Banco Itaú Europa
    Created Banco Itaú Argentina S.A.
    Acquired Banco Francês e Brasileiro
    Acquired Banco del Buen Ayre (Argentina)
    Joint Venture with Bankers Trust (US) in investment banking and derivatives

    Source: 1997 Annual Reports
    where not indicated


    Investment Projects in Brazil (in US$ billions)


    Under Way

    By 2005


    Oil, gas & petrochemicals5.726.332.1
    Transport & ports8.130.638.7
    Paper & Cellulose0.811.712.5
    Mining & Cement1.05.05.9

    Source: EIU Country Report
    4th Quarter 1997. The Economist Intelligence Unit Limited, 1997

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