Burnson on Logistics: Brazil’s ambitious agenda

A number of supply chain summits, forums, and conferences have focused on Brazil this year—and for good reason. The country is chief among rapid-growth markets (RGMs), not only in this hemisphere, but around the world.

According to Alexis Karklins-Marchay, co-leader of the Emerging Markets Center at Ernst & Young, while slower expansion in Brazil and other RGMs is likely in the remaining months of 2012, it will “only be a blip” before returning to significant growth by next January. Mark Pearson, managing director of Accenture’s Supply Chain Management practice, says that by 2020 Brazil could reach five million households earning $30,000 or more per annum. Pearson adds that economic data and projections are a key starting point for companies seeking to expand their sales, sourcing, or manufacturing presence in rapid-growth countries like Brazil. But, far more “granular analyses” are needed to make growth manageable as well as profitable, he argues.

Meanwhile, supply chain managers will be weighing their options when it comes to shipping and sourcing from the well-established manufacturing sectors in Brazil’s southeast and the industrial clusters in Manaus, the capital of the Amazonas state, in the North.

Even though Brazil is South America’s largest exporter and importer, U.S. multinationals must still work around the country’s tariff and non-tariff barriers. Analysts with Transport Intelligence (Ti) in London, report that the country’s trade administration is fairly good, although businesses complain that customs procedures are burdensome. The country’s border administration is fair, too, although transport infrastructure—in particular, railroads, roads, and ports—is relatively underdeveloped.

But Ti analysts say that the telecommunications infrastructure is more than adequate for today’s shippers. The country boasts an open and competitive air transport sector, too. Brazil is the world’s largest producer of regional jets.

Other economic statistics are similarly impressive.

• Brazil ranks third in production of shoes and soft drinks, fourth in commercial aircraft, eighth in steel, and tenth in automobiles.

• The country is home to Latin America’s largest forestry based industry, and boasts the world’s fifth-biggest rubber industry and the seventh largest paper and pulp industry.

• Brazil is the world’s sixth-largest market for cosmetics, with annual sales of $9 billion.

• The textile sector is made up of 30,000 companies which generate annual sales of approximately $21 billion.

• The country contains 22 percent of the world’s arable land surface.

If there is one caveat these days, it is that border security remains weak. This problem is hardly unique in South America, and Brazilian trade authorities are adamant about solving it.

Infrastructure a work in progress
So, given this complex risk/reward scenario, is it any wonder that aggressive global players are seizing the advantage? Strong demand from China for Brazilian commodities such as steel and iron ore has resulted in that nation becoming Brazil’s top export trade partner, surpassing the United States. Furthermore, Brazil is pursuing an energetic policy to expand its supply chain infrastructure across the continent for greater access to Asian markets.

As it stands now, Brazil’s port system desperately needs updating and expansion as many ocean cargo gateways are experiencing serious congestion in the country. Indeed, Ti analysts note that of the 34 public maritime ports under the jurisdiction of the Special Secretariat of Ports of the Presidency (SEP), 16 are managed directly by the state and local governments—a bureaucratic nightmare. The other 18 are administered by “dock” companies, which are joint stock companies whose major shareholder is the federal government.

Adding to this confusion is the fact that the SEP also is responsible for formulating policy and implementing measures, programs and projects to support the development of infrastructure of seaports.

Because of the poor state of the ports, many private alternatives have been built in order for companies to move their commodities to market quicker, Ti analysts observe. For example, Brazil’s mining mogul, Eike Batista, announced plans to build one of the world’s largest ports. The project has attracted both local and foreign investors. Batista came up with the idea of building a new port after experiencing constant delays in getting iron ore from his mines onto ships bound for China.

The port will include a cement causeway that will stretch about 1.8 miles into the ocean. It will have a four-lane highway, pipelines and conveyor belts that will move raw materials onto vessels heading to China. The Acu Super Port, nicknamed “highway to China,” will be completed this year at a cost of about $2.7 billion. The port will be a 10-berth terminal off the Brazilian coast.

Work is also underway to improve rail and road access to the Port of Santos, which up until recently has been a choke point for goods moving in and out of the southeast.

Grupo Libra, the first private company to manage a sea terminal in Brazil, recently completed a dredging project at Santos’ navigation channel. Analysts say the company will likely make similar improvements in Rio de Janeiro, where it holds several terminal concessions.

The Port of Rio Grande—a southern gateway having a strategic importance that goes beyond the limits of its national borders—is another resource worth tracking. According to port administrator Jaime Ramis, it will soon become “the hub for the region,” including Argentina, Paraguay, Uruguay, and Bolivia. Indeed, the Port of Rio Grande is able to accept 8,500 twenty-foot equivalent units, while the average in Brazilian ports is 2,300 TEUs. It is also preparing to become a logistics center for the southern end of Brazil’s hydrocarbons offshore deposits and booming oil industry.

Despite Brazil’s vast network of navigable rivers, inland waterways currently account for only 13 percent of waterborne traffic. That, too, is changing, however. The Agencia Nacional de Transportes Aquaviarios, the federal agency that regulates inland waterway, has been aggressively promoting private investment for the past decade. And there have been encouraging signs that international companies are preparing to expand operations into this cost-efficient distribution mode.

Brazil shaping own destiny
As we have surmised before, the Panama Canal may not be the global transportation “game changer” many expect. Brazil is an example of how one giant sovereign state and its supply chain stakeholders are shaping destiny with ambitious plans of their own. Witness the string of new highways planned to extend Brazil’s reach from the Atlantic to the Pacific via landbridge to Peru. Odebrecht, the Brazilian firm that built part of the existing highways, plans to invest $10 billion on infrastructure in Peru over the next five years on a range of power, water and road projects.

The project is being dubbed “InterOceanica,” and analysts suggest that this inevitable byproduct of South American integration will make Brazil the leader in boosting the continent’s trade with China and the rest of Asia.

Finally, because risk mitigation is now top-of-mind with most U.S. supply chain managers, this could be another reason to invest closer to home. Sudden and dramatic supply chain disruptions in Japan (earthquake)Thailand (floods), and India (blackouts) may make this hemispheric neighbor even more attractive as a way to “hedge bets” with a more sustainable sourcing strategy.