Imports to Brazil: Import Duties, Import Taxes and Strong Real

Interview with Antonio Pargana, President of CISA Trading

Brazil opened up in the 90s and now it’s easier to import goods to Brazil. Exports are also gaining ground because they have seen price hikes in commodities, such as oil which Brazil exports on an exponential basis. So, what is your outlook for the trade balance of Brazil? Are we going to see more imports or exports?

Last year, we had a surplus of almost $30 billion and it will continue through this year. This surplus is based on a large volume of commodities being exported; mainly iron ore and agricultural commodities, but also products such as meat, which Brazil is the leading producer. Industrialized products accounted for 50% of exports, with increased sales of manufactured and semi-manufactured goods. Only 17,7 % of the total imports are consumer goods; and 82,3% imported by the industry, to be used for industrial processing, including machinery and industrial equipment. These imports are boosted by the growing demand of the large domestic market.

We have been reading recently that the Brazilian manufacturing sector shrank by 2%. What is your opinion about that?

I do not agree on Brazilian industries losing ground – they are growing, but they hope to grow more. Let’s look at Brazil: we have practically full employment. These industries are saying that we could do more, but then we would have to have more people – better educated people and better prepared workers. So, 82,3 % of everything that Brazil imports is the result of what the industry is incapable of buying in Brazil and needs to import in order to go on being competitive here and abroad. Of course, that doesn’t mean that some sectors are not suffering because of foreign competition – this happens all around the world. In 2010, for instance, Brazil imported 5 million tons of steel – 2 million above the norm. This was the result of having large steel subsidies in the world, causing prices to go down. The steel mills in Brazil tried to keep the price high; this left an opening for imported steel to enter the country at a reduced price. Mills had to reduce price to compete and their profits were down due to the price increase of iron ore and coal. When there is a surplus in the world market, some industries might suffer). Consider the textile industry for instance – there are no problems for companies that need fibers to produce goods here, but there are problems for companies that produce shirts or low-cost t-shirts, because then they face competition from China. So, you have to look at these reports very carefully – sometimes things are not always black and white.

One thing that certainly affected your business was the 30% increase in import tariffs for imported cars. Do you see Brazil going in the direction of protectionism?

Ten years ago, the real-dollar exchange rate was 1.85 – today it’s 1.80. Although ten years went by, the exchange rate is the same, but inflation was more than 100%, the exchange rate being one of the main causes of the industrial drop in GNP. This is true for some sectors, but others were able to have productivity gains to compensate for it. We have a lot of national and multinational companies producing goods in Brazil with imported components from Europe, the United States or Argentina and they also have production in the States with goods sent from Brazil or Japan. When the price of the imported components went down, they became more competitive, so it is not always negative. I think there is pressure on the government to become more protectionist and the government is concerned about some sectors. The point is to balance protectionism well; we can do that with import duties, for example. However, if you choose unorthodox solutions, I think that will be very bad for Brazil because an open economy has helped the country grow in the last 20 years.

The strong real is a major factor for import-export; it’s actually better to import things to Brazil with a strong real. How are you capitalizing on these opportunities?

It is an advantage for imports, but an obstacle for exports. However, I’m sure the government is going to try to keep the real around 1.80 and not let it go to 1.60 because it would be very bad for certain industrial sectors. At 1.80 or 1.85 it would be ideal.

How are you capitalizing on that opportunity?

Our business is the product of the business of our customers. Of course, we see several customers capitalizing on the fact that they have production abroad that they can use to supply the market here. But you see a lot of products – cars, for example – that we bought for our customers come from Mercosul. These cars are produced in Argentina with spare parts produced in Brazil; so, parts go from Brazil to Argentina, then General Motors or Toyota incorporate these parts to products produced in Argentina or other places of the world, and then they sell it back to Brazil. These products coming from Mercosul would not be affected by an increase on the import duty due to the use of Brazilian made parts.

What are the main fiscal and non-fiscal benefits you offer for your clients because you are specialized in the supply chain, logistics, warehousing, tax clearance…

You have to save on every part of the supply chain. Scale is very important – if we have scale then we have the possibility of lower costing freight, international or national. Similarly, if we have volume we can have lower insurance rates, lower warehousing costs, etc. Then, if you have good banks working with you, you can provide better financial solutions for the customers. For companies from abroad that are starting their activity in Brazil, we provide credit analysis of potential customers. This is a big help because they are a start-up here and they only send a few guys who can’t do everything, so if we help them with credit reviews or financing they can concentrate on their core business. The point is to make a penny on each part of the transaction. We are proud to only make roughly one percent profit on top of all the transactions we do .This is the result of small gains that we share with the customer. Our idea for the company is to have large volume of business and small margins.

Imagine if you were to confront a company that wants to do everything themselves; maybe they don’t know that this facility exists that allows them to go to you and save money or maybe they think they prefer to do it themselves instead of acquiring another cost and intermediary. What would you say to these people?

If they look at Apple, for example: is there any reason for Apple to use our service? Could they do it themselves? Of course they could do it. But, for example, last year we received an award from Infraero for having, during the entire year, the goods we imported for Apple out of the plane and into the warehouse, after having cleared customs, in eleven hours! What our customers look for is efficiency. If they have it in eleven hours instead of three days or five days what they pay us is much cheaper than what it would cost them for having a less efficient operation. Why are we efficient? Because that’s our business and their business is to produce iPads or iPods or iPhones. Our business is to have partnerships with freight companies, banks, customs agents, knowing what documents we need, etc.

Where do you see strategic opportunities for the company? Which sector would you like to grow in and which products would you like to develop?

A lot of our clients want us to go abroad with them and this could be a next step in terms of trying to go to other countries and provide the same type of services that we do here: not only to export goods, but also to provide the same type of services. This is one possibility. Another possibility would be to partner with a conglomerate that has vessels and warehouses, but is only concentrated in one or a few of the activities Cisa does, and then to add value to what they have. So, these are things for the future that could happen.

There’s no strategic development then for you to find these potential partners. It’s just by luck that a potential partner might come to you.

No, it could happen through development of relationships with existing companies, or because it fits with what they or we think. So, it happens like that – opportunities.

What are some of the things you are most worried about – your cause of concern in terms of your business development in the future, both strategic and operational? Is it the worsening of the business environment in Brazil or fees on doing business?

I think that Brazil is in a very positive moment.

Not according to the World Bank; it’s been downgraded by six places this year.

We have incorporated into the market more than 30 million people in the last five or six years. The domestic market is growing, people are buying more, and interest rates are going down. Go out of Sao Paulo and see what is happening in Mato Grosso or Ceará. We have for instance a turbo-electric plant in Petrolina that is 700 km from Recife in Pernambuco. I am always amazed when I go there to visit the plant because the city is growing not only with more houses but also better schools, better restaurants and better hotels. If you go out to New York and you speak Portuguese, you see a guy from Ceará or Mato Grosso whereas 10 years ago you would only see people from Rio de Janeiro or Sao Paulo. So, you see we are becoming a more international country, people are more educated – there is still a long way to go in education, and growth outside of the big towns – a lot of sustained growth based on land and production, and on goods that the world needs. I do not see the world not needing soya beans or meat and Brazil has them in large quantities. So, I think people have to be better educated and there has to be more security for everyone in the streets. But I am very optimistic.

What about your company?

On the top of my head it is not a question of it being easy, but of having good customers. The government is not trying to nationalize your business, and there is no danger of that in Brazil. Of course, we could use much less bureaucracy.

You want development? You say you want to go abroad…

Myself and my partners have invested in other sectors. We have invested in power generation; for example, we have a turbo-electric plant that was an investment that Cisa Trading made in 2002 in Pernambuco. With another of my associates in Cisa we also invested in hydro plants in the state of Rio. So, power generation is a sector we are interested in. We are looking for investments in solar energy because I think it will be competitive in Brazil. It is not competitive yet because there are no subsidies like in Europe so the cost of production is still higher than elsewhere. We are also investing in ports. We have a supply base in Vitoria that provides services to the oil industry, to companies such as Petrobrás. So, we are looking at other areas of business.

But compared to your main business, it’s very small.

In terms of revenue, yes, but all of them are very good businesses – much better than trade, which is based on volume and very small margins.

In terms of investment, how much is it worth?

In total, probably about $400 million.

Are you looking for partnerships?

Right now, we are waiting for the government to decide if they are going to auction solar energy as they did with wind power. If all the different sources are put together, solar will never be competitive with wind or water, which have the advantage of being cheaper. We are also awaiting some legislation in this sector. We are doing a feasibility study and the identification of eventual suppliers from whom we could buy the solar panels. At the moment, there is a possibility. Of course, we would be open to partnerships if it makes sense and depending on if the company fits. If it does not fit and we think it is good, we will do it by ourselves.

Do you have anything to add? Perhaps in terms of corporate social responsibility?

We support art exhibitions, book publishing, and children care associations, for example. These causes are part of our culture. Being born and raised in Portugal – I have been in Brazil for 36 years – I was the President of the Portuguese Chamber of Commerce in Brasil, as well as member of the board of the American Chamber of Commerce, so through these associations we have cooperated with certain social activities related to education.

Do you have a final message that you think might be interesting?

I think Brazil is a good place to invest; there are still a lot of opportunities today. The market is growing, there is demand for products and services and the market is very competitive. This is something that always amazes me. Also, there was inflation and people were forced to live with it and try to make quick decisions, not to leave the money in the bank without generating revenue, not to have the burden of large debts and to be competitive. People think that Brazil is not competitive, but everyone and every good world player is here. The government is not going to nationalize, so I don’t see this as a problem. I still envision a lot of investments in the coming years and I’m very optimistic.