Keidanren and Confederação Nacional da Indústria (CNI) have supported the Japan-Brazil Economic Cooperation Committee since 1974 in pursuit of closer economic relations between the two countries. In the late 1990s, they convened Joint Meetings nearly every year, responding to the changes in the Brazilian economy brought about by the success of the Real Plan.
Achieving a visible revitalization of the two countries' economic relations emerged as a central concern at the 8th Joint Meeting of the Japan-Brazil Economic Cooperation Committee, which took place in Tokyo on September 2nd, 1999.
As it turned out, business activities between the two countries were forced to shrink in the 1980s and have not yet fully recovered to where they were once. Meanwhile, the comparative position of major Japanese companies in Brazil has notably declined in contrast to their Western counterparts, some of them actively participating in privatization projects these days.
The conferees thus agreed to develop a strategy and call it an "Alliance for the 21st Century". The objective is to build a stronger partnership between the private sectors of the two countries.
There is full recognition of the high potential that exists for the development of a new pattern of bilateral economic relations between Japan and Brazil. The Alliance for the 21st Century is based on the acknowledgement that Japan and Brazil - given their history and their cultural and economic links - enjoy a special rapport based on a century of good relations, which cannot be despised.
Rebuilding this relationship should be based on the following facts and tendencies:
These new tendencies and opportunities come to join the large projects that are already consolidated. For a true Alliance for the 21st Century, a new geo-economic focus has to be used in order to open up other alternatives for the bilateral relationship that has existed up to now.
This report aims at describing and analyzing the evolution of recent bilateral trade and investment relationships between Brazil and Japan (Chapter 2), discussing how important it is for Brazil and Japan to strengthen bilateral economic ties at this moment. Particular emphasis is put on showing the rapid transformation of the Brazilian economy and industry in more recent years. Chapter 3 explores those sectors holding out promising opportunities for Japanese and Brazilian businesses to build new partnerships as proposed in this Report. Efforts are made to specify as far as possible such areas where the Brazilian side has high expectations on Japanese entries and where Japanese companies could make the best of their strengths. It is emphasized that Japanese businesses would have to update old views and habits of thinking and rewrite their strategies toward Brazil if they are to succeed in the sectors mentioned in Chapter 3. The paper concludes identifying the strategies required to promote this strengthening process (Chapter 4).
Brazil and Japan have been traditional partners for over a century, collaborating in a wide variety of activities. This partnership began with the Agreement on Friendship, Trade and Navigation at the end of the 19th century and was sealed with the immigration of more than a quarter of a million Japanese to this country. It gained more impulse with the large joint projects in the 60s and 70s.
The two economies figure among those that have developed most during the last one hundred years throughout the world. Japanese immigrants changed the racial, socio-cultural and economic profile of Brazil, which previously had welcomed important contributions from Europe and Africa. Japanese immigrants left deep marks on agriculture, trade and services and contributed towards improving many features of these areas.
Besides that, both countries have together accomplished one of the most efficient strategic alliances in the world, one which has served as an example to many other cases. Japanese equipment helped to accelerate Brazilian industrialization, and Brazil was one of Japan's leading markets, especially in the international assertion of the quality of Japanese heavy machinery after the World War II.
In the 1960s, the two nations soon found each other an indispensable partner particularly in the area of major raw materials investment known as 'national projects'. Foreign direct investment (FDI) from Japan in Brazil had rapidly grown until the beginning of the 80s. In fiscal year 1983, for example, it reached a level higher than that in Indonesia or Singapore, which received the largest volume of Japanese FDI on a flow basis only next to Hong Kong in the Asian region.
A marked feature of Japan's investment in Brazil has been its relatively high foreign-trade intensity. The export and import coefficients of Japanese companies operating in Brazil - including companies with minority Japanese participation - both reached 19%, in 1995. For the whole set of companies with foreign participation these coefficients stood at 12% and 11%, respectively.
Between the early 80s and the late 90s, direct investment by Japanese businesses in Asian countries swelled across the board by three to four times, mainly driven by their need to maintain price competitiveness. Investment in Brazil, on the other hand, expanded but little. It was 1.2 billion dollars in the fiscal year 1999, far less than those in Indonesia (2.5 billion dollars) and Singapore (1.8 billion dollars).
Also, the share of Japanese investment in the total FDI in Brazil has noticeably diminished over the years (FY1951-80: 7.97%, FY1951-98: 2.23%, FY1994-98: 1.75%; on a cumulative basis).
In 1999, Brazil got over an acute economic crisis and was back in favor with foreign investors as the world's most attractive emerging market. During the year Brazil saw an FDI inflow of 29 billion dollars, topping even China (26 billion dollars) and other emerging economies. Japanese investment in Brazil recorded a modest 274 million dollars, placing Japan as the 14th among world investors with a tiny share of 0.9% in the total FDI received by Brazil. It is losing further ground with the rise of western investors. The list of top 500 companies in terms of sales in Brazil included 10 Japanese-affiliated companies back in 1984. The number dropped to 5 by 1997. During the same period, the presence of German, Italian, and French firms grew increasingly conspicuous.
After the 80s, when foreign investment retreated from Brazil during debt crisis, western investors came back as soon as the Brazilian economy turned around thanks to the Real Plan, to take advantage of business chances in privatization. Meanwhile, Japanese investors remained uninterested because they had lost confidence in Brazil, as if Brazil had almost disappeared from their global radar, while they grew preoccupied with investing in Asia. There was an additional constraint on outward Japanese investment. Japanese firms, with their balance sheets deteriorated in the course of the prolonged stagnation after the crash of the bubble economy, came under pressure to improve their financial positions. They thus found their capability for fresh investment sharply reduced. As a result, Japan found itself removed from the business opportunities that opened in a whole variety of sectors in Brazil in the wake of liberalization of the economy, expansion of consumption after the introduction of the Real Plan, privatization and concession processes, de-monopolization of petrol and restructuring of the financial sector.
On the trade side, two developments draw our attention when analyzing the bilateral flows. On the one hand, the trade balance favorable to Brazil in the early 90s was strongly inverted in the course of the decade. On the other hand, trade relations with Japan lost importance for Brazil, both in terms of imports and exports: in 1990, the bilateral trade flows accounted for 7% of Brazil's foreign trade, a figure that fell to 5% in 1998. At the same time, Japan lost market share in Brazil, particularly in dynamic sectors, such as machines and electrical and non-electrical equipment in the automobile chain.
While Brazilian exports to Japan are heavily concentrated in a few sectors producing primary and semi-manufactured goods - especially mineral products - exports from Japan are heavily based on technology-intensive manufactured products: mechanics, electronic equipment and parts and other vehicles, electrical appliances, automobiles and tires.
What the sectoral view of the performance of Brazil's exports to Japan in the 90s suggests is that, although the export list remained concentrated on some few sectors - the mineral-metallurgy complex -, there was a trend towards the diversification of the list. This trend involves some on primary and semi-manufactured sectors such as pulp and paper, coffee, processed vegetable products and meat but also concerns manufacturing sectors such as wood and furniture, electrical material, parts and other vehicles, shoes, clothing, vegetable oils and pharmaceutics and perfumery.
Brazil's exports to Japan are heavily concentrated in a small number of companies. A significant share of sales to Japan comes from companies that maintain stable and contractual relations with Japanese importers, especially - but not only - in the sectors that produce mineral commodities. Although this characteristic is related to the fact that Brazil's exports to Japan are concentrated in commodities, it is however also present among smaller-scale exporters in the sectors identified as dynamic in the Japanese market, implying that regardless of the volume of sales the stability of relations with importers may be an important condition for growth in that market.
Japan is the principal market for Japanese companies in Brazil and Nipponese trading companies play an important role in bilateral trade. For companies with Japanese capital participation, Japan generally represents the main export market. This is true for the companies that export commodities as well as for trading companies.
Brazil's imports from Japan are less concentrated than its exports to that country. The most powerful group of importers is strongly dominated by the presence of Japanese companies belonging to the automobile and electro-electronic sectors, but there is also a significant share of North-American transnational corporations. The chief characteristic of the flow of Brazilian imports from Japan is the very high rate of intra-firm trade especially in the area of parts, components and intermediate products that are assembled or finished in Brazil.
Bilateral trade and investment relations between Brazil and Japan in the 90s were marked by low dynamism. Strictly speaking, the only dynamic element of these relations was the growth of Brazilian imports from Japan. Even so, this growth can be attributed to the trade opening introduced by Brazil, and also - as has been pointed out - the fact that Japan had only a reasonable performance compared with its competitors in the Brazilian market, especially in more technology-intensive sectors. In general, the flows of bilateral trade continued to be marked by a traditional North-South pattern of relationship, despite an incipient movement of sectoral / entrepreneurial diversification in Brazil's exports list in recent years.
On the investment side, Japan's presence in the enormous volumes of FDI flows recently received by Brazil was discreet to such an extent that the total stock of Japanese investments in the country still essentially reflects processes typical of the decades prior to the 80s.
One can therefore see that the picture presented today only reproduces what was done in the past, and a major effort is needed to put an end to this stagnancy in economic relations by resorting to new initiatives to mark the Alliance for the 21st Century.
Most of the Japanese companies that suffered from the Brazilian debt crisis of the 80s are obsessed with the notion that the Brazilian economy is unstable and its management untrustworthy, and that investment in Brazil would bring little profit. The Brazilian economy, however, has changed remarkably since President Cardoso launched the Real Plan in 1994. It might be partly because Japanese investors are not as much appreciative of such changes as they should that their investment has not yet reversed to Brazil.
In the 90s, the Brazilian economy underwent deep regulatory and structural changes. In general, these changes aimed at (i) obtaining and then consolidating macro-economic stability; (ii) intensifying the integration of the country in the world economy; and (iii) redefining the economic role of the State, shifting from a producer of goods and services towards a regulating agent of private activities. As a result, the new model of development adopted by Brazil reserves for the private sector - both national and foreign - a leadership role in the dynamics of investment and in the production of goods and services.
Some major evidences of the Brazilian's economy process of change are:
The 90s therefore mark a historical turning point in Brazil's economy: the business environment becomes more and more favorable to domestic production and exports, thus conferring on the private sector the leadership role in productive investment, industry becomes stronger and more modernized, and the cast of pertinent actors in the economy changes in parallel with the other tendencies (less State agents, etc). Besides all this, under Brazil's leadership, an important manufacturing pole is consolidated around the South-American market, with the South Cone as the dynamic center of consumption.
As regards the macro-economic dimension, the introduction of the Real Plan in July 1994 marked the overcoming of the phase of high inflation. However, significant imbalances persisted, especially in respect to high domestic interest rates and exchange appreciation. Added to the distortions caused by the tax structure, in the years following the implantation of the Real, these imbalances generated a domestic anti-production and anti-export bias that was attenuated in 1999 with the devaluation of the Brazilian currency. The competitiveness of domestic production and Brazilian exports has improved significantly, interest rates are coming down, and with the movement toward tax reform the country will reach its final phase of economic adjustment.
Brazil's ability to quickly regain market confidence after the real devaluation was impressive. What is more, owing to the trade balance improvement aided by a cheaper Real, the Brazilian economy achieved a notable recovery in a short period, transforming itself into one of the most attractive investments outlet in the world.
One of Brazil's strong points as a location for investment is high return. The ROE (Return on Equity) for investment in Brazil from developed countries averaged 9.5% between 1988-97. Western businesses are said to keep a place for Brazil in their global agendas and to be ready to expand investment there if the chance of making money outweighs foreseeable risks. They have actually applied such a policy in recent years. On the other hand, one of the widely shared comments among Japanese investors in Brazil is that they can hardly hope to make money there. That attitude seems to spring from their experiences during the 80s and early 90s. It is hoped that Japanese business readjust their strategies to a new Brazil in the making.
Structural and regulatory changes in Brazil have generated new business opportunities and increased the potential profitability of private firms. Among those changes the following are worth noticing:
Brazil experienced in the 90s dynamic transformation in its economy and industries as described above. A sustained increase in investment in Brazil will require continuous improvement of the economic environment.
First of all, infrastructure improvement would be an important step toward creating a better business environment in Brazil by lowering the costs. The Brazilian side wishes Japanese companies to invest in this area actively. Financial support extended by both governments will play an important role in this respect to be explained later.
Solution to the problems, which have long been known as "Brazil costs", is a key to the growth of new investment by Japanese firms. The list of challenges to be tackled include: a reform of the complex tax system to make it more simple and transparent; deregulation and reform of the laws, regulations and administrative procedures to make them more simple, stable, and transparent; speeding up of issuing visas; extension of the effective period of visas.
The enhancement of the socio-economic environment and the improvement of public security are important conditions for attracting new investments flows. Efforts to realize these improvements should be given special priority.
If Japanese enterprises are to survive in the global economy, they have to reallocate their production and sales all around the world, targeting Latin America as another major center of their operations next to Asia, North America and Europe in importance.
So far, the Japanese FDI in Brazil has had two main focus: investment in raw material sectors targeted at supplying the Japanese market and investment in manufacturing sectors directed primarily at the Brazilian market with its enormous growth potential. Japanese investors' next step is likely to seek a wider regional market: first, from Brazil to MERCOSUR; next, to South American nations as the region's economic integration proceeds; then possibly to North America and Europe. Thus Latin America as the fourth center of global Japanese business activities takes on an increased importance.
On Brazil's side, the two most weighty trading and investment partners have been the U.S. and the European Union (EU). By comparison, Brazil's relationship with Asia so far has been a less substantial one. Nevertheless, Japan might be able to serve as an Asian bridgehead for Brazil's grains and manufactured goods exports to the Asian market, and for Brazilian firms starting locally based operations in this part of the world.
Japan and Brazil are assigning each other a major role in their respective trade strategies, and have shared interests in strengthening their economic relations in the years ahead. This makes it all the more important for the two sides to develop a dialogue based not only on a bilateral viewpoint but also on regional and global perspectives. They need to keep in mind Japan's position in Asia and that of Brazil in MERCOSUR and South America.
The structural and regulatory changes that the Brazilian economy has experienced define a new field of opportunity to strengthen economic relations between Brazil and Japan. This strengthened relation should be based on the intensification of trade, but above all on more profound forms of cooperation such as direct investment and techno-scientific and financial partnership.
The abundance of business opportunities in Brazil can best be shown through an international market comparison. In 1998, the Brazilian automobile market, where 1.53 million units were sold, was the 8th largest in the world. The annual demand for color TV's in 1996 was 25 million units in the U. S., 20 million units in China, 11 million units in Japan. It was as many as 7.5 million units in Brazil, more than the 6 million units in the 10 member countries of ASEAN. Two million units of video cassete recorder (VCR) were sold in Brazil in the same year, double the number for ASEAN. Plant and equipment investment in the telecommunication sector in Brazil in 1997 amounted to 6.9 billion dollars, compared with 6.3 billion dollars in ASEAN. Considering that the population of Brazil is 160 million while that of the 10 ASEAN nations is more than 500 million, these figures illustrate plentiful business opportunities in Brazil.
The following areas offer the most promising opportunities for strengthening bilateral economic relations.
Japan did not participate in the recent cycle of foreign investment in infrastructure triggered by the process of privatization of the sectors of telecommunications and energy as well as the concession of railroads, highways and ports. Public sector holdings worth nearly 10 billion dollars were privatized in 1999 and more assets valued at 20 billion are planned for sale between 2000-2001. Public utilities earmarked for privatization appear to be Brazil's most promising area in terms of business opportunities for the near term.
Recently the government of Brazil prepared a comprehensive investment portfolio for the period 2000-2007, at an estimated total value of US$ 181 billion, 60% of this being meant for infrastructure projects. The official perspective is that these projects - brought together in the Avança Brazil! Program - should mostly be carried out by the private initiative, while the government plays a supportive role. The projects are coordinated within a spatial view of "axes of development and integration" that maximizes the private and social returns of the identified investment opportunities, which include hydroelectric and thermoelectric projects, airports and seaports, river ports and terminals, railways and waterways, integration terminals and warehouses. The objective of the federal government is to attract foreign capital to make these projects feasible, and furthermore to coordinate them with investment that aim at the physical integration of the countries of South America.
The government intends to step up the privatization of the power generation, moving beyond power distribution where reform is well advanced. In February, 2000, the government announced it would go ahead with 49 IPP (Independent Power Producer) projects utilizing natural gas.
While European companies, especially Spanish and Portuguese, appear to be taking a dominant position on the market, two Japanese companies are operating in alliance with local and Western counterparts. In Brazil, fixed phone users are limited to 20% of the population, and cellular phone users to 10%. The figures are still small compared with those of developed countries, thus leaving plenty of room for growth.
Exclusively dominated by Petrobras in former times, these sectors have been open to domestic as well as foreign investors under concession contracts since 1997. In 1999, some mining areas were sold at auction with more than 20 foreign bidders taking part. Some Japanese firms have participated in projects such as the development of drilling areas and the construction of pipelines. In June, 2000, five trading companies of Japan agreed to initiate 3 projects to develop oil fields off the coast of Campos in the state of Rio de Janeiro. Investment outlays totaling 4.6 billion dollars are to be financed by the Japan Bank for International Cooperation (JBIC).
Many of the projects included in the Avança Brasil! Program are expected to substantially lower the costs of exporting from Brazil. Furthermore, the South American Presidential Summit, held in Brasilia, at the end of August 2000 adopted the program of " infrastructure for the integration", which should generate new opportunities for Japanese investments and allow for new reductions in the costs of doing business and exporting in Brazil.
Western companies are actively investing in the infrastructure sectors in Brazil, while Japanese companies remain cautious. This may be partly explained by the fact that the latter have little experience in infrastructure operations because this particular sector was for a long time closed to private business in Japan. It is hoped that they will be better able to compete by gaining experiences through more active participation in infrastructure business overseas. Cooperating with western firms having comparative advantage is another possible avenue. For its part, Japan should further liberalize the operation of domestic infrastructure.
In order to foster the process of development, Brazil's exports have to grow substantially to finance its import needs and foreign debt service. Alliances with Japanese companies can give a significant contribution to achieve this objective.
There are a lot of opportunities concerning trade of products and services, investment and techno-scientific and financial cooperation in the are of agribusiness. This is a traditional area for economic cooperation between the two countries based on the clear complementarity of both economies as far as production and consumption of agribusiness goods and services are concerned.
The chief objective in the commercial area would be to reduce or eliminate the tariff and non-tariff restrictions that impact negatively on Brazilian exports of agricultural products to Japan. Today, these restrictions affect products in which Brazil enjoys recognition as an international competitor: meat, sugar, alcohol and fruits, among others. The barriers to Brazilian exports should be carefully analyzed in order to identify the products that would be the prior objects of a program to eliminate trade barriers.
In the area of investment, the starting point is the acknowledgement that Mercosur is already one of the main world poles in the competitive production of foodstuffs, a trend that should be made all the stronger in the years to come with the gradual reduction of the negative effects of the national agricultural policies of the developed nations, which distort trade flows.
In this case too, potential investment should be made feasible within the logic of the axes of development and integration, to the extent that investment in production will be complemented by infrastructure projects and will prevent the appearance of bottlenecks and inefficiency during the post-production and exporting stages. Furthermore, sectors such as fishing and cotton also should become more and more interesting as areas of investment for Japanese companies.
In the field of techno-scientific and financial cooperation, the goal is to expand and stimulate the tradition of bilateral relations in agriculture, today's emphasis being on studies for the sustainability of agriculture and animal-raising in the Cerrados region as well as cooperation in the sanitation area.
A good example of successful bilateral cooperation is the PRODECER project. Thanks to this project, Brazil has become the second largest soybean exporter next to the U.S. Japan imports from Brazil plenty of foodstuffs such as coffee, soybean, chicken and orange juice. Considering the projected growth of the world population in the future, it is not hard to appreciate the increasing importance of Brazil as a foodstuffs supplier. Its exports, particularly to Asia including China are expected to expand. As regards the food business in Asia, Japanese firms can hope to play a leadership role as they have more experience and know-how than do their western counterparts.
Automobiles and auto-parts, electronics and information technology, electric appliances, telecommunications equipment, and the food industry are strong candidates for fresh Japanese investment generating new exports flows to Japan and to other markets, especially in the Western Hemisphere. These sectors have received substantial foreign investment in the last few years and there are signs that in all of them Brazil is becoming a major pole of manufacturing production directed towards Mercosur and other regions of the world, bringing together not only assembly companies and terminals but also producers of parts and accessories. In other words, in many of these sectors production chains in the process of consolidation are reasonably integrated and dynamized by criteria of competitiveness and efficiency. From Brazil, they export goods to the rest of the Latin American market. Japanese companies should explore an entire range of possibilities including re-import to Japan and export to third countries such as the U.S. To enter into such wider operations successfully, Japanese manufacturers will need to enhance their competitive strengths in terms of prices and quality, seizing the opportunities afforded by the Real depreciation. This being so, for global players in many of these sectors not investing in Brazil may mean being left out of the South-American market and losing ground in other markets.
For those sectors where Brazilian exports to Japan have recently proved dynamic, the barriers to trade should be mapped and an attempt made to create favorable conditions for these products to gain access to the Japanese market (including General System of Preferences schemes, for example).
Japanese companies have much experience in taking up various raw materials projects (iron ore, aluminum, paper and pulp, etc.) such as former "national projects". It might be feasible for them to launch "new Brazilian projects" making good use of the lessons they have learned from the past. A "new Brazilian project" does not need to be large, nor to enlist participation of the whole industry. Financing can be arranged in Japan and third countries, and products may also be exported to them. As with farm and livestock products, there will be considerable room for Japanese firms to play a part in the exports of "new Brazilian project" products from Brazil to Asia, where demand is certain to expand sooner or later.
In addition to the areas mentioned above, Japanese companies should try to open up new areas of industry by making the best use of their technological capabilities and other resources, including their experience in the Asian market.
This is an area with few initiatives for cooperation between Brazil and its developed partners, and it could become a field where the Brazil-Japan rapport distinguishes itself from all the others and creates a unique model of partnership. For example, Internet access and data communication services for mobile phone users have just begun in Brazil. Japanese operators enjoy a technological edge over foreign competitors in this area. Also, they have already been providing such services in the domestic market ahead of other countries. It is hoped that they will be a leading player in the development of Brazil's wireless communications.
Brazil's transportation infrastructure is still insufficiently developed, although a number of ideas have been advanced to modernize it. One of them is a proposal for developing a rapid transit system based on the technologies of the Japanese bullet train and the linear motor car. Another calls for development of a total distribution system complete with distribution centers and freezing facilities. Japan's transport companies have well developed distribution networks in the Asian region. They might also be able to cooperate as logistics partners with Brazilian companies that are interested in expanding their business in the Asian market.
Computer software industry can also be considered strong candidate to receive Japanese investment, especially in the form of joint ventures and business partnerships. Brazil has already developed technical and human capacity as the sector's growing level of exports clearly demonstrates.
In this sector, too, lie opportunities for technical cooperation between Brazil and Japan. Brazil's assets are mainly its natural resources and the setting up of partnerships aimed at utilizing them could prove to be a significant segment for Japanese investment.
The strategies proposed below are based on the assertion that bilateral economic relations reached a very low mark in the 90s and that there is still a series of difficulties for the future strengthening of these relations. But they are also based on the idea that nowadays the potential for these relations to strengthen is very high, especially given the recent changes experienced by the two economies and the evidence that these changes have opened up new opportunities for economic cooperation. As already mentioned, the strengthening of economic bilateral relations would be helped by further improvements in the Brazilian business environment, such as the reduction of the so-called Brazil cost and advances in infrastructure, socio-economic environment and public security.
Moreover, it is necessary to re-establish the climate of confidence and credibility that was at the origin of bilateral relations up to the 70s, although taking into account that this climate could no longer be based on a model of dialogue where, on the Brazilian side, State agents played a central role.
There is no doubt that, if the set of opportunities described herein is properly explored, this will open up the possibility of a radical change in the bilateral relations between Brazil and Japan, with concrete results appearing as early as the middle of the first decade of the 21st century. The Brazil-Japan partnership would enjoy the support of all Brazilians who are concerned with the challenges emerging from the transition towards a knowledge society, without neglecting the fact that in the short run Brazil tends to consolidate itself as an internationally important pole in the production of goods and services in the agribusiness and in the production of manufactured goods that encompass electronics, information technology, telecommunications and automobiles.
The strategy proposed for the Alliance for the 21st Century has four essential axes:
A lack of mutual understanding and information owing to geography, linguistic, cultural and historical gaps between the two countries is most frequently pointed out as responsible for holding back Japanese companies' participation in the Brazilian market. The two countries need strategies to cope with such largely unchangeable gaps between them if they are to succeed in revitalizing their economic partnership.
Information exchange should be conducted more vigorously. For inviting Japanese firms to invest in Brazil, it is essential to convince them of the stability of its economy and the high potential profitability of its market.
It is important to promote mutual understanding on the grass-roots level as the bedrock of bilateral economic relations. Brazil has the largest Japanese colony overseas, from which more and more people come to work in Japan in recent years. Still, Brazil is too distant for ordinary Japanese to visit. But even a single visit often changes one's notion of a foreign country and its people. Such personal experiences could lead to new business opportunities in the end.
In order to advance mutual understanding between the Japanese and Brazilian private sectors, their representatives should regularly meet to exchange views mainly within the traditional framework of the Japan-Brazil Economic Cooperation Committee.
For their part, the two governments should cultivate greater mutual confidence by increasing ministerial visits. In April, 2000, JBIC and the Brazilian government signed a memorandum aimed at having policy dialogues and the exchange of information on a regular basis, in addition to the traditional dialogues between the two governments. These dialogues should be result-oriented so as to reflect the opinions of the private sector.
At a time when Japanese companies are losing ground in Brazil, it is necessary to reexamine their business strategies from the double viewpoint of globalization and localization.
Japanese enterprises need to look at Brazil not only in itself but in the context of their global business strategies when they start business there. For western firms, Brazil is a region of strategic value on their world maps. It is important also for Japanese companies to design strategies for Brazil in relation to other areas.
Particularly, Brazil is the leader of regional economic integration in South America. Mercosur is an undeniable geo-economic and political reality in the American continent. Its importance as the core of the new South-American economy is already recognized the world over, and negotiations of the bloc with the Free Trade Area of the Americas (FTAA), with the rest of Latin America and with the European Union attest to this recognition. It is of utmost importance to update the relations between Japan and the countries in the bloc and grant these relations high priority.
It is often said that business with Brazilians is difficult for Japanese. Handicapped by a shortage of Portuguese speaking staff, cultural differences, incomprehensibly complex tax and legal systems, Japanese business people often cannot cope by themselves alone.
Cultural differences constitute a major obstacle against expanding business among companies of the two countries. It is clearly understood that cultural "distance" produces very different business practices and procedures. This perception is only reinforced by the loss of relevance of the relationship model where the Brazilian State agents played a central role.
Localization of the management, in which Japanese companies are said to be behind those from the U.S. and Europe, is an answer to the difficulty of adjustment. U.S. and European affiliated companies in Brazil operate with a broad range of powers delegated by their parent companies. This enables them to make quick decisions and react flexibly to sudden changes in the business environment.
In the past, Japanese companies were able to recruit top personnel for modest rates of compensation, thanks to the Japanese colony. Recently, however, younger people of Japanese ancestry have shown less interest in Japan, and many of them went to work for Western companies attracted by the better terms offered. Japanese firms should offer more incentives to draw local talent. In this regard, human resource development should be considered to facilitate the employment of more locals as staff or managers in their subsidiaries.
It is necessary to deepen reciprocal knowledge and create different inter-entrepreneurial and inter-governmental mechanisms for confidence-building and providing investors with guarantees. This theme is a priority insofar as the aim is to attract Japanese investors to infrastructure sectors, where investment take a long time to mature and there are all sorts of risks for the investor. Moreover, it should be borne in mind that the consolidation of Mercosur and the prospects for amplifying the bloc open great possibilities for attracting industrial investment directed at exploiting this market. As said above, Brazil is becoming a hub of the regional networks of production in South America, and the tendency is for this process to speed up with more integration on the sub-continent and later confirmation of the Free Trade Area of the Americas (FTAA)
It is worth studying whether new bilateral or regional agreements can help meet the above-mentioned Japanese concerns over the business environment. For example, a Japan-Brazil Investment Treaty could help to solve problems now troubling Japanese businesses, such as what seems to Japanese firms a lack of constancy and transparency in the legal and regulatory systems, regulations on the transfer of loans and royalties to parent companies, and difficulties in getting visas for the staff sent from the headquarters. These problems could be dealt with by clauses that guarantee legal transparency, freedom of transfer, entrance and temporary stay of key personnel.
Likewise, a free trade agreement (FTA) between Japan and MERCOSUR would be instrumental in solving the issue of high tariffs. It would play a symbolic role in enhancing two-way trade and investment flows. MERCOSUR is now considering an FTA with EU, while Japan has started to negotiate bilateral investment treaties with Korea and Mexico, and is exploring the possibility of concluding an FTA with Singapore. Agreements between Japan and Brazil may deserve consideration as a long-term proposition and as a link in the global networks of bilateral and regional treaties.
A serious concern of Japanese investors is the financial instability regarding the foreign exchange rate, the interest rate and the availability of money. The Japanese government should provide its support to Brazil's efforts to attract stable money flows from the international financial market to the country.
As has been mentioned before, the infrastructure projects in PPA (Avança Brasil!) seem to offer attractive investment opportunities to Japanese enterprises. Yet, projects in the infrastructure sector extend over such a long period of time that the availability of adequate insurances and guarantees is the key to minimizing the risks involved. So it is indispensable to utilize to the largest possible extent official sources such as EID/MITI (Export, Import and Investment Insurance Department, Ministry of International Trade and Industry) and JBIC.
Furthermore, financial support by official sources to local Japanese-affiliated companies through commercial banks is also important to ensure their risk activities. It is hoped that the Japanese government will extend this type of support applying various tools including the JBIC's two-step loans. The Brazilian government, in turn, should transfer such financial support smoothly to business borrowers via official financial institutions like BNDES. Meanwhile private banks should continue to provide project finance as well as assistance in issuing samurai bonds in capital markets.
There are two focuses of action in the commercial area. In the first place, the complementarity between the two countries has to be exploited, expanding exports from Brazil that are intensive in natural resources (especially agriculture and animal-raising). Secondly, the diversification of Brazilian exports should be encouraged.
With regard to the first point, bringing down the tariff and non-tariff barriers, s well as sanitary cooperation in the area of agricultural products, would be important initiatives to strengthen bilateral relations. In fact, in the area of agribusiness products, the trade barriers to Brazilian exports are quite significant, and some way has to be found to overcome them.
Furthermore, granting favorable conditions for dynamic industrial products to have access to the Japanese market, and implementing pioneer programs for the competent Japanese agencies to promote the imports of these products, would help to overcome the main obstacles to Brazilian exports, namely, cultural differences, unfamiliarity with the market, and the complexity of distribution structures.
Finally, it is indispensable to sponsor the presence of Brazilian companies in Japan, by creating proper mechanisms with the cooperation of governmental agencies and the Japanese private sector, including for the purpose of consolidating recognizably Brazilian brands.
The Brazilian economy and industry have been transformed since the beginning of the 90s. The economy is now open to global business, and the Brazilian companies has achieved modernization and globalization. Major companies in the Western countries lose no time in realizing such changes and are vigorously making large-scale investment in expecting areas with sufficient returns.
Japanese companies should realize that Brazil is no longer an "untrustworthy, unprofitable" economy but a partner they can trust and together make money with. Therefore, they must find a new type of relationship and new ways to develop it. In this sense, Japan needs to reconsider its trade strategies.
Japanese companies should focus on the following areas in searching business chances in Brazil: 1) privatization projects in the infrastructure sectors such as energy, telecommunication, petroleum and gas; 2) export from Brazil of manufactured goods, agricultural products and raw materials; 3) new types of service industries such as data communication, transportation and distribution systems. On the other hand, Brazilian enterprises should try to enlighten Japanese business people on the current economic environment in Brazil and the appropriate way to expand business. Furthermore, they should actively pursue an export strategy to Japan and Asia and strive to develop partnerships with Japanese companies, by encouraging them to fully utilize their global networks to increase the export of Brazilian products.
Japanese and Brazilian governments should provide systemic and financial support to Japanese investment in Brazil and to Brazilian exports so as to increase and develop partnerships between the two industries.
To this end, the following challenges should be tackled: promotion of mutual understanding as the basic underpinning of business relations; drafting of new business strategies in terms of both globalization and local empowerment; improvement of the business environment; and promotion of Brazilian exports.
This report includes various concrete proposals along this line to the private and public sectors in Japan and Brazil. What matters is that they should be seriously discussed and put into practice.
Keidanren and CNI are going to hold the Japan-Brazil Economic Cooperation Committee 9th Joint Meeting in Brazil in early November to urge the governments and industries to take up the proposals put forth in this report.
There is no quick way for enhancing economic intercourse between nations. Most of the challenges have to be dealt with over a long period of time. It is essential, therefore, to keep the implementation of the report and its results under review in various public and private frameworks such as the Economic Cooperation Committee.
In order to analyze how important Japan is for Brazilian companies, in May 2000 the National Confederation of Industry sent out questionnaires to several hundred firms and received answers from 46. Although the questionnaire was sent to companies from different sectors, whether they were related to Japan or not, the sample of firms that answered concentrated on those which engage in or plan to engage in business with that country. In fact, companies with that characteristic represented 84% of those that answered, implying that the great majority of the answers obtained involve corporations with a specific interest in Japan.
Direct investments are the most promising channel for recovering bilateral relations. The type of initiative considered to be of greatest potential for developing the bilateral economic relationship is direct Japanese investment in Brazil. As a matter of fact, 68% of the companies in the sample considered Brazil's potential to attract new Japanese direct investments as high or very high. Contrasting with this, only 37% of the companies held the same opinion (high or very high) for the growth potential of Brazilian exports to Japan, whereas 33% see a positive possibility of both countries developing partnerships in third markets.
As regards sectors with a high potential to attract Japanese direct investments, the most favourable evaluations of the companies in the sample involve the following segments:
On a second level, but also substantially important, appears the mining sector.
With regard to the growth potential of Brazilian exports to Japan, the survey shows that ores and agro-industrial products concentrate the preferences of the companies, that is, the greatest potential for growth is considered to lie in those sectors that are already relevant in the export list to Japan. According to the questionnaire, this potential for growth tends to become feasible through three types of project:
In other words, not only is it supposed that the growth of exports will be based on the dominant sectors of the list, but also that it will be based on Japanese firms that operate or will begin to operate in Brazil. This means that, in the opinion of the companies that took part in the survey, given the present scenario described above there is little chance of Brazilian exports expanding through sectoral diversification of the export list and/or integration of non-Japanese companies in the roll of firms that export to that country.
In view of the widespread perception of the difficulties of intensifying exports to Japan, only 31% of the firms envisage any significant increase in sales to the Japanese market, whereas another 55% feel that exports to Japan will not increase to any substantial degree.
Cultural differences hamper increasing exports and bilateral trade. Among the main factors mentioned as obstacles to improving Brazilian exports to Japan the firms participating in the questionnaire emphasized the following, in order of importance:
This result deserves some comments, especially if we consider that some of the answers offered as options referred to technical requirements, sanitary conditions, quality and price of product, and so on. Such options were left on a second level by the companies, who saw cultural and informational characteristics, as well as problems of distribution and marketing, as some of the obstacles to expanding exports to Japan. So, for companies that for the most part have or plan to have business with Japan, intensifying this business via exports seems a difficult task because of the above-mentioned problems of access.
This answer is coherent with the perception that expanding business with Japan will depend essentially on the Japanese firms that are already active in Brazil or initiate activities through new investments. These companies would be able to overcome cultural and informational barriers from the very start and consequently would not have to face the problems of brands and the distribution structure of the Japanese market (which certainly have greater impact on non-Japanese companies).
Finally, on assessing the factors that inhibit closer approximation between Japanese companies and Brazil, the firms interviewed stressed the Japanese focus on Asian markets, which are geographically closer to Japan. For 67% of the companies, this factor was highly relevant in inhibiting an approximation between Japanese companies and Brazil, to the extent that the priority for Japanese investments and imports concentrated on the Asian markets. The lack of credit support in Brazil was a second inhibiting factor underlined by the companies, followed by the lack of Japanese tradition in the sectors that are being privatized.