ANN SHORTELL January 19 1987


ANN SHORTELL January 19 1987


A long line of 540 Brazilianmade Volkswagen Fox sedans rolled out of the cargo hatch of an ocean freighter in Halifax harbor last week. The cars were en route from a factory in São Paulo to their North American debut in showrooms across Canada, where they will sell for around $8,500 each. But the Brazilian-made autos represent more than one more import whose price reflects lower foreign labor costs. The consignment—the first of 25,000 Brazilian-made Foxes destined for Canada this year—is a symbol of the changing trade relationship between Canada and Brazil. Reversing the normal trade pattern between developed and developing nations, Canada now imports significantly more manufactured goods from Brazil than it sends back. And it exports more raw materials to that country than it receives.

Top: That trend is not likely to change.

Canadians now have $1.5 billion invested in Brazil, making the South American country the fourth-largest recipient of Canadian investment after the United States, Britain and Australia. But the Brazilians seem determined to keep Canadian manufactured goods out. Said Ian Telfer, Rio de Janeiro-based president of Consolidated TVX Mining Corp., a joint Canadian-Brazilian gold mining operation: “They will continue to encourage capital and discourage goods.” Still, because of notable successes in the past and a sizable market—137 million people, with a large middle-class—Canadian business continues to find Brazil enticing. Said Duncan McDowall, a Brazil expert at the Ottawa-based think-tank, the Conference Board of Canada: “Brazil, of all the countries in

the developing world, strikes one as being at the top of the graduating class.”

Debt: Brazilian officials blame the protectionist trade policies on the pressures of repaying the nation’s huge $103-billion (U.S.) foreign debt. As a result,

Brazil has enacted measures to promote sales of domestic products and restrict imports. A product cannot be imported if a similar one is made in Brazil, which means that Canadian clothing and shoes cannot be sold there. As well, there is a ban on imports of small computer products. Those measures have generated hostility from the country’s trading partners, particularly the United States, which is threatening countermeasures. But it appears unlikely that Brazil will change its strategy. “If an underdeveloped country wants to develop, it must establish its own protection,” said Sergio Sardenberg, a Rio de Janeiro-based corporate lawyer with a slate of Canadian clients.

Still, Brazil is a country with a history rooted in trade. Its very name is derived from its first export of brazilwood, which the Portuguese called brasa, or “burning coal,” because of its glowing red color. And Canada has been an important foreign investor for more than 100 years. Indeed, one of the largest conglomerates in Canada, Toronto-based Brascan Ltd., began in 1899 as the Brazilian Traction, Light and Power Co. Ltd. and became one of the world’s largest public utilities.

The Canadian-owned company, with

holdings in railways and telephone companies, was known in Brazil as “The Light” and was a major force in the developing Brazilian economy. In 1978 the Brazilian government purchased the utility portion. But Brascan, which controls such diverse Canadian enterprises as John Labatt Ltd. and Royal Trustco Ltd., still has $250 million invested in Brazil through its subsidiary Brascan Administration and Investments Ltd., under company president Roberto de Andrade. A major investment is the country’s largest shopping mall, the Rio Sul in Rio de Janeiro.

Aluminum: Other companies with well-established Brazilian operations include business forms giant Moore Corp. of Toronto and Montreal’s Alcan Ltd. Indeed, Alcan has made Canadian business’s largest recent investment in Brazil—$182 million in 1986 on its aluminum operations.

The Brazilians prefer joint ventures with foreign investors rather than 100-per-cent foreign ownership. Since the 1970s, that policy has favored Canadians. According to McDowall, Brazilians regard Canadian business in “a more positive light” than U.S. industry. “They don’t see us as threatening,” he said. That goodwill has helped Canadian businessmen such as Jacob Joseph Elkin, a Toronto-based financier, who has raised $65 million

in North America, Europe and Japan for the TVX Mining Corp. With Canadian directors dominating its board and Canadian investors holding 49 per cent of the shares, the Brazilian company is looking for gold in the interior of Brazil, an area that rivals the Ca-

nadian Shield for mineral deposits. TVX has two operating mines and four more planned for 1987, and Elkin says profits will start flowing this year. Canadians also are beginning to de-

ventures: “Not many Canadian firms have the combination of courage and financial strength.” As well, many Canadian businesses are hesitant to tackle an unknown and reputedly bureau-

velop joint ventures in high technology. Spar Aerospace of Canada Ltd. has just completed a $165-million sale of two communications satellites, with an option for Brazil to purchase two more. But that deal commits Spar to setting up a special operation to sell a wide range of Brazilian products and services abroad. As well, Toronto-based Sentrol Systems Ltd., which manufactures computer-run pulp-and-paper measuring-and-control devices, has spent $600,000 and almost two years arranging a ^ joint venture in Brazil. Q It substituted the CaS nadian computers it g normally uses with lo5 cally made ones and de| veloped new Brazilian o computer software proQ grams to meet regula| tions. As a result, the s company has sold eight $750,000 systems and is awaiting government approval for four more sales.

Combination: So far, few Canadian companies have signed joint ventures. Said Jeremy Fox, a partner in the Toronto-based management consulting firm Fox Jones & Associates, which specializes in arranging Brazilian joint

cratic economy. But, said TVX president Telfer, the country’s mood is probusiness. Added Elkin: “There is a perception among Canadians and Americans that Brazil is some kind of banana republic. We know that it is not.”

Key: Some experts believe that greater awareness of Brazil’s cultural and economic goals is the key to increased trade between the two countries. Brazil-Canada Chamber of Commerce general manager Michael de Freitas aims to encourage information exchanges. He said that one drawback is the temporary lack of a Canadian ambassador in the capital, Brasilia. Ambassador Anthony Eyton—brother of Brascan chief executive Trevor Eyton—was relocated to Ottawa in mid1986 and has not yet been replaced. Such delays are common in ambassadorial appointments but, said de Freitas, “you hurt a country’s image if you’ve only got a country’s standby, as it were.” That is especially damaging, Fox added, in a country where personal contact is crucial and “a good handshake and an embrace at the airport are more important than a contract.” Exploring the intricacies of the Brazilian economy has been the most risky for Canadian banks. During the late 1970s Canada’s five largest banks poured money into the country and now hold $5 billion of Brazil’s overseas debt. The Toronto Dominion Bank, which is owed $822 million, closed its Sào Paulo office in 1986. At the same time, the Bank of Montreal—the largest Canadian lender with $2 billion in outstanding loans—remains active in financing Brazilian-Canadian trade.

Tremendous: Despite the impediments, an exotic and rich country remains a challenge to Canadian business. Brazil has a six-month backlog of demand for freezers, but almost no frozen foods on sale, offering an opening for such large Canadian food companies as New Brunswick-based McCain Foods Ltd. Indeed, as part of a Canadian government effort to encourage a broader trade base, the Conference Board’s McDowall is now completing a study on Brazil for the Investment Development Agency. “Sixty million people in South Brazil are every bit as affluent as we are in Canada,” he said. “It’s a tremendous market, and not many Canadians realize it.” Added consultant Fox: “I always liken Brazil to what the United States must have been at the turn of the century.” The key for Canadian entrepreneurs is to develop a close working relationship with local business before Brazil reaches its full stature in world trade.