MARKET ENTRY CHALLENGES FOR EUROPEAN SMEs IN BRAZIL: LESSONS LEARNED

Public Summary

Research Institute for International Management, University of St. Gallen

Loris Garcia & Dr. Roger Moser

Study Background and Approach

For some years now, Western companies have often identified Brazil as a promising investment opportunity. The increase in purchasing power as well as a relatively large young population has drawn the attention of European SMEs to the Brazilian market. Considering the fact that most European countries face stagnation or only limited growth, the prospects of a market entry in Brazil seem to be favourable, especially as the IMF is predicting a sustainable annual growth rate of 4% still for the coming years. Nevertheless, the market entry into Brazil challenges foreign companies in multiple dimensions. The market is still affected from high criminality, weak infrastructure, red-tape bureaucracy and corruption in the legal system. These challenges need to be considered when analysing the market potential and developing a market entry strategy. A research team of the University of St. Gallen in collaboration with students from the EBS University of Business & Law has analysed fundamental challenges for SMEs imposed when entering the Brazilian market. This public summary provides some take-aways including which incidents along the four market entry phases are a) most important for the market entry success and b) most complex to address by executives of Western SMEs in Brazil.

Study based on critical incident methodology, analyzing 11 crucial situations along four market entry process phases: market evaluation, entry planning, entry implementation, local operations (see illustration).

Brazil is growing rapidly. Nevertheless the success of the business is also depending on the ability of the company to adapt to the constant law changes and if the company spends the money right.
(Study Participant)

Take-Aways
According to the study participants profound market research and cultural experience are key-factors in order to establish a successful business in Brazil. Legal and contractual aspects are major concerns of SME executives when operating in Brazil. It is indespensable to act cautiously when negotiating with possible business partners.

The activities in Brazil have to be controlled regularly for example by continuous visits of an international controller who is checking the financial and compliance behavior.
(Study Participant)

SME executives judge the market evaluation phase as the most important and most complex to address. Specifically, participants identify the following incidents as most important for overall market entry success: o Composition of a good agreement with Brazilian partners including an exit clause when entering into a joint venture. o Determination of the market in which a company is planning to enter through reliable market evaluation. o Awareness of cultural differences and possible challenges during the negotiations with potential business partners. o A realistic and flexible financial plan for the market entry. Executives of European SMEs perceive the following incidents as most complex to address: o Identifying relevant information in order to adapt the product to the Brazilian market. o The adaptation of the operations of European companies to the Brazilian business culture on the management and process level. o Maintainance of a high standard of quality. o Finding qualified and trustworthy partners during market evaluation. Our analysis of the participants answers suggests that the most complex challenges can be efficiently addressed by the following guidelines: o Conduct detailed research about market potentials, cultural differences and legal regulations through different local networks in Brazil. o Hiring experts who are familiar with local business, culture and language and can open doors to local decision makers. o Focus on a long-term production planning and use scenario techniques so that suitable quality is ensures and undercapacities are avoided. o Plan the market entry accurately, however, maintain flexibility in order to deal with unexpected incidents and delays. o Seek for professional legal advice and when entering in a joint venture clearly identify duties and responsibilities in advance.

I would have many meetings and look for as much information as possible about the way of handling things in Brazil. With that in hand it would be easier to negotiate with Brazilians, if you already know how they think and what is important for them
(Study Participant)

The business is going more on the Latin way. You need to be patient to work in Brazil and with Brazilian people.
(Study Participant)

No contract without advocate in business. Let always check each paper by an advocate.
(Study Participant)

1. Evaluating market potential 2. Adapting product for the Brazilian market

1. Choosing the right location 2. Financial planning 3. Entry mode choice

1. Business process design 2. Managing Brazilian partners 3. Developing a local leadership team 4. Land acquisition

1. Technology protection 2. Quality management

When entering Brazil, executives of SMEs should

The Brazilian market is very European oriented when considering quality of products. It is ok not to launch latest technology, but never compromise on quality
(Study Participant)

Market evaluation: gain substantial insights into the target market through market research and realistically plan the market entry. seek for reliable partners and invest in trust-building measures from the very beginning. not compromise on the product-quality. only invest in qualified Brazilian employees. Market entry planning: posess very good knowledge of the market and a good local network. be aware of the high importance of the political and legal environment in Brazil. not choose a location based on financial incentives such as taxe rebates etc. but and visit the production sites beforehand and look for cluster advantages. distinguish between the establishment of a production facility and a representative office when looking for the right location. expect the unexpected when devising financial plans and calculate for substantial waiting times/delays. Market entry implementation: develop a leadership team for the operations in Brazil which is familiar with culture and language in Brazil and Switzerland. adjust to local customs and be patient when cooperating with Brazilians. Invest in hands-on training measures. aim for a good compromise and include exit clauses when entering in a joint venture partnership. visit business partners in order to profit from trust-building and increased mutual understanding. Be aware that this takes time. hire local professionals that are embedded in your network. Local operations: avoid unlimited trust in Brazilian partners and monitor the market and the subsidiaries regularly. hire experienced European engineers or a company that searches for qualified local people in order to ensure a high product-quality. think in different scenarios in order to improve the forecasting of the production. Contact: Dr. Roger Moser, Research Institute for International Management: roger.moser@unisg.ch

You have to adopt to the behavior in Brazil, but you have also to proceed according to your companys compliance rules.
(Study Participant)

The activities in Brazil have to be controlled regularly. For example by continuous visits of an international controller who is checking the financial data and compliance behaviour.
(Study Participant)

Doing business in Brazil is not possible without speaking Portuguese

(Study Participant)