Brazil's Trade Barriers - overcoming tariffs for biz dev success

Ed Marsh | Sep 9, 2013

Everyone wants to sell to Brazil

After all it's a party, it's big, it's growing and new consumers are minted every day.  Think Copacabana, World Cup, Olympics, caipirinhas, swimsuit models, etc.  What's not to like commercially or as a tourist?

Let's start with how hard it is to sell there....Not only do you have the typical emerging markets challenges including FCPA compliance and often unpredictable customs regulations, but you typically start out with a substantial price disadvantage due to tariffs.

Wait!  I know that your company doesn't sell on price, and certainly Brazilian consumers value "Made in America" quality.  But out of the gate you'll likely face not only a pricing disadvantage due to freight and logistics, but also massive tariffs often between 50-80%.  So if your product has the same landed price as a domestic alternative, your DDP position will be substantially less advantageous.  That's the government's objective.

Very few succeed

That's the common reason many companies spend 3 or more years investing in travel, relationship building, channel development and marketing...only to achieve precious little success.  By design the Brazilian government prices you out of the market in hopes of fostering local industry.

Is it fair?  Does it matter?  After all, we do the same to their sugar, and many other countries have similar policies.  

So in addition to, or better yet instead of simply whining about it in forums and petitioning your congressional delegation and the Dept of Commerce advocacy folks you have a couple options.
  • skip Brazil - get over the BRICs hang-up that many companies have and instead look to a diverse group of second tier markets with lower barriers and high likely return on your efforts
  • keep at it until you eventually get a couple deals and then quit because you can't justify the investment
  • quit now before your sunk costs are so large that you feel compelled to continue fruitlessly
or get sensible and
  • grab the Mercosur by the tail and overcome the tariff barriers throughout the region (typically not just local Brazilian but set by the Mercosur trade union) with some KDA (knock down assembly)

Reasons it can't work for your business

I know.  Your product/business is different.  It must be assembled by trained people in your factory.  Your IP is too sensitive to expose.  The skills require highly trained workers.  You need clean room conditions.  I won't bore you with the whole litany, but I've heard all the reasons why the conversation needs to be quickly aborted.

But I've never had anyone tell me the real reason, honestly.  

Establishing local assembly feels complicated and overwhelming for an SMB.  

That's fair.  If you were to wake up one morning and decide to undertake that effort on your own there would be missteps and wasted resources - not to mention quality nightmares.

I am also sensitive to the perception of outsourcing.  But remember what we are discussing here.  Not having your product made elsewhere to bring it into the US cheaply, but rather to do some or most of the actual manufacturing and assembly in your domestic US factory, then ship product to a final assembly facility in Brazil.  Will that reduce the labor required in your factory?  Unit for unit yes.  But if you can sell hundreds or thousands as much as you would without this strategy, and continue to do substantial portions of the work at home, then you will create huge numbers of jobs rather than eliminate them.  Your company, employees & community will win - not to mention the Brazilian consumers who will have easier access to your innovation!

How to make it work

brazil business development export tariff trade barrierIf you have an open mind and are committed to growth in the market you've already satisfied the primary criteria.

You'll need a realistic understanding of where you can properly hand-off components (including logistics considerations) to another facility.  Additionally you should identify any particular technical skill or facility requirements.  Then call us.  We've got access to a great network of factories that already do precisely this type of work for a variety of high profile end user customers.  Capabilities range from mechanical industrial assembly through complex electronics.  

In the security/defense contractor world this is often known as offsets for local contracts.  In the general manufacturing world it's known as sensible business.  You retain most of your manufacturing work in your factory, have final assembly done locally, circumvent the primary barrier to business development in Brazil and simultaneously open the Mercosur market as a whole to your product.

And if you sell your product on public tenders (sales to government) then you'll actually be able to SELL AT A HIGHER PRICE.  Seriously.  Details vary, but often a 20% premium is available for locally "manufactured" (often simply final assembly) products.

Help me overcome the tariff barrier to success in Brazil!