And Now the World

And Now the World

Increased liberalization of economic policy in Brazil is creating
new threats and opportunities for domestic firms. Within Brazil’s top firms, these changes
have prompted shifts in strategies signaling their willingness to participate in the
global economy. This report surveyed the top ten firms in Brazil according to market
capitalization as of June 1998.
By Arnoldo Fonseca

While Brazil began its political journey to democracy in the 1970s, its economy
remained insulated during a large part of the twentieth century. Like many Latin American
countries during the mid to late half of the twentieth century, Brazil subscribed to
economic policies based on ideas by Raul Prebisch and the United Nations’ Economic
Commission for Latin America, which stressed protectionist, import-substitution based
policies as a means to induce growth and infrastructural development.

Large state monopolies were created to reach this end, and private firms were able to
compete or, usually, oligopolize, in the domestic arena without a high level of foreign
competition. These conditions created a dualism in management and operating practices
within Brazil; state monopolies tended to be bureaucratic and inefficient while private,
export-oriented firms were more able to appropriate some of the same management practices
found within developed nations.

Large private, export-oriented firms tended to be in industries where Brazil had a
distinct comparative resource advantage with respect to other countries. Brazil had a
resource advantage in minerals and paper-related products. Since the role of foreign and
domestic investment capital was limited in Brazil, domestic banks became important
financing vehicles for several firms, leading to the growth of banking as a substantial
sector of the economy.

and Privatization

Threat of foreign competition and an increasingly market-aware public is driving change
in Brazil’s economy. Aside from internal income inequalities, consumer consumption has
increased and consumers are learning how a competitive market should function. More
imports are streaming into Brazil as a result of lower tariffs. A more open economy is
empowering people with choice, both of domestic and international products; this is in
turn driving vast restructuring within Brazilian firms.

Some changes are being driven by fear of foreign takeovers; several major firms
including food processor giant Ceval Alimentos and steel producer Coafb have been absorbed
by international firms. Foreign inflows of capital were quite significant last year,
especially in the form of portfolio and direct investment. This phenomenon is likely to
continue as foreign firms build positions in the Brazilian market. South African firm,
Anglo American Corp., for example, purchased 28% of Aracruz stock in 1996. With over $60
billion in assets, domestic pension funds have also become heavy investors in many firms.

Restructuring and reorganization are underway throughout the economy. Within
state-owned monopolies, restructuring and rationalization of operations has recently led
to revenue levels that pushed these historically docile firms up the Global Fortune 500
rankings. Most restructuring in state-owned firms has been a consequence of government
mandated privatization, but many private firms are also following suit.

Several divestitures of subsidiaries, such as those by Suzano and Klabin, and
acquisitions, such as Banco Itaú’s acquisition of Banespa ($13 billion in deposits), have
already taken place and more are likely to follow. In addition, there has been large
activity in capacity building within firms as they expand exportation to foreign markets.

Top Management

Top management in many Brazilian companies has traditionally been composed of long
standing employees of the firm. Although privatization is introducing outsiders to top
ranks, leaders in firms like Aracruz and Vale do Rio Doce have been within the
organization for an average of 13 years. This phenomenon is not uncommon in other
countries, and in some Brazilian firms it is explicitly encouraged.

Banco Bradesco prides itself on the fact that many top managers started at lower ranks,
and its corporate culture favors the "work-your-way up" attitude. In other
cases, this practice has been influenced by the firm’s control structures. Familial
relations and ties in the ownership of firms are not uncommon in Brazil. The Marinho
family, which owns media firm Globo, are among the more visible. Less visible are groups
like the Ioschpe family which has stakes in the firm bearing their name, or the Setúbal,
and Villela families which have stakes in Banco Itaú.

The Klabin family, which own Indústrias Klabin, for instance, uses an organizational
vehicle, Klabin Irmãos & Cia (Klabin Brothers & Co), in order to hold majority
stock control. A large stake of Aracruz S.A. is owned by Arapar, a firm affiliated with
chairman of the board of Aracruz, Erling Sven Lorentzen.

Aside from voting shares, families also exert control by participating as members of
the board like in Klabin and Banco Itaú, or being involved in more operational aspects,
like Mr. Olavo E. Setúbal who is president of Itaú S.A. and Banco Itaú. Familial
control and internal executive succession seem to have been shaped in large measure by the
development of Brazil’s governmental and commercial law structures. Brazil had highly
interventionist government regulations rooted in laws that stem back to Portuguese and
even Roman law. The path of least resistance for commercial development came through close
ties with law makers, which came in the form of bribery or familial relations.

In some instances, "political entrepreneurs," as Joseph Schumpeter called
them, used their political office as means to benefit their own commercial endeavors. In
this environment, the closed family circle or long-standing insider relationships were the
most efficient mechanisms for trust and empowerment in private commercial activity. In
large, state-owned firms, relationships between managers and politicians were a basis upon
which job longevity and succession could be achieved.

The dynamics of governance and ownership are nonetheless changing within some firms.
The investment boom by foreigners and domestic pension funds in particular, are upsetting
traditional proportions of voting shares. Previ, Brazil’s largest pension firm with $14
billion in assets and a subsidiary of Banco do Brasil, has been active in gaining majority
or sizable minority shares of over 35 companies, muscling its way into board room
representation in each one. Aggressive entrepreneurs like Benjamin Steinbruch are also
forcing changes.

Using their work experiences from abroad and within Brazil, these business people are
either taking the helms of some firms or forcing better returns from others. Steinbruch,
who studied at Harvard and worked in Brazil for several years, helped engineer a takeover
of Vale do Rio de Doce and acting as executive chairman has helped to privatize and
rationalize some of its operations, reducing costs by over 23%. Other executives, like
former CEO of Aracruz Luiz Kaufmann, are also bringing management lessons from other
foreign firms (Kaufmann worked from Arthur D. Little in Chicago). Even Olavo Setúbal, who
has been with Banco Itaú since 1984, comes with work experience at Citibank.


Eyeing global markets is not something new to firms in Brazil. For the past four years
Aracruz has exported ten times more eucalyptus pulp, their main product, than sold it
domestically. The impact of the recent Asian crisis on these firms’ balance sheets is an
indicator of their global dependence. Annual reports of Aracruz, Suzano, and Klabin all
attribute lower sales in 1997 to decreased foreign demand stemming from the crisis.

Banco Itaú, Banco Bradesco, and Banco do Brasil were all spared significant exposure
due to the government’s quick monetary response to the crisis and the fact that most of
their investments were focused in Brazil and Latin America. Another indicator involves the
availability of firms’ securities abroad and use of global financing avenues by these
firms. Companies like Vale do Rio Doce and Banco Itaú are cross listed in the New York
Stock Exchange while others like Banco Bradesco use American Depository Receipts (ADRs).

The use of international financial firms to acquire funds is also common, with Aracruz
using Merrill Lynch to issue $125 in bonds and Suzano using Chase Manhattan in a similar
deal. Foreign financial houses are having an integral role in privatization efforts of
some firms like Eletrobrás. Credit Swiss First Boston has been charged with being the
lead manager for Eletrobrás’ securitization program, playing an important decision making
role in, when and how Eletrobrás privatizes.

Most of the top ten firms are expanding abroad and domestically. Some are undertaking
these efforts through joint ventures with foreign firms or through outright acquisitions.
Manufacturing firms like Aracruz, Suzano, and Klabin at this point are focusing more
heavily on restructuring internal operations in hopes to gain efficiencies. Investments in
projects within Brazil are strong and are likely to continue.

Building capacity and scales has become important as it has become easier for domestic
firms to export goods. Historically, exports were looked down upon as a means for domestic
growth; they were believed to be risky and unstable sources of income. Exchange rates and
other monetary instruments were commonly used with ends like inflation control in mind,
sometimes diminishing the ability of producers to export. Changes in government policy in
these areas are making exportation more attractive to producers.

A common thread in all these firms is the recognition of the importance of
technological concurrency with foreign competitors. Many of the restructuring efforts aim
at introducing and streamlining operations with new technologies. The inability to
modernize and expand capacity in existing plants, like those in and around the Santana,
São Paulo area, has been a main justification for plant closings by Klabin.

Suzano has recently installed a SAP R/3 business management system, and Banco do Brasil
spent $1.8 billion last year in acquisition of networking and information technologies.
Banco Itaú has spent over $160 million annually over the past five years to increase
automation technology, while Klabin is importing million dollar equipment from US
manufacturers to improve their processes. ISO (International Organization for
Standardization) certification has also been a goal or recent achievement of all top ten
firms as has been the implementation of employee training programs.

Some firms are even moving beyond technological adoption and towards innovation. Both
Suzano and Klabin have increased research in improving forestry product yields and
processing. Suzano has had success with its genetics research, while Klabin has been
recognized worldwide for its superior Indrovent DSD tissue forming felt system. Many firms
in Brazil, from telecom giant Telebrás to mineral concerns like Cia Siderúrgica
Nacional, are improving upon current technology to gain a competitive edge.

The Top Ten

Brazil’s top companies are positioning themselves to be players in the international
market. While governance and top management are tightly controlled, these firms are
adopting technological and organizational ideas that are pushing restructuring, education
of their work force, and greater competitive efficiency. It is not clear if firm control
by small groups like families will hinder growth or whether this will ever change, but at
this point, this factor does not seem to pose significant problems.

Unlike multinationals composed of a patchwork from many countries, Brazil’s top firms
remain distinctly Brazilian. The vast majority of workers are domestic laborers and much
of the production and value-added is done within national borders. At this stage, these
firms are for the most part limiting international activities to exportation of goods,
especially since their competitive advantage derives in large measure from Brazil’s
natural resources.

Joint ventures and some operations abroad do signal a willingness to expand, but such
steps will have to be progressive as both management and operations learn to fully adapt
to the new rules of the market. Perhaps it is this interaction with foreign firms and
institutions that best signal the international nature of Brazil’s top ten; they are
tapping into the global economy to find new opportunities for cooperation, expansion, and

Arnoldo Fonseca is a student of Management and Information Systems at
the Wharton School of the University of Pennsylvania. He is very interested in development
issues within Brazil, including knowledge transfer and market efficiency. You can contact
him at: 

Top Ten Brazilian Firms by Market Capitalization, June 1998

Name Mkt Cap
1998.  ($US
Net Sales
1997 ($US millions)
of Activities
Petrobrás $34,630.0 $8,663 Distribution and trade of oil and
petrochemical derivative products throughout all of Brazil
Banco do Brasil $21,213.0 $21,888 The largest financial institution in Latin
America, it deals with various aspects of banking and insurance. It is a federally owned
Companhia Vale do Rio Doce $11,991.8 $5,255 Recently privatized mining-industrial concern
with activities ranging from exporting iron ore to transoceanic shipping and technological
Banco Bradesco $7,887.4 $13,622 Deals with various aspects of banking
including more of a consumer focus
Aracruz Celulose S.A. $7,791.4 $536 World’s largest supplier of eucalyptus
pulp and manufactures several paper and tissue products
Companhia Suzano de Papel e Celulose $7,015.7 $1,384 A conglomerate focusing on production and
sales of eucalyptus pulp and other paper-based products
Indústrias Klabin de Papel e Celulose $6,190.2 $1,153 Largest integrated manufacturer of forest
products in Latin America
Banco Itaú $6,090.2 $10,908 Deals with various aspects of banking
Itaú S.A. – Investimentos Itaú $4,968.7 $10,450 Brazil’s largest holding company of
approximately 70 multi-industry firms, including Banco Itaú.
Electrobrás $4,716.5 $6,447 Responsible for Brazil’s electric power
generation, transmission, and policy

Source: "Top 100
Equities 1988 vs. 1998". LatinFinance. July 1998.

Net Sales Figures from Disclosure Information Services.


Brazil Development Profile (1995)

Per Capita GNP (US$) $3,640 Average Annual Inflation 875.3%




Population (1995) 159.0 Million Per Capita Energy Use




Projected Growth Rate (1995-2015) 1.1% Commercial Energy Use (1,000
m. tons of oil equivalent)




Urban Population (% of total in 1995) 78%      
Net Foreign Direct Investment (% of GDP
0.7% Radios (per 1000 people
Televisions (per 1000 people
Personal Computers (per 1000
people 1995)
Trade (% of GDP 1993-95) 16% 399 278 13.0
Export-Import Ratio (exports as % of imports

Source: Human
Development Report 1998.

United Nations Development Program


Import Tariffs



Std. Deviation



















Source: Silber, Simão Davi.
"The External Sector of the Brazilian Economy."

(see Endnotes for full citation)


Gross Inflows of Foreign Capital,

Jan – Sept. 1997 (US$

















Source: EIU Country Report
4th Quarter 1997.

The Economist Intelligence Unit Limited, 1997


Changes in Ranking of Brazil’s Global Fortune 500 Firms

Firm Name

1996 Rank

1997 Rank


223 (G)

202 (G)


500 (G)


Banco do Brasil

182 (G)

256 (G)

Itaú S.A. – Investimentos Itaú



Banco Bradesco


(G) – Indicates
Government Owned Firm

Source: Fortune Magazine, August 4, 1997 v136 and August 5, 1996 v134


Indústrias Klabin’s Board Members

Armando Klabin – President



Israel Klabin Daniel Miguel Klabin Vera Lafer Roberto Luiz Leme Klabin
Alfred landau Eliezer Batista da Silva Pedro Franco Piva Miguel Lafer
Olavo Egydio Monteiro de Carvalho

Source: 1997
Annual Report


Banco Itaú Board Members

Olavo Egydio Setúbal –

Vice Chairman:

Eudoro Villela

José Carlos Moraes Abreu


Maurício Villela Ana Lúcia de M. B. Villela Maria de L. E. Villela Roberto E. Setúbal
Sérgio S. de Freitas Olavo F. Bueno Júnior Luiz Moraes Barros Jairo Cupertino
Aloysia Foz Antônio Gomes de Costa Carlos de C. Pestana Antônio T. Correia
Luiz A. Queiroz Guimarães

Source: 1997
Annual Report


Sample of Top Brazilian Firms’ Foreign and Domestic Expansion


Increasing speculation in Campos basin off Rio de Janeiro state
Potentially many joint ventures with domestic and foreign oil producers in drilling
projects, esp. as oil industry is opened by government
In consortium with Shell and India’s Oil and Natural Gas Corp. (ONGC) to undertake
deepwater exploration off India
Building Bolivia-Brazil natural gas pipeline to import the resource into Brazil
Acquired stakes in Colombian oil field previously owned by British firm Lasmo

Banco do Brasil

Building relationships with Top Financial firms abroad to facilitate exportation
process/financing for customers

Companhia Vale do Rio Doce

Finding new foreign buyers for their products
Owns 50% California Steel Industries and firms in Argentina
Constructing $438-million iron pellet in northern Brazil
Bought significant stake in domestic industry related firm, Usinas Siderúrgicas de
Minas Gerais SA (USIMINAS)
Joint venture with Kawasaki Steel Corp to develop a new mine in Brazil

Banco Bradesco

Acquired Banco de Crédito Real de Minas Gerais
Acquired Banco de Crédito Nacional
Acquired Cia União de Seguros insurance firm
Expanding into insurance and pension fund management
Strengthening import-export services
Joint venture between subsidiary Bradesco Seguros and Prudential Insurance Co. in
selling insurance in Brazil
Joint venture with Templeton International, Inc. (US) to form asset management firm in

Aracruz Celulose S.A.

Joint Venture with Gutchess International Group(US) to manufacture wood-based products
Shoring up distribution methods by contracts with CXS Transportation and the Port of
Jacksonville in the US

Companhia Suzano de Papel e Celulose

Joint ventures with Riverwood and Igras (domestic-based firms) in packaging machinery
Acquired Polipropfieno S.A. and Koppol Fums S.A in consortium with other paper and
chemical firms

Indústrias Klabin de Papel e Celulose

Expansion of manufacturing activities in Argentina
Joint Venture with Kimberly-Clark in Argentina
Informal relationship with Swedish firm Tetra Pak for providing materials supplies

Banco Itaú

Acquired Banrj (Banco Nacional do Rio de Janeiro) and currently eyeing Banesp (Banco
Nacional de São Paulo)
Created Banco Itaú Europa
Created Banco Itaú Argentina S.A.
Acquired Banco Francês e Brasileiro
Acquired Banco del Buen Ayre (Argentina)
Joint Venture with Bankers Trust (US) in investment banking and derivatives

Source: 1997 Annual Reports
where not indicated


Investment Projects in Brazil (in US$ billions)


Under Way

By 2005


Electricity 20.6 65.2 85.7
Oil, gas & petrochemicals 5.7 26.3 32.1
Transport & ports 8.1 30.6 38.7
Paper & Cellulose 0.8 11.7 12.5
Steel 1.1 4.4 5.4
Mining & Cement 1.0 5.0 5.9
Sanitation 5.5 4.1 9.6
Total 42.8 147.3 190.0

Source: EIU Country Report
4th Quarter 1997. The Economist Intelligence Unit Limited, 1997

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