Sky High Taxes and Stifling Red Tape Can’t Deter Brazil’s Small Entrepreneurs

Small business in Brazil Dublauto Gaúcha is a small maker of components for the shoe
industry based in the city of Ivoti, in the southernmost Brazilian state of Rio
Grande do Sul. Founded in 2003, as the arm in the state of an already successful
company from the southeastern Brazilian state of São Paulo, Dublauto has ten
employees, produces 200,000 meters of items per month and has customers in
Uruguay, Chile and Argentina.

The head of the company is engineer Evandro Wolfart. His résumé includes a prize for the invention of a product that does not stifle the feet’s pores, and a project selected among 2,600 companies by the Studies and Projects Funding Body (Finep), of the Ministry of Science and Technology, under which Dublauto aims to “incorporate nanotechnology particles into textile products.” To that extent, he intends to interact with universities that already do research on nanotechnology, such as Unicamp, in Campinas, interior of São Paulo.

The company cited above is a typical new Brazilian micro and small business: its structure is lean, and production is carried out according to the demand. But it grows 30% per year. And if exports totaled 6% of the company’s revenues in 2006, this year they should account for 13%.

What leads a small company to gain space like this? “Micro and small businesses need to think as big ones do: they must know how to use the Internet, to internationalize themselves, to have good distribution and to always be up-to-date with technology,” explains Wolfart, who became associated with a consortium along with other small companies in the shoe sector, linked to the Brazilian Association of Shoe and Leather Components Industries (Assintecal) so as to be able to export.

Along with the group, which counts on support from the Brazilian Micro and Small Business Support Service (Sebrae) and the Brazilian Export and Investment Promotion Agency (Apex-Brasil), Wolfart has even been to China on a “technological mission,” to check out what the Chinese have been doing. He has also been to the United States. He came back from New York loaded with marketing ideas for his new product line.

Small Brazilian companies are becoming more dynamic, global and professional. According to the survey “Survival and Mortality Rate of Micro and Small Businesses,” disclosed by the Sebrae halfway through the year, companies of those sizes have been surviving more now than they did in the past: 78% of enterprises established between 2003 and 2005 have remained in the market, as compared to 50.6% of all companies established between 2000 and 2002.

Among the reasons for such a change, the Sebrae points to a higher education level of micro-businessmen and their employees, much better trained entrepreneurs – demand for consultancy from Sebrae itself has increased five-fold in the period surveyed, compared with the previous survey (2000-2002) – as well, of course, as economical stability in Brazil.

At the time when the survey was disclosed, the president of Sebrae, Paulo Okamoto, drew a profile of the Brazilian small business entrepreneur: “He has a good education level, seeks knowledge and information so as to manage his company well, and insists on entrepreneurship, despite the obstacles that he is faced with.”

Along with the consolidation of small businesses, there comes a series of positive factors for the country: the number of jobs grows, the number of exporting companies grows, and thus the economy accelerates.

Presently, according to data supplied by the Brazilian Ministry of Development, Industry and Foreign Trade, micro and small businesses – the concept of “small” being liable to include medium-sized companies, depending on revenues – account for 20% of the country’s GDP.

They represent 99% of formal companies in operation, 55% of formal jobs and 51% of exporter companies. On the other hand, they account for only 2.7% of Brazilian exports.

When it comes to the informal market, micro and small businesses show even greater strength: according to data disclosed by the Brazilian Institute for Geography and Statistics (IBGE) in 2005, there are 10.3 million micro and small businesses in informality – twice as much as the formal ones (4.91 million).

Of those informal companies, 33% are in the repair trade and services sectors, 17% are in civil construction and 16% are in the processing and extraction industries. Informal companies employ a total of 13.8 million workers.

For the time being, neither the General Law for Micro and Small Companies, passed in 2006, nor the “Super Simple” tax, passed in 2007, have managed to lure this mass into formality. The reasons for that are varied, but they are the same ones that lead formal companies to go bankrupt, or stop many others from growing: high taxes, bad management and impossible financing.

Almost Professional

To the postgraduate course Professor at business school Faculdade Getúlio Vargas, in São Paulo (FGV-SP), Francisco Guglielme Júnior, micro and small companies are on their way to professionalization – but are not yet quite there.

“They are becoming more adapted to the ever more demanding market, but many still stumble upon finances due to mere lack of knowledge about basic management principles,” explains the Professor, who specializes in entrepreneurship.

And that applies to virtually every sector – both for the entrepreneur who ventures into small trade, and for the engineer who wants to establish his own project company. “As a whole, micro and small businessmen are people from all sorts of backgrounds and who have not learned simple things, ranging from ‘how to manage a company’ to dealing with interest rates, working capital, cost operation,” he asserts.

“The greatest problem when it comes to the survival of micro and small businesses, besides the high tax burden in our country, is surely the entrepreneurial management issue,” agrees Cloir Dassoler, president at the Federation of Micro and Small Company Associations of the State of Santa Catarina (Fampesc), a state in which 98% of the companies are either micro or small, and employ more than 60% of local workforce.

“Our businessmen still need improving, and lots of it, when it comes to managing their companies. Coupled with that, it would be necessary to solve the problems caused by bureaucracy in Brazil, lack of investment and government incentives, and the lack of more accessible credit lines for those segments,” states Dassoler.

To Guglielme Júnior, of FGV, also missing are lots of information about micro and small businesses. The subject needs more space in the media, in university courses, and even in high school. “A course on entrepreneurship should be in the first-year curriculum in every school. It should be as basic as learning language,” he believes.

For those who wish to start a business, the Professor advises: read a lot, inform yourself, seek the Sebrae, the Apex – in case your business involves exporting. To him, companies that offer quality and good pricing, and always keep an eye out for new technologies, are sure to be solid.

“And the less you depend on financing from banks, the better. If possible, do not ever put yourself in the hands of a bank,” he advises.

Giants in Trade

As 99% of Brazilian companies are small, things would be no different when it comes to trade. According to the São Paulo Trade Association (ACSP), 98% of trade companies fit into the small-sized category. And among the small ones, micro-sized businesses are the majority.

According to the superintendent for Economy at the ACSP, Marcel Solimeo, of the 136,000 companies established in 2007 in the Commercial Registry of the State of Sao Paulo (Jucesp), 65% fit in the micro-business category.

They, the small ones, are the great employers in the trade sector. “And these enterprises end up serving as training places for workforce, and represent one of the greatest first-job opportunities for non-specialized personnel,” states Alencar Burti, president at the ACSP and also at the Confederation of Commercial and Business Associations of Brazil (CACB) and at the Federation of Commercial Associations of the State of São Paulo (Facesp).

Although they exist in greater quantity, micro- and small-sized commercial enterprises account for 60% of the sector’s total revenues. As with other sectors – industry, services, agribusiness, etc -, in trade, bureaucracy is one of the major obstacles to establishing and maintaining a new business.

Burti also lists lack of access to credit, high interest rates and floating of the economy as other factors that hinder the greatness of small companies.

“Fortunately, however, in the last two years the economy has been growing, which makes it easier for companies to survive and thrive,” he says. “In the years to come, economic growth should be maintained, constituting a favorable scenario for those willing to become entrepreneurs.”

Small Companies, Great Ambitions

In order to start off in the foreign market on a good note, micro and small businesses must combine determination and creativity, conquer challenges such as the language barrier and, most of all, “think big”.

The statement was made by the general manager at the Brazilian Export and Investment Promotion Agency (Apex-Brasil), Rogério Belline. According to him, a survey conducted by the Brazilian Micro and Small Business Support Service (Sebrae) among Local Production Arrangements (APLs) indicates that between 2001 and 2007, 3,500 micro and small companies participated in training projects and programs in the country. “Presently, approximately 300 of those companies are also taking part in projects developed by the Apex and turned to exporting,” he said.

In 2008, the Apex is willing to take its work with small enterprises even further. The idea is to develop a partnership with all of the projects and temporary initiatives in the most varied sectors – shoes, real estate, fashion and textiles, design, agroindustry – so that small companies that already had at least one experience in the foreign market may become permanent exporters.

“Our first step will be consulting those companies to find whether they are in fact interested in exporting. Then, we will carry out a series of actions aimed at fitting them into Apex’s initiatives and projects,” he explained. “This will be our main goal when it comes to micro and small companies in 2008.”

The work of Apex is more than needed. After all, if on the one hand 51% of exporter companies in Brazil are small-sized, on the other hand they amount to just 2.7% of Brazilian foreign sales – a figure too low.

A survey conducted by the Sebrae in 2006 showed that the share of small companies in total Brazilian exports decreased from 3.1% in 2004 to 2.7% in 2005. It is worth noting that in 2005, total exports from Brazil expanded considerably: 22.6% over the previous year, totaling US$ 118.3 billion.

The strategic management manager at the Sebrae, Pio Cortizo Vidal, claims that the decrease in the share of micro and small businesses in exports is relative, because in fact what took place was a very large increase in sales by large companies. “The large ones grew a lot, approximately 170%, between 1998 and 2005. Small ones, on the other hand, grew only 71%,” he asserted.

Anyway, at this moment of expansion in international trade, micro and small companies are still making too small a contribution, volume-wise. In Italy, for instance, according to data supplied by the Federation of Industries of the State of São Paulo (Fiesp), the share of small companies in sales to other countries is 58%.

There, micro and small-sized companies are organized into business groups called clusters (similar to the Local Production Arrangements that exist in Brazil), but count on strong government incentive, so that they can be competitive abroad.

“Our economic model was never turned to exports by micro and small companies. The model is bureaucratic, there are problems when it comes to understanding the regulations, but the actual problem precedes those – there is lack of knowledge regarding demand in foreign markets.

“The Sebrae is really helpful, however there is still a need for a government policy, for a special treatment to those micro and small businesses, one that shows them how to export while assuming the lowest possible risk,” says Francisco Guglielme Junior, a Professor in a postgraduate course at the Getúlio Vargas Foundation-São Paulo (FGV-SP), who specializes in entrepreneurship.

To the Professor, it would take a sort of small exporter’s handbook, a really didactic, step-by-step guide. Furthermore, micro and small businesses that already export should advertise more, thus setting an example for others to follow.

“A small businessman does not have the time to do research on how to export, to understand the regulations, the taxes, exchange rates, advance credit, etc, let alone do they have the funds needed to pay for ‘And trading companies are not always the solution. Some cannot afford them. Furthermore, the product to be exported is often not interesting to the trading company. “But I believe that in the medium-term, around ten years from now, the export volume of small- and medium-sized businesses should be much greater, more consolidated.”

Continuous Exports

A positive feature of micro and small companies is that they grew a lot in the continuous exporters category, i.e., those that exported in a systematic, uninterrupted fashion. According to the same Sebrae-2006 survey, no less than 52.9% of all micro-companies that exported in 2005 were continuous exporters, a much higher percentage than that of 2004 (32%) and even greater than recorded in 1998 (11%).

The scenario is similar for small companies, among which continuous exporters increased their share to 63.6% in 2005, up from the 52.1% recorded in the previous year.

To Vidal, from Sebrae, the survey clearly shows that, currently, companies have better conditions of maintaining their presence in the foreign market. “It is good to see that, at least, most of the companies that gave up exporting were the non-continuous exporters and first-timers, whereas the share of continuous exporters grew a lot,” he asserts.

Anyway, according to him, a policy is needed for increasing the share of micro and small businesses in exports. “Exporting demands work. The first thing to do is to obtain information about the products for which there is demand in the foreign market. And then you need to be competitive.” The more organized sectors, according to Vidal, are the ones that stand out the most abroad. Marble, granite, shoes and furniture are among them.

“Sebrae keeps on working to challenge competitiveness of micro and small-sized companies. We need to show businessmen that exporting is not an otherworldly thing, that it is feasible.”

Obstacles and Solutions

One way for exporters to overcome the obstacles is to join several companies together. The so-called consortiums are a solution, especially for micro-businessmen, who have no budget even to begin obtaining information on the subject. Together, micro and small businesses are capable of showing themselves to the entire world.

The General Law for Micro and Small Companies, passed in 2006, encourages the creation of such consortia. Class organizations in the most varied sectors stimulate the establishment of these exporter groups. They also take smaller companies on business missions abroad.

Such is the case with the Brazilian Association of Shoe and Leather Components Industries (Assintecal). “We began placing greater emphasis on exports and company internationalization in 1999 and 2000. We even took companies that had only four employees on foreign missions,” says Luis Amaral, president at Assintecal.

But even before they go out and showcase their products, Brazilian companies need to bet on quality and exclusiveness. With that in mind, the Assintecal has renewed an agreement with Sebrae in December. Valid for two years and forecasting an investment of 4.4 million reais (US$ 2.4 million), the contract provides for the training, every half-year, of 1,600 companies in 20 APLs throughout Brazil.

The training should focus on development of Brazilian leather and shoe fashion. The aim is to qualify companies and generate business deals worth up to 20 million reais (US$ 11.1 million).

“We want to anticipate shoe manufacturers and storeowners, and set the trend ourselves. Instead of them ordering a heel with a given shape, we want to launch our own and start a trend,” explains Amaral.

This stance, of providing greater value to products, is going to help exports by small companies in the sector even further.

“Whenever there is a differential and quality, size does not matter. We have an associate who makes ornaments for shoes, and who asks for Prada to wait because he is still catering to Gucci. And he already has a huge order placed by Louis Vuitton for 2009,” he exemplifies.

What the Small Ones Sell

If sales by small Brazilian companies are still low in terms of volume, variety abounds. There is so much diversity that the majority of products does not fit into specific groups. In spite of that, nearly 20% of foreign sales in 2005 consisted of only five items. Highlight export products by micro-companies include sawed or split wood (6.4%), shoes (3.9%), furniture (3.5%), clothing (3%), and marble and granite pieces (2.9%).

The profile is quite similar to that of small exporters, for which five products account for 24.5% of sales. The list is led by wood (8.2%), followed by furniture (5.8%), marble and granite (4.6%), shoes (3.5%) and plywood (2.5%).

Thus, the scenario is completely different from the universe of the so-called special micro and small companies, whose leading products are coffee (14.5%), soy (8.9%), sugar (6.9%), and iron ore (5.6%). That is, their profile is similar to that of medium and large-sized companies.

Exporting Technology

One example of success attained by a small company abroad is that of software manufacturer Ivia, based in the northeastern Brazilian city of Fortaleza, capital of the state of Ceará. The company was established in 1995 by two partners, and had 40 employees in 2004. Now it has 320. Ivia has already set up an office in Portugal, its leading foreign customer, and now it is preparing to enter the United States.

One of the owners at Ivia, Alexandre Menezes, explains that determination to expand the business and practical actions such as training, company certification and mature management were key to the brand’s internationalization process.

“These days, software is a must for any type of company, and that ensures a growing demand. But the market requires constant updating and lots of investment,” he explains.

According to Menezes, foreign market insertion has a positive repercussion in the domestic market as well. “It warrants credibility. The customer knows that if you won your space among competitors from all over the world, it means your product is good,” he says.

As he closed the year with revenues of more than 10.5 million reais (US$ 5.8 million), which is the maximum amount for rating a company as being small-sized – according to the criteria adopted by the Sebrae, in early December Ivia became a medium-sized company. “Our goal is to continue growing,” he asserts.

Menezes’ advice for businessmen who want to export and grow is to invest in training and in the quest for knowledge about the country in which they want to insert their company. “To learn from one’s mistakes is costly and takes a lot of time,” he warns. And he encourages entrepreneurs. “I have seen many Brazilian companies abroad, from various segments, and there is space for all.”

Oil Business

The self-sufficiency in petroleum that Brazil attained in April 2006 and the recent discovery of new oil and gas reserves in the Campos Basin, in Rio de Janeiro, have cheered up the huge, wealthy, and demanding oil and gas production chain in the country. What not everybody knows is that this huge universe might translate into opportunities for many other sectors, including small entrepreneurs.

Between April 2005 and November 2007, 3,365 micro and small companies engaged in actions seeking to qualify as suppliers of products and services to the O&G chain, with support from Sebrae and Petrobras.

“A total of 28 business roundtables were held, with business deals estimated at 1.5 billion reais (US$ 842 million),” says the national projects coordinator at Sebrae, Eliane Borges. “It is a sector that buys everything. From coffee break services, to uniforms, shoes, furniture, information technology and electric and electronic goods,” she says.

The companies participating in the project are based in the eleven Brazilian states in which Petrobras produces or refines oil – Amazonas (N), Ceará (NE), Rio Grande do Norte (N), Alagoas (MW), Sergipe (NE), Bahia (NE), Espírito Santo (SE), Minas Gerais (SE), Rio de Janeiro (SE), Paraná (S) and Rio Grande do Sul (S).

The initiative contributes to foster national development and is one of the objectives of the Program for Mobilization of the National Oil Industry (Prominp) of the federal government.

“The agreement was signed in 2004 and will be renewed in January 2008,” states Eliane, from Sebrae. According to her, during this period, 8,544 companies were identified as effective or potential suppliers. Of those, 4,592 micro and small companies were invited to participate in the activities. Furthermore, 188 large and medium companies were mobilized and participated as anchors – in addition to the 21 Petrobras units.

According to Eliana, the project was divided into four major strategic actions. The first one was to map out the regions where Petrobras operates. The second was to train the suppliers to the chain -ranging from support for them to enroll as potential suppliers to courses, lectures, workshops and consultancy. “We have oriented 2,207 companies to enroll. The lectures were attended by 6,032 companies, and the courses and consultancies by 1,058 companies,” states Eliana.

“Companies pay for approximately 20% of the price of courses and consultancies. Advisory for enrolling and lectures are free of charge,” she claims. “Since the sector is very demanding, technically, small companies that are apt to supply to the O&G chain in Brazil are apt to supply anywhere in the world,” Eliane ensures.

The third strategic action was the creation of Redes Petro (‘Petro Networks’), cooperation groups comprised of effective or potential suppliers to the chain, counting on the support of institutions and large companies.

“Petro Network Rio Grande do Sul was the pioneer, it emerged prior to the signing of the partnership and spawned the model throughout Brazil,” explains the coordinator at Sebrae. “Currently, we have 10 Petro Networks in operation and three others in the structuring phase,” says Eliane.

One detail that attracts attention is the fact that, out of the 2,207 companies in the Petro Networks, more than half, 1,541, are located in the state of Minas Gerais. One of the reasons for that, according to Eliana, is the fact that the State has a strong industry, and therefore strong services.

Another reason is the fact that they created a Website, thus making it easier for interested companies to enroll. In the State of Minas Gerais, a Competitive Intelligence Hub was created, with the objective of diagnosing the chain by mapping out opportunities for suppliers.

“The Petro Networks are excellent for micro and small companies. One the greatest problems facing small companies is access to information. After the partnership agreement, it became possible to create an entire cooperation system. Together, they are able to create catalogues, to go to trade fairs,” she exemplifies.

Finally, the fourth major action of the partnership agreement consists of mobilizing large companies so that they will help integrate the small ones into the chain. Some participate as buyers in business roundtables, while others are part of the project’s managing committee – says Eliana.

“There are those that participate by giving lectures on their investment, purchasing policies and demands made by suppliers. And there are also those that act as anchors for the supplier training actions, often with financial support,” she asserts.

Two-way Street

If for the small ones the O&G chain is a potential business, for Petrobras it is essential to have companies like these increasingly qualified – thus making products more accessible and even cheaper. Such is the case of company Filtrex, based in the Campos Basin, which developed an oil filter that used to be imported. The product has the same features as the imported one, but is 30% cheaper.

“They used to manufacture automobile filters, then they learned that there was an opportunity, they worked hard and there is the result,” explains the manager of the partnership agreement at Petrobras, José Luiz de Oliveira Reis. “For company, it is very important to be in the oil and gas chain. That is why we seek to train micro and small businesses, working to improve their competitiveness and sustainability.”

Another success case cited by Reis as having been welcomed by the giant Petrobras is that of robotics technology company Armtec Tecnologia em Robótica, based in the state of Ceará, which created a fire-fighter robot. The Saci (Portuguese acronym for Support System for Fighting Incidents) robot is controlled by firemen from a distance.

The mission of the robot, which delivers up to 4,200 liters of water per minute, is to protect fire-fighter teams. “Now they are working on a new underwater robot, the Samba, which is being developed in partnership with the Federal University of Ceará and the Navy,” he explains.

For its innovative potential, Armtec won the first place in the Product from the Northeast Region of the 2005 Finep Technological Innovation Award, and the second place in the Operational Security and Preservation category of the Petrobras Technology Award.

The plans of the partnership agreement for 2008 include a meeting of all Petro Network, in order to establish Rede Petro Brasil (‘Petro Network Brazil’), and the beginning of the internationalization process of micro and small companies by means of a partnership with the Brazilian Export and Investment Promotion Agency (Apex-Brasil). Finally, a fifth strategic action will be launched: promoting development and innovation among micro and small companies.

Tightening the Screws

A small manufacturer of screws with 25 employees, even since its foundation, in 1979, Simper Parafusos had customers such as mining companies, steel industries and cement makers in the region where it is based, in the city of Contagem, in the southeastern Brazilian state of Minas Gerais. Things were going well, without any major events, until one of the leading customers invited Simper to seek training in order to cater to the oil and gas market.

“We participated in a training project. Only after almost a year of preparation did we change our focus and enrolled in Petro Network Minas,” says Márcio Kac, general director at the company.

“There was a strong cultural change. We realized the need for certification, for improving our product,” he explains. Training also included management and finance. “We were able to reformulate several working strategies and to win new customers,” he says.

The result of all that was a 40% increase in the company’s revenues compared with 2004, even though the production of 30 tons of screws per month remained unaltered. “As the oil and gas chain is much more demanding, it calls for greater investment and training. But financial return is greater as well,” he says.

Anba –


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