The Brazilian model

STAND on the observation deck in Embraer’s final-assembly hangar in São José dos Campos and you can see the case for globalisation laid out below you. Five freshly finished aircraft bear the insignia of airlines from across the world. Brazilian technicians wear T-shirts emblazoned with the word “lean” to emphasise their commitment to the principles of Japanese manufacturing. A supervisor boasts about the company’s ranking in an American guide to best places to work.

Not bad for a company that nearly collapsed in the early 1990s. Embraer turned itself around by spotting a market niche in medium-sized jets and by inventing new business models. It pioneered “reverse outsourcing”, doing the high-value-added work of design and assembly itself and contracting out the making of parts to rich-world companies such as General Electric. It also introduced risk-sharing, by persuading customers and suppliers to offer some money upfront. The near-bankrupt firm had no choice but to embrace this model in the early 1990s but it has since become standard in the industry.

Embraer is a prime exhibit in a debate that is convulsing Brazilian business, about the country’s capacity to innovate. Businessmen are in a euphoric mood at the moment. Brazil’s economy is expected to grow by more than 7% this year. The country boasts some of the world’s largest companies: Vale is the biggest producer of iron ore, AB InBev is the biggest brewer and Marcopolo is a big producer of bus bodies. Its firms have been involved in some mighty deals. In September Petrobras raised $67 billion in equity in the biggest share issue ever undertaken.

But throw in the word “innovation” and businessmen become more philosophical. Brazil spends a paltry 1.1% of its GDP on research and development compared with 1.4% in China and 3.4% in Japan. Last year Brazil fell 18 places in Insead’s annual innovation index, from 50th to 68th. Worse still, its ratio of basic-product to manufactured-product exports was the highest since 1978. These figures confront Brazilians with a troubling question. Can their country become an innovator in its own right, or is its recent growth little more than a by-product of China’s appetite for commodities?

Optimists have more than just Embraer on their side. Natura Cosméticos is emerging as a cosmetics giant by dint of clever marketing and borrowing from others. Everything about the company, from its use of recyclable materials in its packaging to its use of ordinary women rather than supermodels in its advertisements, is designed to emphasise the twin themes of naturalness and sustainability. Natura is also a master of what might be dubbed “lean innovation”. About 40% of its revenues come from products introduced in the past two years. But the company has only about 150 research and development staff compared with L’Oréal’s 2,800. Its trick is to form partnerships with foreign universities and to scour the world for products that it can license.

Some of Brazil’s commodity giants have also managed to add brains to muscles. Petrobras is a leader in deep-sea oil production. Farmers have presided over a productivity revolution with the help of Embrapa, a government-funded research corporation. Brazil is a leader not just in producing biofuels, attracting big investments from Shell and BP, but also in green innovation. Most Brazilian cars can run on a mixture of ethanol and petrol, thanks in part to the flex-fuel engine, developed in the country.

Yet Brazil suffers from two huge blocks to growth: red tape and gaping inequality. For all its recent commitment to liberalisation the Brazilian government is still a rule-spewing, incumbent-protecting monster. Brazil comes 152nd in the World Bank’s “Doing Business” rankings for the ease of paying taxes (it took the Bank’s hypothetical medium-sized company 2,600 hours a year to comply with the tax code) and 128th on the ease of starting a business. Mexico is business-friendly by comparison.

Brazilians pride themselves on their knack for dodging silly rules (they call it jeitinho). Banks persuaded the government to open a route around pro-debtor rules that discouraged lending: they now deduct monthly payments directly from borrowers’ paycheques. But all that time spent finding ways around daft rules would be better devoted to world-beating innovation.

A poor record at home

Brazilian companies are also doing far less than their rivals in India and China to master the art of producing frugal goods for the masses. Clever ideas and products aimed at the poor abound in the country. Whirlpool has produced a cheap mini-freezer for the Brazilian market. AstraZeneca is seeking approval to sell cheap off-patent drugs to Brazil. Nestlé, a food giant, and Bradesco, a big bank, have both developed floating outlets that sail up and down the Amazon. But most of these innovators are foreign. Brazil’s own champions are applying much less ingenuity to producing goods for the local market than for the global one.

A visit to Heliópolis, São Paulo’s largest favela, underlines how far the country still has to go to harness its potential for innovation. The favela is alive with activity. Women sell home-made cleaning products from shacks. Men make chairs from crates. An outfit called MecFavela sells burgers. But although the gap between this informal economy and Brazil’s formal one is closing, it remains huge. Too many companies ignore the inhabitants of Heliópolis and the government continues to regard them more as potential victims than as budding entrepreneurs.

Among the books in the favela’s surprisingly well-stocked library is Tom Peters’s “The Circle of Innovation”. If Brazil can devote more effort to bringing the favelas into this circle, and less to protecting incumbents, it may be able to convert its temporary good fortune into a long-term blessing.