Brazil Country Survey Report Session 4: IT Usage for Indirect Exports by SMEs Antonio José J. Botelho Genesis Research U

1. International Seminar Information Technology for Development of Small- and Medium-sized Exporters in East Asia and Latin America ECLAC, Santiago de Chile, 23-24 November 2004 Brazil Country Survey Report Session 4: IT Usage for Indirect Exports by SMEs Antonio José J. Botelho Genesis Research Unit, PUC Rio, abotelho@dctc.puc-rio.br Paulo Bastos Tigre UFRJ Antonio José J Botelho, November 2004

2. Agenda 1. Overview 2. Ornamental stones cluster 3. Aeronautics cluster 4. Problems for SMEs to participate in trade-oriented value chain 5. Trade Facilitation Policies 6. Conclusions Antonio José J Botelho, November 2004

3. Agenda 1. Overview Antonio José J Botelho, November 2004

4. Micro and Small Enterprises in Brazil, 2001 • From 1996 to 2001, micro and small enterprises went from 3.1 million to 4.6 million • Going from 98.9% to 99.2% o total • Generated 3.5 million new jobs • Whereas medium and large, only 686 thousand • Acounted for 14.5 million formal employment, 56.1% of the total Antonio José J Botelho, November 2004

5. Exporting SMEs • Exports are 15% of GNP (2003) • Growth rate 58% (2004 to August) • Exporting micro and small enterprises represent over 75% of the country’s total export base, BUT account for less than 11% of exports by value • This share is further reduced to 5%, once excluded a select group of about 200 high exporting enterprises, made up mainly of trading companies and others Antonio José J Botelho, November 2004 Source: Markwald e Pessoa, 2003

6. IT Development • Brazil accounts for 1.7% of total global IT expenditures (contrast 1% world exports) • 4.7% of GDP (2002) • PC per 1,000 inhabitants of 7.5% (smaller than world) • Mobile growth rate 30% (above world) • In 2003, according to e-Consulting, electronic transactions in Brazil (B2B, B2C, B2G, m-commerce and on-line retail) reached USD 47.2 billion (about 4% of world) • B2B over 2/3; B2G = B2C Antonio José J Botelho, November 2004

7. SMEs IT Development – São Paulo • Half of SMEs do not have any intention of implementing Internet-based EDI • 20% do not even have a website • Among Micro enterprises • only 8% make use of B2B for sales • 16% use it for purchases • 8% do B2C. • Among Small enterprises • 15% use B2B (purchases and sales) • 11% do B2C. Source: FIESP, Pesquisa Perfil da Empresa Digital 2003/2004 Antonio José J Botelho, November 2004

8. Barriers • Government regulations • Privacy of data or security issues • Lack of business law for e-commerce • Inadequate legal protection for Internet purchases • Internet taxation • Staff with e-commerce expertise • Cost of implemengting e-commerce Antonio José J Botelho, November 2004

9. Agenda 2. Ornamental stones cluster Antonio José J Botelho, November 2004

10. Characteristics • In Brazil 6.6% of SMEs exports • Brazil 7th largest exporter in volume • Exports growing faster than world • Espirito Santo: marble and granites (90%) • Largest producer (47% of total) and exporter ($ 222 million or 52% of total; 10 largest just 6% of that) • 24 thousand employees in 1,200 firms, mainly SMEs, of which 12% exporters • Low mortality rate • Horizontal cluster with ring structure governance • Most advanced technologically • Processed materials now 81% of total exports versus just 36% in 1996 => upgrading value-added Antonio José J Botelho, November 2004

11. Policies and Impacts • Program of New Export Arrangements-PNPE • Increased value-added of exports • Main market shifted to US • Anchor enterprise (new) • Total Trading / $ 1.7 million credit to support export SMEs/receive payment at time of sale to it/78 participating firms • BNDES $ 100 million credit facility • Share to destined for the producers and the largest to manufactures and equipment makers, in an effort to increase the value added of the sector’s exports Antonio José J Botelho, November 2004

12. Policies and Impacts • Sindirochas trade group (1973) • Organizes fairs • Training (Sebare/Senai) • Technological research (Cetemag) • Maqrochas (2004) : 20 associates • Regional Action Program: vortal (Prossiga) • Static / Portuguese only • Other (private) websites: • Marble: on-line price quotes • The Way of Stones • E-commerce website: Marmoregranito Antonio José J Botelho, November 2004

13. Barriers to export • foreign language; • lack of experience in foreign business; • lack of knowledge of the external market, including information and export procedures; • lack of marketing strategy and promotion of materials and companies in others countries; • absence of organizational and technical capacity in the companies to be present in a competitive market and • lack of internal competitiveness in the companies to comply with requirements and international standards. • technological imbalance • low productivity in comparison with international standards • environmental degradation Antonio José J Botelho, November 2004

14. Barriers to IT use • Small production scale • Unfamiliarity with new technologies • Access to financial resources • Shortage of specialized workers • Vortal discontinued • Cooperate and share • Role for APEX and BNDES Prosoft and Bank of Brazil IT deployment credit line Antonio José J Botelho, November 2004

15. Lessons learned • Export promotion policies (PNPE) increased value-added • IT could deal with low productivity • IT could also help overcome barriers to exports: • foreign language, • lack of experience in foreign business • information on export procedures • Emerging cooperative relations geared to IT diffusion Antonio José J Botelho, November 2004

16. Agenda 2. Aeronautics cluster Antonio José J Botelho, November 2004

17. Characteristics • Embraer - One of Brazil’s largest firms • World’s fourth largest aircraft manufacturer • Revenue: USD 3 billion (2003) • Located in São José dos Campos, SP • Share in the state’s economy went from 6.5%, in 1996 to 11%, in 2001 • Buys over USD 60 million from SME’s • 50% in Brazil • 50% foreign companies • Over 30 small specialized suppliers located near its plant • Direct: Seek to capture 0.5% of $ 33 billion market Antonio José J Botelho, November 2004

18. Characteristics Antonio José J Botelho, November 2004

19. Policies and Impact • APEX program: in 2002 (process began in 1999), 11 SME’s formed High Technology Association – HTA, an export association • Average of 15 years in the aeronautical sector • Most companies founded by ex EMBRAER employees, bringing 20 years experience in several areas • Firms have complementary capabilities • HTA is a trading company – High Technology Aeronautics • Since then, the HTA has participated in several international fairs and missions • Participation in fairs and trade missions • ISO 9000 certification Antonio José J Botelho, November 2004

20. IT Use • Low level of Internet and e-commerce use • Relatively high level of IT use • Average: • 11 PCs per company • 1 PC per 7 employees • No use of EDI or any form of e-commerce • All information websites are available in 3 languages: • Portuguese, English and Spanish • HTA website is still in early stage of development. • It shows only static information about consortium, its products and services Antonio José J Botelho, November 2004

21. Barriers to export • technology gap of about 30% from state of the art • distance from major markets • freight costs • high cost of inputs (often imported) • lack of working capital • lack of investment capital • lack of guarantees • Embraer does not award long-term contracts • does not generate the necessary incentives for firms to invest in technology and productivity • grace periods, and finance rates are generally unfavorable Antonio José J Botelho, November 2004

22. Barriers to Export with IT • Websites does not have • A reserved area for associates or potential clients • Possibility to register potential clients • Even links associated firms’ websites • Only 4 (36%) of the firms have their own website. • Sites allows client registration, but some do not even provide product and services information Antonio José J Botelho, November 2004

23. Lessons learned • SMEs in high-tech vertical clusters face particular problems toward exports in so far as the nature of the business exposes them to intense international competition very early on • Lead or anchor firm in a vertical cluster is a mixed blessing • subcontracting patterns has developed to the point of relying on a limited number of first-tier suppliers. • Breaking into this closed group, often made up of foreign firms is hard task. • A lead national firm could, in principle, assist SMEs in this endeavor Antonio José J Botelho, November 2004

24. Agenda 4. Problems for SMEs to participate in trade-oriented value chain Antonio José J Botelho, November 2004

25. Group 1: High cost of purchasing equipment and operating it, the scarcity of affordable quality human resources, and the difficulty in identifying the company’s IT needs ad designing and implementing a strategy to meet them • Group 2: limited scope and administrative burden of finance programs, availability of expertise on SME’s IT functions and needs and lack of knowledge of sector-specific network and export-oriented IT processes Antonio José J Botelho, November 2004

26. Main barriers that inhibit SMEs: industrial structure (in the case of high tech sectors), the industry fragmentation (in the case or ornamental stones) and, one-size fits all format of existing support programs and quality of the activities offered Antonio José J Botelho, November 2004

27. Agenda 5. Trade Facilitation Policies Antonio José J Botelho, November 2004

28. There are several national as well as regional government institutions involved in export promotion policy with a focus on SMEs. • Program of entrepreneurship: “Programa Brasil Empreendedor” (PBE). • Brings together many actions of programs of diversified agents that affect the new business • complementary activities aimed at increasing SMEs share in exports; their digital inclusion; support of the productive arrangements; and strengthening of the handcraft segment. Antonio José J Botelho, November 2004

29. Export Promotion Agency (APEX) • Projects are executed by not for profit private institutions, public institutions and by Sebrae’s regional units • Costs are shared between the APEX and the executing organizations, with gradual phase out of APEX support • Small companies are the agency’s focus • Supports projects in companies with up to 99 employees or US$ 3.5 million in annual revenues. Antonio José J Botelho, November 2004

30. Export Promotion Agency (APEX) • Its website (http://www.apexbrasil.com.br/) provides a step-by-step guide to export, explains different types of export sales, briefly shows how to determine an export price and instructs potential exporters on administrative procedures and documents. • Supports a series of activities that contribute to an increase in the export offer and straightforward commercial promotion: • seminars and workshops for consciousness building and mobilization, product and market prospecting, training and capacity-building, product and process adaptation, (design, packaging, ISO certification), marketing and advertisement, participation in fairs abroad, business rounds with exporting firms and importers and e-commerce (B2B, B2C, virtual catalogue) • Until September 2003, APEX supported 8.196 SMEs to participate in 410 international events. Business generated in these events reached US$399 million and future agreements top US$ 1.8 billion. Assisted by 185 projects developed by APEX in partnership with the private sector, MSMES exported to 42 countries. Antonio José J Botelho, November 2004

31. Other • BNDES export promotion finance programs • Program of Technology Support to Exports-PROGEX • provide technological assistance to the micro and small enterprises which want to become exporters or to those already exporting that wish to improve their performance in external markets • Project National Network of Trade Agents –REDEAGENTES • Until December of 2003 trained more than two thousand agents of foreign commerce and about six thousand entrepreneurs and employees of diverse institutions such as cooperative, trade associations, city halls and other similars. The agents of foreign commerce, after the training, are integrated in a net based on the Internet, the REDEAGENTES. In this net, they start to contribute in the process of spreading the exporting culture and to give orientations to other small business on how to export. Antonio José J Botelho, November 2004

32. Other • The Banco do Brasil / Foreign Trade Platform - FTP (Balcão de Comércio Exterior in Portuguese). FTP allows an online export operation and responds to a demand by small firms willing to start exporting. • Through the web site www.bb.com.br the entrepreneur has access to a virtual international business room, with no restrictions to a bank client (exporter). • The service takes advantage of the streamlining of the export process for values up to US$10 thousand. • From its beginning in January 2003 until December of the same year, the service registered 2.846 exporters and 680 importers and completed 173 operations valued at US$483 thousand. Today, there are 4.790 export product offers and 701 importing firms registered. Antonio José J Botelho, November 2004

33. Other There are three main web sites for SMEs that wish to export • the Exporter´s Portal (Portal do Exportador in Portuguese) (http://www.portaldoexportador.gov.br/) • Exporter´s Window (Vitrine do Exportador in Portuguese) (https://www.exportadoresbrasileiros.gov.br/), both managed by MDIC • Brazilian Trade Net (http://www.braziltradenet.gov.br/), managed by the Ministry of Foreign Relation (MRE). Antonio José J Botelho, November 2004

34. Other Export Finance • Bank of Brazil (Banco do Brasil) finances exporting SMEs through its Proex program (Programa de Financiamento às Exportações) which currently serves 400 firms: 11% large, 39% médium, 37% small and 13% micro enterprises. Postal Service • The state company Correios has established the program Easy Export (Exporta Fácil), to take Brazilian products to the four corners of the world. In 2003, MSEs products accounted for 62% of total sales and MSEs for 67% of the exporting firms in the program. • Created in November 2000, Exporta Fácil main results are: • in 2001, 6,745 shipments were made to a total value of R$ 8,670,349.89; • in 2002 there were 11,440 shipments totaling R$ 19,011,898.37, with a significant increase in the value of exported merchandise; • and in 2003 shipments reached 19,631 valued at R$ 35,543,007.40, a growth of 87% in relation to the previous year. Antonio José J Botelho, November 2004

35. Other • The federal government has one major program of digital inclusion for SMEs: the Infocenters of Information and Business. • Main goals are qualifying entrepreneurs and workers in the use of the technologies of the information, promoting the sprouting of new enterprises, magnifying of the exportations, bigger joint between entities and new partnerships, improvement in the level of quality of products and services and the strengthening of projects of productive arrangements. • By July of 2004, 400 infocenters were operating and 10 cooperation terms were signed to implant more 163 units. The project’s goal is to implement 1 thousand infocenters up to July of 2005 and at least one unit in each of Brazilian 5567 municipalities up to 2007. For this, government is establishing partnerships with public banks and private enterprises. TIM, for example, is responsible for a net of 41 infocenters. Antonio José J Botelho, November 2004

36. Other There is one major credit line to SMEs that want to buy computers: • Enterprise Informatization Program, operated by the Brazil Bank (BB). • purpose to finance the acquisition of computer and peripherals to the micron and small companies, being aimed at modernizing its management and to make possible the electronic communication of the customer with the BB. Antonio José J Botelho, November 2004

37. Other New networks or websites in the planning stage • In June of 2004, the federal government has launched a new program to promote SMEs exportation. • Finances the exporter of goods produced by SMEs, in the phase pre-embarkment, through credential finance institutions • Credit can go up to 100% of FOB value and will be related to the long rate term rate, plus 1% a year of BNDES remuneration (the program agent) and remuneration of credential finance institution (of no more than 4%). • These exporters will operate as Anchor Enterprises, making possible the indirect export • Trading companies, commercial exporting firms or firms in the supply chain that acquire the production of a significant set of SMEs looking for exportation. Antonio José J Botelho, November 2004

38. Agenda 6. Conclusions Antonio José J Botelho, November 2004

39. Lessons learned • Experiences analyzed show us the importance of paying attention to the nature of the industry and its structure. • In the case of aeronautics parts, the small number of firms, their highly specialized production capabilities and the critical role played by the lead firm Embraer in the vertical cluster requires: • a tighter cooperation between firms in order to negotiate better and more long-term contracts with the lead firm • to develop foreign niche markets which are often part of national industry supply chains. • Need a marketing strategy aimed at building trustwith potential clients, given the nature and internationalized structure of the aeronautics end market, is needed. • This is a long-term process. • Firms have to be able to integrate their complementary capabilities and fill in absent ones in order to offer foreign customers a more solid solution platform. Antonio José J Botelho, November 2004

40. Lessons learned • Finally, in this proto-cluster, non arm-lengths forward linkages to first-tier suppliers might be more important than backward linkages to even smaller firms, and in complement to the current direct strictly business linkages to the lead firm. • For these first-tier suppliers, pressured by end buyers will be always pursuing cost reductions, including in services provision and new parts development. Antonio José J Botelho, November 2004

41. Lessons learned • In the ornamental stones, the cluster is more horizontal and centerless. • The relatively large number of firms and the length of the supply chain with several levels of inputs and equipment suppliers, make the formation of stronger and denser networks more difficult to achieve. • The cluster is very active in exports, particularly when compared to other industry-like clusters and in other regions. • It success is due, in part, to previous export promotion policies. • The challenge ahead is to sustain its momentum and to increase exports’ value-added. • An emphasis is being put by the new administration in a wholesale policy of expansion of telecenters, which while needed may be a setback to the in relation of the previous orientation of IT diffusion of targeted local empowerment Antonio José J Botelho, November 2004

42. Assessment of the experiences • SME export promotion policies in Brazil are entering a second-generation, those for IT are still in their infancy. • Beginning to gain an understanding of the SMEs IT needs and uses individually. • However, we do not fathom yet the possibilities for IT use in SME networks. • Beyond the basic goal of achieving widespread diffusion, there has been little policy development in this area. • In regard to broad diffusion, the new government initiative of developing a cheap computer could be part of the answer, but that remains to be seen. • Moreover, SMEs will still be faced with the problem of adequate software and, most important, qualified IT personnel aware of the organizational and strategic challenges facing SMEs. Antonio José J Botelho, November 2004

43. Assessment of the experiences • Export promotion policies are becoming more sophisticated and tailor made. • The recent emergence of local / regional networks of exporting firms like the HTA consortium and the support give them by APEX, as well as the increase in easy of use of export portals like that of the Bank of Brazil and of facilities to export such as those provided by the Correios government post office firm, are a few indications of gradual and important changes in the policy. • The scope of APEX support to these networks needs to be expanded to include development of IT tools to promote meaningful collaboration as well as to allow for interactive export activities. • This would increase the offer of complete platforms in the case of high-tech sectors, thus capturing greater value-added and providing increased sustainability. Antonio José J Botelho, November 2004

44. Assessment of the experiences • Export sustainability is indeed a critical problem that continues to plague SMEs exports, which has been correctly identified but that still remains to be diagnosed, above and beyond thee lure of the domestic market once the local economy picks up. • Guidance and sustainability by anchor firms appears to bear promising avenue for both SME export capacity-building and sustainability. • Care ought to be taken however to avoid a strong dependency relationship to develop. • In this regard, experimentation could be pursued to involve first-tier suppliers in this support and learning network for export-oriented SMEs Antonio José J Botelho, November 2004

45. Assessment of the experiences • The full potential of Internet-based instruments has not yet been fully grasped by promotion agencies. • Full interactivity and high-quality graphic interfaces are critical into breaking into an overcrowded export market. • Marketing is often the weak or lacking export capability in exporting SMEs. • Either because of the type of specialized training in the case of high-tech firms or a lack thereof in the case of traditional industries’ clusters. • Internet tools can be employed effectively in building missing capacities Antonio José J Botelho, November 2004