SÃO PAULO, BRAZIL (April 7, 9:30 a.m. EDT) — To understand how much Brazil's economic slowdown has squeezed companies, consider that by one estimate, half the firms in the flexible plastic packaging sector now operate in a sort of gray zone, with off-the-books transactions that let them skimp on tax payments.
Sergio Haberfeld, chairman of SÃ£o Paulo packaging giant Dixie Toga SA, said that's a reaction to the country's difficult business climate, where resin prices have risen 80 percent in six months, the currency has dropped sharply and inflation-adjusted interest rates of more than 10 percent restrict access to capital.
Brazilians call it the informal economy. Beyond flexible packaging, it's also seen in segments like blow molding of plastic bottles. Large companies like publicly traded Dixie Toga are not part of the informal economy, Haberfeld said, but many of its small competitors are immersed in it.
“I would say that 55 percent of the flexible packaging people are totally in the black, in the informal economy, in Brazil, because of survival,” said Haberfeld, who also heads Brazil's flexible packaging industry trade association. “It's been happening in different sectors due to the strangulation of the economy and the lack of public efforts to go against it.”
That's the underside of Brazil's economy.
There are many positives, of course. The country only opened up its economy in 1994, and many companies still see opportunities and potential in South America's largest economy.
Some segments of the plastics industry, like rotational molding and packaging, appear to be doing fairly well.
And some economic observers say the country remains relatively stable. It has absorbed several shocks in the past few years — from Brazil's energy crisis, to Argentina's meltdown to the world's economic slowdown — and it still projects growth of 2 percent this year and 4-5 percent in 2004.
“We have all the basics for this bright future,” said Luciano Coutinho, a SÃ£o Paulo economist. “If you look to all the emerging economies, Brazil has an opportunity to be a star.”
Plastic consumption in Brazil is expected to grow 6 percent in 2003, well ahead of the overall economy. The growth remains below the 10 percent annual growth seen in much of the past decade, but still is sizable.
There's plenty of room for growth. Each Brazilian uses on average 48 pounds of plastic a year, compared with more than 175 pounds per person in Europe and more than 200 pounds in the United States.
One segment projected to do well in Brazil is packaging. A March report prepared by a U.S. Department of Commerce analyst in Brazil said the country's new hunger eradication program, “Zero Hunger,” will stimulate polypropylene and polyethylene packaging consumption, and expectations of a record grain crop this year also will boost plastic use.
The PET market is doing reasonably well, growing at double the rate of gross domestic product as metal and glass packaging continue to switch over to PET, said Frank Neuhaus, director general of SIG Tecnologia para Plasticos (Brasil) Ltda., the Jundiaí, Brazil, arm of the Swiss-based blow molding machine maker. Bottled water and edible oils have led that growth, he said.
Still, the falling Brazilian currency that has made resin that much more expensive has prompted some companies to look for cheaper materials.
There has been a push toward using PP in some water bottles, and unsuccessful efforts by some soft drink companies to move back into glass, Neu-haus said.
“The packaging market is kind of complicated because the economy is suffering” and soft drink markets have flattened, said Fa-bio Seabra, general manager of Husky do Brasil Sistemas de InjeÃ§Ã£o Ltda. in Jundiaí.
Merheg Cachum, president of Brazil's plastics processing trade group Abiplast in SÃ£o Paulo, said markets for agriculture, automotive and electronics parts will have opportunities in 2003.
Injection press maker Milacron Equipamentos Plasticos Ltda. said the pharmaceutical packaging and cell phone markets are good. But Hugo Korkes, general manager of the SÃ£o Paulo-based subsidiary of Milacron Inc., said the local market for automobiles is weak.
“They export, fortunately, to the U.S. and Asia,” he said. “They are surviving because of this.”
DaimlerChrysler AG, for example, said late last year it plans to assemble a four-seat version of its European Smart Car in Brazil, with an eye toward exporting to the United States.
Husky's Seabra said the auto market is very unpredictable: “One day someone will lay off people and the next month they will hire.”
“The hike in raw material prices is throwing in some uncertainty and slowing down investment plans,” said Carlos Helfenstein, vice president of sales and marketing for Bekum America Corp., which has a blow molding machinery plant in SÃ£o Paulo. “I don't want to say depressed, but it is not growing.”
Part of the uncertainty in the economy stemmed from how the business community would react to the country's new president, Luiz Inacio Lula da Silva, the labor-oriented candidate who swept into office in October by defeating a candidate more favored with the business community.
Lula, as he is widely known, is a charismatic former machine shop employee and union organizer who is popular with voters in a country where the per-capita income is $2,500 a year.
What has surprised most business observers is that so far, at least, he's also popular among the corporate world. He's made appointments to key finance and central bank posts that have reassured businesses, and generally, he's adopted the economic policies of his predecessor, Fernando Cardoso.
Haberfeld, who is also president of the American Chamber of Commerce in Brazil, said no one entirely expected Lula to pursue a business-friendly economic policy. Haberfeld, who sits on an 82-member advisory board to the administration, said Lula is interested in growing the economy so he can deliver the better quality of life, including more food, that his constituents want.
“In talking to him, he's sure the only way is by economic growth,” Haberfeld said.