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October 6, 2005
Alcoa's only option
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Why, despite the negative business scenario, the company decided to bet on Brazil
By Alexa Salomão
A
company such as Alcoa — the world’s largest aluminum producer, with
annual sales of 23.5 billion dollars — if it were to rely solely on the
local investment conditions, would never bet on Brazil. Nonetheless,
Alain Belda, the president of Alcoa worldwide, announced in late
September to the president Luiz Inácio Lula da Silva that the company
will invest in the country 1.6 billion dollars in the next three
years — the largest investment yet by Alcoa on a single country in all
of its history. Considering the taxation chaos, the
environmentalists' pressures and the difficulty of assuring cheap
energy to an industry that’s dependent on electricity, the investment
doesn’t seem to make much sense. The truth, however, is that Alcoa has
no other option. In the world of ores, the country has all it takes to
become a strategic trade mecca and it is of utmost importance to
establish the company’s position as soon as possible.
The
privileged nature helped Brazil attract such investments. The creation
of a lesser hostile business environment, regardless of which area —
will be a key point in maintaining and increasing such flow of
resources. Alcoa is a good example of that. According to the plans of
the company headed by Belda, at least another 2 billion to 3 billion
dollars could finance projects in the country in coming years. “We have
cash and the intention to invest in Brazil and we could almost double
our sales in the country,” said Belda in an exclusive interview to
EXAME. “But we remained 20 years attached to the problem of lack of
energy and other deficiencies.”
Alcoa’s case is proof of
how Brazil’s complex regulatory and taxation situation ends up keeping
foreign investment at bay and turns the country into a risky business
for investors. The money Belda intends to send to Brazil will be used
to expand a refinery in Maranhão, modernize the company’s plant in
Minas Gerais and to open a bauxite mine in Pará. The investment, which
made it to the list of the largest ones this year, should generate
6,500 new direct jobs and increase exports by 400 million dollars per
year. It sounds a lot. If Brazil's business environment were less
chaotic, however, Alcoa would even undertake impressive works in Pará,
such as the Belo Monte Plant — one of the country’s largest power
generation projects —, would open a new refinery and would even build
another aluminum plant. “Brazil has ore reserves, the potential to
supply cheap and clean energy, as well as professional skills to place
the local operation among the most profitable in the world,” says
Belda. “It only has to organize itself to offer a safe environment to
investors.”
In the globalization arena, the urbanization
of emerging economies — such as China, India, Russia and Brazil —
raises the industries’ demand for aluminum-based products, such as
refrigerators or air conditioning units. This drives the prices of the
majority of ores. In the case of aluminum, the factories located in the
United States and Europe, built after the Second World War, are
obsolete to fulfill the new growth cycle. On top of that, considering
the fact that such regions depend on electricity based on oil, an input
whose price tend only to go up, we can easily understand why the
industry started to migrate to countries where production conditions
are better. For almost one year now, Alcoa has been undergoing a
restructuring process in which it has been closing factories in
countries where labor is expensive, such as Germany, and announcing
investments in countries such as Jamaica, where the government has
reduced tax levied on bauxite exploration.
Over two
decades ago, however, the company would postpone investments in Brazil.
In the 80’s, the Brazilian subsidiary accounted for 12% of global
sales. Today, this share has been reduced to 4% and there are no
projections that the country will regain its importance in the short
term. To assure energy at competitive prices is the biggest headache of
Alcoa’s executives in the country. This input is vital to transform
bauxite into aluminum and accounts for one fourth of production costs.
To have an idea of the importance of electricity for the sector, just
look at the performance of CBA – Companhia Brasileira de Alumínio, the
only company of the Votorantim Group that is directly managed by the
entrepreneur Antonio Ermírio de Moraes.
About 60% of CBA’s energy is supplied by the group’s power plants. Last year, the company had sales of 2.2 billion Reais, 500 million less than Alcoa’s subsidiary. But CBA’s profits were 716 million Reais
— almost double the 389 million posted by the American multinational
company. “CBA has been investing on power generation for years and
obtains its energy for less than half the price that a company such as
ours is able to achieve,” says Belda. The billionaire investment he
announced to Lula was only made possible after Alcoa signed with
Eletronorte a contract for the supply of energy for 20 years. But the
agreed price — 30 dollars per megawatt-hour — was far from ideal. In
Iceland, the company pays half that.
It's also difficult
for Alcoa to sort out the Brazilian regulatory mess. Foreign investors
were authorized to build their own power plants in 1995. Alcoa saw,
then, the possibility of structuring itself to quicken its pace in
Brazil and prepared several projects. But what was meant to be a
solution turned into more problems. One of the power plants, in Santa
Isabel on Pará’s border with Tocantins, has never received an
environmental license to come out of the drawing board. Alcoa and its
partners tried to return the project to the government, but the
legislation does not provide for this solution. “The situation in Santa
Isabel is a nightmare,” argues Franklin Feder, an American who is
Alcoa’s president for Latin America. Another project, the Serra do
Facão power plant, in Goiás, was won at an auction for 3 times the
expected value and, after the change in the electric sector’s laws, its
construction became financially inviable. Today, its power would cost
more than double the market average.
Even when the ending
is happy, the workload is scary. In order to make viable the
exploration of the Juruti mine in Pará, the company found itself forced
by legislation to promote public hearings where members of local
communities could have their questions answered. One of them gathered
more than 6,000 people — a number so absurd that it was said that the
event would make it to the world of records. The works at Barra Grande
Power Plant, a project of nearly 500 million dollars between the states
of Santa Catarina and Rio Grande do Sul, arouse the subsidiary’s
management’s concerns. The prior environmental assessment conducted by
public agencies did not point out the presence of an araucaria pine
tree reserve. The environmentalists discovered it and accused Alcoa of
forging the experts’ opinions. In order to make feasible the works and
to save face, the company had to spend 50 million Reais over
budget. As soon as the license was approved, Feder sent in relief an
e-mail to Belda: “Boss, it went through.” Belda’s answer was: “To make
business in Brazil is always more exciting.”
Outside the
production line, Belda’s largest battle in the country is against
piracy. The company holds a 40% share of the domestic aluminum frame
market. Its products cover urban architecture landmarks, such as
BankBoston's building in São Paulo, and the International Guararapes
Airport in Recife. More than half the window product lines sold in
construction material stores are fakes. Two years ago, Alcoa created a
legal task force to sue counterfeiters and store owners. A dozen
lawsuits have already been filed, but this is too little in a market
that’s pulverized into hundreds of irregular manufacturers. According
to Belda, piracy persists due to the high taxes. In São Paulo, frames
pay 18% in ICMS tax. “The heavy taxation incentives
underinvoicing and makes this market impossible,” he says. “No
profit margin can stand this.”
Son of a Spaniard and a
Portuguese mother, Belda was born in Morocco, but came to Brazil when
he was 3. He was admitted at Alcoa in the early 70’s and since 1999 he
is the company’s worldwide chief executive officer. He says that he has
always favored the country where he was raised, but with the passing of
time he was forced to see Brazil lose its space. For foreign
shareholders, it's difficult to keep the good humor and cold blood when
the business runs the risk of sinking. The Frenchman Patrice Zagamé,
Novertis do Brazil's president, wanted to build a biodiversity research
center in the country in 2000, to develop medications. It was an
investment of 120 million dollars. As the government wasn’t able to
secure the rights to intellectual property, the headquarters gave up
the idea. The laboratory company today is in Singapore and two of its
board members are researchers who have Nobel prizes in their résumés.
The American citizen Jeffrey Immelt, General Electric’s worldwide
president, also fears to make big bets on Brazil due to deficiencies in
infrastructure. “I would love to build a factory to assemble
locomotives, but will there be enough railroads?” asked Immelt in an
interview to EXAME early this year. Belda uses an analogy to justify
the foreigner’s cautions. “The business world doesn’t want any heroes —
heroes are creations of unstable environments. We need skillful people,
who work every day with serenity, planning and capacity to execute,” he
says. “Here in Brazil, you end up needing heroes.”
BILLIONAIRE ANNOUNCEMENTS
| The great investment intentions announced in 2005 (in billions of dollars)
| Company
| Sector
| Amount
| Petrobras
| Energy
| 11.5
| Arcelor
| Mining
| 3
| Energias do Brasil
| Energy
| 3
| Rio Tinto Brasil
| Infrastructure
| 2
| TMK/Kommetpron
| Metallurgy
| 2
| Eletrobrás
| Aluminum
| 1.7
| ALCOA
| Aluminum
| 1.6
| TIM Brasil
| Telephony
| 1.5
| International Paper
| Pulp and paper
| 1.3
| Gerdau Group
| Iron metallurgy
| 1.1
| Sources: Simonsen Associados and Alcoa
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