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Alcoa in Brazil
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October 6, 2005

Alcoa's only option

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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