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Country Commercial Guides for FY 2000: Brazil Report prepared by U.S. Embassy Brasilia, released July 1999 Note*

CHAPTER IV.   MARKETING U.S. PRODUCTS AND SERVICES

Distribution and Sales Channels

All the customary import channels exist in Brazil: agents, distributors, import houses, trading companies, subsidiaries and branches of foreign firms, among others. The typical import transaction is the importation of capital goods or raw materials by an individual firm for its own use. Brazilian import firms generally do not maintain stocks of capital equipment or raw materials. This is partly due to a high level of taxation. Some flexibility in the maintenance of stocks in the country has been opened up by legislation enlarging the operations of bonded warehouses. Implementing regulations are contained in Decree Law No. 71,866, dated February 26, 1973.

Use of Agents and Distributors; Finding a Partner

Although some companies import directly from overseas manufacturers without local representation, in most cases the presence of a local agent or distributor is essential to penetrate the Brazilian market. As in other countries, the selection of an agent requires careful consideration. In Brazil, larger representatives have sales offices in several Brazilian cities to supply companies all over the country, whereas smaller representatives may either supply companies in a limited region or appoint "business opportunity finders" in major Brazilian regions. It is up to the international supplier and the local agent or distributor to negotiate the type of representation that will take place, whether it is an exclusive representation or not and whether or not any performance targets or term limitations will be incorporated.

The ability of an agent to cover the country depends in large part on the item being sold, for example, certain types of sophisticated machinery may have only a dozen or so potential buyers in Brazil, making marketing relatively simple. On the other hand, less expensive equipment with a wide potential market and the need for countrywide service facilities puts much greater organizational demands on a single agent. Geographic and product coverage restrictions can also be incorporated into a distributor or representative contract.

U.S. companies should consult with a local law firm when signing agent or distribution contracts with a Brazilian partner. Commercial distribution contracts are not regulated by specific legislation, only by general Brazilian commercial law, whereas there is specific legislation regulating the relationship between the foreign company and the Brazilian agent. Although the contract clauses are freely negotiated between the U.S. Company and the local agent, there are laws that govern this relationship. The indemnization payable to the agent in case the contract is broken is established by law and is usually very favorable to the agent.

Brazilian income tax is levied on a foreign exporter if the exporter is "present" in Brazil (Article 76 of Law 3470/58). This "presence" is determined basically by two interrelated factors -- the closing of sales contracts in Brazil and the existence of power of attorney granted to an agent or representative in Brazil. The taxable income is estimated at 20 percent of the total price of the product imported into Brazil. A Brazilian tax lawyer best determines the precise applicability of this law to any particular transaction or agent-principal relationship.

Once the agent-principal contract is signed, a Brazilian agent is protected by law from unilateral termination of the contract by the foreign principal without "just cause." The definition of just cause is agent's negligence; agent's breach of contract; acts by the agent damaging to the principal; and conviction of the agent for a criminal offense. Contract stipulations and conditions for termination of agency agreements in Brazil are contained in Articles 27-39 of Law No. 4886, of December 10, 1965.

Franchising

The franchise sector is sophisticated and a mature market in Brazil. A good number of franchises are Brazilian in original and the franchise sector is well organized through its franchise trade association. In order to avoid any possible setbacks in a franchise company's plans for Brazil, and to take best advantage of the Brazilian market, U.S. franchisors should consider securing a Master-Franchisee with some experience in the areas related to the U.S. company. A qualified Master-Franchisee is able to offer the best advice in terms of tailoring a franchisor's product or concept to the Brazilian market. In-depth knowledge of the local market is essential: all commercial, cultural and legal aspects should be considered before entering the market. In some instances, even a brand name may have to be changed to avoid problems. Finally, a franchisor should first register its brand name in the Brazilian market before selecting a partner. In Brazil franchise consultants call adapting franchise to the Brazilian market, "the tropicalization" of the franchise.

Pay close attention to Article Three of the Franchising Law that states that franchisors - or their master-franchisees - should provide all their potential franchisees with a Franchise Offering Circular (Circular de Oferta de Franquia). This document must contain basic vital, information regarding the economic and financial health of the franchisor, as well as information on any pending legal disputes. Consumer's rights in Brazil should not be a problem for US franchises because of the sophistication of consumer laws in the U.S. Franchisors who are able to understand these trends and adopt themselves for the Brazilian market can be successful in this expanding market.

Direct Marketing

U.S. firms exporting to Brazil must be registered with the Secretariat of Foreign Trade (SECEX) of the Ministry of Development, Industry and Commerce (MDIC). (See Appendix E, Brazilian Government Contacts). SECEX plays a central role in the implementation of directives on trade policy.

Once registered with SECEX, companies must apply for an import license to proceed with a planned shipment. The procedure is normally routine, with a license granted within five days. SECEX has a computerized registration system, called "SISCOMEX", for all export transactions.

Effective January 1, 1997, export transactions were included in this system, which enables importers to receive their licenses automatically via modem. SECEX home page is: www.mict.gov.br

Joint Ventures/Licensing

Establishment of joint ventures is a common practice in Brazil. A major motivation for joint ventures is to pair foreign firms with Brazilian partners to compete in segments of the government procurement market or in other markets subject to government regulation, such as telecommunications, computers and capital goods. Formation of a joint venture can be accomplished through a variety of business entities, the most common of which are "sociedades anônimas" and "limitadas", which are similar to limited partnerships and limited liability companies under U.S. laws.

Licensing agreements are common forms of accessing the Brazilian market. Use of a competent local attorney in structuring such an arrangement is advised. All licensing and technical assistance agreements, including trademark licenses, must be registered with the Brazilian Industrial Property Institute (INPI). (See Appendix E - Country Government Agencies.)

Steps to Establishing an Office

Either setting up a company in Brazil or acquiring an existing entity are options for investing in Brazil. Setting up new companies is relatively easy and inexpensive. Acquisitions of existing companies are monitored by the Central Bank. For further information please contact the Secretariat of Foreign Trade - SECEX or the Consulate in New York City. (See Appendix E, U.S. Contacts.)

Branch offices are difficult to form, whereas corporations (sociedades anonimas) and limited liability companies (limitadas) are relatively easy to form. Capital registration with the Central Bank is required for access to foreign exchange, capital repatriation, and profit remittance.

Brazil's minimal capital requirements are nominal in general, but are significant for the establishment of financial institutions. When selecting the site of an investment, potential local investment incentives should be carefully considered.

For further information, consult the Ministry of External Relations' homepage at http://www.mre.gov.br.

Selling Factors/Techniques

Sales of industrial products are typically price-driven. However, with the opening of the market to imports in the early nineties, quality has become increasingly more important, particularly for companies seeking to modernize their production methods. After price and quality, delivery and after-sales servicing are the most important factors. Sales of consumer goods tend to be principally affected by brand name rather than price and quality.

Special price discounts are a common sales tool in the industrial and consumer/retail segments. As a rule, most final sale products tend to have substantial markups, thereby allowing for a price reduction when the actual sale takes place.

Advertising and Trade Promotion

Advertising in specialized trade and technical publications is an important marketing tool in the Brazilian market. With its well-established and diversified industrial sector, Brazil has a variety of specialized publications that serve the industrial and business communities. U.S. firms wishing to sell in the Brazilian market should not ignore advertising in these trade publications.

Major Brazilian newspapers are: Jornal do Brasil, O Globo, Folha de Sao Paulo, O Estado de Sao Paulo and Gazeta Mercantil; major news magazines are: Veja, Isto É, Época and Exame.

Brazil is home for many well-established and sophisticated advertising agencies, with first-world standards and a high level of creativity. TV advertising is highly developed and plays an important role in the promotion of consumer goods and food products.

Participation in Brazilian trade fairs is another important marketing tool. The city of São Paulo hosts around 300 trade fairs per year, many of international quality and reputation. The U.S. Department of Commerce participates with a U.S. pavilion in several high quality trade shows in Brazil.

With the opening of the U.S. Commercial Trade Center in São Paulo, U.S. companies may also make use of its facilities for solo events, technical seminars and special meetings. (See Appendix G for USCS Brazil's Trade Events Schedule for 2000/01.)

Pricing a Product

With the high inflation rates that prevailed in Brazil for more than two decades, product pricing was an inexact methodology at best. With inflation rates averaging 30% per month, companies usually just added the "expected" monthly inflation rate to the current price. When sales needed to be pushed upward, the method of increasing the price followed by a "discount" was commonly used. Another common pricing strategy is the use of installments for most consumer goods. However, with the implementation of the new currency, the "real", and 1999 monthly inflation averaging less than 1/2 of 1%, pricing methodologies have been reconsidered and revised.

Sales Service/Customer Support

Most buyers of industrial goods consider sales service of utmost importance. All large manufacturers offer good after-sales and customer support service. Quality control is also an important factor. Even the small companies have programs to increase quality control and customer service to improve sales.

Since passage of the "Consumer Protection Law" in March 1992, sales of consumer goods now require customer support and after-sales servicing. Also, Brazilian consumers are gradually becoming more aware of the need to demand these services. An increasing number of Brazilian manufacturers of consumer goods, including food processors, now have customer support services, and toll free customer service telephone numbers.

Selling to the Government

Brazilian government procurement policies apply to purchases by government entities and by parastatal companies. Government procurement regulations are contained in Law 8666 of August 1993, which establishes an open competitive process for major government procurement. Under Law 8666, price is to be the determining factor in selecting suppliers, i.e. the bid with the lowest price, becomes the provisional winner. Most government procurements are open to international competition, either through direct bidding, consortia or imports. International bidding is required for all procurements with international development bank funding, i.e. the Interamerican Development Bank, the World Bank, etc.

Government procurement of telecommunications equipment and data processing (informatics) equipment is exempted from the above requirements. Special requirements were established in 1993 and 1994 allowing locally manufactured telecommunications and informatics products to receive preferential treatment in government procurement, and to be eligible for tax and other fiscal benefits based on meeting local content and other requirements.

In practice, it is difficult for foreign service firms to operate in the public sector in Brazil unless in association with a local firm. To be considered Brazilian, a firm must have majority Brazilian capital participation and Brazilians -- "operational control." A Brazilian state enterprise is permitted to subcontract services to a foreign firm if domestic expertise is not available for the specific task. A foreign firm may only bid for government contracts to provide technical services when no qualified Brazilian firms exist.

In the case of international bids to supply goods and services or specific government projects, successful bidders are required to have local representation -- i.e., "legal presence" in Brazil. Since the open period for bidding is often as short as one month, it is advisable to have a partner resident in Brazil able to act on tenders as soon as they are announced.

A U.S. supplier may find that inclusion of local purchases of Brazilian goods and services within its bid, or significant subcontract association with a Brazilian firm, will improve the chances for success. Similarly, a financing proposal that includes credit for the purchase of local goods and services for the project will be more attractive.

Advance descriptions of a U.S. suppliers' capabilities can often be influential in gaining a bid contract. These early proposals can be effective even before the exact terms of an investment plan are defined or the project's specifications are completed. Such a proposal should include financing, engineering, and equipment presentations.

Protecting your Products from IPR Infringement

Brazil is a signatory to the Paris, Bern, and Universal Copyright conventions on intellectual property rights (IPR) protection. The National Institute of Industrial Property (INPI - www.inpi.gov.br) is the government entity responsible for industrial property rights, and examines requests for patents and registration of trademarks.

In order for an invention to be protected, it must be patented in Brazil. Brazil is a member of the Paris Convention and thus U.S. patent holders have an exclusive right to apply for patents during certain periods: 6 months for industrial designs, and 12 months for inventions and utility models (a new arrangement of known materials which improve a product). A patent holder must use the patent commercially or the patent lapses. Food, medical, chemical-pharmaceutical products or preparations, and microorganisms are patentable. Foreign patent holders have expressed concern about INPI's slow processing of patent applications.

Application for a trademark may be either as a foreign or a Brazilian trademark. A foreign trademark is registered under the terms of the Paris Convention and thus establishes an exclusive priority. Registering your trademark secures protection and enables the trademark to be licensed or transferred in return for a royalty payment. A registration is valid for ten years and is renewable for successive ten-year periods.

Copyrights are protected regardless of whether or not they are registered. Infringement is punishable by imprisonment and civil damages may be awarded. The registration of software prior to marketing is no longer required. However, registration is recommended. Brazil's new software law meets the TRIPS accord framework. It addresses protection of software programs, and modifies definitions of reproduction, publication, transmission, and distribution. This provides protection especially against large distributors of pirated software including producers of hardware and CDs. Nevertheless, there has been some concern with enforcement of videocassettes, sound recordings, books and computer software entering the market.

Companies established in Brazil are now virtually free to negotiate technology transfer contracts. However, contracts still have to be registered with INPI.

Franchising agreements are not subject to the same statutory rules as trademarks, patents and transfer of technology. However, these contracts are subject to review and approval by INPI. It is not mandatory to register a franchising agreement to be valid, but to be executable against third parties it must be registered in accordance with Norm 115/93. If the franchiser is a foreign party, it has to register with the Central Bank in order to remit payments.

(See the Protection of Property Rights section in Chapter VII for additional information on Brazil's IPR regime.)

Need for a Local Attorney

Securing competent local legal representation is a fundamental step in establishing a commercial presence in Brazil when intellectual property licensing or protection is involved, or where investments involve local manufacturing or local investment incentives. (See Appendix E, List of Attorneys.)

Performing Due Diligence/Checking Bona Fides Of Banks/Agents/Customer

Because laws regulating commercial agreements and commercial transactions vary from country to country, the U.S. Commercial Service strongly encourages all U. S. companies to conduct legal and financial due diligence before completing a commercial transaction or formalizing an agent/representative agreement outside of the U.S. In Brazil, the Commercial Service can provide U.S. companies with lists of well-known and respected credit rating companies and law firms to assist U.S. firms to conduct credit checks on potential customers or to obtain important legal advice before signing commercial agreements. This is especially important in Brazil and especially in the privatization process or in matters involving government regulations. A significant number of U.S. companies have encountered, over very substantial tax binders that were unexpected in their investments in Brazil as well as in the regular course of doing business. We strongly recommend that any areas of doubt (concerning taxes) be clarified by a written opinion of the Receita Federal in Brazil (see tax section below).