Brazil's Tough Diet Works Wonders

The Real Plan has Brazil's big companies slimming down and becoming formidable competitors

Brazilian companies "got a scare," recalls Fernando Henrique Cardoso, from the anti-inflationary Real Plan he launched in 1994 as Brazil's Finance Minister, before being elected President. They faced a double whammy from the unprecedented price stability, which ended their traditional freedom to pass on costs to customers, and from stepped-up imports drawn in by the country's market opening. But Cardoso's reforms left companies no choice: They had to adjust.

The results are starting to show. From paper producers to shoemakers, Brazilian companies are remaking themselves (table). Their execs have realized that Cardoso, unlike previous presidents, will not bail them out with subsidies and devaluations. Brazilian consumers are benefiting from better products at stable prices. And prospects for rising corporate profits have helped push Brazil's stock market up 94% in dollar terms in the past 12 months. There's also a downside: While unemployment is only 6% countrywide, in industrial Greater Sao Paulo, joblessness has risen to 15% as companies shed workers or move production to lower-cost regions.

One company that's successfully making the transition, Cardoso told BUSINESS WEEK in a June 12 interview (box), is food-processing giant Sadia Concordia. A year ago, Sadia's sales and profits were slumping as the initial consumer binge triggered by the Real Plan tapered off. And exports, which made up 20% of Sadia's $3 billion sales in 1996, were being hurt by the strength of the new currency, the real.

FIGHTING BACK. The squeeze forced Sadia board Chairman Luiz Fernando Furlan to start a major restructuring. "We're in an open, globalized economy, and we know that to survive, we must compete at the standard of the world's best," he says. To boost efficiency, he split the company into three product lines--grains, meats, and processed foods. Starting in May, 1996, he slashed the payroll by 5,000 employees, closed two poultry plants, and launched a $100 million modernization of others. The result: Output per employee has soared 25% and fixed costs are down 11%.

Textile and footwear makers, battered by cheap Asian imports, are also fighting back. Sneaker manufacturer Cambuci, for example, saw its sales drop from $199 million in 1995 to $164 million last year. But before the year was out, Cambuci's managers had decided to fire one-third of their 3,600 workers and move production from Sao Paulo state to northeast Brazil, where labor costs are 20% lower and tax breaks will help the bottom line. T-shirt maker Wentex Textil is spending $140 million to complete "one of the world's most advanced integrated knitting facilities" in the northeast, says an analysis by Salomon Brothers' Sao Paulo affiliate, Banco Patrimonio. It is undercutting Chinese imports with T-shirts selling for just 75 cents cents.

To revamp themselves, many Brazilian companies have had to start by taking apart their Byzantine corporate structures. Votorantim Celulose e Papel (VCP), a publicly traded forest-products company controlled by Votorantim, Brazil's largest business group, plans to invest up to $800 million to expand pulp output by 40% annually for the next three years. And as the industry consolidates, says VCP President Jose Roberto Ermirio de Moraes, "we're looking for opportunities to buy production capacity."

Plane manufacturer Embraer, privatized in December, 1994, focused on logistics to cut by nearly half the time it takes to build some aircraft. In mid-June, it announced contracts totaling more than $1 billion to supply versions of its EMB-145 commuter jet to subsidiaries of American Airlines Inc. and Continental Airlines Inc.

To tap international financing for their overhauls, many Brazilian companies are opening their operations to closer scrutiny and adopting U.S. accounting standards for the first time. That paid off for Votorantim. In early June, it raised $400 million in Eurobonds. And on May 29, fast-growing supermarket chain Pao de Acucar, which is battling foreign invaders such as France's Carrefour, became the first Brazilian retailer listed on the New York Stock Exchange, with a $150 million issue of American Depositary Receipts. Sadia and at least 10 other Brazilian companies are expected to follow suit this year.

Cardoso, who supports corporate restructuring, concedes that layoffs could cause social strains in a country with historically low unemployment. And as large companies become fitter, smaller businesses may be squeezed. But there's no other exit from the tight spot that the economic reforms have pushed Brazilian companies into. So far, they're coming out swinging.