Brazil's in Crisis and This Blue-Collar Town Couldn't Be Happierby
Manufacturing output atrophied during commodities frenzy
Now that currency collapsed, exporters see better times ahead
Not many people in Brazil look back on the crisis-plagued years from the late 1980s to the early 1990s as a golden era. But the people of Franca do.
The country’s capital for men’s footwear is among large sections of Brazil that watched their manufacturing sectors atrophy in the emerging-market frenzy and commodities boom of the 2000s. Now the nation’s currency has collapsed, making Brazilian exports cheaper, and Franca is looking ahead to better days.
On a recent walk through this town of 300,000 in southeast Brazil, it wasn’t hard to find businesses plotting a comeback, even as companies including retail giant Wal-Mart Stores Inc. and Citibank Inc. contract or exit Brazil completely. The local optimism, echoed by carmakers and other industries across the country, is a rare bright spot for a nation stuck in the worst recession in a century.
“This could be a turning point,” said Giuliano Gera, the 38-year-old founder of shoemaker PG4. Even as Brazil’s slump deepened, his revenue rose by a third to 25 million reais ($6.6 million) in 2015, and he expects another 20 percent jump this year, he said. “The real at the level we’re seeing now is great for us.”
There are any number of reasons why manufacturing crumbled in recent decades, from costly and burdensome regulations to the government’s preference for trade ties with China over the U.S. But many agree the overvalued real was the key culprit. It more than doubled between the end of 2002 and mid-2011, eclipsing gains by every other major currency, and manufacturers simply couldn’t compete.
The impact was especially severe in Franca, where the shoe industry employs about one in 10 workers. The municipality’s footwear exports had almost quadrupled to $257 million in the decade through 1993, even as the nation struggled with hyperinflation that pushed it to the brink of economic collapse. But by 2015, shipments of brands such as Calvin Klein and Cole Haan had slid to $78.5 million, data from the local association of shoemakers show.
That trend was mirrored throughout Brazil and helps explain why the country has been so hard hit by the commodities bust. Two decades ago, manufactured goods accounted for 55 percent of exports, and commodities represented about 45 percent. By January, industrial goods had plunged to 38 percent and commodities made up almost two-thirds, according to Trade Ministry data. In 2009, China replaced the U.S. as Brazil’s biggest trade partner.
Manufacturers who lost global market share and shifted their focus to the domestic market will now face “a difficult time,” said Francisco Crizol, a commercial manager at Netto Footwear. The company is forecasting its exports will increase more than sixfold by the end of 2016.
Even after the real’s 38 percent tumble in the past two years, resuming exports isn’t as easy as a quick shift and a new focus. The currency was little changed on Tuesday at 3.7842 per dollar as of 12:15 p.m. in Sao Paulo.
“A lot of producers either lost the technology, the clients or the know-how to produce and sell to foreign customers,” said Jose Carlos Brigagao, president of the shoemakers union known as Sindifranca. “It’s like letting a giant fall asleep. Now it’s hard to wake it up again.”
Franca’s shoemakers are courting new international clients at trade shows and trying to rebuild old relationships. They’re just one example of industries that should benefit as exports pick up. Shipments abroad of vehicles manufactured by companies including Volkswagen AG and Ford Motor Co. climbed by more than a third in January from a year earlier, the national automakers association said. While that’s not enough to make up for the collapse in local demand, it’s helping to ease the blow, said Luiz Moan Yabiku Junior, the group’s president.
“All our members right now are rushing to export,” Moan said.
Shoemaker Fernando Xavier, 42, is in talks with three potential new clients in Italy and says he hopes the real’s collapse will usher in a boom like the one Franca experienced from the late 1980s through the early 1990s. Though he was still a teenager at the time, he remembers the sewing machines at his parents’ shoe-parts factory running full speed and the new cars and ranches local businessmen bought as exports surged.
“Shoes were our meal ticket,” said the manufacturer of high-end footwear and custom snakeskin cowboy boots that sell for as much as $2,000 a pair. “Franca was like an island in the middle of a country that was suffering with unemployment and high inflation.” Now “we need to really work hard to recover the market share we lost.”