Experiencing Brazil

Today we had one of the best meetings on this trip! Azul Airlines!

Azul Airlines was founded in 2008 by Brazilian-born David Neeleman, the former CEO of Jet Blue. Within four years they became the biggest low-cost airline in Brazil with ~15% market share. Furthermore, they also have the highest load factor (how full their airplanes are) in the Brazilian airline industry. Their main competitors are LAM and GOL, which both have about 40% market share.

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Unfortunately, David Neeleman had to go to Brasilia on the day of our meeting, because Dilma announced a plan to build 800 new airports. And if Dilma calls, you have to follow.

So instead we met with the CFO and Chief Marketing/Revenue officers of Azul. They both worked with David at Jet Blue and decided to come with him to Brazil when we wanted to build Azul. They are truly American: their language and accent, they opinions, their behavior.. In a way, this was the easiest meeting because they “spoke our language”. Interesting, how such cultural things can be very connecting.. (However, in their whole company they have about 9,000 Brazilian employees and only a handful of Americans. So they’re an actual Brazilian company).

Furthermore, even though they used a lot of slides, it didn’t seem like a practiced company presentation. They talked very freely and gave us a lot of inside stories about the beginning of the company. We definitely got a lot of great insights into the Brazilian airline market. A really cool meeting!

Key takeaways:

• About the airline business in general: “It’s not a business we recommend if you wanna make a lot of money” 😉 For example, if you take the S&P 500 over the last couple of years, the airline industry has the worst return on investment.

• The market before their entry: Before Azul was launched, GOL and TAM formed a perfect oligopoly, because they were exactly the same. The both had the same market share, the same airplanes, the same routes and the same prices. Everything was very inefficient and fares were 50% higher than in the US.

• Roads: In Brazil, a lot of the roads are either in very bad conditions, or they are in good conditions but you have to pay toll fees. So if you count the toll fees from Sao Paulo to Rio, it is so expensive that flying doesn’t cost much more.

• Inertia: When they started their business, they heard a lot of “oh, it doesn’t work” or “oh, you can’t do that.. it’s the law”. For example, they got told that they had to provide the pilots with a hot meal during the flight, because “it’s the law”. However, this costs a lot of money, because you have to put a microwave in every single airplane.. just for the pilots.. However, they checked with their lawyers and found out that there is no law about this in Brazil. So if you’re new in a country, don’t believe everything they say.

• Hierarchy in Brazil: In this country, managers are treated like gods and are paid very well (also because of the skilled labor shortage). It is not common for a CEO to speak to employees two or three levels below him. If someone would do that people would probably think they did a huge mistake and will get punished now.

  Furthermore, people also don’t like to do work which of lower hierarchy people. For example, at Jet Blue the whole cabin crew helps to clean the airplane, because external cleaning companies cost a lot. Here in Brazil, the cabin crews refused to do this work, because they have a very strong culture of hiring people to clean instead of doing it yourself. So in the end, they had to hire an external company for it. Luckily, labor is relatively cheap in Brazil.

  However, in their view it is very important to have flat hierarchies. Therefore, things which are visible to the front line staff should be equal (e.g. parking, eating etc). You can still pay the differently, but the rest should be the same for everyone.

• American vs. Brazilian culture: The American culture is very much “in your face”. Brazilians are more relationship driven. They would never publicly disagree or argue. Their Brazilian employees never understood in the beginning how the Americans could have a very hard argument with each other and afterwards still drink a beer together.

• Short-team focus: Brazilians are very much short-term focused. 90% of all airplane tickets are sold in the respective month of the flight, compared to 50/60% in the US. There is no culture of booking or planning in advance.

• Economic classes: In Brazil, everyone speaks very openly about the economic classes (which are called A to E here, with C being the middle class). And everyone really likes to show the graph how the middle class developed over the past couple of years (we literally saw this graph in EVERY meeting)

• Government and taxes: The government thinks only the rich people travel, so they don’t focus on making airfares cheaper. Instead they use it as a cash cow to generate taxes. For example, on an average airline ticket of 200 USD, at least 50 USD are taxes.

• Unions: In the US, unions take care of everything (healthcare, working hours etc.). In Brazil, unions mostly care about wages. However, the union represents all airlines. So if they negotiate a 5% salary increase, it counts for Azul as well as all the competitors. And because their competitors pay higher salaries in general, the 5% increase hurts them even more.

After the meeting they showed us the airplane simulator 🙂 Really cool!

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In the afternoon, we met with the famous soccer player Rai. He played for Sao Paulo and Paris Saint-Germain and won the World Cup in 1994 with the Brazilian team. After his professional career, he started to NGO’s which deal with obesity in Brazil (and after traveling for three weeks in this country I can testify that it’s a real problem.. no wonder if everything here is deep-fried and with lots of cheese)

However, I felt this meeting was not really insightful, so I didn’t even take notes.. The only thing I jotted down was that teachers in Brazil need a bachelor’s degree in order to be allowed to teach. However, this creates a shortage of teachers. We have the same rule in Switzerland, but I don’t really see the reason why we need it. If I think about the most important skill for a teacher than they would be empathy and teaching skills. And none of them is bound to a Bachelor’s degree. This only works if teaching is such a popular job that highly talented people see it as a real option next to other jobs.

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Tomorrow is already our last day!! However it’s also one of the most important ones with four meetings! Looking forward to more insights into Brazil!

Today we discussed two completely different company types: Family businesses vs. start-ups or traditional sectors vs. internet.

Most of the big companies in Brazil either belong to the government or very important families. One of the biggest companies

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Camargo Corrêa

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The first meeting was with one of the biggest private conglomerates in Brazil: Camargo Corrêa. They have about 11bn USD revenue and over 16,000 employees. Their main divisions are:

• Engineering and construction: 2nd biggest in Brazil

• Cement: No. 11 in the world, 2nd in Brazil and 1st in Argentina

• Highway concessions: largest toll operator in Brazil, no. 3 in the world

• Energy concessions: largest private power utility company in Brazil

• Others: Everything from airport and port operations, railway concessions etc. etc.

• And, last but not least, footwear! Among other brands, they also own the famous Havaianas brand :)! Although I really don’t know how this company fits into their portfolio. However, even they acknowledge this fact. Apparently they are currently discussing whether they should stay an infrastructure company or develop into a portfolio holding.

I have to admit here that I was dragged into the Havaiana flagship store in Sao Paulo twice ;)! And although I rarely wear flipflops, I actually bought one pair.. 😉

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The meeting was really interesting and insightful! We met with the CEO and the CFO of the company and both were very open and informal about their answers. Great meeting!

They opened the meeting with the famous saying: “Brazil takes off..”

However, in their view the question is “.. but where will it land?” 😉

And they also meant it literally, because the airports in Brazil are horrible 😉

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The second important comment was: “More important than being a good rower, is choosing the right boat!”

Brazil might have some issues at the moment (corruption, bad infrastructure, inefficient economy etc. etc.), but the fundamentals are still strong. Therefore, they absolutely believe in a positive future of Brazil.

Interesting side note is that the CFO actually got this quote from a Finance class at Columbia. He hated the class, but the quote stuck with him. Or as our faculty advisor on the trip said: Never dismiss a course for not being relevant for your career. Because you don’t know what will be important in your future!

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Additional key takeaways:

• International partnerships: They like to work with international partners. Because if the government tries to privatize their business, they get international help 😉 Smart!

• International companies in Brazil: The problem with working for an international company in Brazil is that you will never be part of the decision, because the decision is made somewhere else.

• Infrastructure: Very much dependent on the government (BNDES and pension funds). In their view, there is probably no such thing as a successful public private partnership (PPP); maybe for 10-15 years, but certainly not for projects that last 30 years or longer. However, in the next couple of years Brazil needs to build a lot of infrastructure (World Cup, Olympics, Pre-Salt etc.). Therefore, they probably need some private investments.

• Cement: They are currently betting on cement, because you don’t have to worry about government and regulations. That their client’s problem.

• Airports and ports: They are closely watching this industry, because a lot of them will be privatized in the next couple of years.

• Why Brazil doesn’t have a lot of railroads: Railroads are very capital intensive. Roads are much cheaper and faster to build.

• Lack of engineers: In Brazil, there are 6 engineers per 100,000 people. In contrast, India has 22 and China 25. They have a serious lack of skilled labor at the moment.

• Ageing: In the next couple of years, the Brazilian “baby boomers” will enter the workforce. However, because since then the birth rate dropped to western standards (<2 children per woman) the population will age very quickly. Usually, countries should try to follow the rule “get rich, before you get old”; (e.g. US, Europe, Japan). But they are afraid that Brazil will not reach the necessary level of wealth before the baby boomers retire. Therefore, the next 5-10 years will be crucial for Brazil.

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And, last but not least, the mandatory question about the World Cup 😉

Of course, first of all, they are concerned with the performance of the Brazilian team. However, when it comes to the infrastructure they have a more pessimistic view. In their opinion, it will probably be a “lousy” World Cup! The government will probably solve the infrastructure problems with a lot of last-minute short-term measures (e.g. the holiday rule). Therefore, they don’t believe that the World Cup will be a big driver for innovation and change.

It was very interesting to hear such a pessimistic view about the World Cup. And those guys are experts when it comes to infrastructure.. So far, everyone was always very excited and optimistic about the World Cup organization. Let’s hope that the optimists will win!

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Entrepreneurship in Brazil

In the afternoon we changed from family businesses to start-ups. We met with Monashees, one of the most important VC firms in Brazil, and two of their start-ups:

• Baby.com.br: An online shopping website for moms

• Medicina: A website where doctors answer medical questions from users

Eric Archer, one of the founders of Monashees, is a super charismatic person and it was really interesting listening to him because he basically knows the start-up scene in Brazil from the very beginning!

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Key takeaways about entrepreneurship in Brazil:

• Entrepreneurs: Brazil has one of the highest percentages of entrepreneurs. However most of them are not entrepreneurs by choice, but by necessity. The traditional Silicon Valley type of entrepreneur is still rare.

• Copying ideas: Most of the start-ups here are inspired by proven US concepts. This reduces the risk of a new venture. And the advantage here is that you’re usually the first one and have less competition.

• Failure stigma: The bad reputation of failure is still very strong in Brazil. This does not only affect founders, but also the first employees of a start-up. Why working for a company where there is a risk of failure, when you can work for an established firm? (sounds very similar to the public opinion in Switzerland!)

  In Eric’s view, it is also the responsibility of the investors to continue to support failed entrepreneurs in order to change the public perception.

• Equity salary: Doesn’t work in Brazil. People are too much short-term oriented and rather want to see money than a promise for the future. Furthermore, most of the employees don’t really understand what an equity share is, so you have to teach them first what it exactly means.

• High Inflation: The high inflation in the 80/90ies basically killed a whole generation of entrepreneurs. Therefore, they have a lack of successful start-ups today.

• Full circle: They haven’t had a full investment circle with a successful IPO yet (launch, growth, stability/exit). So their concept of Silicon Valley like entrepreneurs is not fully proven yet.

• Monashees financing: In order to make money as VC’s without regular IPO’s, they cash out a little in every financing round. Furthermore, they finance themselves in every financing round instead of having a long-term fund. This means less stability and predictability, but one bad round doesn’t affect the other deals.

• IPO’s in Brazil: In order to get listed in Brazil they need 300m USD, which is too late for a start-up to exit. So it’s more realistic for them to go to NASTAC, where you only need 70m USD. Another possible exit would be to get acquired by a bigger tech company.

• Logistics in Brazil: Transport in Brazil is horrible. But luckily, the wealth is very concentrated in the south east (Sao Paulo & Rio). However, if you’re creative, you can still solve the logistical nightmare:

  For example, for Baby.com.br they teamed up with P&G, the producer of Pampers baby diapers. In the beginning, they sponsored all the shipping and in return were allowed to put a sticker with “free shipping was made available by Pampers” on all the packages.

  Furthermore, the good thing about the Brazilians in the far north is that they know that they live at the end of the world. So they are used to pay more for delivery than people in the south. Americans on the other hand expect free delivery everywhere in the US, no matter in what kind of backwater they live.

• Law suits: People sue for everything! Apparently, it’s even worse than in America (and I always thought Americans are the worst: don’t burn your lip with a hot coffee, don’t make coffee in your camper while on cruise control.. you know what I mean..). For example, they just had to pay someone about a thousand dollars, because they forgot to giftwrap the package. This service costs a dollar or so and people still sue. Apparently people get very aggressive and serious over these lawsuits.

Key takeaways about entrepreneurship in general:

• “Hope is not a strategy!”

• “You’re crazy! It’s not gonna work!” Great thing for an entrepreneur, because this means that you will not have a lot of competition 😉

• Culture! Build a culture from a early stage on which is different and controversial. For example, at Facebook they decided that they will hire inexperienced engineers. This increased their creativity and the “college” vibe and resulted in a distinct culture (however, it also had the negative side-effects that they had more program mistakes and re-work in the beginning.. but in the end it worked out for them).

  At Baby.com.br they choose “family” to be their distinct factor. They have a lot of women and moms working at their company. It’s perfectly fine to work part-time or from home and so on. Therefore, they have a strategic advantage over other start-ups.

Listening to Eric and his team was really cool. It must be amazing to be one of the first one’s who start a whole new industry in a country!

Today was a big day! With met two of the most interesting business people in Brazil, Paulo Guedes and Eike Batista, before heading to Sao Paolo to visit the other great city in Brazil.

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Paulo Guedes

Paulo Guedes is a very fascinating businessman! He founded an investment bank, sold it to UBS, turned around a business school and writes a regular newspaper column about Brazil’s economy. His views very very interesting and he smoothly switched from topic to topic.

Key takeaways:

• “Poverty is one thing, misery is another”: In his view, todays misery is an urban phenomenon. In earlier days when people were still living in rural areas, they could find everything they needed in the forest. If you’re living in a city this isn’t possible anymore.

• “Strategy without execution is a dream!”: Ah, Goldberg would love him 😉 No additional comments needed.

• Economy and government style: Brazil is going from an European style (left-wing, supporting your people) to a more American one (capitalist, more leverage).

• High interest rates: Makes it difficult to invest in the stock market, because why should you do that if you can get 15% interest rate from a bank.

• Number of companies: In the 70/80s, there were about 1,000 listed companies. Today, we only have about 400. Especially during the high inflation years, a lot of companies died, and not enough new ones grew. There is definitely a shortage of entrepreneurship in Brazil.

• Family businesses: Most of the important companies in Brazil are still in family hands. However, it is very difficult to work for these companies, because everything is connected to the familiy in the end.

• Why he went into education: In his view, media & education is basically the same. If you take the daily knowledge and digitalize it, you call it news. If you do the same thing with 2000 years of knowledge, you call it history course.

• “Everything a chinese can do, I’m out”: e.g. steel, production etc.. but speaking and teaching portuguese, he’s in 😉

He’s a true whirlwind 😉 Looking forward to verify his statements with other business people!

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And now, the one and only – Eike Batista!

After this fulminant start, we had the most senior meeting ouf our entire trip: Eike Batista!

He is the founder and owner of EBX, which literally means “Eike Batista X” – which stands for the ‘multiple’ in value he brings to the business 😉 His main investment areas are mining, oil and infrastructure, so he profits a lot from the current run in natural resources. Therefore, his net worth is constantly changing between 20-30bn USD, which makes him somewhere between No. 6-40 on the worlds rich list.

So how is he as a person.. well, don’t think about Warren Buffett, think more about Donald Trump 😉

In order to get a better picture, you have to check out this video about him – soooooo funny 😉 This video was actually shown to us before the meeting ;)!!

http://www.eikebatista.com.br/(X(1)S(qryzjd45nib3ctzzcdvjrc45))/page/bio_video.aspx?cod=0

(click on “english” on the bottom left corner in order to get the right version) – thanks to N.Z. for finding it online!

So Eike is extremely self-assured, energetic and charismatic. Most of the meeting he talked about his future mega projects, for example a mega port next to Rio or the new pre-salt oil reserves. He’s a very good salesperson and an absolut visionary :)!

Key takeaways:

• “Most people don’t dare!”: About what makes him so successful..

• About the government: He tries to keep his companies private so that the government has less influence on him. Furthermore, he’s in the lucky position that his and Dilma’s goals align. He’s crucial for her economic vision of Brazil. However, he also needs her approval, so of course he speaks very highly of her 😉

• About BNDES: “BNDES employs more money than the Worldbank. It’s a great source of cheap money *biiiiig smile*! And they love great projects *even biiiigger smile*!” 😉

• High margin projects: He usually look for high margin industries (such as mining and gold), so that he can make more money, even if the infrastructure and the employees are inefficient.

• About Brazil’s dependency on exports: In his view, this is a myth. Apparently, exports only account for 10% of Brazil’s GDP. So his not concerned at all about this point.

• Partnerships: He usually tries to build partnerships with international companies such as GE in order to bring expertise to his projects. However, he didn’t answer the question how he usually handles the division of power between him and the international stakeholders.

• Advice for entrepreneurs: Dicipline, double-checking, thinking 360°, listen to advice, have courage, tackle the impossible

He was definitely one of the most interesting speakers on this trip! However, our team was divided between people who loved him and people who hated him. Some thought he’s an incredible visionary and role model. Others thought he’s too full of himself and basically a big gambler..

Or as another CEO later that week said:

“Eike Batista made more money with Powerpoint than Microsoft.”

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After the meeting we went straight to the airport to catch our flight to Sao Paulo :)!!!

So bye bye Rio..

… and hello Sao Paulo 🙂

The city is just huge!! It looks like a large carpet of houses… What a difference to Rio ;)!

So let’s see how the second part of our trip will be!

(And don’t worry, Sao Paulo is actually quite pretty ;))