Brazil Slowdown Means Shake-Up in United States

SAO PAULO, Brazil —  While U.S. officials focus on the contagious turmoil in East Asia, a sharp slowdown expected in the Brazilian economy is likely to spell bigger trouble for the many American companies that have gotten rich in recent years off this country’s remarkable resurgence.

Legions of U.S. firms, many of them unknown here just five years ago, have found a profit mecca in Brazil, selling computers, cellular telephones, processed food, autos and trucks, insurance, disposable diapers and microwave ovens to newly acquisitive citizens.

So Brazil’s problems, which recently prompted the government to impose an austerity program after earlier raising interest rates in a bid to defend the value of its currency, caused immediate reverberations on Wall Street and in corporate boardrooms across America.

Earnings estimates of companies from Ford Motor to Texas Instruments were downgraded, growth projections modified and expansion plans put on hold as expectations grew that, at the very least, Brazil was entering a deep recession that will last through most of 1998.

Without Brazil’s bid to protect the value of its currency, the real, the fallout could have been even worse. The crisis began when the currency devaluations in Asia made investors nervous about emerging nations around the world.

The signs now, however, are that Brazil--rocked by a stock market collapse earlier this month--is stabilizing, bolstered by legislative progress on administrative reforms that will cut billions from the government deficit. Speaking to a group of Rio de Janiero businessmen Thursday, Finance Minister Pedro Malan went so far as to say he hopes the worst is over.

Whether or not that’s the case, the stakes are huge for U.S. companies.

Whirlpool, which has seen its appliance sales triple here in four years, now relies on Brazil for 20% of its $10 billion in worldwide sales. The company has invested $235 million in its five Brazilian plants over the last two years.

“China may be the market of tomorrow but Brazil is the market of today,” said Dan Miller, Whirlpool’s executive vice president in charge of Latin America.

But Whirlpool is now putting on hold future investments, and last month laid off 500 in its 11,000-member work force after sensing the Brazilian economy and consumer demand would take a turn for the worse.

Ford, whose Brazil sales were growing at twice the companywide pace and producing twice the profit, declared a 25% production slowdown. “We’ll maintain the slowdown through the holidays and then revisit the issue,” Ford spokesman Mike Meyerend said.

Brazil has become a rich vein for U.S. high-tech companies as well, with overall sales reaching $4 billion last year, double those of 1994, according to the American Electronics Assn.

But U.S. computer sales in Brazil, which at $1.7 billion were almost double the $945 million worth of goods sold here in 1994, are sure to suffer in the upcoming recession. Like cars and appliances, computer sales are heavily dependent on financing, which now costs Brazilians twice as much as it did a month ago.

Just how important Brazil has been as a U.S. market was made plain in Thursday’s trade data released by the Commerce Department. Exports to Brazil over the first nine months of 1997 topped $11.3 billion. That’s more than U.S. exports to each of the “Asian tiger” countries such as Thailand, Indonesia, Hong Kong and even China.

Through September, U.S. exports to Brazil had increased a fat 25% over the same period last year, the department said.

More important, Brazilian sales in September produced the largest monthly U.S. trade surplus--$700 million--of any country except the Netherlands, but the Dutch figures are inflated by its status as a major European transit center. Many of the goods shipped there end up being sold in other countries.

Some U.S. companies that aren’t exporting here have been setting up factories to produce goods locally. After decades of protectionism, Brazil’s government is openly courting foreign investment, and Brazil now ranks second worldwide only to China in direct foreign investment, with $16 billion in foreign capital expected this year. The lion’s share of that investment is coming from the United States.

Why Brazil’s near-overnight emergence as a major market? Economists point to the unleashing of Brazilian consumers after two decades of being fettered by hyper-inflation and currency devaluation that robbed them of purchasing power.

Currency stability is the centerpiece of the so-called Real Plan, Brazilian President Fernando Henrique Cardoso’s fiscal reform package. That stability, along with the availability of consumer credit and the opening of Brazil’s economy to competition from foreign companies, has been credited with Brazil’s dramatic economic growth of 3% to 6% annually since 1993.

“We are a very large country, but only a small portion of the society shared in consumption before,” said Edmar Bacha, an economist at Banco BBA Creditenstalt in Sao Paulo and formerly a Cardoso advisor. “When inflation was brought down from 5,000% a year in 1993 to about 4% now, the erosion of purchasing power stopped.”

Until the Real Plan took hold in 1994, Brazil had been whipsawed by inflation and devaluation ever since the 1973 oil shocks, Bacha said. Each government attempt to bring inflation under control only made it worse, until Cardoso’s plan anchored the real to the value of the dollar.

Until then, the pool of Brazilian consumers was severely limited by hyper-inflation because most Brazilians did not have access to defense mechanisms available to the well-off, such as inflation-indexed savings accounts that protected their money from devaluation.

Julia Rauner Guerrero, principal commerce officer at the U.S. Consulate in Sao Paulo, estimates that 15 million Brazilian consumers--in a country of 160 million people--have been added to the market since the recovery began. And U.S. companies have been the prime beneficiaries of that consumption boom.

But the sales pace of U.S goods is certain to slow in the aftermath of the government’s austerity program. Higher interest rates mean big-ticket items such as Ford autos, Whirlpool washers and IBM personal computers will be less affordable.

The expected recession means tens of thousands of Brazilians will lose their jobs, shrinking the marketplace. Just last Friday, Samsung, the South Korean-based TV and computer monitor manufacturer, said it might scrap three-quarters of a planned $800-million investment in Brazil.

Whirlpool’s Miller noted: “We have a lot of confidence in Brazil, we’ve been here 40 years, we agree with what President Cardoso is doing.” But he added, “The country will likely go into a recession that could get very long and be very deep.”