BYD’s rise from battery manufacturer to global electric car leader

The Chinese company, which generated revenues of $61.7 billion in 2023, launched its first model as a sedan

01/17/2024

Chinese company BYD’s assembly line in Hefei: the company had produced 6 million vehicles by last year — Foto: Costfoto/NurPhoto via Getty Images

Chinese company BYD’s assembly line in Hefei: the company had produced 6 million vehicles by last year — Foto: Costfoto/NurPhoto via Getty Images

A visit to BYD’s headquarters in Shenzhen, China, often begins unconventionally. Just beyond the entrance to a vast showroom, encased by glass walls, are two machines, each holding a battery. These machines ignite the batteries, demonstrating their durability. The employee explains that the battery that withstands the flames is used in BYD vehicles, which, in 2023, became the world’s largest electric car manufacturer. The other battery, quickly consumed by fire, is said to be typical of other brands.

This dramatic demonstration is part of BYD’s narrative, a company with a history stretching back almost 28 years and revenues of $61.7 billion in the previous year. Founded in 1995, BYD initially produced batteries for cell phones, a venture initiated by Wang Chuanfu, a chemist with a specialization in battery technology. At 29, Mr. Chuanfu capitalized on the burgeoning cell phone trend, establishing a battery factory in Shenzhen’s Kuichong industrial subdistrict, an epicenter of innovation.

Like a museum, the showroom chronicles the journey of BYD and its reserved founder through photographs and informative displays. BYD’s breakthrough came in 2000 when it began supplying lithium batteries to Motorola, later expanding to serve Nokia, Ericsson, and Samsung.

In 2002, BYD, standing for “Build Your Dreams,” went public on the Hong Kong Stock Exchange. The following year, Mr. Chuanfu, now chairman, realized his ambition to venture into vehicle production, with a sedan as the company’s inaugural model.

In 2008, a significant development occurred as American billionaire Warren Buffett invested $232 million to acquire shares in BYD, priced at $1 each at the time. Fourteen years later, when Mr. Buffett’s holding company Berkshire Hathaway started selling these shares, their value had surged to $35 each.

BYD entered the bus segment in 2009, producing its first electric bus in the subsequent year. In 2012, the company established a bus manufacturing facility in Campinas, in the Brazilian state of São Paulo. In 2016, it ventured into monorail production in China, a technology soon to become familiar to residents of São Paulo. By the close of 2024, BYD aims to deliver the first vehicles for use on the 17-Ouro line in São Paulo.

Alongside its automotive pursuits, BYD maintains a battery production presence, with a Manaus facility supplying the bus line in Campinas. The company also produces solar panels, emphasizing that it extends beyond the scope of a vehicle manufacturer.

The year 2023 marked BYD’s establishment in Bahia. The former Ford factory in Camaçari will transition to producing electric cars and plug-in hybrids, including a hybrid pickup truck fueled by ethanol. Plans to expand and modernize the Brazilian factory are set to start in February. BYD’s director, Marcelo Schneider, announced an expansion of the initial labor force recruitment from 5,000 to 10,000 workers. The first stage of investment is projected to amount to R$3 billion.

In Shenzhen, BYD employees take pride in their contribution to the fight against COVID-19. Throughout the pandemic, the production of protective masks against the coronavirus not only saved lives but also secured the salaries of BYD employees in China, where the majority of the company’s 750,000-strong workforce resides.

When the global population was compelled into social isolation, BYD swiftly mobilized its engineering team to develop masks, a scarce commodity at the time. Remarkably, the project was completed in just three days. BYD emerged as a major mask producer, with ongoing sales, including in Brazil.

With 90,000 engineers on board, BYD anticipates reaching 100,000 by year-end, a testament to its commitment to innovation. Rows of patents acquired by BYD adorn a vast wall in the showroom at its Shenzhen headquarters, attesting to the company’s dedication to research and development, with 11,000 daily patent applications.

BYD’s achievements are colossal in every dimension. In vehicle manufacturing, it took 13 years to produce its first million units. A mere year and a half later, that number surged to three million, followed by an additional million within nine months. By 2023, the company had surpassed the milestone of six million vehicles produced.

The showroom’s car display area showcases compact models featuring whimsical animal-inspired names like the Dolphin. Notably, the Dolphin Mini, set to launch in Brazil in February, is called the Seagle in China.

Outside, it’s time to witness a car that offers a unique driving experience. Introduced to the Chinese market in September, the Yangwang U8 model, a sizable SUV, can rotate a full 360 degrees on its own axis.

However, BYD’s management is most eager to gauge the reaction of Brazilian visitors to the Dolphin Mini. Jolin Zhang, the director of the American sales division, joins in to generate excitement, stating, “This car is compact but exceptionally roomy inside. It’s ideally suited for Brazil.”

*Por Marli Olmos — Shenzhen

Source: Valor International

https://valorinternational.globo.com/
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Electricity bill subsidy doubles in 5 years, puts system at risk

Shift to free market and incentives for specific segments, such as distributed generation, pose threats to payment capacity

01/17/2024

Luiz Eduardo Barata — Foto: Leo Pinheiro/Valor

Luiz Eduardo Barata — Foto: Leo Pinheiro/Valor

In Brazil, the total subsidies on electricity bills have doubled over the past five years. From 2018 to 2023, the annual cumulative amount surged from R$18.8 billion to R$37.4 billion, according to data from the “subsidiômetro,” a National Electricity Agency (ANEEL) tracking tool. Such increase in subsidies, primarily levied through the Electricity Development Account (CDE), has been a concern for industry experts.

Recent warnings highlight the potential collapse of the payment system. Key among the sectoral charges, which are designed to subsidize electricity bill discounts, the CDE encompasses various initiatives, including the social tariff (a special discounted rate designed to make essential services more affordable for low-income households), universalization programs (initiatives aimed at ensuring that all citizens have access to basic services, regardless of their location or economic status), and the procurement of diesel or fuel oil for power plants not connected to the national grid. In 2023, the CDE’s budget sanctioned by Aneel was R$34.99 billion. The budget for the current year is yet to be approved, but an estimated figure of R$37.17 billion has been proposed.

The escalating subsidies are challenging the financial stability of the captive market, which primarily consists of traditional distributors, that is, consumers who do not have the option to choose their electricity supplier and are therefore “captive” to a single local utility provider. Luiz Eduardo Barata, president of the National Front for the Defense of Electricity Consumers, warns, “If comprehensive measures are not implemented soon, we could face a severe crisis by 2026 or 2027.”

In 2023, the highest subsidy allocation was for mitigating the operational costs of thermal power plants in isolated systems, amounting to R$10.3 billion. This was followed by expenditures for incentivized sources (R$10 billion), distributed generation (R$7.1 billion), and discounts for low-income households under the Social Tariff program (R$5.2 billion).

Experts are concerned about the imbalance in expenditure distribution within the sector and question the validity of maintaining certain benefits. They attribute many adverse effects to outdated regulations, recent market changes, and technical decisions made by Congress.

The same experts caution that the situation could deteriorate further with the introduction of new subsidies. Proposals for extending economic incentives for sector groups, potentially adding nearly R$30 billion annually to electricity bills, were included in the draft legal framework for offshore wind generation at the year’s end.

Mr. Barata, a former director-general of the Operator of the National Electricity System (ONS) and president of the Electricity Trading Chamber (CCEE), notes the trend of consumers shifting from distributor contracts to electricity traders in the free market, which allows them to choose their supplier. Due to legislative loopholes, this shift exempts consumers from paying certain obligatory charges in the captive market, some of which ensure supply quality.

Mr. Barata notes that in 2024, “almost everyone could choose the free market,” except for residential consumers. He warns that if a crisis arises, the government’s response must extend beyond localized actions, in contrast to the approach taken during the 2001 electricity rationing. That period was marked by strategic adjustments aimed at attracting investments to improve regional interconnections and expand thermal power plant contracts, vital for ensuring the reliability of the power supply. Mr. Barata now anticipates that the current perceived imbalances might necessitate broader restructuring, echoing the reforms of 1992. “The companies were on the brink of bankruptcy, and billions of dollars had to be injected into the sector, which led to the creation of the Eliseu Resende Act.”

In 2023, despite Congress making headway in discussions on modernizing the sector through Bill 414/21, the Minister of Mines and Energy, Alexandre Silveira, has committed to proposing a comprehensive sector reform through a provisional presidential decree. Economist Elena Landau, known for her role in privatizations during the Fernando Henrique Cardoso administration, argues for passing Bill 414 and deferring further improvements. She suggests the government should convene a sector-wide debate, resisting the urge to draft a new legal framework single-handedly “inside the cabinet.” Ms. Landau believes her suggested approach could protect the new law from becoming a “zombie project,” a term she uses for parliamentary amendments that attempt to establish substantial subsidies for financing gas pipelines through electricity bills.

Jerson Kelman, a former director of ANEEL and the National Water Agency (ANA), recently discussed the potential for a “bubble burst” in Brazil’s electricity market in an article on the Energia Brasil portal. He explains that this can happen in a “poorly regulated” sector that induces market players into a “euphoria of immediate gains.” Mr. Kelman points specifically to the advantageous position of DG (Distributed Generation) consumers, who generate part of their electricity, benefiting from reduced distributor consumption and a discount for contributing the excess to the power grid. He estimates that the subsidy for DG is, on average, 14 times higher than that for a family on the Social Tariff. Generally, DG is adopted by middle-class consumers or companies able to invest in solar panel systems.

In a statement to Valor, Mr. Kelman, who previously led Light and Sabesp, reaffirmed his stance. He draws parallels between Brazil’s electricity sector situation and the American mortgage bond market scenario that led to the 2008 financial crisis, where certain groups favored short-term gains at the expense of medium and long-term systemic consequences.

Marcos Madureira, president of the Brazilian Association of Electricity Distributors (ABRADEE), identifies at least two factors contributing to higher tariffs in the regulated market. One is the surplus power bought in long-term contracts, some lasting until 2050, which raises costs and encourages migration to the free market. The other is the increasing adoption of distributed generation under special conditions, without sharing the expenses for maintaining the distribution network.

“Distributors are burdened with more expensive electricity, which they cannot reallocate in the market. This results in higher electricity prices for the remaining consumers. It’s what we call a death spiral, as the increased cost is borne by an ever-decreasing group of consumers,” Mr. Madureira cautioned.

In response to inquiries, the Ministry of Mines and Energy stated that the “issue of subsidies is a critical one for the ministry, which is actively working to limit the growth of these costs for consumers.”

*Por Rafael Bitencourt — Brasília

Source: Valor International

https://valorinternational.globo.com/
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North, Northeast, Central-West to lead in income growth

Smaller base, agriculture, investment, and public sector actions explain higher growth in these regions, study shows

01/17/2024

Angelo Ozelame — Foto: Divulgação

Angelo Ozelame — Foto: Divulgação

The total wage bill of Brazilian households is expected to grow more in the North, Northeast, and Central-West regions than in the Southeast and South of the country in the coming years, according to a study by Tendências Consultoria entitled “Classes of Income and Consumption in Brazil: 2023-2033.” The study takes into account the real total wages, excluding inflation.

In the period from 2023 to 2027, the consultancy forecasts that the Brazilian total wages will grow by 3.4% per year. The rates are expected to be 4.6% in the North and 4.1% in the Northeast and Central-West. The same pattern appears in the estimates for the period from 2028 to 2033, when the North (4.1%), the Northeast (4%), and the Central-West (3.9%) are expected to report a greater annual increase in total wages than the South (3%) and the Southeast (3.3%) of the country.

It is not unusual for the country’s total wages to grow at different rates in the five major regions. Experts point to several factors in this scenario of uneven growth of total income from a regional perspective.

The head of the study, Tendências’s economist Lucas Assis, said that the regions with the fastest growth in total wages benefit from a smaller base, which makes growth easier than in areas that are already consolidated, but that each of them also has specific reasons for the movement.

In the Northeast, the outlook is for increased public and private investment. The return of the Growth Acceleration Program (PAC) tends to benefit the region, he said, as does the expansion of production capacity in several sectors, especially oil and gas.

“If in 2022 and 2023 total wages in the Northeast benefited from income transfer programs and increases in the minimum wage, in the coming years the main influences will be public and private investment, which may benefit the local labor market. No further expansion of transfer programs is expected,” he said.

In the North, the boost will come from public administration—with a significant presence in the local GDP—and the concession of highways and ports. The maturation of investments in the iron ore mining industry will also play a role. “With the reduction of logistical hurdles, the region is also expected to attract investment,” he added.

Agriculture, in turn, is behind the income growth expected for the Central-West, said Mr. Assis. “The Central West is the country’s main agricultural frontier and will continue to grow over the next decade. Reducing transportation bottlenecks will further stimulate production in the region,” he said.

In the Central-West, this faster pace of income growth will be sustained by people like Ângelo Ozelame and Daniel Latorraca. They are part of the AgriHub network of entrepreneurs, linked to the Mato Grosso Federation of Agriculture and Livestock (Famato). They show the spread of agribusiness in the economy. Mr. Ozelame is the founder of Escola Agro—a school with courses aimed at agribusiness suppliers—and Lucro Rural—a financial management platform for agribusiness, working in the commercial, financial, and tax areas. The 34-year-old comes from a family of small farmers in Espumoso, Rio Grande do Sul state, has a degree in Agronomy from the Federal University of Pelotas (UFPel), and worked for several years as an analyst at the Mato Grosso Institute of Agricultural Economics (Imea) in Cuiabá, the state capital.

He opened Escola Agro while he was still employed, but a year later, in 2018, he began to dedicate himself fully to the business. In 2020, he opened a second business. His income is now 10 times higher than before he became a businessperson, he said. In 2023, Lucro Rural ended the year with six times more customers than the previous year, as well as R$25 billion in invoices processed in customer service. “More than the financial aspect, I’ve gained a lot of knowledge. The potential of the sector is huge, not only because of the growth prospects for agribusiness but also because of its financial and tax complexity. We help producers make decisions from the front gate, on the economic side,” said Mr. Ozelame.

Economist Daniel Latorraca saw financial services as an opportunity to work with agribusiness. He founded Creditares, a company that presents itself as a financial services hub for rural producers through financial advisors, the so-called “agrobankers.” The platform currently offers loans and will expand its portfolio to include insurance and hedging tools for operations on the futures market. “I have been following the evolution of agriculture and its impact on the economy in recent years, especially in Mato Grosso. So much so that I was encouraged to take the plunge. In my spreadsheets, agribusiness will continue to grow. If it is going to grow, it is going to need more credit,” said Mr. Latorraca.

However, this more significant income growth in the Northeast, North, and Central-West does not mean a reduction in regional inequalities in the country, said Mr. Assis. This is because the total wages of the Southeast and the South will continue to grow. “Regional disparities are likely to persist for at least the next decade. Even though the most vulnerable regions are experiencing greater income growth than the Southeast and South, the latter regions are also growing. As all regions grow, regional inequality is likely to remain big,” he said.

The regional dynamic of faster income growth in the Northeast, North, and Central-West goes hand in hand with faster income growth in the higher income classes than in the D/E class, according to the Tendências Consultoria study. This is because the economic recovery tends to benefit the richest, who also benefit from returns on investments, rents, and corporate profits.

For 2024, the consultancy predicts an increase of 2.9% in the country’s total wages. While in classes D/E this variation is 1.4%, the pace is over 3% in the other classes: A (3.2%), B (3.4%), and C (3.6%). Between 2023 and 2027, the average annual growth in classes D/E is 2.2%, half of the 4.4% of class A. Since there are no official criteria in the country for defining income classes, Tendências uses the following parameters: class A (monthly household income of more than R$24,200), B (between R$7,800 and R$24,200), C (between R$3,200 and R$7,800) and classes D/E (up to R$3,200).

In the analysis of class A, Mr. Assis said that there is an impact both from the increase in the average income of this group and from the increase in the number of households at the top of the pyramid, reflecting migration from other classes. At the other end of the spectrum, classes D/E, no major change in income transfer programs is expected to affect the ability of the total wages to expand. “In the long run, the higher income classes should still lead this income growth. There is an expected migration of households from the lower classes to the higher ones, but it’s still a very slow process,” said Mr. Assis.

Mr. Assis highlighted the difference between now and the 2000s, when there was a rapid rise of the poorest and an increase in the middle class. “This last decade in Brazil has been marked by two negative shocks: the recession of 2015/2016, and the pandemic. So, this growth in the next few years is a positive scenario compared to the last decade, but it’s different from the 2000s,” he said.

*Por Lucianne Carneiro — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Venture capital faces another challenging year after 39% decline in 2023

KPMG Report: $111 billion awaits capital calls from global management companies, recovery likely postponed to 2025

01/16/2024

Daniel Malandrin — Foto: Rogerio Vieira/Valor

Daniel Malandrin — Foto: Rogerio Vieira/Valor

In 2023, high-interest rates and macroeconomic uncertainties severely affected the venture capital sector, leading to a consecutive annual decline in Brazil’s startup investments. A survey commissioned by Valor and conducted by Sling Hub, a data intelligence platform for the sector, revealed a 39% decrease in investments last year, a decline slightly less than the 41% experienced across Latin America.

A KPMG report reveals that investors have committed $111 billion globally to management companies, pending allocation to startups. Daniel Malandrin, KPMG’s lead venture capital and innovation partner, attributes the move to increased risk aversion, leading to greater selectivity among asset managers and investors who now favor larger, profit-generating companies. He forecasts a challenging 2024, with many startups struggling and investors remaining cautious.

Mr. Malandrin predicts a continued rise in startup failures due to funding challenges in 2024. The start of monetary easing in the United States, a key driver for the market, remains uncertain.

In December, Distrito, an innovation platform, reported that 60% of venture capital fund managers do not anticipate a return to pre-crisis activity levels in the sector for over 18 months.

Oscar Decotelli, CEO of DXA Invest, which manages R$1 billion in “growth equity” funds—a blend of venture capital and private equity—noted that companies that weathered 2023 have emerged stronger into 2024, having slashed costs and enhanced efficiency. He also noted a significant reduction in financial needs, with companies now requiring only R$0.30 for every real they needed at the beginning of last year. However, Mr. Decotelli anticipates that investor interest in both startups and established companies will only pick up in the latter half of the year.

Mr. Decotelli points to uncertainties in both international and domestic markets as major influences on investment decisions. In the United States, the anticipated decline in inflation due to rising interest rates has been offset by signs of a resilient economy, delaying expectations of rate cuts. In Brazil, initial concerns over fiscal policy have eased following government measures. Despite high-interest rates in 2022, which saw a robust influx of startups, Mr. Decotelli describes 2023 as a “double negative” year, where companies struggled to sell products or raise capital for operations, marking it the most challenging year in the past decade.

Additionally, the early 2023 credit crisis, influenced by Americanas and Light, led to costlier financing and significant declines in funding through capital markets and bank lending. Mr. Decotelli highlights the plight of small companies with innovative products, which started the year hopeful for capital to grow or maintain operations but failed to secure funding.

The Distrito survey reveals that 35.7% of asset managers experienced negative impacts on their operations during the crisis. In comparison, 11.1% seized opportunities, such as purchasing assets at reduced prices. Mr. Malandrin from KPMG remarks, “Managers who have successfully raised funds in the past two years are now ideally positioned for negotiating with promising startups in need of growth capital.” He emphasized the need for investors to recognize the adequacy of the risk premium in venture capital for the sector’s recovery.

The KPMG executive highlights that the recent widespread increase in interest rates marks a major macroeconomic shift unprecedented in a decade of venture capital. “Until 2022, the remarkable productivity gains of startups didn’t impede investments due to the surplus of capital. The focus was on growth at any cost, followed by profitability.” However, he notes, there is a heightened demand for results due to competition with U.S. interest rates. Previously, venture capital investments were estimated to yield a 12% annual return in dollars; that has now decreased to a 7% differential with the U.S. prime rate at 5%.

Data from the Brazilian Private Equity and Venture Capital Association (ABVCAP) indicates a partial recovery in the third quarter of 2023. Venture capital funds invested R$1.9 billion across 62 rounds, a 19% increase from the R$1.6 billion invested between April and June of the same year. However, the number of deals decreased by 16%. Compared to the third quarter of 2022, there was a 29.6% reduction in the invested amount and a 66% decrease in the total number of transactions.

Mr. Malandrin from KPMG explains that the current trend of investing more money in fewer startups, particularly larger ones on the path to profitability, is due to increased selectivity. He emphasizes that this trend is not a structural but a cyclical change, likening it to a temporary memory that might fade with new technologies and managerial approaches. “Nevertheless, it represents a significant learning opportunity for the entire industry,” he added.

Globally, KPMG data indicates that the volume of transactions fell to its lowest since the fourth quarter of 2018. In the second quarter of 2023, the volume was $81.4 billion across 9,563 transactions, which decreased to $77.05 billion in 7,434 transactions in the third quarter. That represents a 5.35% drop in value and a 23% decrease in the number of deals.

In Brazil, fintechs garnered the most investment in 2023. The Sling Hub survey reports that 54% of the country’s transactions involved fintech companies, up from 43% in 2021 and 45% in 2022. João Ventura, founder and CEO of Sling Hub, attributes the increase to large funding rounds during the year.

Mr. Ventura highlights significant transactions such as fintech Meutudo’s announcement of a new R$2 billion FIDC—a fixed-income investment backed by receivables such as trade assets, checks, and car loans—managed and administered by BTG Pactual Asset, focusing on social security (INSS) payroll loans. Another notable investment was Citi’s $466 million infusion into Mercado Pago, which was aimed at expanding its credit operations in Brazil and Mexico. “We haven’t seen operations of this magnitude for quite some time,” Mr. Ventura remarked. According to KPMG, Brazil currently boasts 13,300 active startups, with fintechs constituting 11% of these enterprises.

*Por Liane Thedim — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Egg producer Mantiqueira could help boost JBS

According to newspaper O Globo, an agreement between the two companies is being negotiated

01/16/2024

Leandro Pinto — Foto: Divulgação

Leandro Pinto — Foto: Divulgação

The possible acquisition of the Mantiqueira Group, one of the country’s largest egg producers, by JBS, as reported by daily newspaper O Globo, is a strategic move that aligns with JBS’s multi-protein strategy, according to analysts and industry sources.

Negotiations between the two companies are currently underway, as reported by journalist Lauro Jardim in his Sunday column. Notably, in such discussions, there is a possibility that Mantiqueira’s founder, Leandro Pinto, may retain a partnership in the company even following the sale.

When contacted by Valor, Mr. Pinto refuted the information, while JBS was not immediately available for comment.

An insider disclosed that rumors about JBS’s interest in Mantiqueira began circulating in mid-December. In the insider’s opinion, Mantiqueira has been signaling its readiness for a potential acquisition, citing its acquisition of Toca Orgânicos, investments in cage-free production, and the rebranding of the Mantiqueira label as Happy Eggs.

“In the past three years, if you observe Mantiqueira’s actions, it appears that Leandro [Pinto] is dressing up the bride. On the other side, there seems to be a groom in need of a partner,” commented the insider.

In an initial evaluation, Leonardo Alencar, an analyst at XP Investimentos, expressed his belief that JBS’s acquisition of an egg company would be advantageous. Diversifying its protein offerings helps mitigate the impact of market fluctuations in each sector on the company’s financial performance. Additionally, it could open doors to a sector that thrives during periods of increased demand for affordable food and evolving global consumption patterns.

An industry source concurred that JBS’s potential entry into the egg sector would enhance its diversification, considering the company’s prominence in other protein markets. The source also noted that the global outlook for the egg segment appears highly promising.

However, the XP analyst pointed out that the acquisition of Mantiqueira alone might not significantly alter JBS’s overall trajectory. “It would only make sense if it were the first step in a larger strategy. Everything indicates that JBS aims to maintain financial prudence and focus on the dual listing process, which may not be the ideal time for acquisitions.”

Opinions differ on whether the recent termination of the agreement to sell a portion of Eldorado Celulose to the Indonesian group Paper Excellence could impact the potential acquisition in the short term. J&F Investimentos, the holding company of the Batista family, which controls JBS, announced the cancellation of the deal and the return of R$3.7 billion. Industry insiders suggest that Mantiqueira’s market value may fall short of the Batista family’s expectations.

*Por José Florentino, Nayara Figueiredo — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Falling revenues put fiscal adjustment back on states’ radar

Total revenues, which include transfers, fell in the first 10 months of 2023 compared with the same period in 2022

01/16/2024

Renata dos Santos — Foto: Ricardo Ledo/Valor

Renata dos Santos — Foto: Ricardo Ledo/Valor

Even with the gain considered exceptional in 2021 and part of 2022, states’ revenue fell last year not only compared to the previous year but also to 2019, the period before the Covid-19 pandemic and also the first year of the previous governors’ terms.

From January to October 2023, the latest data available, revenues from taxes, fees, and contributions from the total of 26 states and the Federal District amounted to R$553.45 billion, 6.7% lower in real terms than in 2022 and 3.4% lower than in 2019. Although still 11.3% higher in real terms than in 2019, aggregate current revenue for 2023, which totaled R$954.9 billion, also deteriorated compared to 2022, with a decline of 3.1%. Aggregate revenues include transfers that states receive from the federal government.

As revenues fell, current expenditures increased by 3.9% in real terms in 2023 compared to the previous year, also from January to October. Personnel costs, which account for 58% of state governments’ current expenditures, rose by 5.2%.

The data up to October show the outlook before the advance payment in 2023 of the compensation for sales tax ICMS losses, which will not be paid by the federal government to states and municipalities until 2024. These funds were transferred to regional governments in November and December and helped improve the outlook at the end of 2023, according to representatives of state governments.

The data on realized revenues and liquidated expenses were collected by Valor from the fiscal reports submitted by the states to the National Treasury Secretariat. The figures for 2019 and 2022 were updated by the benchmark inflation index IPCA to October 2023.

For Gabriel Leal de Barros, economist and partner at Ryo Asset, the outlook shows that concerns about the states’ fiscal adjustment are back on the radar. The issue was sidelined during the pandemic and then, with the positive commodity shocks, in 2021 and part of 2022. “The issue of the states’ revenue base is back on the table,” he said.

According to the data, the drop in own revenue from January to October 2023 compared to the same period of the previous year occurred in 11 of the 27 entities. The drop in current income affected 16 of them. What is striking, says Mr. Leal de Barros, is the drop in revenue in the southeastern states, because they were hit hard by the ICMS cut imposed on the states in 2022. States with significant relative tax revenues, such as São Paulo and Minas Gerais, did not increase the standard tax rate, as did most of the Northeastern states. In these states, own revenues are more representative in the composition of revenues. According to the survey, current revenues in São Paulo and Minas Gerais fell by 7.3% and 3.4%, respectively, in real terms, from January to October compared to the same period in 2022.

The data collected shows that the Northeastern states’ revenue was stable in real terms compared to 2022, and the decrease in current revenue was only 0.7%. In the Central-West, own-source revenue was also virtually stable, with a 0.1% increase in real terms and a 2.2% decrease in current revenue. The North experienced a 7% increase in its revenue and a 2% increase in current revenue.

The largest losses were in the Southeast, which saw a 12.7 percent drop in own resources and a 6.7% drop in current resources. No state in the region raised the modal ICMS rate in 2023. In the South, the loss was 1.8% in own revenue, but there was a 1.4% increase in current revenue. Among the southern states, only Paraná increased the standard ICMS rate to 19% in 2023, up from 18% in 2022. At the end of last year, the state passed a law to raise it again in 2024, to 19.5%. At the end of 2023, the Rio Grande do Sul government even proposed to increase the rate from 17% to 19.5% in 2024, but the project was withdrawn due to difficulties in getting it approved by the state legislative assembly.

The figures show that the increase in the modal tax rate by the states was not enough to compensate for the loss of revenue from the aggregate, said Mr. Leal de Barros of Ryo Asset. The states that increased the tax rate, he explains, are less representative when looking at the overall fiscal picture of state entities. Data from the reports show that the four southeastern states account for 52.5% of the total revenue of the five regions and 45.2% of the current revenue.

The move to increase the modal tax rate came in response to supplementary laws 192/2022 and 194/2022. Approved in 2022, amid the presidential election campaign, the two laws imposed changes that resulted in rate reductions and changes to the ICMS calculation base in the telecommunications, electricity, and fuel sectors, considered the “blue chips” of tax collection.

The states’ loss of revenue was challenged in court and resulted in an agreement for the federal government to compensate states and municipalities for their loss of the tax, as 25% of the ICMS revenue is transferred by the state government to the respective municipalities. The agreement set a schedule for payments in 2023 and 2024 and in some cases 2025. Last year, however, the federal government made the scheduled transfer and also front-loaded the payments to be made in 2024. The advance payments were made in November and December.

According to Mr. Leal de Barros, the revenue from the compensations probably contributed to the state’s accounts being in the black in 2023. However, the revenue was temporary and 2024 is expected to be a year of economic slowdown, with a major fiscal challenge for the federal government.

The final text of the tax reform, the economist pointed out, had no provision that considered the average ICMS revenue from 2024 to 2028 as part of the criteria for distributing the future tax on goods and services (IBS), the new tax created by the reform and which will be collected by the states and municipalities. “The debate on how to compensate for the loss of the ICMS tax base will probably be part of the discussions on the tax reform regulations.”

The Rio Grande do Sul government said that the ICMS reduction imposed in 2022 continues to have an impact on its revenues, and to maintain regular payments and investments and overcome accumulated liabilities, the state needs to restore revenue levels. Part of the losses have been compensated, the state government said in a statement, but still not enough to restore the previous situation. The government has proposed “a review of tax benefits that will be implemented with caution to guarantee and maintain the competitiveness of the state, combining it with the need to seek a model of sustainability in the short, medium, and long term, especially in light of the changes in the tax reform,” the note said.

From January to October 2023, the state’s revenue fell by 2.4% compared to the same period in 2022, but with a 3.9% increase in current revenue and a 5.1% increase in current expenditure. The state government said that the data for 2023 are still being finalized, but Rio Grande do Sul maintains its budget surplus as a result of management measures, privatization, and the effects of the so-called Fiscal Recovery Regime, a mechanism created in 2017 to provide tools for struggling states to adjust their accounts.

Alagoas is among the states with an increase in revenue in 2023. The state’s revenue increased by 8.1% from January to October 2023 compared to the same months of the previous year. Current revenues increased by 3.2%. Renata dos Santos, Finance Secretary of Alagoas, said that the state’s revenue will end 2023 with a real growth between 10% and 12%. She said that a special ICMS installment plan also contributed to this revenue at the end of the year. The recovery, she said, was also helped by the increase in the modal ICMS rate to 19% in 2023 from 17%, along with changes in the state’s tax collection structure. The state’s tax revenue was favored in 2023 by the real increase in the minimum wage and the cash-transfer program Bolsa Família, which benefited a significant part of the Alagoas population and “turned into consumption.”

For 2024, she said, the idea is “to begin in balance,” and that’s why the state is already taking measures to contain current expenditures “to mitigate the pressure that may come from the municipal elections.” Revenues are expected to grow by 2% in real terms this year compared to 2023, while expenditures will remain at the same level in nominal terms.

In Pará, revenues also increased by 13.8% and current revenues by 3.5%. According to the state’s secretary of Finance, René Sousa Júnior, this reflects the increase in the modal ICMS rate from 17% to 19% in 2023 and the good performance of the mining sector, which does not generate tax revenue from exports but brings dynamism to local activity. Driven by hikes such as the teachers’ salary floor, the state’s personnel costs accelerated, rising by 11.9% in 2023 compared to 2022. Current expenditure increased by 9.8% from January to October. According to the secretary, the accounts were adjusted in 2023, with an important contribution from the compensation of ICMS losses by the federal government. According to Mr. Sousa Júnior, the state received a total of R$600 million in compensation in 2023, of which approximately R$200 million was related to the year itself.

*Por Marta Watanabe — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Business with China overcomes legal differences

Equal treatment for foreign companies in Brazil attracts interest from Asian businesspeople

01/15/2024

Thiago Vallandro Flores — Foto: Divulgação

Thiago Vallandro Flores — Foto: Divulgação

Over the past 15 years, Brazilian law firms, particularly those specializing in corporate and tax matters, have witnessed a growing interest from Chinese companies seeking to engage in business within the country. Legal experts in Brazil have cultivated specialized knowledge in this domain. Thiago Vallandro Flores, a partner in the finance department at Dias Carneiro Advogados, with nearly two decades of experience working on contracts involving Chinese companies, notes that the Chinese anticipate a higher level of expertise when engaging with Brazilian lawyers.

Mr. Flores highlights cultural differences, emphasizing that the Chinese place value on closer interactions with senior professionals, and he notes variations in decision-making processes that can sometimes lead to differing expectations about deadlines.

Nick Beckett, a partner at CMS in China, observes the evolution of China’s legal system since the founding of the People’s Republic of China in 1949, stating that it has become more sophisticated and “comparable to Western systems.” Aldo de Andrade, senior lawyer at BYD do Brasil, acknowledges “undeniable differences in legal systems,” emphasizing the challenge of establishing clear communication between the legal and doctrinal systems of two economic powers.

Due to these distinct legal cultures, Mr. Andrade emphasizes the necessity of developing strategies with partner firms to elucidate Brazilian legislation guidelines, particularly concerning labor laws and the recent tax reform. Paulo M. Focaccia, a partner at FAS Advogados collaborating with CMS, underscores opportunities for bilateral business in sectors like power generation, commodities, mobility, and technology, noting the transcendence of legal differences. “We observe with some caution the day-to-day activities of newly established Chinese companies—or those planning to establish their subsidiaries here—with frequent doubts about the complex Brazilian tax system,” said Mr. Focaccia.

Lucas Tavares, a partner in the mergers and acquisitions practice at Demarest Advogados, with over two decades of experience with Chinese clients, highlights labor and tax concerns in Brazil as focal points for foreign investors. He appreciates Brazil’s lack of geographical distinction for investors from a legal perspective, a feature welcomed by the Chinese. Mr. Tavares emphasizes the predictability of Brazil’s regulatory environment as a positive factor but warns against imprudent document signings, urging Chinese companies to seek proper advice.

For Brazilian companies venturing into China, Leonardo Briganti, partner at Briganti Advogados, underscores the importance of China’s Foreign Investment Law, in effect since January 1, 2020. Mr. Briganti provides a didactic description of activities permitted, restrictive, and prohibited for foreign companies in China under this law. He highlights the issuance of Negative Lists by the National Development and Reform Commission and the Ministry of Commerce of China (MOFCOM), clarifying restrictions and rules for operating in Chinese territory.

*Por Suzana Liskauskas — Rio de Janeiro

Source: Valor International

https://valorinternational.globo.com/
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Soybean exports to fall with lower production and use in biodiesel

National Supply Company estimates shipments of 98.45 million tonnes of grain

01/15/2024

The amount of biodiesel in diesel grew to 14% from 12% — Foto: Divulgação

The amount of biodiesel in diesel grew to 14% from 12% — Foto: Divulgação

The drop in Brazil’s soybean production estimate, announced on Wednesday by the National Supply Company (Conab), due to climatic problems in the main producing states, is also expected to lead to lower exports of the oilseed this year.

In addition, the National Energy Policy Council (CNPE) approved the increase in the amount of biodiesel in diesel, to 14% from 12%, which indicates that there will be an increase in domestic demand for soybean oil.

As a result, Conab reduced its export estimate by 3.13 million tonnes, to 98.45 million tonnes of grains.

The number of soybeans crushed was adjusted by 119,000 tonnes to 53.4 million tonnes, due to the increase in the proportion of biodiesel added to diesel.

Conab therefore expects ending stocks in 2023/24 to be 3.58 million tonnes, compared to 3.4 million tonnes at the end of 2022/23.

Stocks of soy meal are expected to total 3.27 million tonnes, compared to 1.6 million tonnes in the previous season, and oil stocks are expected to fall to 300,000 tonnes from 310,000 tonnes.

*Por Fernanda Pressinott — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Benefits for payment via Pix soar in e-commerce

Nearly half of major online stores offer discounts to customers who use the instant-payment system

01/15/2024

Gastão Mattos — Foto: Carol Carquejeiro/Valor

Gastão Mattos — Foto: Carol Carquejeiro/Valor

From different discounts to free shipping, the benefits offered in e-commerce for customers who choose to pay with Pix are progressively increasing. In early January, nearly half (47%) of the country’s large online stores offered some kind of advantage for customers using Brazil’s instant-payment system, according to a study carried out by Gmattos Pagamentos consultancy reviewed by Valor. The survey also reveals a decrease in the number of interest-free installments offered on credit cards. Experts see price reductions for cash payments as a healthy market trend.

The trend to promote Pix payment is a result of lower costs for retailers and advantages to their cash flow, as the money is made available immediately. There is also a high level of conversion in the shopping cart. Sales that actually occur after the customer adds the items to shopping cart exceed 90% on Pix, the consultancy notes. With a credit card, the conversion rate is around 70%, compared to 50% for boletos (bank-issued invoices) and 30% for debit card transactions.

The survey included 59 major online stores in the Brazilian market in the January edition and has been carried out bimonthly since 2021. Since September last year, Pix has been offered as a payment method in all stores surveyed, just like credit cards, that was the leading payment method in e-commerce until then.

Until early 2023, research showed some fluctuation in retailers’ incentive to use Pix. Since May, however, the percentage of businesses offering advantages for customers using Pix has been steadily growing. At that time, the offering of benefits involved 30% of stores surveyed. The percentage observed in January even exceeded that seen on Black Friday (46%), although during the promotional date discounts were greater, ranging from 10% to 15%. This month, discounts ranged from 4% to 12% and there was also free shipping offers in some cases.

“I believe the incentive to use Pix will continue to grow. Our view is that retailers were very engaged,” Gastão Mattos, co-founder and CEO of Gmattos, said. “Given the advantages it offers, offering different prices makes sense,” he adds.

Although Pix first became popular in transfers between individuals, transactions from people to businesses have been growing each month. In December, these transactions accounted for 36% of total operations. A year earlier, this share was 24%, according to Central Bank data.

Maurício Salvador, president of the Brazilian E-Commerce Association (ABcomm), points out the discount offer for customers using the instant payment system is not restricted to large online stores; it’s widespread across the Brazilian e-commerce. “On the one hand, Pix became popular among customers. On the other hand, it has a direct positive impact on the retailers’ cash flow. Furthermore, shopping cart abandonment is much lower and there is no risk of chargeback,” he said, on a reference to refunds on credit card purchases after dispute.

When accepting payment via credit card, the retailer has to bear the MDR costs (a discount rate charged by the acquirer firm), in addition to the cost of factoring of receivables in order to receive the money immediately. The greater the number of installments, the higher the costs are. Bank-issued invoices remain resilient in e-commerce—with 62.7% of surveyed stores offering this payment option in January—but has an average confirmation of receipt period of two business days, which affects sales flow.

The survey also revealed that, while the advantages for using Pix grow, the number of interest-free installments offered on credit card payments falls. In January, the average term was 5.4 times, compared to 5.7 times in the previous survey, carried out during Black Friday. A year earlier, the average was around 7.4 interest-free installments.

The discount offered in payment via credit card in one single installment is still low and was observed in only 5% of stores in January. However, Mr. Mattos notes this could be a trend in promotional strategies, given the retailers’ movement to reduce the number of interest-free installments. “Just as the discounts on Pix grew, discounts on a single installment on credit card should also start to increase, even if they’re smaller. It’s a healthy trend,” Mr. Mattos said.

Interest-free installments were in the spotlight last year amid discussions about measures to help reduce revolving credit interest rates, and the topic is expected to remain on the agenda. Carla Beni, an economist and MBA professor at FGV, says the option has become a habit in the Brazilian market, but she notes it is important that consumers understand there is no such thing as interest-free installments. As she explains, if there is no explicit fee, that is because the customer is not getting a discount on cash payments. “There is the normalization of interest rates embedded in the installment.”

In the professor’s opinion, part of consumers is willing to pay in cash if there is a discount, and the practice can help bring up discussions involving financial education. “Offering a discount on cash payments helps the retailer build customer loyalty and become less dependent on factoring of receivables,” she adds.

The evolution of payment transaction initiators (ITPs), a feature that allows the user to operate their account outside the financial institution’s environment, as well as the launch of Automatic Pix, scheduled for 2024, should help increase momentum for instant payment in digital transactions.

The possibility to pay in installments and a more fluid experience are currently the biggest factors for credit card differentiation in the online world, in addition to the chargeback. Pix has a special refund mechanism, aimed at facilitating a chargeback in the event of fraud or operational failure, but the Central Bank points out that cases of commercial disagreement are not part of the rules and must be dealt with directly by the parties.

Although installments via Pix have not yet been officially implemented, several businesses have been offering purchases with alternative installments to credit card, in many cases using instant payment options. According to the Gmattos study, 39% of the stores surveyed offered payment under the “buy now, pay later” option. That was the highest level of acceptance since records started, and the numbers are expected to remain up.

Debit-card payments, the modality that has lost the most space in e-commerce since the launch of Pix, in November 2020, was offered by only 20% of stores in November. Digital wallet payments were accepted in 42.4% of businesses. The highlight was NuPay, digital bank Nubank’s online payment solution, which has established as the second digital wallet in market presence, second only to Paypal.

*Por Mariana Ribeiro — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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Arteris, São Paulo government sign agreement to extend Intervias contract

Agreement ends legal disputes, sets out the amounts of the main past imbalances, but outstanding values remain open; next another round of negotiations will be required

01/12/2024

With the signing of the agreement, Arteris puts an end to multi-billion disputes with the São Paulo government — Foto: Julio Bittencourt

With the signing of the agreement, Arteris puts an end to multi-billion disputes with the São Paulo government — Foto: Julio Bittencourt

With a delay of more than a year, Arteris and the government of São Paulo reached an agreement to resolve the road concessionaire’s long-standing liabilities in the state. The amendment extends until December 2039 the Intervias contract, which would expire in 2028. The agreement may also include new obligations — another round of negotiations will be required to decide on the final amount owed by the concessionaire to the state, which could result in discounts for users of the automatic payment system, among other compensating measures.

The preliminary agreement had been signed in September 2022 with the previous administration. The parties had expected to reach a final agreement within 120 days, which did not happen. Negotiations dragged on even longer, given the change of administration in 2023. The final agreement was signed on Wednesday (10) and announced on Thursday.

It ends legal disputes, sets out the amounts of the main past imbalances, but outstanding values remain open — which should be decided in a next stage of negotiations.

For the agreement, the parties carried out a set-off of their accounts, considering credits in favor of the government and the concessionaires. In the end, the negotiation led to the extension of the Intervias contract, as a way of offsetting imbalances in favor of the company.

However, there is still an outstanding credit in favor of the state in the amount of R$426.5 million, which has to be offset. The final amount remains to be defined since other imbalances are pending resolutions, which could change the balance.

With the signing of the agreement, Arteris puts an end to multi-billion disputes with the São Paulo government, which had been going on for decades. The disputes also involved three other concessionaires by Arteris, in addition to Intervias: ViaNorte, Autovias, and Centrovias. Those, however, have been resolved, between 2018 and 2020.

The main dispute was created in 2006, when the Claudio Lembo’s administration signed contractual amendments extending the terms of multiple highway concessions. However, years later, the São Paulo government reviewed the agreements and decided to cancel the extensions, which triggered legal disputes with companies in the sector. In addition to this emblematic case, other disputes remained open.

In addition to Arteris, Ecorodovias and CCR had already reached agreements with the São Paulo government, between 2021 and 2022, in which they also ended regulatory disputes and obtained the extension of concessions, in exchange for including construction work.

For Arteris, that is a crucial step towards resolving its regulatory liabilities. The company still has another important standoff pending: Autopista Fluminense. The federal concession, which has been accumulating problems, has even agreed upon a re-tender, but is currently undergoing renegotiations with the federal government and the Federal Court of Accounts (TCU) to be able to continue operations under the contract, with new terms.

According to industry analysts, solving regulatory problems may pave the way for a definition of the future of Arteris, which has already been put up for sale by its owners, Brookfield and Abertis, unsuccessfully. In the market, the general opinion is that liabilities are bringing down the company’s value. Amid the disputes, the company was left out of the road auctions held in recent years. The last concession won by the group was Rodovia dos Calçados, in 2017.

*Por Taís Hirata — São Paulo

Source: Valor International

https://valorinternational.globo.com/
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