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CNH Bullish on Brazil

Case New Holland (CNH) expects to benefit from growing infrastructure projects, including the 2014 World Cup.

BY VALERIO FABRIS
AND WAGNER CONCHA

Valentino Rizzioli is the CEO of Case New Holland (CNH), which makes construction and agricultural machinery, and vice president of the Fiat Group in Brazil. His company stands to benefit from two major projects aimed at boosting Brazil´s economic and social development – the Accelerated Growth Program to upgrade the country´s aging infrastructure and the “My House, My Life” Program which aims to build one million popular homes. As Brazil will be hosting the 2014 World Cup and Rio de Janeiro is in contention for the Olympic Games in 2016, the opportunities for infrastructure projects are even greater. In this interview, Mr. Rizzioli discusses not only Brazil´s infrastructure needs but also how it needs to improve basic education, reform its complicated tax system and ensure that farmers have access to credit to enable the agricultural sector to continue to grow and benefit the trade balance through exports.

You have been in Brazil for more than 40 years. What are the main changes you have seen in this period?

Valentino Rizzioli: When I arrived here the military were still in power and the government was giving priority to the business and technological sectors. Infrastructure projects were extremely important at that time and they still form the base of today´s roads and telecommunications. Brazil was much more advanced in telecommunications and infrastructure than Europe in the 1970s. Investments were also made in higher education. The universities were strengthened and this led to a great period of research and development. However, there was a clear division between the elite and the rest of the population.  This was the weak point of these governments. Unfortunately, there was a split and you had two countries: one benefiting from high technology and infrastructure and another which was not accompanying this growth. The democratic governments which followed started to include the population in the productive cycle. The government says that more than 20 million people have entered the productive cycle over the last four years and Brazil now has a very large active population which is growing by the day. The various measures which have been taken by recent governments have brought much stronger growth. Brazil is now an example to the whole world of how to combine economic growth and social development.

What areas still have to be dealt with?

Rizzioli: Brazil has three extremely important points which are being dealt with although they are still in the initial stage.  The first is basic education which allows countries to grow in social and economic terms. Higher education was developed very well during the military government but basic education left much to be desired not only in the interior but also in the large urban centers. It needs to be dealt with as quickly as possible because this is part of the country’s cultural baggage. Another point is more technical and relates to the infrastructure which stopped being developed after the military regime. Investments in this segment have been resumed in recent years as the failings of the infrastructure had become a great problem for industrial, technological and agricultural growth. We have problems with highways which have, in turn, caused enormous damages to the agricultural and industrial sectors.

The cost of transporting exports is almost the same as the cost of production nowadays. For example, most of the Fiat group’s plants in the metropolitan region of Belo Horizonte face an extremely serious problem on a daily basis due to the state of the highway infrastructure. All our plants use the “Just in Time” system and depend on just one highway to supply them. Can you imagine what would happen if anything went wrong with the Fernão Dias highway? Our plants would stop and we would face great losses. The infrastructure in the industrial region of Belo Horizonte is in exactly the same state as when Fiat began operating there more than 30 years ago. Great efforts have been made in the telecommunications sector but a lot still needs to be done in terms of security information. This is a fundamental for our company.

A third critical point relates to the fiscal area. Brazil´s tax system is extremely complicated, very difficult to understand and has hundred of regulations which change from one day to the next. This is terrible because it means that companies need to have an army of tax specialists to be able to work within the regulations. Obviously, this is an enormous waste of time and efficiency. It creates instability, particularly for the foreign investor. If a company had known at the time of making a decision that the rules would be changed a year later from one moment to the next, it would never have made the investment in the first place. It is very confusing and there is no reliable regulation.

Macroeconomic stability has saved Brazil during this global turbulence. How do you see the country against this backdrop?

Rizzioli: Brazil went in the opposite direction due to its stability and sustainable economic and social growth. This is the difference between the Brazilian economy and the others, including the BRIC countries. At the same time, the government acted quickly and took the right decisions. For these reasons we should recognize the great awareness shown by President Lula, particularly in seeing that the way to beat this crisis was to boost economic activity. This was done by taking a three-pronged approach and supporting the construction and automobile sectors, two large sources of employment, which ensures consumption and the farm sector, which maintains inflation under control and the well-being of the Brazilian population. Family farming also allows the poorer regions of the country to be self-sufficient while agribusiness maintains the trade balance. This was the tripod on which president Lula assembled a successful system. 

Should a fourth leg related to infrastructure be added to this tripod?

Rizzioli: Yes. The government´s Accelerated Growth Program projects have got underway. Orders have been increasing on a daily basis in our plants. We are expanding our production for the first time since November. The increased demand for construction and agriculture machinery began in June and shows the pent-up demand which had existed. The small producer is currently buying small tractors of up to 75 HP but demand from agribusiness has stopped. The producers need the machinery but most buy in cash because they do not have any financing conditions as the banks are not granting them credit.

What about commodity prices?

Rizzioli: These are good and producers will have a good financial result this year. The problem is they will have to renegotiate their outstanding debt which means they cannot seek other loans. This is an obstacle which leads to a big loss since the producer needs the machines now. This problem could be resolved through an agreement involving the government, the producer, the financial system and the machine manufacturers. We need to create mechanisms which allow confidence to be transmitted to the financial system so that banks start granting credit to producers again. This is a proposal which should be examined again as we believe the way ahead is to resume investments in the farm sector. If this does not happen, we will start having a lower harvest as the machinery is aging and there is a great risk of returning to the past when inefficient machinery led to large production losses. In the 1990s, for example, the losses from our harvests were equivalent to the entire production of France, Italy and Germany combined.

What do you think of the government´s “My House, My Life” homebuilding program?

Rizzioli: The program is fundamental for our business and also for the country from the social point of view. Brazil´s housing program, which has been carried out by the Caixa Economica bank, never worked because of inflation. The amount of the debt the person had assumed ended up being higher than the value of the home due to the high interest rates and monetary restatement. The current economic stability allows the owner to look ahead and plan future payments and a household budget, something which was not possible before.

Is there one infrastructure project you regard as essential?

Rizzioli: The São Paulo Ring Road (Rodoanel) is a classical example of a very important project for the São Paulo region which should be developed as fast as possible in other Brazilian capitals. It will bring relief to São Paulo’s traffic and boost industrial growth in the region.

What effect will the World Cup have on Brazil?

Rizzioli: It will have a very strong impact as we have seen in other parts of the world. For example, the big structural development seen in Spain was based on the World Cup and the Barcelona Olympics. The effect will be greater in Brazil and will certainly be a big opportunity for tourism which needs a boost. We are also hoping that the 2016 Olympics will be hosted by Rio de Janeiro.

How does CNH fit into this?

Rizzioli: We are directly involved and hope that our machines will make a big contribution to the infrastructure projects in the coming years so that Brazil can host the two largest sporting events in the world.

This is an edited translated version of an interview by Valerio Fabris and Wagner Concha which appeared in the magazine Mundo FIAT. Republished with permission.

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