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Meeting the Challenge of Conducting Biomass-Related Business in Brazil

Starting up a business in a foreign country such as Brazil can be quite challenging and some setbacks can arise. That shouldn't discourage investment from foreign companies and start-up ventures, however, for a simple reason: Brazil offers remarkable advantages.
By Felipe Tavares, Thiago Carneiro and Aldemir Marrei
Major changes are taking place in the international distribution of the petrochemical industry, mainly driven by availability and cost of raw materials. Amid this trend, the Middle East has been in the spotlight with plentiful supplies of feedstock and a growing petrochemical industry. In alternative feedstocks, however, Brazil is at the forefront, leading the way in the biomass-based industry, and its competitive advantages have attracted several start-up companies and world-class players looking for ways to boost their "green" businesses. A proper entry strategy is imperative for decision makers aiming to jump on the Brazil bandwagon. In the contemporary corporate realm, if one were to make any business decision without gaining substantial knowledge about the outcome it could result in an economic catastrophe. Therefore prudence dictates that prospective investors must devise suitable due diligence processes to obtain as much information about the Brazilian assets as possible to be able to make good business decisions.

Brazil's Competitive Advantages
Articles about Brazil's promising future have been popping up in the media lately. Recently, The Economist published an article titled "Brazil Takes Off," highlighting the country's robust economy and political stability, and stated that "Forecasts vary, but sometime in the decade after 2014 Brazil is likely to become the world's fifth-largest economy, overtaking Britain and France." A recent article in the Financial Times, "Dancing Through the Economic Crisis," pointed out that Brazil "is catching the world's attention-and sucking in foreign direct investment, while many rivals go without."

Brazil also presents a unique set of advantages over other countries in terms of its geography, tropical/temperate climate, plenty of arable land and absence of large natural catastrophes. The country has an area of more than 850 million hectares (2.1 billion acres), with forests, agriculture and pastures representing almost 90 percent of it (see figure 1).

When performing a comparison with other countries, Brazil's potential is prominently greater (see figure 2 on page 46).

The Race has Begun: The Moment is Now
After decades of research and commitment to a technology based on sugarcane ethanol, Brazil is the leading and most efficient sugarcane producer in the world. The country has more than 350 sugarcane mills producing more than 20 billion liters (5.5 billion gallons) of sugarcane ethanol per year, and has the potential to produce much more-sugarcane production occupies less than 1 percent of the country's arable land. More than a cost-effective way of manufacturing biofuels, the country has proven to have projects that are environmentally sustainable and potentially capable of changing the way we manufacture several chemical products, formerly made from petroleum.

Such facts have encouraged large petrochemical companies to embark on sizeable green plastics projects in Brazil. Giants such as Dow Chemical, Solvay and Braskem are already planning to produce ethylene from Brazilian ethanol and use it as raw material in the manufacture of renewable polyethylene and polyvinylchloride (PVC).

-Dow announced plans to build a facility Santa Vitoria in (Southeast Brazil) to produce 350,000 metric tons (770 million pounds) per year of polyethylene. The $1 billion facility, expected to start production in 2011, would be the first integrated facility in the world (sugarcane plantation, ethanol mill and plastics manufacturing) to produce bioplastics.

-Solvay-Indupa, Brazil's arm of the chemical major Solvay, is investing $135 million to produce "green" PVC also in Southeast Brazil. Solvay-Indupa's plan is to use its existing assets to make PVC from an additional 60,000 metric tons (130 million pounds) of green ethylene per year, starting in 2011.

-Braskem, the third-largest resins producer in the Americas, is building a $300 million plant at the company's Triunfo (South Brazil) site with the capacity to produce 200,000 metric tons (450 million pounds) of green plastic per year. The facility, expected to come on line in the next year, will be the first of its kind to enter commercial operation.

Small- and medium-sized companies, such as the American Amyris Biotechnologies Inc. and the local Raudi Industria e Comercio Ltda., are also seeking to capitalize on the competitive advantages offered by Brazil.

-Amyris Brasil Pesquisa Desenvolvimento Ltda., a wholly owned subsidiary of Amyris, started its demonstration facility in Campinas (Southeast Brazil), which was the final step before full commercial production of Amyris products. The facility is designed to convert Brazilian sugarcane into a range of high-value renewable fuels and chemicals using a proprietary synthetic biology technology.

-Brazilian company Raudi is also attracting the attention of foreign investors with its pioneer technology. The company makes "green" sodium bicarbonate using the carbon dioxide byproduct of alcohol production as feedstock. The company has an operating plant and plans to expand its capacity.

All opportunities are being carefully analyzed by the international community and big players are investing heavily in Brazil to either build new ethanol mills or acquire existing assets run by local and less structured groups.

Recently, the Brazilian unit of the French commodities group Louis Dreyfus agreed to take over the Brazilian firm Santelisa Vale. Dreyfus will hold a 60 percent stake of the new venture, called LDC-SEV, which will control 13 sugar and ethanol plants and have annual cane crushing capacity of 88 billion pounds (40 million metric tons), being the world's second-largest sugarcane processor, only after Brazil's Cosan.

At least 10 major foreign groups are already getting their pieces of the Brazilian pie, including some of the biggest commodities companies such as Cargill Inc., Bunge Ltd., Tereos, Adecoagro, Noble Group and even the oil giant BP.

From 2000 to September 2009, Brazilian ethanol companies were faced with 99 mergers and acquisitions. It's important to mention that 45 of them occurred in the past three years, and 22 out of those 45 ventures involved foreign companies acquiring existing assets.

The dilemma here would probably be the classic one of entering a new market: There's still plenty of uncertainty in the young biomass-based industry. Would it be too risky to bet on a specific business now and lose competitiveness in the near future?

It's no secret that if the business environment changes considerably, future entrants will be favored. Indeed, in the commodities sector, often the latest entrants were the winners, wielding the most efficient technologies and producing on a larger scale.

However, the trick is that land and other vital resources should soon be at a premium (some already are) and waiting is likely to be a costly choice. In addition, newcomers will need partners, and the best ones may soon be taken. On the whole, companies aiming to compete really must devise entry strategies now.

Imperative Steps to Joining the Brazilian Green Wave
If either a world-class or start-up company is planning to benefit from Brazil's competitive advantages, through joint ventures, acquisitions or investing, a proper auditing process (due diligence) approaching Brazil's company in focus, its agents and commercial partners is imperative.

In the due diligence process some vital steps must be considered, such as gathering data, reviewing documents, researching and interviewing current (and former) employees, business partners and related government entities. The goal of this initial approach is to establish precisely the expertise, competence and reputation of the company, understanding its business model and culture.

Another big challenge that cannot be taken for granted is obtaining reliable data in Brazil. Unlike the U.S., where several agencies often publish compiled data that supports entrepreneurs and executives in the complex decision-making process, in Brazil gathering, and many times even discovering such information may be a tough task. Usually and unfortunately, the source and the nature of the information provided are the main bottlenecks for auditing accuracy. Effective due diligence relies on a set of planned interviews that must be focused on relevant industry information, its processes and procedures; they must be able to disclose incomplete information and enable the understanding of companies' performance, financial status and internal controls.BIO

Felipe Tavares is president and CEO of Intratec Solutions LLC. Reach him at felipe.tavares@intratec.us or (713) 821-1745. Thiago Carneiro and Aldemir Marreiros are technical managers at Intratec Solutions. Reach them at thiago.carneiro@intratec.us and aldemir.marreiros@intratec.us.
 

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