Family business in Brazil

To succeed in business and be able to compete with the government and foreign investment, family businesses in Brazil need to concentrate on modernisation and educating future generations

Family business has played a prominent role in Brazil from the 16th century to the present day. However, privatisation and globalisation have seriously affected the success and overall prevalence of family businesses.

Origins
The Portuguese discovered Brazil in 1500. Columbus had already discovered Central America and the existence of North America was already known to Europe. However, the existence of a South American continent was unknown up to that time. With the discovery of Brazil, Portugal had a problem on its hands. As a very small country, with a population of around 3 million, it had its hands full dealing with colonies in Africa and Asia (Portugal was a pioneer in navigation and was the first colonial power). What should it do with Brazil? The kingdom's resources were over-stretched, in terms of both finance and manpower.

The solution was found by King John III in 1534. He decided to make land grants to people who were willing to go to these faraway lands and establish colonies. The grants were hereditary, using the system of primogeniture. These ventures can be viewed as the first family businesses in the country. Most of the grantees failed but some were very successful: the modern city of Sao Paulo, with its 12 million inhabitants, is a direct consequence of King John III's grants.

A second generation of family businesses developed in the agricultural sector: sugar cane plantations in the Northeast, and coffee plantations in the Rio de Janeiro and Sao Paulo areas. These thrived between the 17th and the 19th centuries. Plantation owners were the richest men in the country and also ruled politics after Brazil became independent from Portugal in 1822. By this time primogeniture had been abolished and the system of all children inheriting equally was adopted. This system gradually caused properties to be divided and subdivided; after a few generations the very large properties had disappeared.

Industrial development
African slaves were the main source of labour for the agricultural sector. However, in the second half of the 19th century a strong campaign began for the abolition of slavery. As a result, some farmers started worrying about a possible shortage of labour and the government created a plan of incentives to attract immigrants from European countries, especially Italy. Between 1888, when slavery was finally abolished, and 1900 one million immigrants arrived in Sao Paulo State. Although Italians were by far the largest group of immigrants during that period, there were also other nationalities. An important contingent of Germans came to the southernmost part of the country, where the mild climate was more to their taste.

These and other European immigrants started the 'Brazilian Industrial Revolution'. Their story is best illustrated by one young immigrant who arrived in the tiny town of Sorocaba, in Sao Paulo State, in the early 1880s. The Italian Francesco Matarazzo started dealing with pork fat, then an important product for cooking, before the arrival of the vegetable oils we use today. From here he went on to buying and selling pigs, then to manufacturing cans in which to sell the fat, which up to then had been sold in wooden barrels.

Matarazzo continued to diversify and expand his operations. He needed wooden crates to package his cans of pork fat, so he started a lumber business. He didn't like to throw anything away, so he used the pigs' bones to make buttons for clothing. He entered the cotton business, first with a cotton mill, later going into textiles. This simple doctrine of producing basic products locally that until then were imported from Europe turned his firm, in the 1920s and 30s, into the largest conglomerate in Latin America. By this time he had moved his headquarters to the city of Sao Paulo, which was on the way to becoming a great industrial metropolis, on a par with Mexico City and Buenos Aires.

Matarazzo went on diversifying his business, abandoning his initial policy of making and selling basic consumer products, eventually entering the chemicals and cement fields. By the time of his death in the 1930s he was the richest man in Brazil. The Pope had created him Count Matarazzo. Of his 13 children he chose the 12th, (who carried his name, although now in the Brazilian form, Francisco) to inherit control of the group. When his will was read after his death, the family learned about his succession plans and there was revolt: several of the new controller's siblings went to court trying to void the will.

The first generation of children of Italian immigrants became the richest citizens in the country. The beautiful houses that used to be the headquarters of coffee plantations in the state of Sao Paulo, built by descendants of the first Portuguese settlers, the so called 'coffee barons', had mostly been bought by the 'new money', the Italian industrialists. Several of these would imitate Matarazzo and obtain a title of 'Count'from the Vatican.

During those first decades of the 20th century the industrial revolution started in the city of Sao Paulo. Textiles were the number one product, and Italians the most frequent entrepreneurs. Of five manufacturing concerns that lasted for a 100 years in the area, four were textile businesses, all started by Italians. The fifth was a paper mill, started by a Lithuanian Jew. Up to World War II things didn't change much, and textiles remained the number one industrial product.

World War II to the 1990s
World War II brought changes to Brazil. For a long time Brazil had been a supplier of raw materials, such as iron ore and rubber, to European and American industry. It imported back these same materials in the form of final industrial products: home appliances, vehicles and all kinds of machinery. Due to the war effort, production of durable consumer goods in the countries involved in the war was almost at a standstill. As a result, Brazil went through an industrial boom. The first steel mill, owned by the federal government, was built during the war. Home appliances that had previously been imported were now produced locally. An automobile parts industry was also started.

During the 1950s the federal government created tax incentives for the automobile industry. Some of the major world players, such as Volkswagen, General Motors, Ford and later, Fiat, built local plants. They had no interest in expanding into producing parts, so the Brazilian auto-parts industry grew very quickly. Also at this time a federal law was passed creating a government monopoly for oil exploration. Non-government companies were barred from searching for oil. As oil was gradually found (Brazil still depends on imports for about a third of its needs) an important heavy equipment industry grew, manufacturing equipment for oil exploration and refining, as well as for hydro-electric power stations, the main source of energy in the country.

During the 1970s Brazil went through a so-called 'economic miracle'. Growth rates were close to 10% per year. The second oil shock in 1979 put an end to that. Growth was gone and 'stagflation' (the combination of stagnation and inflation) settled in.

The 1980s are now known as 'the lost decade': there was no growth and inflation rates hit a record high. The government, trying to deal with inflation with no success, tried several economic plans. Some of them involved devaluing the currency. In fact, five different currencies have existed in the last 50 years.

As the 1990s approached, the situation in Brazil was as follows:
- A military dictatorship that lasted for 20 years gave up power peacefully and a democratic government is in power.
- The military regime created many new state-owned companies. The economy is divided in three types of companies, each with roughly a third of GDP: multinationals, government-owned companies and private sector companies. This last group is totally made up of family businesses. The concept of the company that goes public on the stock exchange and has no controlling owner does not exist here. A stock exchange does exist, but companies go public using non-voting shares, and the owning family retains control.
- All public services (electricity, water, post office, telephone, etc) are government monopolies. Oil is still a government monopoly and the state-owned oil company, Petrobras, is the largest company in the country. The federal government also owns CVRD, the largest ironore producer in the world, and all major steel mills, and has a monopoly in railways.
- Multinationals dominate automobile production, although automobile parts are a large business dominated by local family-owned companies
- Petrochemicals have become a large activity, and companies are owned one-third each by Petrobras, a local family business and a foreign strategic partner.
- Some sectors, such as media, engineering and banking enjoy legal protection from foreign competition and are almost 100% Brazilianowned.
- Of the twenty largest banks one is foreign (Citibank, US based), six are government owned and thirteen are family businesses.
- Some sectors are local-family-dominated: agriculture, textiles, retail and supermarkets are some of them.
- Most of the companies started by Italian immigrants, who had made their fortune with textiles early in the century, went broke in the second or third generation.

The Matarazzo family today
The second Count Matarazzo died in 1977. He had gone on diversifying, abandoning the founder's policy of verticalising and substituting imports. He went into packaged foods and then started a supermarket chain to provide an outlet for them, but this backfired as other supermarkets saw him as a new competitor and boycotted his products. He died leaving a highly indebted business that, although still big, was no longer a major player in any industry. Of his five children, he chose his youngest, the only daughter, as the new controlling owner. She had never worked a day in her life, did not expect this and was not prepared to face a difficult situation. In 1983, one year after the group celebrated 100 years of activity, it filed for protection from creditors. Unfortunately, this has become a theme in family business in Brazil today.

Privatisation and globalisation
A lot has happened in the last decade of the 20th century. A large part (though not all) of state-owned businesses has been sold. Gone are electricity, telephone and telecommunications, steel and mining. The post office, oil (though no longer a legal monopoly) and some banks remain in government hands. Local businessmen were the least important of buyers. Utilities were mainly bought by foreign companies: the electricity company in Rio de Janeiro was bought by Eletricite de France; the phone company in Sao Paulo was bought by Telefonica de Espana; and the ex-government monopoly in telecommunications was purchased by US-based MCI.

The number one buyer of companies that were privatised were the pension funds of formerly state-owned companies, some of which were privatised and some were not. Previ, by far the largest investor in the country, which has become a partner in almost all companies that were sold, is the pension fund of Banco do Brasil employees. This, the largest bank in the country, still belongs to the government. The second largest investor is the Petrobras pension fund. Petrobras, a huge oil company, is also still government owned. Thus, there has been a change from state capitalism to pension fund capitalism. This was supposedly a healthy move, although the pension funds were not prepared to play their role of largest shareholders in the country with competence. With a few years' delay, they are now starting to learn about corporate governance and how to use a board effectively.

The banking and auto-parts sectors were also opened to foreign competition. In the list of the 20 largest banks in Brazil, there are now seven foreign banks. Six previously fmaily-owned banks were bought by foreign banks and five still belong to the government. Automobile parts companies have almost all been bought by multinationals.

In the retail and supermarket sector some of the local family companies have survived, but major international players, like Carrefour, C&A and Walmart are making their prescence felt, with Carrefour the leader in this field.

Although all this might give a pessimistic impression of the state of Brazilian family business, there is some good news. Even with the market open to foreign banks, the three largest non-government banks are local family businesses. They are doing very well in the face of the fierce ocompetition from some of the worl's largest banks. The largest industrial conglomerate in the country, Votorantim, still totally owned by the founder's family, is also doing very well and is in the process of transition to the fourth generation.

Clogs to clogs
The 'clogs to clogs in three generations'syndrome of entrepreneurs creating a business and their children or grandchildren losing everything seems to be universal and includes Brazil. What could be the cause?

The most probable explanation seems to be that people who are good at making money are very bad at educating their chil dren. Psychologists say that the founder, typically a very hard-working man, feels guilty because he dedicates very little time to his children, and tries to assuage this guilt by using the only effective weapon he knows how to use: money. Thus, many expensive toys, and later expensive cars and travel are lavished upon the founder's children. Children raised in this way will almost surely be bad business owners - and probably bad parents, too.

Wealthy Brazilian families seem to think educating their children is not important. There are less Brazilians obtaining MBAs from important universities in the US and Europe than young people from other Latin American countries with smaller populations. And the few Brazilians to be found are usually not the children of the wealthy families. Apparently they don't seem to think the effort is necessary.

The large number of family businesses that has disappeared in the past decades, even before the opening of the economy to competition in 1990, seems to show that if our business owning families don't change their ways, more and more of them are going to lose their business. In the old days, when the country's companies were protected from foreign competition, the number one worry for a family business was succession. Consultants would advise their clients that if they could manage this in an efficient manner they had nothing to worry about.

Now, in the new competitive environment, Brazilian family companies have to learn to be competitive at the international level. This means that not only must family matters be taken care of, but also that management efficiency must be pursued. Modernisation and change are key words for the future success of Brazilian family businesses.