Family Business in Brazil
     Antonio C. Vidigal, DBA*

Origins

This article will attempt to give an overview of family businesses in Brazil, from the first ventures in the 16th century up to the present days. The effects of privatization and globalization will be analyzed and the present situation assessed.

The Portuguese discovered Brazil in 1500. Columbus had already discovered Central America, and the existence of North America was already known to Europe, but the existence of a South American continent was unknown up to that time. Portugal had a problem on its hands. A very small country, with a population of around 3 million, it had its hands full dealing with colonies in Africa and Asia (nowadays many people don't know this, but Portugal was a pioneer in navigation and was the first colonial power). The kingdom's resources were outstretched, regarding both finance and manpower.

The solution found by King John III in 1534 was 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, so we regard these ventures as the first family businesses in the country. Most of the grantees failed but some were very successful, and the modern city of São Paulo, with its 12 million inhabitants today, is a direct consequence of the most successful of them.

A second generation of family businesses was in the agricultural sector: sugar cane plantations in the Northeast and coffee plantations in the Rio de Janeiro and São 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 so that after a few generations the very large properties had disappeared.

Industrial development in the 20th century

African slaves were the main source of labour for the agricultural sector. In the second half of the 19th century a strong campaign began for the abolition of slavery. 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 São 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 what we could call the Brazilian Industrial Revolution. We shall take as an example one young immigrant who arrived in the tiny town of Sorocaba, in São Paulo State, in the early 1880's. 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 this he went on to buying and selling pigs, then to manufacturing cans in which to sell the fat, which up to then was sold in wooden barrels.

Matarazzo went on diversifying and verticalizing 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 and whalebone substitutes for clothing. He entered the cotton business, first with a cotton mill, later on going into textiles. This simple doctrine of producing locally in Brazil basic products that until then were imported from Europe turned his firm, in the 1920's and 30's, into the largest conglomerate in Latin America. By this time he had moved his headquarters to the city of São Paulo, which was on the way to becoming a great industrial metropolis, on a par with Mexico City in Mexico and Buenos Aires in Argentina.

During those first decades of the 20th century the industrial revolution started in the city of São Paulo. Textiles were the number one product, and Italians the most frequent entrepreneurs. Of five manufacturing concerns that lasted for a hundred 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.

Our friend Matarazzo went on diversifying, abandoning his initial policy of making and selling basic consumer products and going into chemicals and cement. By the time of his death in the 1930's he still was the richest man in Brazil. The Pope had created him Count Matarazzo. Of his thirteen children he chose the twelfth, which carried his name although now in the Brazilian form, Francisco, to inherit control of the group. When his will was opened and the family learned about this 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 São 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.

From World War II to the 1990's

The war brought changes. Brazil had been, for a long time, a supplier of raw materials, like iron ore and rubber, to European and American industry. And 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 like home appliances and cars, in the countries involved in the war, was almost stopped and 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 50's 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 verticalising into producing parts, so the auto-parts industry grew very quickly. Also in the 50's 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 1970's 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 80's are known as "the lost decade". No growth, and record inflation rates. The government, trying to deal with inflation with no success, tried several economic plans. Some of them involved changing the currency, taking three zeros off. In this author's lifetime five different currencies have existed in the country.

Here's the situation as we reach 1990:

• A military dictatorship that lasted for 20 years has given 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 in 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 iron-ore 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% Brazilian-owned.
• 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.

An update on the Matarazzo family

The second Count Matarazzo died in the 1977. He had gone on diversifying, abandoning the founder's policy of verticalizing 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, didn't 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.

Privatization and globalization: the challenges

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. 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. Thus, the electricity company in Rio de Janeiro was bought by Eletricité de France, the phone company in São Paulo was bought by Telefónica de España and the ex-government monopoly in telecommunications by MCI, a large U. S. based company.

The number one buyer of companies that were privatized were the pension funds of formerly state-owned companies, some of which were privatized 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, the huge oil company, is still government owned. So there has been a change from state capitalism to pension fund capitalism. This is 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 sector was also opened to foreign competition. In the list of the twenty largest banks, there are now seven foreign banks. Six previously family-owned ones were bought by foreign banks. 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 survive, but major international players like Carrefour, C & A and Walmart are making their presence felt. Carrefour has become the leader in its field.

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

Clogs to clogs in three generations

This is an English saying for which there are equivalents in dozens of countries, including mine. The syndrome of entrepreneurs creating a business and their children or grandchildren losing everything seems to be universal. And 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 children. 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 expensive travel. 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 doing MBA's in important universities in the USA 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. These 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, but at a faster speed in the 90's, seem 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 the 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 companies have to learn to be competitive at the international level. This means that not only the family matters have to be taken care of, but also that management efficiency must be pursued. Modernization and change are key words. Here are some suggestions to business owners:

• Abandon the custom of having children started in the business as soon as they are ready to go to work. Instead, let them have some outside experience, preferably in larger companies than yours.
  
• Make having an MBA, abroad for those families that can afford it, a rigid requirement for admitting your children in the business.
• Be prepared to retire earlier than the former generation - if you followed the two pieces of advice above, your children have a pretty good chance of being much better prepared than yourself to face the new world created by globalization.

Antonio C. Vidigal is a professor and consultant in Brazil