Rapid Ratings Blog

How Brazil's Volatility is Affecting Supply Chain Decisions

Posted by Rapid Ratings on August 12, 2016
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In the months leading up to the 2016 Olympic Games, all eyes have been on Brazil, but not always for the best reasons. Zika virus and water pollution aside, Brazil could have more to worry about if the country’s economic environment doesn’t improve. As one of the largest supplier hubs of heavy industrial and agricultural manufacturing, Brazil has been causing supply chain executives headaches for years, and they might be reaching their breaking point. 

3 Areas of Concern for Brazilian Supply Chains

  • Lack of Demand

    Several years ago, Brazil enjoyed a period of high demand in agricultural and industrial equipment, enabling the country’s suppliers to grow tremendously. Now, machinery purchases in these industries are few and far between. Since the buying boom ended, the level of demand for suppliers dropped significantly, showing no signs of turning around. As a result, Brazilian suppliers are struggling to make ends meet.

  • Volatility in both markets and politics
    Brazil is currently in its largest recession since the 1930s, with the economy shrinking over 5 percent in the first quarter alone. With the imminent impeachment of President Dilma Rousseff, everyone is unsure of the future political direction of the country, making it difficult to see the light at the end of the tunnel.
  • Cycle of Uncertainty in Banking
    These conditions have made the market skittish, further restricting already scarce capital availability. Large banks are nervous due to the increased risk factors, and therefore hesitant to lend. Those who do lend charge high interest rates, making it difficult for cash flow hindered suppliers to pay back debt, making banks more reticent and perpetuating the continuous cycle.

Brazil's Implications for Supply Chain Professionals

Although, in the past, suppliers have thrived in this country, the fact of the matter is that Brazil is no longer providing a feasible environment for suppliers to flourish – or even to survive. Buyers cannot shrug off this problem by assuming their supplier is too big or important to fail. Earlier this year, telecom giant Oi went bankrupt, shocking most of the world. However, Rapid Ratings' FHR® (Financial Health Rating) showed the warning signs well in advance. For the full story, read our blog: The Record-Breaking Bankruptcy in Brazil: Did You See It Coming? After all, if it can happen to Oi, which supplied the likes of Nokia, it can happen to anybody.

Companies may feel there are not many options for them as their Brazilian suppliers are struggling.  The two options – to risk staying in Brazil or to reshore – both have serious potential hurdles. Staying in Brazil means uncertainty for the foreseeable future, supplier financial hardships, and potential bankruptcies.  Moving manufacturing production or seeking other suppliers outside the country should be considered as a viable long-term strategy, but one that requires a potentially significant capital expenditure. Though costly, it could soon be more favorable than the risk of staying in Brazil.

Next Steps: Weather the storm or look for alternatives?

The tipping point will vary and depends on how much capital a given company has to invest in their Brazilian suppliers. In order to develop a strategy for how to weather the Brazilian storm, buyers first need to understand the state of their suppliers’ financial health. What are the growth plans, is improvement on the horizon, or should other plans be made?

Buyers reliant upon Brazil will need to require transparency from their suppliers, before it’s too late.  While much is unknown, it is safe to say that some are already looking for alternatives to Brazil, and those who choose to stay may need to support key suppliers through all this volatility. 

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Topics: Supplier Risk Management, Bankruptcies & Default Studies