By David Rohde
VITORIA DE SANTO ANTAO, Brazil, Oct 4 (Reuters) - Last year, Kraft built a gleaming new factory on the outskirts of this town in northeastern Brazil. When I visited it last month, my heart sank.
The state-of-the art, $80 million facility seemed to be yet another example of the inevitable shift of jobs from a declining America to emerging powers like Brazil, China and India.
When I looked closer, though, it was clear that the globalized economy at work here is not a zero-sum game. There are opportunities for Americans as well. We simply need to let Europeans teach us how to seize them.
After decades of poverty, northeastern Brazil is one of the fastest-growing regions in the country. The birthplace of former President Luiz Inácio Lula da Silva, Pernambuco state is attracting hefty domestic and foreign investment.
The Brazilian government is constructing the country’s largest new World Cup stadium here at a cost of $500 million, replete with hotels, shopping malls, apartment buildings and a university. State-run companies have hired 40,000 workers to construct one of the country’s largest refineries, port and shipyard complexes at a cost of $13 billion.
In a former sugarcane field, Fiat is building a $1.7 billion auto plant that will produce 200,000 cars a year in 2014. Chinese, South Korean, Filipino and Russian companies are here as well.
Last year, Kraft joined them. The Chicago-based conglomerate is the world’s second-largest food company. Over the years, it has purchased Cadbury, Toblerone and other rivals, but some analysts and investors - including Warren Buffett - have criticized it for trying to grow too quickly.
Kraft’s new factory here employs 700 Brazilians and churns out tens of thousands of tons of Tang, chocolate wafers and Oreo cookies for sale to northeastern Brazil’s growing middle class. If all goes as planned, expansions will triple the size of the factory and its workforce to 2,200 over the next five years. For now, this corner of Brazil is a winner in globalization.
Cities and towns across northeastern Brazil competed to be the site of the new Kraft plant. Each offered larger and larger concessions to the company. In the end, the town gave Kraft the land for the factory for free, and the state gave the company a 90 percent tax break. Kraft, like other multinationals, is a big winner in globalization as well.
A tour of the factory was filled with surprises and lessons. Andre Imianoski, a young, friendly and professional Brazilian engineer, told me this was Kraft’s first LEED environmentally certified facility in the world. There were solar panels from Spain, high-speed packaging equipment from Italy and German-made machinery that churned out tens of thousands of sweet-smelling, chocolate-covered wafers.
Ninety percent of the machinery in the factory was made in Europe, and there was little American-made equipment. European companies, it seemed, had adjusted to the loss of manufacturing by producing complex machinery for factories in emerging market nations.
After the tour, I learned that by far the largest foreign investors in Pernambuco were European companies, not American ones. Between 2004 and 2011, Kraft, Alcoa, Pepsi and four other American companies invested roughly $244 million in the state, according to Brazilian officials. During the same period, Fiat, Nestlé, Novartis and two dozen other European companies invested over $4 billion. Doing business in Brazil is extremely frustrating, costly and time-consuming, according to Brazilian and American officials. Success requires patient, long-term investment. While European companies focused on the long term have flocked to the northeast, American managers focused on short-term profits and their companies’ daily stock price have focused on the saturated markets São Paolo and Rio de Janeiro. That is a lost opportunity for the United States.
“They’re missing out,” says Usha E. Pitts, the senior American diplomat in northeastern Brazil. “There is so much potential here for American companies that are in it for the long haul.”
Kraft deserves credit for its move here, but another step it is taking has been questioned by some analysts. Last year, its management decided to divide the multinational behemoth into two companies. A smaller entity called Kraft Foods Group will focus on the saturated North American grocery market and have $19 billion in annual revenues. (Read: low profits and limited rise in stock value.)
A new company called Mondelez - an invented name that marketers hope will connote “delicious world” to global consumers - will focus on emerging markets and have projected revenue of $36 billion a year. (Read: high profits and enormous growth in stock value.) Its star product is the Oreo, which is now the world’s top-selling cookie, generating $2.3 billion a year in revenue.
Kraft officials say the split will allow them to better manage the sprawling company and serve investors. I worry it is a Wall Street-inspired maneuver to inflate stock values that will cost American jobs. As part of the division, over 1,600 Kraft employees in the U.S. and Canada will lose their jobs. “Perhaps, though, such serial deal making is sweetest for Kraft’s investment bankers,” Wall Street Journal columnist Spencer Jakab wrote in August.
Multinational corporations shifting their attention to emerging market countries is inevitable. Kraft manufacturing plants will never return to the United States. But that does not mean there are no opportunities here for patient Americans. European companies have shown the path. Exporting to the growing middle classes of Brazil, China and India is one way for the American economy to thrive again.