Late last month, as faithful readers know, I spent a week in Sao Paulo, serving the cause of market research for Adam Smith, Esq. Why Sao Paulo and what do I mean by market research?
Sao Paulo is the largest city proper in North or South America: Over 11-million residents within the city limits (588 square miles), and 20-million in the metropolitan area (3,000 square miles). More importantly, of course, it is the financial and economic capital of Brazil. As such, any number of foreign law firms are there or are wondering if they should be. Actually, the roster of those there is not “any number,” it is, among the Global 50:
- Allen & Overy
- Baker & McKenzie
- Clifford Chance
- DLA Piper
- Gibson Dunn
- Linklaters
- Mayer Brown
- Proskauer
- Skadden
- Shearman & Sterling
- Simpson Thacher
- White & Case
I can promise you that this list will soon be superseded, as the number of firms interested in being there–for real or for bluffing purposes–is legion.
Almost all are there with just a handful of lawyers, servicing surges in demand from home. But some of those that are there are wondering if their approach to the market is right, while others not there are wondering if they should be, and the dozen or so large and sophisticated local Brazilian firms are also finding the dynamics of the market newly challenging.
What did I learn?
Over the course of 14 meetings spread among leading local firms, US/UK firms, bankers, journalists, and recruiters, quite a bit, actually. Herewith a report.
Brazil is famously a component of BRIC, the sticky acronym coined in 2001 by a Goldman Sachs analyst. However, I’ve come to think it should more accurately be written as B, R, I, C, with the following gloss:
- B: Perhaps the most accessible and immediately promising of all; see below.
- R: On the self-inflicted Injured Reserve list for the foreseeable fugure, suffering from kleptocracy and cronyism, shameless authoritarianism, economic deseutude, the curse of abundant natural resources, and dismal, and worsening, demographics and measures of physical and psychological health.
- I: Capable, many believe (yours truly included) of giving China run for its money as an economic superpower par excellence in the 21st Century. Pro: English language, common law heritage, sturdy democracy, history of entrepreneurial spirits, felicitous time zone (I’m not kidding about the latter!). Con: Protectionism, 19th Century infrastructure, environmental spoliation. Prescription: Open the doors and the world will come–and insist that all the failings be remedied in the process.
- C: The new titleholder of Churchill’s famous description of the Soviet Union as “a puzzle inside a riddle wrapped in an enigma.” Entrepreneurially gifted but politically repressed; enormously productive and hard-working but, to date, far more skilled at borrowing and stealing intellectual property than creating it; super-efficient in top-down projects (Exhibit A: High-speed rail), but “not proven” in permitting bottom-up innovation to flourish.
Bringing us to Brazil.
The bromidic “perpetual country of the next decade” may now be safely filed firmly in the past. Post-military dictatorship democracy appears to be irreversibly entrenched, inflation (which ran at an average of 732% per year for a decade) has been slain and the central bank is independent; and the country is, by and large, open to foreign trade. Here’s a quick list of pro’s and con’s:
|
Problem
|
Opportunity
|
| Abysmal infrastructure I: (2-1/2 hours to make the 15-mile trip from downtown to the airport) | Abysmal infrastructure |
| Abysmal infrastructure II: No serious railroads, no serious mass transit, one serious port so congested that ships typically have to anchor offshore for 30 days before they can dock | See above |
| Woefully low levels of education, on average (sixth grade, approximately) | Small gains would go a long way |
| Antedeluvian (as in WWII era) and sclerotic labor laws: Employment courts occupy entire skyscrapers and keep legions of Brazil’s 600,000 lawyers fully occupied | Any relaxation would be a gift |
| Disgraceful system of taxation (more than 70 entities with the power to levy taxes in Sao Paulo alone) | Political awareness that reform is needed |
In terms of exports, Brazil’s strengths are raw commodities (minerals, including bauxite, and some day soon, oil) and agricultural goods. They have yet to make the transition to higher value-added finished or semi-finished manufactured goods, but there are a few, far-between examples of how Brazil could get there, notably Embraer, the commercial aircraft producer. (Critics say Embraer is merely a high-end assembly process, with the design and engineering done abroad and entire mega-components of the planes, such as wings, cockpit avionics, engines, etc., merely brought in intact from abroad, but even if that critique is correct, it’s a big start.)
What, then, is the state of the art in the law firm market?
To begin with, the Brazilian bar will have no truck with foreign firms coming in and pretending to practice Brazilian law. The very week I was down there, it reiterated this stand in particularly vociferous tones, not only threatening action against foreign firms that dared to even affiliate with local lawyers, but actually denying that foreign lawyers were lawyers at all: We could call ourselves “consultants,” perhaps, but not lawyers.
Of the “foreign” firms listed above, the Brazilian bar seems to have DLA, Linklaters, and Mayer Brown in its sites, as they have been more vocal, prominent, and conspicuous in announcing affiliations with local lawyers. Ultimately, this may go all the way to the court of last resort in Brasilia, but in the meantime US and UK firms thinking of opening in Sao Paulo would be well advised to stay firmly on the US/UK side of the line.
Needless to say, when I was down there-particularly at the conference where I presented my views of the Brazilian market compared to the rest of the world-this was a topic of huge interest.
And I had a minor epiphany during that conference: What if it really doesn’t matter?
Consider that New York and English law are the lingua franca, of course, of international deal-making, project finance, and inbound and outbound investment. Brazilian law, a variety of civil law, isn’t exactly, not to be unkind, a “player” on the global stage. So what precisely is the threat to US and UK based firms of not being able to practice Brazilian law?
Or, as one US firm partner put it to us:
- Our advantage is that we practice both New York and English law; that’s our identity in the marketplace. Why would we want to compromise that?
- Not only that, but the minute we hire one Brazilian lawyer, two things happen:
- Our entire referral network with Brazilian firms dries up, instantaneously; and
- We have to hire a whole firm’s worth of Brazilian lawyers if we’re going to purport to offer Brazilian law: One guy won’t do it.
This strikes me as fundamentally true.
Which brings me back to: So what does it matter?
Before leaving this topic, I have to address one last trope that was in widespread circulation at least while I was down there: The fear from local Brazilian firms that US and UK firms could come in “with their vast resources” and distort the market for partners by being willing to pay way above going-market rate for their services, disemboweling local firms in the process.
Say what?
The market power of US and UK firms comes, according to this narrative, from making economically preposterous and financially irrational deals. Those firms will deploy (a better word would be squander) their resources to pay legions of people (at least firm-disemboweling numbers of people) substantially more than they’re worth currently, in a market in presumed equilibrium at the moment. And the hope would be that those people would justify their newly grandiose income how?
Now, is it possible for silly new arrivals to pay above-market for splashy headline-making new hires? Sure. Is it a sustainable business model? No. Should Brazilian firms, in fact, welcome it as offering temporary windfalls to some of their people who will collect the gold while the getting’s good and then come back home?
Indeed, this doesn’t appear to be a topic on which you can engage people in entirely rational discourse. So we didn’t try.
Nevertheless, I report this mindset because it seemed to be almost universal. “We report, you decide.”
So, the opportunities in the Brazilian market?
If you’re thinking of going there, a recap of the pro’s:
- Tremendous infrastructure project finance opportunities
- Growing local savings with a concomitant need to invest them appropriately
- Not yet, remotely, a saturated market.
And the con’s:
- Very high startup and ongoing expenses: The Brazilian real is overvalued and you can add on top of that a 200-300% “getting things done” tax in the form of making things actually happen when you want to open an office. (‘Nuff said.)
- Don’t even dream of practicing local law; but, as above, you might not want to and it probably shouldn’t matter.
- Lots of friction in your day. The standing joke is that when meetings are scheduled in Sao Paulo people are either 15 minutes early or 20 minutes late, depending on traffic.
All in all, one of the most fascinating trips of my business life. And yes, Adam Smith, Esq. is going back to Sao Paulo, early and often.
If you want to learn more, let me know.
