Brazil is one of the world's largest economies, a land with tremendous natural resources, and with 163.5 million people one of the most-populous nations. It's a big, democratic free market. In the long run, Brazil is going places. But for the short term, at least, the only place Brazil is going is downhill. Rubber companies that jumped into Brazil better have a long-term outlook on their investment, or they'll be sliding down, too.
A $41.5 billion support package from the International Monetary Fund kept Brazil from collapsing last year from a form of the Asian economic flu. But the symptoms are back—such as rapidly rising interest rates and out-of-control trade and budget deficits—sending the nation toward recession. In mid-January the Brazilian government devalued the nation's currency.
For the rubber industry, what happens in Brazil is of some importance. Drawn by the nation's great potential, the world's auto makers have flocked to Brazil. Many manufacturers of automotive rubber components saw the potential and followed the major tire makers who are in the country or nearby.
Economic problems and currency devaluation could benefit manufacturers who export Brazilian-made rubber goods, but the domestic market will decline. Already layoffs have occurred at some rubber goods suppliers in the country.
The Brazilian situation is reminiscent of the opening of China to the West. Companies flocked to the nation, determined to get in on the ground floor of a potentially huge domestic market. But it's still slow going in China; lower-cost labor, yes, but significant local consumption is far in the future.
The bottom line is that companies interested in tapping into the potential of nations like Brazil and China best be prepared to take a financial hit for a number of years.