Brazil Slowdown Hits Alibaba and Lenovo

Results of a Slowing Economy and Weakening Currency

We noticed a recurring theme last week in the effect of economic weakness in Brazil on company bottom lines. Alibaba and Lenovo pointed specifically to a slowdown in Brazil, one of the more important growth markets for device makers, retailers and service providers.

Brazil is Latin America’s largest and the world’s eighth-largest economy. It has a population of more than 200 million, and has provided volume opportunity as Western markets become saturated. However, macroeconomic and social disruptions in Brazil and surrounding Latin American territories could have a continued effect on global forecasts and company projections.

Expansion has been the norm for the nation, but Brazil’s economy is now contracting and unemployment, officially reported to be at 6.9 percent, is on the rise. The country’s currency, the real, has lost about 50 percent of its value in the past year compared with the Chinese yuan and US dollar. This makes imports more expensive, and forces companies to cut into already thin margins.

Last week, Lenovo’s quarterly results outlined an operating loss for the Americas, primarily attributed to Brazil. Few industries enjoy the growth rates or annual volumes of the smartphone market, but even this product class isn’t immune to serious economic slowdowns. Lenovo’s subsidiary Motorola has a leading market position in Brazil, and the numbers are becoming particularly conspicuous. Lenovo’s operating loss margin of 4.0 percent in the US last quarter was mainly owing to falls within the Motorola unit in Brazil. Motorola’s global volumes for the period stood at 5.9 million units, a 31 percent decline from a year earlier. Product life cycles were a factor, but the weakening Latin American market was a key cause.

Alibaba also pointed to slowing sales in Brazil in its quarterly results last week. Its AliExpress subsidiary is one of Brazil’s top e-commerce sites, and a slowdown in growth in key emerging markets was apparent in an otherwise solid set of financial metrics.

Brazil’s importance to large companies like Alibaba highlights their need for global growth and their sensitivity to a slowdown in any particular region.

It’s too early to tell if macroeconomic conditions are weakening enough to affect regional or even global volume forecasts. Social disruptions are raising near-term uncertainties for companies dependent on Latin America for growth. Chinese firms looking to diversify from their home market can’t count on Brazil to fill the gaps.

The headwind in Brazil, the persistently difficult macroeconomic situation in Russia and the warning signals of slowdown in China leaves India as a crucial battlefield within the so-called BRIC territories. Large companies will quickly become more aware of the next tier of important emerging markets.

If you’d like to receive free Daily Insight e-mails every day, click here to sign up