It’s a common intuition between agile technology companies that testing the Brazilian market by selling from abroad is a good way to test out the market in Brazil. Even Apple had this approach to the Brazilian market for many years.
FOB sales might be a good way to TEST the market but it’s under no circumstances a feasible market entry strategy.
As an expansion manager for a foreign technology company you should consider FOB sales to Brazil as alternative to running market studies or focus groups. FOB sales to Brazil is an investment project and not a revenue source, and you are most likely not going to make any money.
Made in China
Most gadgets these days are made in China and often quite standardised products. For the calculation example bellow I’m using a laptop as example, but the same logic applies for any type of technology gadgets.
In competition with local importers, a foreign technology gadget that is sold FOB to Brazil by a foreign company will always be more expensive than the same gadget imported by a local importer.
In this example we calculate the different sales price in Brazil for two companies that sell the same laptop from the same manufacturer in China with the same operational margin. The only difference is:
- Company 1: International company importing to Europe before selling FOB to Brazil.
- Company 2: Brazilian company importing and selling directly in Brazil.
|Company 1||Company 2|
|Cost Laptop in China||BRL 200.00||BRL 200.00|
|Shipping Cost to Europe||BRL 50.00||-|
|50% Markup before Shipped to Brazil||BRL 125.00||-|
|Shipping Cost to Brazil||BRL 50.00||BRL 50.00|
|Base for Import Duties and Tax to Brazil||BRL 425.00||BRL 250.00|
|Import Duty and Taxes in Brazil (approx. 50%)||BRL 212.50||BRL 125.00|
|50% Markup after Import to Brazil||-||BRL 125.00|
|Increase in Sales Tax on Markup in Brazil||-||BRL 18.75|
|Sales Price in Brazil||BRL 637.50||BRL 518.75|
The calculation above show that in this example, selling FOB results in a 22.89% higher sales price in Brazil compared to a local operation that extract the same operational margin.
In addition to the higher sales price for the FOB approach it also require that the customer in Brazil have a Siscomex licence to handle the import of goods. This is not necessarily a trivial requirement, specially for smaller companies with assets of less than BRL 1 Million.
Conclusion is that running a market test with FOB sales can be a viable option but it’s not a viable market entry strategy for the Brazilian technology market.