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Executive Report on Strategies in Portugal
ICON Group International, June 2007, Pages: 392
How to Strategically Evaluate Portugal
Perhaps the most efficient way of evaluating Portugal is to consider key dimensions which themselves are composites of multiple factors. Composite portfolio approaches have long been used by strategic planners. The biggest challenge in this approach is to choose the appropriate factors that are the most relevant to international planning. The two measures of greatest relevance are “latent demand” and “market accessibility”. The figure below summarizes the key dimensions and recommendations of such an approach. Using these two composites, one can prioritize all countries of the world. Countries of high latent demand and high relative accessibility (e.g. easier entry for one firm compared to other firms) are given highest priority. The figure below shows two different scenarios. Accessibility is defined as a firm’s ease of entering or supplying from or to a market (the “supply side”), and latent demand is an indicator of the potential in serving from or to the market (the “demand side”).
Framework for Prioritizing Countries
Demand/Market Potential Driven Firm
Relative Accessibility
Accessibility/Supply Averse Firm
Relative Accessibility
In the top figure, the firm is driven by market potential, whereas the bottom figure represents a firm that is driven by costs or by an aversion to difficult markets. This report treats the reader as coming from a “generic firm” approaching the global market - neither a market-driven nor a cost-driven company. Planners must therefore augment this report with their own company-specific factors that might change the priorities.
Latent Demand and Accessibility in Portugal
This report provides an extremely detailed overview of factors driving latent demand and accessibility in Portugal. Latent demand is largely driven by economic fundamentals. But, latent demand only represents half of the picture. A country may at first sight appear to be attractive due to a high latent demand, but it is often less attractive when one considers at the macro level how easy it might be to serve that entire potential and/or general business risks.
Chapter 2 deals with macro-accessibility. While accessibility will always vary from one company to another for a given country, the following domains are typically considered when evaluating macro-accessibility in Portugal:
Openness to Trade in Portugal
Openness to Direct Investment in Portugal
Local Marketing and Entry Strategy Alternatives
Local Human Resources
Local Risks
Across these domains, a number of not-so-obvious factors can affect accessibility and risk. These are also covered in Chapter 2, which is presented from the perspective of an American firm, though it is equally applicable to most firms entering Portugal. This chapter has been authored by local offices of the U.S. Government. I have included a number of edits to clarify the provided information as it relates to the general strategic framework.
In Chapter 3, I summarize the economic potential for Portugal over the next five years for hundreds of industries, categories, and products. The goal of this chapter is to report my findings on the real economic potential, or latent demand, represented by Portugal when defined as an area of dominant influence. The data presented are the result of various spatial econometric and time-series forecasting models which, for each category presented, are applied to forecast and allocate latent demand across all countries of the world and major distribution centers or centers of dominant influence within each country. This is accomplished knowing that economic fundamentals (e.g. income) generally vary from one country to another within a given country over time. In this chapter, I report the allocation for each category for Portugal as an area of dominant influence in Europe and, potentially, the world.
The report concludes with trade indicators for Portugal. Often, the amount of trade flowing into and out of a country is a strong indicator of trading partners, trade openness, and related latent demand. Trade indicators are purely statistical in nature. Although international trade is not a direct measure of latent demand, it does provide an indicator of general market conditions with respect to trade flows and trade openness in Portugal.
As a whole, this report presents a strategic assessment of Portugal by considering an extremely broad set of factors affecting both latent demand and accessibility, as outlined in the following chapters.
MACRO-ACCESSIBILITY IN PORTUGAL
Principle Growth Sectors
Over the longer term, Portugal has been in transition from a largely agrarian and fishing-based economy to one based on manufacturing and services. In 1971, the percentage of the Portuguese workforce engaged in agriculture, forestry, hunting and fishing was 26 percent. By 2000, this had fallen to 12.5 percent. Over the same period, the percentage of the work force in the service sector rose from 39 to 52 percent. Manufacturing has remained steady at about one-quarter of all workers.
Government Intervention Risks
One result of Portugal’s 1974 “Revolution” was the nationalization of many of the country’s industries. Following accession to the EU, however, Portugal began dismantling its system of state ownership. The primary privatization mechanism has been to sell shares in these companies, either through a public offering or a private sale.
In a number of privatizations, the government has retained a “golden share” which accords it veto rights over certain corporate decisions. In June 2002, the European Court of Justice found certain provisions of Portuguese laws governing “golden shares” to be violations of the European Union treaty. This finding was the result of cases brought before the Court in 1998 and 1999. The Portuguese provisions at issue are laws and regulations, which limit participation by non-nationals and establish a procedure for the grant of prior authorization by the Minister of Finance once an individual investor’s shares company, exceed 10 percent. The companies concerned are in the banking, insurance, energy and transport sectors. The Court found that the Portuguese rules restricted the free movement of capital and were therefore “unlawful.”
Infrastructure Development
Portugal’s economic growth has been accompanied by heavy investment in infrastructure, largely funded by the EU. From 1994 to 1999, EU transfers to Portugal equaled 3.3 percent of GDP. Between 1994 and 1999, EU funds provided 14 percent of total investment funds, with the greatest portion disbursed through the European Regional Development Fund. Portugal’s most visible expenditures of these monies have been in its highway system.
Political Risks
Economic Relationship with the United States
Bilateral relations between the United States and Portugal are excellent, characterized by shared democratic values and similar foreign policy perspectives. Approximately two million Americans who claim Portuguese descent strengthen ties between the two countries. A charter member of NATO, Portugal is a strong proponent of vigorous bilateral and U.S.-EU transatlantic ties and of active American involvement in European security affairs. The United States has maintained a military presence in the Azores since World War II.
Political Issues Affecting the Business Climate
Currently, there are no major political issues, which would have a negative effect on Portugal’s business climate.
The Political System
Portugal is a small country and the oldest nation state in Europe, having essentially established its current borders in the 12th century. As a result, the Portuguese have a strong sense of national identity and cohesion. The country is a stable parliamentary democracy with a directly elected President who wields significant authority, including that of appointing the Prime Minister and the cabinet. In appointing the government, the President is guided by the results of legislative assembly elections. The Prime Minister is responsible for managing Portugal’s domestic and foreign policy, except in a few areas where the constitution gives the President direct responsibility.
Portuguese political leadership in general, regardless of whether it is the center right or left, supports broadly similar policies on most issues. The government has been able to guide Portugal with a steady hand due in part to its successful campaign to be in the first tier of countries entering the European Economic and Monetary Union (EMU).
Marketing Strategies
In doing business in Portugal, U.S. business should keep the following points in mind:
Local Representative. One needs a local representative who must have good contacts in order to be aware of future contracts and to participate in tenders. Portugal is a small country and knowing people in your industry is important.
Exclusive Distributor. One distributor that is appointed on an exclusive basis is the ideal.
The Iberian Peninsula. Portugal and Spain is not one homogeneous marketing area. Normally your Spanish distributor should not be asked to cover Portugal unless the Spanish company is willing to set up a separate Portuguese entity to handle this. The Portuguese may resent the assumption that the Spanish know the Portuguese market. If Spanish distributors consider Portugal an extension of the Spanish market, they are largely ineffective in Portugal.
Impact of the EU. If homework has been done for other EU markets it is basically done for Portugal. Many projects are EU-funded so an EU partner is desirable and is fundamental when bidding on these.
Slow Down. Business takes longer as compared to northern Europe because personal contacts are important. Your customers want to get to know you before they will trust you.
Business Is Honorable. There are relatively few trade complaints. Because the business community is close knit and many distributors are family-run operations, trade disputes are few and are normally resolved out of court. But, if you do have to resort to the courts be prepared to wait and wait. The Portuguese legal system is hopelessly slow and is the biggest single cause of unresolved U.S. Company trade complaints.
English Is Common. Although Portugal is a European country it looks to the Atlantic and to trade with others. After all, Portugal discovered trade routes to Africa before Columbus landed in America. The Portuguese also opened the first major trading routes to India and the Far East, and administered a vast colonial empire for 500 years. The U.S. is well respected in the market and companies can usually do business in English.
Distribution Channel Options
The Portuguese population is concentrated on the coast. The major distribution centers are Lisbon in the South and Porto in the North, although the regional centers of Braga (north of Porto) and Setubal (South of Lisbon) have come much into their own in recent years. The Lisbon region accounts for 21% of Portugal’s population with 63% employed in services and 33% employed in industry. Major industries as well as the head offices of many large corporations are located here. Most financial institutions have also chosen Lisbon to locate their headquarters. The Lisbon area has the highest purchasing power in the country and suffers, like many metropolitan areas, from traffic congestion and rising costs. Porto is the most dynamic industrial development area in Portugal. It accounts for 16% of the Portuguese population and is also an area of high purchasing power. Most importers and distributors have offices in Porto and U.S. firms looking to appoint a distributor in Portugal should not overlook this fact. The Commercial Service maintains an office in Porto primarily to locate and to service these distributors. Porto is now connected to Lisbon by a new motorway and a new bridge over the Douro River. The coastal region between these two, and extending into Braga and Setubal, is where the large majority of Portuguese industries are located.
Portugal is a relatively small country and most sales channels cover the entire territory. Distribution centers tend to be located in Lisbon and Porto. However, many large importers and wholesalers have branch sales offices and/or sub-agents or dealers in the principal cities and towns, including those of the Portuguese islands of Madeira and the Azores.
Agents and Distributors
American firms interested in selling in Portugal generally start by appointing an agent or distributor. The establishment of local facilities through wholly owned subsidiaries or joint ventures might follow this. Most manufacturers/exporters are commonly represented in the market through exclusive importers/distributors who may appoint sub distributors and dealers.
Generally agents and distributors who operate sales networks that cover the entire country expect exclusive representation agreements. They tend to be quite specialized in their respective market segments. It is often the case that an American firm offering a wide range of products may require representation in the Portuguese market by different local firms depending on the particular product.
Large retail stores and hypermarkets (Jumbo, Continente, Carrefour, Feira Nova, Lidl, Macro, Grula) are growing very quickly. This may be an alternative sales channel for some products. Some of these organizations buy/import directly and generally do not raise problems of financial/credit reliability.
Portuguese law distinguishes two types of distribution contracts: Agency agreements and commercial concession agreements. Generally, relationships established between American and Portuguese companies, with or without a written agreement, meet the requirements of Portuguese law. However, a good Portuguese agent/distributor respects any informal type of commercial agreement made with his/her suppliers. As an EU country, Portugal is subject to EU directive 86/653/CEE, which protects commercial agents in their relations with the companies for which they work.
The Commercial Service (CS) at the American Embassy in Lisbon can help American exporters find a partner in Portugal. The services offered in Lisbon include all the export assistance core programs of the United States Department of Commerce. They are targeted to the development of sales leads or finding potential partners, and has low costs.
Franchising Activities
The Portuguese franchising market has grown steadily and enjoys an annual growth rate of 5-10%. Even though the most developed segment of franchising in Portugal is clothing, the fast-food sector represents about 15% of the total market. Services are the fastest growing segment. However, other sectors should be considered, since Portugal offers many opportunities for expansion and the market still has considerable room for new, internationally known franchising concepts.
Direct Marketing Options
Since 1989, mail order and TV-sales have become effective direct marketing methods and have grown rapidly. The most popular direct marketing sectors are cultural, instruction/training and amusement materials (35% of sales) and apparel and clothing (19% of sales). Other successful areas are home furnishings, perfumes and cosmetics, and art/collectible products.
The expansion of this type of marketing has not been greater because Portuguese mailing expenses are still high and consumer confidence in direct marketing methods is low. Portuguese consumer protection regulations and laws are considered adequate. Authorities implementing controls and conducting inspections, nevertheless, often fail to do so effectively.
Direct marketing is increasing in importance as a sales method and is expanding every year to new areas of activity. Although relatively less developed than in many other EU countries, “E-commerce” has brought a new life to the sector and allowed the emergence of very successful shops of office supplies, computer hardware/software, groceries, clothing, and books.
Joint Venture and Licensing Options
Joint ventures and licensing are alternative ways to enter the Portuguese market. Joint ventures between American and Portuguese firms are treated under Portuguese law as a foreign investment operation, which may take the form of any type of business firm. With regard to tax treatment and incentives, both domestic and foreign-owned are treated equally.
Licensing is a contractual arrangement, in which the licensor makes available or sells its know-how, patents, trademarks or copyrights to a licensee for compensation. Franchising could be considered as an important form of know-how licensing.
American firms should, perhaps, be reminded of the obvious: As a fully integrated member of the EU, Portugal abides by the foreign trade and investment rules that govern the rest of the EU. Whatever applies in other EU countries applies to Portugal. If an American firm is mastering EU regulations prior to exporting or investing in the EU, it has already done its homework for Portugal. However, enforcement of some intellectual property rights laws is still weak.
Creating a Sales Office
In order to establish an office in Portugal, one must create a new Portuguese company that is recognized under Portuguese law. For a foreigner, this process once offered some difficulties. Since 1998, though, the process was simplified via the Formality Centers for Companies (CFE), an agency created by the Portuguese Government to help companies bypass the bureaucracy by locating all necessary approval agencies in one place. Commercial Service Lisbon considers CFE to be the most qualified entity to meet a new company’s needs. One may use the assistance of a documentation agent (an individual or company specialized in handling administrative procedures to obtain legal documents) or a lawyer.
Any U.S. entity interested in establishing a company in Portugal should visit and discuss the project with both the Commercial Service Office of the American Embassy in Lisbon and the Portuguese Institute of Foreign Commerce (ICEP) in order to obtain additional and useful information about Portugal.
The legal process is as follows:
Obtain a Certificate of Approval of the company’s name (which may be the parent company name in the United States):
The National Registry of Collective Entities (RNPC) issues the Certificate of approval of the company’s name after completion and submission of the necessary forms. This is to ensure that no company is incorporated with a name, which may be confused with that of an existing company, and that the name is in accordance with the company’s activities.
One or more of the future shareholders, a representative nominated by them, or by an authorized agent must request the certificate.
The certificate is valid for 180 days and may be renewed within designated time limits.
Applications to the RNPC for the provisional identification card of a company.
To prevent delays, this card should be requested at the same time as the certificate of the approval of the company’s name.
The application is made to the RNPC by completion of the appropriate forms.
The card is valid for one year and can be renewed if the incorporation process has not been completed.
The Deed of Incorporation or Association should be signed in the presence of a notary after the finalization of the Articles of Association. The following information must be included:
The name of all the founding shareholders and their identification documents
The type of company
The company’s name
The activities of the company
The registered office
The share capital (except for General Partnerships, when all the Partners contribute personal services in exchange for their shares)
The number of shares and the holding of each shareholder
If the subscription is not in cash, a description should be given and an auditor’s report on the value of the assets being contributed in exchange must be made.
Open a bank account in the name of the new company being created and deposit its initial capital (registered capital) in one of the local banks.
The financial year-end is different from the calendar year.
Declaration of commencement of activities:
The company must file a form - Declaration of Commencement of Activities - with the local tax office for the area of its head office. This effects registration for taxation purposes and must be submitted within 90 days of registration at the RNPC and before any activity takes place.
Registration at the commercial registry (“Conservatória do Registo Comercial”):
The registration of the company’s incorporation must be made within 90 days of the signature of the deed.
The Memorandum of Association must be published in the official gazette - Diário da República. This is the responsibility of the Conservatória do Registo Comercial that must also ensure its final registration with the RNPC and its publication in a national newspaper.
The Conservatória do Registo Comercial ensures that the final registration Takes place at the RNPC, which then issues the final identification card of a collective person (NPC)
Registration of the foreign investment with ICEP.
CFEs - Formality Centers for Companies - were created by ICEP to streamline the bureaucratic procedures for establishing a business. Following are the steps involved:
Request the certificate of approval of the company’s name.
Obtain a provisional identification card from the National Registry of Collective Persons (RNPC).
Execute the deed of incorporation.
Provide a declaration of commencement of activities.
Assist when applying for the Commercial Registry.
Register the firm in the National Registry of Collective Entities.
Register with Social Security.
The CFEs also provide information and counseling on:
Legal requirements regarding any entrepreneurial activity
Licencing options
Permits
Tax obligations and benefits
Tax and legal advice
Industrial activities must be licensed by any delegation of the Ministry of Economy co-located at one of the five Regional Coordinating Committees of the national government. Commercial activities generally do not require licensing.
For commercial activities related to public health or security, a license must be issued by the DGC - Direcção Geral do Comércio (General Directorate for Commerce).
Selling Strategies
In Portugal modern techniques still coexist with some traditional practices. Modern sales techniques are generally accepted and effective but traditional values continue to be respected. Many businesspeople still consider a personal contact and a handshake stronger than a contract but they will not be offended if a formal contract is requested.
Portuguese consumers have seen their purchasing power increase every year and increasingly buy on impulse. Direct sales, large hypermarkets and shopping malls are becoming common. For consumer goods the decisive selling factors may be price, quality, brand name or the product’s innovative features. However, the institutional buyer is quality conscious and very sensitive to pricing. Most tenders consider price first and quality second. These characteristics and its market size sometimes make Portugal a difficult market for some American exporters. A good understanding of market needs and the demand for new opportunities should lead to profitable niches for the American exporter.
Advertising and Trade Promotion
As in all Western countries some of the preferred techniques to reach Portuguese buyers effectively are advertising and trade promotions. Portugal offers a reasonably priced market in which to advertise. Advertising media is the same as in the majority of developed Western countries. Newspapers, magazines, TV and more recently Internet advertising are the most popular.
In Portugal there are a number of annual specialized international trade shows at the Feira Internacional de Lisboa (FIL) and at the EXPONOR trade center near Porto.
Pricing Issues
Pricing is the most common reason why a number of American products offered in Portugal are not competitive. Pricing of American products as now practiced tends to directly reflect the dealer’s price in the United States.
This often includes the exporter’s marketing overhead that:
Must be recalculated generally downward to properly account for actual expenses in the Portuguese market
Must not be a “double-counted” expense that is, the adding of Portuguese marketing expenses on top of “built-in” American marketing expenses
The most appropriate method of pricing a product for the Portuguese market is marginal cost pricing. This would be the marginal unit cost of production in the United States plus Portuguese market-specific costs associated with overseas promotion, labeling and packaging expenses. To this would then be added, when justifiable, a profit margin which, when added to the other pricing components, would still render the product competitive.
Portuguese importers currently accept the more common terms of international trade (C.I.F, C&F., F.A.S., F.O.B. or Ex point of origin). They prefer to receive C.I.F. quotations or at least F.O.B. quotations including detailed product descriptions, gross and net shipping weight, volume and time of shipment (from where the delivery is made) and delivery. Proforma invoices with all the above details are not mandatory but are advisable and desirable.
Supplying Customer Service
In Portugal there are no rules or current practices regarding sales service/customer support. It is the special nature of the American product or service exported that determines the desirability of this support. However, in representation/agency/distributorship agreements, sharing promotion expenses and cooperating in marketing strategies or technical assistance could add valuable marketing leverage.
Public Sector Marketing
Portugal follows the EU directive to the GATT Procurement Code but has a derogation covering utilities such as water, transportation, energy and telecommunications. Portugal also ratified the decisions of the Uruguay Round, regarding government procurement.
Depending on the amount, government procurement may be made by direct consultation, national, or international tenders. National and international tenders are published in the Portuguese Official Journal (Diario da Republica, Series III) and in the two largest daily Portuguese newspapers. International tenders are also published in the EU Official Journal (Series F).
Intellectual Property Risks
Trademark Protection
Portugal is a member of the International Union for the Protection of Industrial Property (WIPO), a party to the Madrid Agreement on International Registration of Trademarks and Prevention of the Use of False Origins. Portugal’s current trademark law entered into force on June 1, 1995 and is consistent with the terms of the trade related intellectual property provisions of the World Trade Organization (WTO), Trade Related Aspects of Intellectual Property Rights (TRIPS).
Copyright Protection
The Government of Portugal is in the process of amending national copyright legislation to conform to EU directives and the copyright provisions of TRIPS. In July 2000, the country adopted the EU directive on protection of databases. However, unauthorized reproduction of software remains a problem, despite modest success of efforts by the Portuguese Association of Software Distributors (ASSOFT) to discourage piracy and improve enforcement. While the piracy rate has decreased over recent years, it remains one of the highest in Europe.
Patent Protection
As stated above, Portugal is a member and a party to the Madrid Agreement. The Munich Convention on European Patents went into effect on January 1, 1992. To conform to the trademark and patent provisions of the WTO (TRIPS), Portugal passed a new Code of Industrial Property that took effect on June 1, 1995, but this law proved inconsistent with TRIPS in certain regards. Specific legislation was passed in 1996 extending the term of patents applied for or already in force on January 1, 1996, to the TRIPS-consistent 20-year-from-date-of-filing term. The existing code, however, still does not include provisions to protect test data unless submitted as part of a patent application.
Hiring Local Counsel
Using an attorney is not mandatory to do business in Portugal. Most transactions may be accomplished without an attorney, including the establishment of small non-complex businesses. However, attorneys are strongly recommended to solve some types of trade disputes and for the establishment of local offices such as joint venture investments with local entities or as 100% subsidiaries. For some complex types of licensing, representation/distribution and franchising, an attorney is also recommended to assure compliance with local law.
Import and Export Regulation Risks
Products tested and certified in the U.S. to American standards are likely to have to be retested and re-certified to European Union (EU) requirements as a result of the EU’s different approach to the protection of the health and safety of consumers and the environment. Where products are not regulated by specific EU technical legislation, they are always subject to the EU’s General Product Safety Directive as well as to possible additional national requirements (http://europa.eu.int/comm/consumers/cons_safe/prod_safe/index_en.htm).
European Union standards created in recent years under the New Approach are harmonized across the 25 EU member states and European Economic Area countries in order to allow for the free flow of goods. A feature of the New Approach is CE marking. While harmonization of EU legislation can facilitate access to the EU Single Market, manufacturers should be aware that regulations and technical standards might also become barriers to trade if U.S. standards are different from those of the European Union.
Local Standards
EU Standards setting is a process based on consensus initiated by industry or mandated by the European Commission and carried out by independent standards bodies, acting at the national, European or international level. There is strong encouragement for non-governmental organizations, such as environmental and consumer groups, to actively participate in European standardization.
Many standards in the EU are adopted from international standards bodies such as the International Standards Organization (ISO). The drafting of specific EU standards is handled by three European standards organizations:
CENELEC, European Committee for Electrotechnical Standardization (http://www.cenelec.org/)
ETSI, European Telecommunications Standards Institute (www.etsi.org)
CEN, European Committee for Standardization, handling all other standards (http://www.cenorm.be/)
Standards are created or modified by experts in Technical Committees or Working Groups. The members of CEN and CENELEC are the national standards bodies of the member states, which have “mirror committees” which monitor and participate in ongoing European standardization. CEN and CENELEC standards are sold by the individual member states standards bodies as well as through the American National Standards Institute (ANSI) http://www.ansi.org/. ETSI is different in that it allows direct participation in its technical committees from non-EU companies that have interests in Europe and gives away its individual standards at no charge on its Web site. In addition to the three standards developing organizations, the Commission of the European Union plays an important role in standardization through its funding of the participation in the standardization process of small and medium sized companies and non-governmental organizations, such as environmental and consumer groups. It also provides money to the standards bodies when it mandates standards development to the European Standards Organization for harmonized standards that will be linked to EU technical regulations. All EU harmonized standards, which provide the basis for CE marking, can be found on www.newapproach.org/.
Due to the EU’s vigorous promotion of its regulatory and standards system as well as its generous funding for its business development, the EU’s standards regime is wide and deep - extending well beyond the EU’s political borders to include affiliate members (countries which anticipate to become full members in the future) such as Albania, Bulgaria, Croatia, Romania, FYR of Macedonia, and Turkey. Another category, called “partner standardization bodies” includes the standa
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