Interview with Walter Schalka

Last weekend, 10/07, an interview was published with our CEO, Walter Schalka in IstoÉ Dinheiro magazine.

Walter talks about the responsibility of the private sector in the economy of our country, in addition to exposing and critical reflections on the present and the future of the national industry. Read full interview bellow:

CEO of Suzano since 2013, Walter Schalka is far from being a closed and surly boss. Much to the contrary. When he walks around the São Paulo headquarters of one of Brazil’s largest pulp and paper companies, with revenue of R$10.2 billion in 2015, he is often stopped by younger employees seeking advice, who are promptly addressed by the smiling CEO. However, he makes it a point to state that he is not certain of anything, except for soccer. A diehard supporter of the Santos soccer team, Schalka jokes that it’s because of his team that he is an expert in the British sport. As for business, he expresses his thoughts and criticism about the present and future of industry in Brazil and of Brazil itself. More than this: he stresses that he and the company that he runs also need to take part in the transformation of the system. “If we don’t put an end to this model in which everyone believes they have more rights than duties towards society, we will make Brazil go bust,” says Schalka. Read his interview below:

DINHEIRO – How do you assess the Temer government and the measures taken so far?

SCHALKA – 
Brazil needs a mammoth reform. The main thing is a massive shock of productivity in the Brazilian economy so that the country ceases to be a mere commodity exporter. Brazil’s presence in the global economy is negligible. The country missed the information technology bandwagon – companies such as Google, Airbnb and Uber do not have room to be launched here. We will also miss the next two revolutions: those of biotechnology and nanotechnology. We are addicted to thinking of small reforms, which I call “band-aid reforms”, that tackle specific problems. The tax issue is a huge challenge that we are facing but it is not the only one. And not even that, with the Proposed Constitutional Amendment (PEC) to limit public spending, is being addressed in the best possible manner.

DINHEIRO – Why?

SCHALKA – Because, as soon as this PEC on the ceiling on public spending is approved, we will discover that we will need to cut something. And from then on, more problems will arise. It won’t be possible to cut spending on social security, health, education and civil service, for instance, due to very good reasons. And that is the problem: all of them have their reasons. We must understand that a joint effort is required, which means that everyone will lose benefits. The government will have to withdraw subsidies granted to business on BNDES loans. It will also have to reduce benefits of current and future pensioners or otherwise social security will go broke. The same must happen with employer associations and labor unions. If we don’t put an end to this model in which everyone believes that they have more rights than duties towards society, Brazil will go bust. And what needs to be busted is this model.

DINHEIRO – How can this be done?

SCHALKA –
 This entails more profound changes. We must end this system of indexation in the economy, which affects workers. If every year we need to adjust rent, electricity bill, wages or any other tariff, it feeds back inflation. This is not the solution. Labor laws need to undergo changes so that courts are not used as a tool. We have 4.6 million labor lawsuits in Brazil, with a slow and costly legal system that leads nowhere. In the USA, there are 10 thousand labor lawsuits. And since lawsuits here are free of charge with almost no lost cases, everyone goes to court. It makes no sense. These inefficiencies that accumulate in Brazil as a whole reduce the competitiveness of the system. (Job) stability in public service too must come to an end. It is inconceivable not to be able to dismiss an inefficient employee just because they passed a public exam and, on top of it, grant them more social security benefits than if they were in the private sector. In my opinion, we are discussing reforms that won’t change the scenario very much.

DINHEIRO – But what is the way out?

SCHALKA –
 We need to change our society’s culture and this could start with political reform. It is necessary to create an election threshold (barrier clause) and put an end to electoral funding. We need a better representation process, with fewer parties. By reducing the number of political parties, the interests will clump together. It is necessary to show people that we have more obligations towards society than rights. If we do not make the transformations, which start with education, we will not achieve anything.

DINHEIRO – Is it possible to make the cultural reform in the medium term?

SCHALKA –
 First we need to forget the “we against them”. We must come to a conclusion about the future that we want for Brazil. People must understand that they need to make concessions. We are arguing about petty things, such as the Family Allowance (Bolsa Família), which is necessary. But we need to change the welfare model that we adopt for everything. That is wrong. We must ensure development of the more impoverished communities, but for this to happen, adequate basic services are needed. It’s not a reform of months or years, but of generations. However, I don’t see any action and leadership for this to happen. Worse, there is this belief that it is not worth entering politics as only corrupt people get involved in it. If we sustain such an idea, no honest person will ever enter politics and we will continue to feed this system.

DINHEIRO – So we cannot rule out your entering politics?

SCHALKA – 
I have no intention of entering politics, but I talk with other CEOs and businessmen about our role in society. The private sector too has responsibility for the crisis. We tend to believe that the political world would distance itself from the business world, but the opposite happened. One benefited from the other. We need to speak up, make suggestions and participate in the process for change. This is fundamental. Omission on the part of the business community is unacceptable.

DINHEIRO – And do you see any progress in the business community on this issue?
 
SCHALKA –
 No. It is still too timid. Since 40% of Brazil’s GDP comes from the public sector, companies have become too dependent. They are afraid of losing market share and don’t take any action. We need to look ahead and have broader goals than simply maximizing our profits. The business community must help society transform itself.

DINHEIRO – Do you think that society is prejudiced against the private sector?
 
SCHALKA – 
In Brazil, there is still a lot of corporatism in all sectors and segments. Everyone defends their own interests to the detriment of society’s common goals. The private sector is not different and we must break the cycle. We will have to give up these interests. So, if taxes need to be raised in order to overcome the current situation, we need to pay them. We cannot consider it negative but something that is fundamental for this transition process.

DINHEIRO – Industry’s share of GDP is increasingly declining. How do you see this?

SCHALKA –
 Industry is a fundamental component in Brazil and worldwide. This perception of a decline in share of GDP occurs in several countries. This should change as soon as industry wakes up and realizes that it makes products for end consumers and it can approach them directly, without intermediaries, and this could result in tremendous value generation. It will understand that it is possible to use technology for causing disruption and changing its role. It has slowed down for some time, but will once again play a more prominent role, there’s no doubt about it.

DINHEIRO – How do you see the current moment in the paper and pulp sector?

SCHALKA – The sector is going through transformation around the world: decline in printing and writing as a result of digitization, and growth in consumption of tissue, such as toilet paper. This industry in Brazil is cyclothymic. Foreign exchange volatility, over which we have no control, and the price of pulp, which currently is at its worst level in history, raise questions about what changes the industry should go through to increase the level of profitability. Suzano opted for the path of improving processes and, consequently, structural competitiveness. We tackled each production stage individually, seeking to reduce costs and to change the business model in a process of reducing the increasingly aggressive intermediaries.

DINHEIRO – In your opinion, is it possible to do away with intermediaries in the pulp segment, which is so distant from the end consumer?

SCHALKA – 
The pulp industry has a very serious problem in Brazil. We produce pulp here, send it to China, which makes paper and sends the product to the rest of the world. The question is: what is the strategic logic of not adding value to pulp?

The first reaction is to say that labor in China is cheaper, but conversion to paper does not require much labor. Then we talk of taxes in Brazil, but taxes on exports in Brazil are zero. Finally, they say that cost of capital in China is lower. This is true but is something marginal. Suzano’s cost of capital is 4.4%, while the Chinese cost of capital is 3.2%. There is a difference, however it is not significant enough to justify the lack of paper production in Brazil. That is, we should be manufacturing paper in a much more competitive manner, as we do with pulp. This is why we invested R$400 million in Mucuri and Imperatriz in order to expand production of tissue paper. At the same time, there is the project of the “tree of the future”, which will grow faster and be more resistant to pests. Brazil is the world’s most competitive country in the forest segment, but has potential for much more.

DINHEIRO – As you mentioned, the sector is a hostage to two variables: price of pulp and exchange rate. What can be done to make it more resistant?

SCHALKA –
 The industry needs to be redesigned. It is frustrating when you do your job of growing constantly and see your financial data unstable due to factors beyond your control. Industry needs to undergo major transformation. It could be through consolidation or verticalization, which leads to the creation of more sustainable value.

DINHEIRO – Both Suzano and its main competitors in Brazil and worldwide increased their production capacity. Isn’t there much supply in the market?

SCHALKA – The big problem for value creation was excess capacity. This factor, added to the lower-than-expected international demand, is causing this oversupply. The drop in prices is a result of this. Since companies have been operating below their average cost of capital in pulp exports, in practice we are exporting capital. I don’t see this as positive for the Brazilian industry or for Brazil.

DINHEIRO – So you don’t plan to increase the company’s capacity in the short term?

SCHALKA – The industry trend is to work at full capacity and we have plenty of forests. In theory, we would be the next to announce an increase in production, but we have other priorities in the short term. Over time, it was proven that these huge investments in factories are not bringing adequate returns to investors. Manufacturing units generate cash, but there is also a major perception problem. One thing is to generate cash, another is to generate return on capital employed. These are two entirely different things. Growth is not the only way to create value for our investor.

DINHEIRO – Could consolidation change this? Is it something that Suzano has been observing closely?

SCHALKA – It is impossible to look at numbers and not see that there is immense creation of value in the consolidation of the South American market and not just of the Brazilian market. But there is no talk for now.