Odemiro Fonseca’s friends in the financial services industry used to tell him that he had “3,500 problems, because he had 3,500 employees.” But “employees were never my problem,” says Fonseca, co-founder of Viena Rio Restaurants in Rio de Janeiro. “They work hard. You can trust them. You can train them.” Yet not everything runs smoothly in Brazil, as Fonseca noted in a recent talk with Knowledge at Wharton, during which he discussed the global financial crisis, labor laws, the banking system and other issues.

Knowledge at Wharton: Our guest today is Odemiro Fonseca, co-founder of Viena Rio Restaurants in Rio de Janeiro. Odemiro, thank you very much for joining us today.

Odemiro Fonseca: My pleasure.

Knowledge at Wharton: Let us begin with a question that is on everyone’s mind: What is the impact of the world financial crisis on Brazil?

Fonseca: I think Brazil is quite isolated from this subprime crisis, because Brazilian banks do not have so-called “toxic” assets, and they are very capitalized. The connection with the international crisis is private international credit. Brazil needs international credit. Also, the slowdown in the world economy and the decline in the prices of commodities [affects] Brazil [because] it still exports a lot of commodities. But other than that, Brazil is going to do very well in the short run. The problem with Brazil is in the long run.

Knowledge at Wharton: What do you think is the problem in the long run?

Fonseca: … The Brazilian government is very big. It is really very big. We pay 40% of our GDP in taxes – [more than] any other country in Latin America or in Asia. Only in Europe [do you have] countries that pay 40%. And we do not get this money back. It is almost impossible to get this money back. That means, for example, that our public pension fund is completely broken. People realize this, but it is very difficult to change.

Our labor laws are very complicated for foreigners, for companies. For example, we have about three million labor suits every year in Brazil. People fight for everything because the law incentivizes people to behave like bandits. There is this mafia-like kind of behavior in the labor market. It is not because of the labor. It is not because of the people. It is [because] you have to do this kind of stuff.

Knowledge at Wharton: Can you explain exactly how the incentive system promotes bandits, as you put it?

Fonseca: It is easy. The Brazil labor system came directly from fascism [during a particular] period of Italy’s labor laws. Carta del Lavoro is the labor law from that period that Brazil imported. At that point, Brazil and Argentina had presidents who liked fascism very much — Vargas in Brazil and Perón in Argentina. It is the same story in Argentina. This labor law is very detailed. This labor law [is based on] the fundamental idea that any kind of conference has to be mediated by government.

Second, they put in a union system that [says you must] have a union per class and per region. So a union in Brazil is a monopoly — only one union per area and per type of worker. Labor unions in Brazil sometimes are in the hands of the same family for 30 years. And they are bandits. There is corruption all over. The other assumption behind these labor laws was that labor is the weakest party and has to be very protected. So we have a special justice for labor relations in Brazil called Labor Justice. It is not really a justice. First, they think they have to protect the labor … and second, there is no judgment. They have an agreement. This agreement just takes money and time. They accept this kind of agreement…. There is no discussion when we enter into the labor contract [with] the company and there is a lot of discussion when this labor contract is terminated. So that is the lousy form of contract that you can have — no discussion when you [enter into] the contract, a lot of discussion when you leave the contract. That is why you have three million labor discussions per year in Brazil.

Knowledge at Wharton: I know that President Lula’s background was also in the trade union field. Since he became president, how has the labor situation in Brazil changed?

Fonseca: He knows extremely well about the labor situation in Brazil, but he cannot fight with this huge machine that elected him. So he kind of muddled through. He is not going to do anything about this.

Knowledge at Wharton: What do you think he should have done?

Fonseca: The first thing is, you have to change the constitution to change the labor laws, most of the labor laws. The only thing that you could do is to put limits on this — as you did in the United States for civil litigation. That is the easiest way to reform the law, but nobody does this. As a matter of fact, the 1988 constitution made things worse, because [it said] that a labor litigation can go back five years. So if [a worker] goes against the company because of an extra hour, for example, he can go back five years on this extra hour.

So the number of possibilities for litigation is [very high]. Lula is not going to do anything about this. In his first term, he did not put his friends there, but in the second term, he put all his friends there.  They are labor leaders.

Knowledge at Wharton: Do you see any signs of improvement in the situation?

Fonseca: In the labor situation? No.

Knowledge at Wharton: Coming back to the economy more broadly, we spoke about the fact that commodities have been a big part of Brazil’s growth. We know that the real has started depreciating against the dollar. What impact do you think the financial situation in the world today is going to have on commodity exports from Brazil? Is that going to be sustained?

Fonseca: If the stock exchange is stabilized, the crisis of confidence [ends]. Also, Brazil is going to be in very good shape in its export sector. So far, there is no sign of depression or things like that. The GDP has declined all over the world. You do not see that [here], maybe slower growth. I do not see in the short term a problem for Brazil in the foreign sector either. And remember, Brazil is a very isolated country. Brazil imports only 6% of its GDP. That is half of China. After Brazil, the most closed country in the world is India. And that is about 9%….The domestic market completely dominates more than 90% of the country.

Knowledge at Wharton: You know, one of the things that many people in Brazil have been telling me is there seems to be a feeling of excitement about the oil discovery that took place offshore. There seems to be some expectation that this will lead to a huge boom in the energy sector in Brazil. What are your views about that?

Fonseca: It is difficult because the oil is drilled 200 miles from the coast and eight kilometers deep in the sea. Nobody knows exactly how to take oil out of this place. Maybe it is going to take 10 years to start and we have to develop a technology. Nobody really knows what this is – the politicians are very excited, because the states that [have] this oil … are going to receive royalties…. We have to do something to isolate the oil richness from the domestic economy…. There is a possibility that oil will decline to $67 and stay there. There are [questions about whether] it will be worth the trouble of taking the oil out. But anyway … we know there is oil around that can be used in case of emergency, because most people still think that oil is going to stay around for more than a century or so.

Knowledge at Wharton: You started your career in the financial services industry. Could you tell us a little bit about how your own career has developed from financial services to hospitality?

Fonseca: I started working in banks in 1965. I was hired by Citibank in 1969. I went to Wharton — my major was banking and financial services – and when I returned to Brazil about six years later, it was impossible to have a bank.

Knowledge at Wharton: How so?

Fonseca: Because it was impossible to start a bank. At that point, it was completely frozen. The Central Bank would not [allow] a bank. So I started to think I wanted to be a businessman. I decided to have a restaurant. It was much easier to start with money that I had with my brother-in-law. I came to Rio to open this business. The motivation behind [entering the] restaurant [business] was that, [back then] the shopping center industry was starting in Brazil.

All over, our restaurants were in shopping centers. We [stayed] with the shopping center industry for 30 years. It was a visible location to have food. In reality, the restaurant was five different concepts that we developed, from coffee shops to family restaurants.

Knowledge at Wharton: I believe that, as the Viena Rio group, you expanded to some 2,300 people serving almost one million customers every month. How did that growth come about and what were some of the main challenges you faced in building your restaurant business to that level?

Fonseca: We were not very aggressive … because we stayed with the shopping center business. The growth of the shopping center business was our growth. The problem is that the restaurant business is a very competitive business, very competitive. If you do not like competition, do not go into the restaurant business, because unlike the banks, governments do not save restaurants — never. So we were very conservative in financial matters and very creative. I can say this because we are very well known for creating, adapting, adjusting, putting new products and new marketing concepts in operation in Brazil. And we were also very, very, very well known as having the best IT system. That was something new in Brazil. There was a lot of money put into this, but we had the best operating system for restaurants in Brazil.

Knowledge at Wharton: If you look at the hospitality industry in Brazil, and I believe you were also one of the leaders of the industry association, what kind of challenges does the hospitality industry here face?

Fonseca: Most of the challenges are related to problems with the laws. Restaurants are regulated a lot by federal, state, and city levels. The labor problem is very serious. For example, the service fee that you pay for employees is a problem in Brazil; it never was so. There was a constant fight with the government in relation to this. [The issue is] whether it is a service or a product because [that affects the kind of taxes that you pay.] Most of the problems are related to the government…

[As another example], in Sao Paolo there is a city law that says if you have a restaurant with more than 300 seats, you have to offer 150 parking spaces. That is crazy in Sao Paolo. Absolutely crazy. I do not understand who would write this kind of law. Because the restaurant business is one business; the parking business is another business. To force a restaurant business to be in the parking business — and it has to be in the same building – these are the kinds of stupid things that happen because you have parking problems in Sao Paolo. It is typical in Brazil. They think that if you create the parking problem, you have to solve it…

Knowledge at Wharton: In the course of your career, what would you say is the biggest leadership challenge that you have faced? How did you overcome it, and what did you learn from it?

Odemiro Fonseca: It was outside my business life…. In 1990, there was the Collar plan [an economic plan]. They were freezing the prices of everything … because of this. That was in 1990. I had three of my kids in a first class, traditional, Catholic school. The school was going to break apart, because the professors’ union [wanted higher] salaries. But the fathers could not pay more because the [salaries] were frozen by law. The school was closed and perhaps was going to be closed forever. My wife said I had to go there because the school was breaking apart.

So I went. We had 500 parents together. It was obvious that the professors were the big losers in the whole process, so I was behind the union. I was behind the union in its demands — and of course, a little bit against the law and against the families. They did not want to pay more. This was difficult. It was very difficult to convince a thousand families to pay more…. To get around the law, we made an association. We gave money to the association and the money paid the professors. 

Knowledge at Wharton: How did you convince the families? What argument did you use?

Fonseca: By showing numbers. It was interesting because people understood. [We] said to some fathers and mothers, ‘Look, this is a voluntary thing. If you cannot pay, do not bother. Nobody is going to worry about this.’ What we wanted was a transition. But anyway, [we had] to fight different families that thought the school threw money away and paid too much. They didn’t understand.

It was an effort for me to understand the financial mechanics of a school. But it was very interesting, because in the end the families recognized our effort. They pointed out that I was in favor of the professors and everything. It was interesting, because the union was leftist. I was surprised to be popular with a leftist union. That was the most amazing experience. It took me about three or four months [to work out].

Of course you have to convince people not to go on vacation [so that the] kids [could] go to school during vacations and complete the year. All these kinds of things you have to convince people to do. It was my first great understanding about families giving value to education. It is not the same among [all] families. Some families do not give that much importance to education and some families give a lot of importance to education.

Knowledge at Wharton: I would like to ask one last question. How do you define success?

Fonseca: Well, there is the classic Hollywood definition [which says that] nothing succeeds like success. That is true also for business. But in Brazil, success is to make money, to survive, to grow and to employ people. My friends from the financial markets used to tell me that I had 3,500 problems, because I had 3,500 employees. Employees were never my problem. They work hard. You can trust them. You can train them.

It is much easier to serve people in Brazil than in Europe — in Germany, for example. That was not my problem. I used to joke back with them that if we were not there serving 1.1 million clients per month, they would not be … making money on the trading floor. You have to have a real economy to have somebody on the trading floor or doing IPOs. Working in the real economy is very interesting and I like it very much.

Knowledge at Wharton: Odemiro, thank you for speaking with us today.

Fonseca: You are welcome.