Make Brazil Breathe Again

. Apr 24, 2020

Magnamed is one of the few Brazilian companies that produces lung ventilators which are crucial to saving the lives of patients with severe cases of Covid-19. It was founded 15 years ago by three engineers of Japanese descent who left their careers in medical equipment companies to start their own business.

This year, before the Carnival holidays in February when Brazil was blissfully unaware of what was to come in the following month, Magnamed had noticed an increase in demand for its products coming from abroad. 

</p> <p>Daniel Izzo, co-founder of impact investing venture capital firm Vox Capital — one of the company&#8217;s partners — says that Magnamed co-founder Tatsuo Suzuki called him in February to say that they might need to raise money to meet the rising demand.</p> <p>This was just the beginning of what turned out to be a veritable odyssey.</p> <p>Once Covid-19 took hold in Brazil, the government decided to <a href="">centralize the purchase of ventilators</a> to reduce its dependence on China. On March 19, it sent a letter to Magnamed: the company was to cancel all of its contracted orders. All stock and production for the next six months would go straight to the Health Ministry. </p> <p>At that point, a network of large domestic and multinational companies formed in support of the company to ensure the delivery of 6,500 ventilators to the public health system within the space of three months.</p> <p>However, Magnamed only had a production capacity of between 200 and 250 ventilators per month. In other words, it would have to upscale logistics, production capacity, and working capital in a way the company&#8217;s founders had never imagined possible.</p> <h2>Breathe, Brazil (with ventilators)</h2> <p>Another of Magnamed&#8217;s founders, electrical engineer Wataru Ueda, went to seek support from a group of former colleagues from the Aeronautics Institute of Technology (ITA) on WhatsApp Messenger.&nbsp;</p> <p>On the other end of the line was Walter Schalka, chief executive officer of one of the world&#8217;s largest pulp and paper companies Suzano. The firm transferred BRL 10 million to Magnamed&#8217;s accounts, at zero cost. </p> <p>&#8220;It was the first bit of money we managed to raise, without interest and with 45 days to pay,&#8221; said one executive, who is at the forefront of Magnamed&#8217;s crisis management team.&nbsp;</p> <p>Suzano also put its logistics and engineering departments at the service of the Magnamed and brought packaging manufacturer Klabin into the conversation, which, in addition to helping with logistics, will handle the packaging of the ventilators free of charge.</p> <p>Also from this network of former ITA students came the support of planemaker Embraer, which in a single weekend fabricated 8,000 pieces of steel for Magnamed, charging only for the value of the raw materials. Computer manufacturer Positivo will also supply the integrated circuit boards for the ventilators, at cost price.&nbsp;</p> <p>This emergency effort centered around Magnamed&#8217;s ventilators was given the name<em> Respira Brasil</em>, or &#8220;Breathe, Brazil.&#8221; Every day, representatives of the companies involved hold virtual meetings to coordinate their work.</p> <p>With the help of General Motors engineering, Magnamed&#8217;s production line was redesigned to increase its capacity from 200 to 500 ventilators per month.&nbsp;</p> <p>The big push came from multinational electronics manufacturer Flex — formerly Flextronics — the world&#8217;s largest outsourced producer of mobile phones, computers and printers, working for giant brands such as Apple, Dell, Samsung, and Motorola. Around 5,000 of the 6,500 ventilators will be made at the company&#8217;s factory in Sorocaba.&nbsp;</p> <p>Flex will take care of assembly for Magnamed and its competitors. More than 400 employees who have never seen a ventilator in their lives are currently being trained for the job.</p> <p>Despite having 60 countries in its export portfolio, none of the equipment will be able to leave the country or be sent to private Brazilian customers, which opened a legal battle front to handle dozens of lawsuits against the company.</p> <h2>Going cap in hand</h2> <p>While the task force to secure the production line was on the move, Magnamed needed to raise the money to start buying parts and increase its workers&#8217; shifts.&nbsp;</p> <p>With demand exploding along with the U.S. Dollar exchange rate, Chinese parts suppliers were already demanding advance payment to ensure delivery.&nbsp;</p> <p>The company calculated it would need BRL 120 million — and began its saga in search of a bank that would take the risk of lending that amount to a relatively small company without a history of relationships. Last year, Magnamed&#8217;s turnover was BRL 38 million, less than a third of what it was looking to borrow.</p> <p>The Brazilian Development Bank (BNDES) — a partner of Magnamed since 2008 through the Criatec fund — seemed the obvious solution. A loan of BRL 80 million was discussed, according to a source close to the negotiations, but it was not taken forward by the development bank.</p> <p>The Health Ministry then agreed to advance part of the BRL 320 million payment — originally planned to be transferred after delivery — but required Magnamed to provide a bank guarantee or other form of collateral.&nbsp;</p> <p>&#8220;With the BNDES out of the picture, the ordeal with commercial banks began,&#8221; says one person who participated in the talks.</p> <p>Three people involved say that contact was made with the heads of some of the major commercial banks, which organized a union of five institutions to carry out the operation by way of the Brazilian Banking Foundation (Febraban).&nbsp;</p> <p>One condition, however, made the deal impossible: the three founding partners had to be guarantors of the operation. In practice, this would mean that the trio would take on the debt if the company failed — an unthinkable ask for engineers who left careers in multinational medical equipment companies in 2005 to start their own businesses.&nbsp;</p> <p>The support ended up coming from two private banks outside Brazil&#8217;s Big Five, which waived the guarantor requirement.&nbsp;</p> <p>Banco Votorantim granted a BRL 20 million credit line for working capital and BTG Pactual structured a BRL 129 million insurance guarantee in record time. The company had to open an account that received payment from the Health Ministry and the bank controlled transactions so that the money would only go to suppliers.</p> <p>In a statement, Febraban said it &#8220;received a request for help, but it was not necessary to form the pool of banks, since a financial institution was already at an advanced stage in negotiations with Magnamed and the Health Ministry to guarantee the operation.&#8221;</p> <p>The money from the Health Ministry did not reach Magnamed&#8217;s account until April 14, almost a month after the initial request for the ventilators. The deadline for delivery of the 6,500 pieces of equipment — initially estimated for April, May, and June — will probably drag on until July.</p> <p>At least now, however, the company can finally start breathing.</p> <hr class="wp-block-separator"/> <p><em>This article was </em><a href=""><em>originally featured on Reset</em></a><em> and republished with permission.</em>

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Vanessa Adachi

Vanessa Adachi is the editor-in-chief at Reset, an independent online media outlet covering impactful, sustainable investments and businesses.

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