Tablets to cure Brazil's high-tech ills?

Buildings Brics: Foxconn is making a $12bn investment in Brazil to produce iPads and high-end smartphones and build a new industry there. But the government may prove a major obstacle.

Brazil has signed a $12bn deal with the Taiwanese technology giant Foxconn to produce iPads, but the infamous 'Brazil cost' is casting a shadow over the deal. Paulo Fridman / Bloomberg News

The nondescript stretch of asphalt is an unlikely symbol of Brazil's attempt to lift its economy into a new high-tech era.

If officials in the industrial town of Jundiai get their way, it will soon be named Steve Jobs road - in honour of the late Apple co-founder and a nod to the expected windfall that producing iPads and iPhones in the town will bring.

Brazil's government has loudly proclaimed a deal it says is worth US$12 billion (Dh44.07bn) for the Taiwanese technology giant Foxconn to produce iPads and build a whole new industry based around screens used in an array of consumer electronics from smartphones to televisions.

But the infamous "Brazil cost" - shorthand for the bureaucracy and high taxes that plague business in the country - is already overshadowing the deal, complicating negotiations with Foxconn over the broader investment plan.

The likely need for large state-subsidized loans to lure Foxconn also revives concerns about the state's heavy hand in Brazil's economy.

Yet the benefits for the country are clear - a home-grown technology industry could move the commodities giant up the value-added chain to join the likes of Taiwan and South Korea, reducing its dependence on manufactured imports from Asia.

Still, critics say Brazil's shallow labour pool and poor infrastructure make it ill-prepared to take the leap to high-end work and it risks being stuck at the low end, assembling components designed and made elsewhere.

At first, Foxconn will have to fly in most of the key components such as semiconductors, modems and screens from China, as Brazil attempts to raise its ability to produce more of them locally.

"We are selling our market very cheaply, giving tax incentives for a company to come and produce something that is already developed in the world market," says Joao Maria de Oliveira, a researcher at the government-linked Institute for Applied Economic Research, or IPEA.

"It's not something that adds much value and it won't leave much here."

The amount of value added to Apple products by Foxconn's approximately 1 million workers in China is a mere $10 or so per device, according to a study by researchers at the University of California.

Brazil has cut taxes and duties on tablet production in a move that should reduce the retail price by about a third and is phasing in production requirements to foster a local components industry.

Separately, it is in talks with Foxconn on a package of incentives, including priority customs access, more tax breaks and subsidised loans from the state development bank BNDES to secure the bigger investment in high-end screens.

It is not hard to see what is in it for Foxconn, Apple and other foreign companies, including Motorola and Samsung, which have also expressed interest in making tablets in Brazil

Apple will gain better access to Brazil's voracious consumers, who have faced high prices for its products due to hefty import tariffs, and will create a jumping-off point for other rapidly growing Latin American countries.Foxconn, the world's largest contract electronics company, with about a third of the global market, would gain a vital foothold in Latin America's largest economy and reduce the risks of having so much Apple production in China.

Producing in Brazil would also give Foxconn and Apple preferential access to Brazil's partners in the Mercosur customs union - Argentina, Paraguay and Uruguay.

But the "Brazil cost" raises doubts over whether Apple will be able to make the iPad cheaply enough for the Brazilian market and use the country as a major base to export to the US and Latin America.

Brazil's consumer market is a huge draw for companies such as Apple, but analysts say the domestic industry is likely to take years to move beyond assembly to higher-end production.

"It will take at least five, six years to create the entire ecosystem there," says Satish Lele, a vice president for Asia Pacific at Frost & Sullivan in Singapore.

"I don't think [Brazil] are ready to support huge growth as far as the electronics sector is concerned."

The Foxconn factory near "Steve Jobs" road is rumoured by Brazilian media to already be producing iPhones and is expected to start churning out iPad tablets by December for sale to the nation's growing middle class.

The company, the main listed vehicle of which is Hon Hai Precision Industry, has already hired more than 1,000 staff in Jundiai, a medium-sized city an hour's drive from Sao Paulo, to work at a new factory.

Jundiai is planning to build a technology park and nearby towns are also looking to draw more investment.

"We're the BRICs of Brazil," said Carmelo Paoletti Neto, a spokesman for the town, comparing the region to role played by the emerging powerhouses Brazil, Russia, India and China on the global stage. But the starting monthly wage for members of the metalworkers' union in Jundiai is about 1,058 Brazilian reais (Dh2,322) - almost double the 2,000 yuan (Dh1,155) minimum wage Foxconn pays its workers in China as of October last year.

Those wage pressures are likely to make it hard for the iPad price to fall any time soon to a range that would give it the mass-market appeal it enjoys in the US.

Tablet sales in Brazil will jump to 450,000 this year from 105,000-110,000 last year, according to the consulting company IDC, surging to above 1 million next year.

That is significant growth, but the 60 per cent of Brazilian households without a computer will not necessarily rush out to buy tablets, cautioned Jose Martim Juacida, an analyst with the company.

"The first computer purchase is usually a desktop or a laptop, because a desktop can be shared," he says.

An iPad 2 with 16 gigabytes of memory currently retails for about $1,100 in Brazil, more than double the $499 list price in the US. In Argentina, the same model costs about $950.

Even a cheaper, locally made iPad would be expensive for most Brazilians.

For Taiane Monteiro, a Sao Paulo high school student browsing at a mall, the cost is just too high.

Her price limit? "About 500 reais." That's $285. Foxconn acknowledges Brazil's high costs mean it will not be competitive any time soon with China.

"Brazil itself is a very important market among the big countries and also it would serve as a springboard to other South American countries," says Louis Woo, the special assistant to the Hon Hai and Foxconn founder Terry Gou.

"You can't look at Brazil purely by looking at the labour cost alone," he adds.

Mr Gou personally negotiated Foxconn's investment with the Brazilian president Dilma Rousseff, who first announced the deal in April on a visit to China.

But he has doubts about the efficiency of Brazilian workers.

"Brazilians, as soon as they hear 'soccer', they stop working. And there's all the dancing. It's crazy," he was quoted as saying by The Wall Street Journal last year.

For Brazil, the big prize from the Foxconn investment is not so much access to cheaper, locally produced iPads but the prospect it will stimulate a cascade of high-tech jobs and investments.

That is where Brazil's poor infrastructure presents a major obstacle. The government is already struggling with big building projects related to the Fifa World Cup in 2014 and the Olympics in 2016.

Ships often wait weeks at port to load and unload. Layers of bureaucracy mean importing raw materials can be an obstacle course of seemingly random regulations. "In every five to 10 imports, you're going to have a problem and you're going to have to go down there and spend more money," says Alberto Santos, the sales director of Cromatek, an electronics components company.

He estimates such costs hit his bottom line by 15 per cent.

Virgilio Almeida, the secretary of information-technology at Brazil's science and technology ministry, has pointed out most of the cargo related to the industry would be shipped by air, relieving pressure on clogged ports.

"The Brazil cost exists, but we can minimise these costs through incentives," he says.

A major incentive for Foxconn is likely to come through support from the BNDES, which Mr Almeida confirms is in talks with the company and unidentified Brazilian partners.

One of those partners may the be mining and energy billionaire Eike Batista, Brazil's richest man and one of its flashiest entrepreneurs.

Mr Batista said after a meeting with Ms Rousseff last week that his EBX group would be interested in helping Foxconn set up production in Brazil, although he declined to reveal details.

"What's the most important thing for doing business?" Mr Batista asked. "Is there a market? There is."

* Reuters