NATIONAL IT POLICY
Brazil IT Report, 1998
This is the complete report
COPYRIGHT © 1998, Jason Dedrick and Kenneth L. Kraemer
Center for Research on Information Technology and Organizations
University of California, Irvine
Antonio Botelho, Pontifica Universidade Catolica de Rio de Janeiro
Paulo Tigre, Universidade Federal de Rio de Janeiro
The following is a summary of findings from a research visit to Brazil in April, 1998, based on interviews and data gathered in Rio de Janeiro, Brasilia and Sao Paulo. This research is supported by the U.S. National Science Foundation and the Sloan Foundation.
Overview
Brazil has long been considered a country with great economic potential, due to its size, natural resources, and industrial base. However, more than a decade of triple digit inflation sapped the economy, and protectionist trade policies partially isolated it from international markets, investment and technology. The situation has changed in the 1990s, as the government finally succeeded in bringing inflation under control and has begun to open up and deregulate many sectors of the economy (Table 1).
Table 1. Brazil's recent economic performance
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Source: International Monetary Fund, World Economic Outlook
The stability of the economy has been tested by the Asian crisis, which forced the government to raise interest rates to over 30% in order to protect the real. But so far, the currency has remained solid, even somewhat overvalued. Growth has slowed, but Brazil has not fallen into recession. Based on our direct, if limited observations, there is a real vibrancy to the economy, especially in the megalopolis of Sao Paulo. And while poverty is still a serious problem, we were surprised to see a favella, or slum, in Rio where nearly every house had a satellite dish. Brazil's information technology sector has gone through considerable turbulence itself, as the market reserve policies of the 1980s have ended, leading to the arrival of foreign competition and rapid growth in the market.
Brazil's IT Policies
Under the market reserve policies that reigned from 1981-1992, Brazil's PC market was closed to foreign-owned companies, and there were joint-venture requirements and other restrictions on many segments of the IT industry. In 1992, the market reserve ended and was replaced by a new Informatics Law, which focused on local production instead of ownership. Under this law, companies that produce PCs locally avoid the national value-added tax (known as the IPI), which runs as high as 15% on computers. In order to qualify, PC makers must assemble the motherboard in Brazil as a minimum standard of value added. They must also commit 5% of their revenues to R&D, either through their own R&D spending or through contributions to Brazilian universities and other research institutions. Some parts of the Informatics Law expired in 1997, and the rest end in 1999. There is ongoing discussion about what policies should be pursued in the future, but no decision will likely be made until after this year's presidential election.
Technology policy has been elevated to a higher priority with the creation of a presidential Committee on Science and Technology, including seven ministries with planning responsibilities (Science and Technology; Education; Planning; Strategic Affairs; Military; Foreign Affairs; and Finance). This committee has developed a strategy with the theme of "Science and Technology for Development of the Information Society." A guiding concept is to create a virtuous circle by which R&D drives IT use, which will enhance Brazil's competitiveness, and lead to further investments in R&D.
The government is now focusing more of its attention on the software industry. A program called Softex, created in 1993, promotes software exports and provides support for local software companies in 20 regional software "poles" around the country. Financial support for the industry is now being offered in the form of low-interest loans from the national development bank, BNDES. Also, the financial arm of the Ministry of Science and Technology (MCT), known as FINEP, is providing funds for R&D in the software industry, as well as funding research in high-performance computing and multimedia. Some observers are critical of these efforts, either for being too small to have an impact, or for placing too many restrictions on the small companies who participate.
Hardware is not being ignored by the government. There is a great deal of concern over the growing trade deficit in electronics, which reached $8 billion in 1997. Local production incentives in the Informatics Law have encouraged companies such as IBM, Compaq and Hewlett-Packard to produce PCs and peripherals in Brazil, and the government hopes to attract suppliers of components such as motherboards, CRTs, disk drives, CD-ROMs and semiconductors. BNDES plans to spend $2 billion over four years to promote the electronics industry through low-interest loans.
A big problem for IT production in Brazil is the so-called "Brazil Cost." Production costs are estimated to be around 30% higher than production in Asia and elsewhere. The higher cost is a result of employee benefits, which run as high as 100% of wages, various import duties and sales taxes, and an inefficient customs process which can take 20 days to clear a shipment of components. The government has now allowed Compaq to set up a "virtual bonded warehouse" where customs agents operate within Compaq's warehouse instead of at the airport, and speed the clearing process. Now any company that exports an average of $40 million per year is eligible for similar treatment. The hope is that this program will help lower costs and also encourage exports.
One other policy issue is trade. Brazil belongs to Mercosur, a common market with Argentina, Uruguay and Paraguay, and any production in Brazil can be exported to those countries duty free. The U.S. government has been pressuring Brazil to sign the recent information technology agreement (ITA), but Brazil refuses to do so unless it can negotiate a transition period to ensure that local production will not be lost. For now, Brazil is lowering tariffs on most computer products from the present 32% rate to 16% by 2005 as part of the Mercosur agreement.
Computer Industry
Under the market reserve, a number of Brazilian companies were producing computers and peripherals for the domestic market. After 1992, most of these companies disappeared, or moved into other markets such as services and distribution. The only major remaining local company is Itautec, a subsidiary of the large Itau bank. Itautec is the third leading PC vendor in Brazil, and also produces TV sets, monitors, memory chips and consumer electronics. Local companies have been replaced by multinationals such as Compaq, IBM and HP, who produce all of their PCs for sale in Brazil locally. Compaq uses Brazil as a production base for much of Latin America, and exported $170 million worth of PCs in 1997.
Computer hardware production in Brazil was about $5.8 billion in 1996, up from $4.1 billion at the end of the market reserve in 1992. Exports of computer hardware were $165 million in 1995, according to government statistics. An important center for computer production is the Campinas area, near Sao Paulo, which is a production site for Compaq and IBM, as well as other electronics companies such as Lucent, Philips and Motorola. Campinas offers a good infrastructure, proximity to the largest market in Brazil, a good supplier base, and has good universities that supply people and conduct some R&D in conjuction with leading companies. Other production centers include the Rio de Janeiro area, Minas Gerais, Bahia, and the Manaus Free Trade Zone in the Amazon region.
The software and services industries are small and dispersed, but show strong signs of vitality. The largest local firm is Datasul, with $60 million in revenues. The most advanced market segment is banking automation software, an industry that thrived under the high inflation environment when banks made most of their profits on short-term currency movements. The leading company in this field is Procomp. Estimates of software exports vary widely, from $3 million to as high as $150 million (Softex's estimate), although the Brazilian software industry association (ABES) says the lower number is probably closer to reality. There is also disagreement about the number of software firms in Brazil, but there are probably around 3,000-5,000 firms, not including small one-or two-person shops that come and go. Software industry employment is around 100,000 people, including 8,000 developers, with the rest in support, marketing and other functions. Major international software vendors such as Microsoft, Novell and Lotus are active in the market, and in some cases outsource localization and other programming to local firms.
Computer Market
The end of the market reserve brought about a drastic drop in prices for computers. One analyst estimates that prices dropped 50% the first year after the policy ended, although others point out that prices were declining even in the last years of the reserve. The real boom in IT spending happened three years later, however, after inflation was brought under control and companies could better calculate the costs and benefits of such investments. According to government data, spending on hardware, software and services grew from $7.7 billion in 1993 to $13.8 billion in 1997 (Figure 1). IDC data, which does not include industrial automation and microelectronics, puts Brazil's IT market at just over $10 billion in 1997.
Figure 1. Brazil's IT market, 1991-1997
Source:
Ministry of Science and Technology
The largest supplier in Brazil is IBM, whose sales were $1.7 billion in 1997. Following IBM were Itautec, Unisys, HP and Compaq. The PC market has likewise grown rapidly, with unit sales growing from 650,000 in 1994 to 1.3 million in 1997. IDC reports the following market shares for desktop PCs, based on revenue volume:
Table 2. Top 5 PC vendors and market share (%)
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Source: IDG Brazil web site: http://www.idgnowbrazil.com.br
Compaq also leads in notebook sales, with a market share of 24%, followed by IBM, Toshiba, Texas Instruments and Hitachi. Estimating PC sales is complicated by the fact that about half the market consists of sales by small local assemblers, some of whom skirt the law to avoid import tariffs on components. The government is now trying to crack down on this "grey" market, with the help of the big PC vendors. The situation is even worse in notebooks, where it is estimated that 65% of the market consists of smuggled goods.
A recent government survey of 12 million urban households found that 1 million owned PCs, accounting for 20% of the total installed base in the country. Another survey of households with incomes under $25,000 found that the PC is the second most desired electronics product out of 24 possible choices. This demand is fueled by the belief of parents that computer skills will be vital to their children's success in the future. It should be noted that there are millions of households, especially in rural areas, that have virtually no prospects of buying a PC, given their low income and lack of education. Brazil's highly skewed income distribution will be a major barrier to long-term market growth once the more affluent urban market is saturated.
The information services market has also been growing rapidly in recent years, as corporate customers have begun to outsource IS functions. There is also an increasing use of enterprise software such as SAP, PeopleSoft and Baan, and there is growing demand for service providers to implement these systems. The leading services vendors include IBM, HP, Unisys, Andersen Consulting, Price Waterhouse, and local companies such as Scopus, Logocenter and Datasul. One reason for outsourcing is the high cost of employees' benefits, and even the outsourcers themselves use a lot of freelance workers.
The packaged software market has grown more slowly, with sales of less than $1 billion. The biggest problem is piracy, as pirated programs account for around 65% of software in use. The government, in conjunction with ABES and the Business Software Alliance is working on reducing the level of piracy, and recently passed a new software law that allows tax authorities to investigate resellers who illegally bundle software with computers.
Internet
Internet fever has come to Brazil, and the number of users is estimated at about 1 million. The number of Internet hosts has grown from 20,113 in January 1996 to 117,200 in January, 1998 according to Network Wizards (http://www.nw.com)
The original Internet backbone in Brazil was the RNP (National Research Network), which has been joined by a number of private backbones, including IBM, Unisys, Embratel, and Global One. There are plans now for a high speed research network that would be an enhancement of the RNP and would be linked to the planned Internet II in the United States. There are over 500 Internet Service Providers in Brazil. The top five in 1997 are shown in Table 3
Table 3. Top 5 ISPs in Brazil, 1997 Sales (US$ millions)
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Source: US Department of Commerce, National Trade Data Bank
Initially, Internet usage was confined mostly to people who could read English, but as more Portuguese language content becomes available, a wider range of Brazilians are going online. The growth of Brazilian content has surprised some observers, as there are now over 200 newspapers and 200 magazines online. Brazil is said to be the largest market outside the U.S., for Amazon.com online book sales, and total electronic commerce reached $300 million in 1997.
Already, online banking is available from several banks, and there are companies selling everything from computers and software to CDs, books, perfume and sex toys. A good overview of Brazilian content (in Portuguese) can be found at http://www.cade.com.br/. The main obstacles to Internet use today are the low penetration of PCs and the high cost and poor quality of telecommunications services. PC penetration is growing quite fast, and if telecommunications can be improved, Brazil's enthusiasm for the Internet should translate into rapid growth in online business opportunities.
Conclusions
Brazil is beginning to realize its potential as an IT market, thanks to a more stable macroeconomic environment and lower trade barriers than in earlier years. In spite of remaining tariffs, taxes and some regulatory obstacles, the Brazilian market is attracting a great deal of interest from multinational computer companies. The rapid spread of the Internet and improvements in telecommunications will stimulate further demand growth.
As for production, the end of the market reserve did drive most Brazilian producers out of the hardware business, and much of the growth in demand has been supplied by computers assembled by U.S. companies from imported components. Brazilian companies have not dropped out of the computer business altogether, but have shifted into markets such as information services and distribution, where their local knowledge is an advantage.
Government policy is increasingly aimed at promoting software production, creating a local supply chain in hardware, and promoting R&D associated with IT production and use. The trend towards gradual liberalization is opposed by some as giving away too much of the market to foreign companies and exacerbating the trade deficit. It is criticized by others for being too slow and gradual at a time when the IT industry and markets are global in nature. The next round of policy decisions beginning in 1999 will be an important indicator of the direction the government intends to go and how the Brazilian IT market will likely evolve in the future.