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Tax breaks for telecom bring Brazil a bounty
The Miami Herald / August 31, 1997

By Larry Luxner

For several years, the giants of the telecommunications world have eyed Brazil as Latin America's most promising market for the sale of everything from cell towers to base-station equipment to the handsets themselves.

Now, these same companies are choosing to manufacture their equipment in Brazil -- lured by irresistable tax incentives and a desire to be close to their customers.

In July, Northern Telecom's Fort Lauderdale-based Caribbean and Latin American division announced it would invest $125 million in a cellular infrastructure factory in Campinas, just outside Sao Paulo. That plant will supply BellSouth International, whose BCP consortium recently paid $2.5 billion for a license to operate a cellular network in the Sao Paulo metropolitan area.

The month before, Lucent Technologies broke ground on a 15,000-square-meter cellular equipment factory and distribution center, also in Campinas. The plant, to employ around 300 people by December, is Lucent's first in Brazil; it brings the company's cumulative investment in the nation to over $100 million.

By assembling locally rather than overseas, Lucent -- which already has factories in Mexico and Venezuela -- gets closer to its Brazilian clients and circumvents prohibitively high import taxes.

"The gigantic market potential was definitely a deciding factor in choosing Brazil as the location for this plant," says Art Medeiros, the Miami-based president of Lucent Technologies Network Systems for Latin America and the Caribbean.

Rivals Motorola, Ericsson and Nokia are also making cellular equipment in Brazil, now that the country's B-band mobile networks are being auctioned off to private investors; as a result, cellular penetration will likely hit 15 million by 2000, up from 2 million subscribers today.

Yet there's another factor at work here: effective Oct. 1, 1996, the Brazilian govern-ment dramatically boosted tariffs on cellular phones and 100 other telecom-related products assembled outside the Mercosur customs zone, which in addition to Brazil includes Argentina, Paraguay and Uruguay. Big manufacturers realized they had no choice but to locate their plants in Brazil if they wanted to remain price-competitive.

"The two main factors which would entice cellular companies to manufacture in Brazil are tariff benefits and the sheer size of the Brazilian market," says Ed Czarnecki, a consultant at BIA International Inc. in Chantilly, Va. "The immense potential in and of itself is the primary trigger for locating facilities in Brazil, as are the tariff benefits local manufacturers receive over imports."

Thus, in March, Ericsson inaugurated a 5,000-square-meter facility in Sao Jose dos Campos that'll assemble 500,000 cellular phones a year for the region's burgeoning telecom market. The company has already invested $15 million in the project, and will spend another $10 million to boost production to one million units a year; nearly half of all output will be exported to Argentina and the other Mercosur nations.

Bjorn Lundgren, a vice-president at Ericsson Telecomunicacoes S.A. in Sao Paulo, says the Swedish conglomerate can sell its locally manufactured phones for up to 30% less than the ones it's been importing from the United States. Until recently, say Ericsson offi-cials, all phones sold in Latin America were shipped from an Ericsson plant in Lynchburg, Virginia. So the choice wasn't a question of whether to manufacture in a Mercosur country, but which one.

"The reason we chose Brazil was that Ericsson has a long and strong industrial tra-dition there, and Brazil is competent in the area of manufacturing highly advanced telecom equipment," said Hakan BCM Wretsell, vice-president of Latin American sales and market-ing for Ericsson Mobile Phones in Miami. "The quicker the market ramps up, the more products we'll add."

Wretsell joined Ericsson in 1987, a year when the company sold 35,000 cellphones worldwide. Now, Ericsson sells that many in a week -- just in Latin America.

"Our projection is that during 1997, about 4.9 million new cellphones of all brands will be sold [in Latin America], up from 2.6 million in 1996 and the same in 1995," said Wretsell. "Ericsson is a very weak brand in the minds of the end user. When we started, Motorola and Nokia had a significantly higher name recognition in Latin America than did Ericsson."

That could soon change, however. This year, Ericsson will spend over $20 million in Latin advertising, up from $15 million in 1996 and less than $1 million the year before. In the first half of 1997, Ericsson sold 400,000 handsets throughout the region, the same as it did in all of 1996.

Meanwhile, Finland's Nokia, one of the world's leading manufacturers of mobile phones, isn't sitting on its laurels. Recently, it formed a joint venture with Sao Paulo-based Gradiente Electronica S/A to assemble analog and digital handsets for the Brazilian market.

The $20 million venture (51% Nokia, 49% Gradiente) will make cellphones under both brand names in a plant whose location hasn't yet been finalized. Since 1996, Gradiente has been producing handsets under the Nokia name, though Nokia also sells phones to Gradiente for assembly in the Manaus free zone. Gradiente, with $700 million in sales, is among Brazil's top consumer electronics firms.

Earlier this year, Motorola's Pan American Wireless Infrastructure Division (PWID) began assembling its DPC-650 and other mobile phones at a $20 million plant in Jaguariuna, a suburb of Sao Paulo.

Motorola now plans to go a step further -- it'll soon manufacture cellular infrastructure equipment at an new 50,000-square-foot facility as early as November. Grace Jenkins, director of marketing and operations at PWID, says her company will invest $30-40 million in the factory.

The plant will employ 200 people in the manufacture of SC9600 and SC2400 base transceiver stations for both analog and CDMA digital cellular systems; the rest of the 200-acre Motorola campus will be completed by August 1998, housing other business units besides the Cellular Infrastructure Group (CIG) facility.

Jenkins said in a phone interview that generous tax incentives played a role in locating the plant in Brazil, as did the advantage of manufacturing within Mercosur and thereby avoiding high import tariffs.

"Labor costs are the same as in the U.S., though on the [cellular] infrastructure side, total savings would be a minimum of 15% and as much as 30% [by manufacturing locally]," she explained. "It's in the best interests of our customers."

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