Journal of Commerce / September 2, 1998
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 vendors are choosing to manufacture their equipment in Brazil -- lured by irresistable tax incentives and a desire to be close to their customers.
In June, Northern Telecom inaugurated a $125 million factory in Campinas (São Paulo state that'll produce digital wireless systems for the local market. The plant -- Nortel's first in Latin America -- was purchased in March from Promon Eletrônica, and has an initial annual production capacity of 500 digital cell sites.
Last year, Nortel won contracts to supply cellular infrastructure to three B-band networks -- Americel, BCP-SP and BCP-NE. The company says its 130,000-sq-meter facility "is expected to be consumed by demand from these operators, as well as the continued upgrade to digital cellular systems by A-band cellular operators belonging to Telebrás."
Likewise, in June 1997, Lucent Technologies broke ground on a 15,000-square-meter cellular equipment factory and distribution center in Campinas. The plant, which employs 300 people, will produce up to 500 analog and digital cell sites a year.
"The gigantic market potential was definitely a deciding factor in choosing Brazil as the location for this plant," says Art Medeiros, president of Lucent Technologies Network Systems for Latin America and the Caribbean.
The facility, Lucent's first in Brazil, 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.
Rivals Motorola, Ericsson and Nokia are also making cellular equipment in Brazil, now that the country's mobile networks are being auctioned off to private investors.
Yet there's another factor at work here: effective Oct. 1, 1996, the Brazilian government dramatically boosted tariffs on cellular phones 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 São 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.
Bjørn Lundgren, a vice-president at Ericsson Telecomunicações S.A. in São 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 tradition 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. "The quicker the market ramps up, the more 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.
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 São 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.
Last 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, 30 kilometers from São Paulo.
Grace Jenkins, director of marketing and operations at PWID, said 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."