Brazil grows as an electronics center—slowly
The government is relaxing tariffs and encouraging chip design, hoping a viable semiconductor industry takes hold.
By James Carbone -- Purchasing, 11/15/2007 7:00:00 AM
Buyers involved in outsourcing decisions will be hearing more about Brazil over the next several years, especially if their companies hope to sell electronics equipment there.
While Brazil cannot be considered a hotspot for the global electronics industry, demand for electronics equipment is growing there and so is the electronics manufacturing services (EMS) industry. Although there are few electronics component suppliers in Brazil and most parts have to be imported, some semiconductor companies operate design centers there and more centers are planned. There is no volume production of chips in Brazil, but some limited production could start as early as next year.
With growing demand for electronics equipment and a healthy EMS industry, an electronics component supply base is all but inevitable. Both global component manufacturers and indigenous suppliers will set up operations in Brazil.
They will be encouraged to open facilities in Brazil by equipment manufacturers, which have to pay tariffs on all imported goods, including electronic components. Local component production would reduce the cost for electronics equipment manufacturers.
The number of such manufacturers in Brazil is significant and growing. All the major computer OEMs and telecommunications companies, including Dell, IBM, Motorola and Nokia among others have production in Brazil, either operating their own factories or employing EMS providers.
Revenue from electronics equipment sold in Brazil will grow at a compound annual growth rate of 15.2% from 2006–2011. Systems revenue in 2006 was $34.4 billion and will grow to $68.3 billion by 2011, according to researcher iSuppli. The EMS growth rate will mirror systems growth. EMS revenue in Brazil will grow from $2.9 billion in 2006 to $6 billion in 2011, a compound annual growth rate of 16%, says iSuppli.
"There's no question that electronics in Brazil is growing," says Mike Andrade, senior vice president strategic business development for EMS provider Celestica, based in Toronto. "There is an emerging middle class in Brazil and in South America, per capita income is rising and they are starting to buy more consumer goods such as cell phones," he says.
Celestica builds high-end cell phones as well as communications base stations, switches and enterprise IT and consumer products. The company has had a facility in Brazil for eight years, he says.
"Our global customers view Brazil as a potentially good marketplace. When they want to have a global platform, Brazil is part of it," says Andrade.
Wanted: A supply base
He says while Celestica has seen revenue growth in Brazil it is not "dramatic." He says one reason is a lack of a supply base, which means electronics need to be imported.
"Brazil is not China or Mexico in terms of a supply base and that has been one of the disadvantages," says Andrade. "But that is changing. You hear about how semiconductor companies are going to build fabs down there, probably design centers at first."
John Yapp, director of global sourcing for EMS provider Sanmina-SCI, based in Sunnyvale, Calif., says there is very little electronics manufactured in Brazil. He says Sanmina-SCI buys sheet metal and mechanical assemblies locally for the telecommunications equipment and computers it builds in Brazil.
 “Brazil has some creative taxation duties. The duties encourage companies to build there.”—John Yapp, director of global sourcing for EMS provider Sanmina-SCI. |
 The Brazilian electronics system market will grow from about $34 billion in 2006 to $68 billion in 2011. |
 Despite the lack of a component supply base Brazil’s electronics manufacturing services industry will grow to $6 billion by 2011. |
 Computers account for 43% of Brazil’s electronics manufacturing services market. |
"The semiconductor industry is not there. Most electronic products you need have to be shipped in," he says. Indeed, Brazil imported $3.3 billion in semiconductors alone in 2006, up from $1.6 billion in 2001, according to the Brazilian Electrical and Electronics Industry Association.
Importing electronics is an issue because Brazil imposes tariffs on electronic-product imports. For instance, there is a 6% duty on integrated circuits, a 12% duty on finished printed circuit board assemblies and a 16% tariff on monitors.
"Brazil is an interesting marketing case," says Yapp. "They have some creative taxation duties. The duties encourage companies to build there. The more assembly you do in Brazil, the better. The more you buy from Brazilian manufacturers, the better."
However, the Brazilian government realizes that to have an active electronics industry in the long term, it needs to eliminate or reduce tariffs.
Reducing tariffs
In fact, the country has been reducing tariffs since the 1990s, reversing a policy from the 1970s when the government imposed high tariffs on electronic-products imports, according to iSuppli. The tariffs were part of the government's protectionist policies to encourage domestic production and innovation, according to Adam Pick, principal analyst EMS/ODM for iSuppli.
"During the 1970s, Brazil created heavy trade and import barriers on electronics products. For some electronic goods, import tariffs reached 100% of the purchase price," says Pick. "This removed most foreign manufactured content from the Brazilian electronics market."
In the 1990s, Brazil installed economic reforms and reduced tariffs. Tariffs dropped to 55% and then to 30%. Today, the average import tariff is about 15%, according to iSuppli. Further tariff reductions are likely as the government seeks to entice global electronics companies to open facilities in Brazil.
The country has a stated policy that it wants a semiconductor industry in Brazil, but it remains to be seen how much chip production will occur.
Currently, there is no volume chip production, although a number of companies have chip design centers. It fact, some have operated design centers in Brazil for years. Case-in-point: Freescale Semiconductor, based in Austin, Texas.
Freescale has operated a chip design center for 10 years in Brazil. It recently announced it consolidated its semiconductor design and sales operations in Brazil into a new facility located in Campinas City in Sao Paulo in southern Brazil. Engineers at Freescale's Brazil Semiconductor Technology Center (BSTC) design microcontrollers (MCU), embedded memory, analog/mixed-signal chips and sensors for the automotive, consumer and industrial markets.
Other companies with design centers in Brazil include STMicroelectronics and Fairchild Semiconductor.
More design centers
The Brazilian government is also establishing design centers as well as chip-assembly facilities and a fab.
The government-sponsored Excellence Center for Advanced Electronic Technology (Ceitec) is establishing seven IC design centers and a semiconductor front-end wafer fab. The group is building a small-scale, 6-inch prototype fab in Porto Alegre in the state of Rio Grande do Sul. The fab is expected to start producing chips sometime next year.
In addition, a venture called Companhia Brasileria de Semiconductor will be the first company to develop an analog and mixed signal semiconductor wafer fabrication facility in Minas Gerais in southern Brazil. The project got under way in 2005, but its progress has recently stalled and it is unclear when it will be finished.
Buyers who plan to use EMS providers in Brazil should watch the development of the country's semiconductor industry carefully. If volume chip production starts and global semiconductor companies open fabs there, other component manufacturers will surely follow suit. That will be good news for all the global OEMs and EMS providers operating there and will encourage more multinational OEMs and EMS providers to open facilities in Brazil.
However, some analysts say such a scenario could take years. What is sure is that OEMs will continue to manufacture equipment in Brazil to satisfy growing demand for computers, cell phones and consumer electronics equipment in Brazil and other South American countries. A lot of manufacturing will be outsourced to EMS providers.
"We don't see Brazil as a strategic manufacturing location in itself," says Andrade of Celestica. "But business is growing there and we may have to add more capacity there. Time will tell."
| Product | 1998 | 2006 |
| Source: Ministry of Science and Technology (Brazil), iSuppli | ||
| Integrated Circuits | 15% | 6% |
| Assembled boards | 27% | 12% |
| Programmable controls | 31% | 14% |
| Cellular phones | 22% | 16% |
| Monitors | 32% | 16% |
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