Brazil Clears Hurdles for High-Tech Investors

Dilma Vana Rousseff is not exactly a household name, but if you are a member of the electronics supply chain, I'd suggest you take some time to aquaint yourself with Mrs. Rousseff, or as she is known in Brazil, President Rousseff.

Rousseff was inaugurated in January 2011 as the first woman president of Brazil. She is a no-nonsense leader who is committed to ridding the nation of the political corruption and economic instability that have deterred many manufacturers -- including those in the electronics sector -- from penetrating South America's largest market.

Since taking office, Rousseff has worked to fast-track both social and economic reforms, which have already significantly reduced the Custo Brasil, or Brazil Cost -- factors including an extremely high-tax burden, an under-developed infrastructure, and excessive layers of bureaucracy, which have made Brazil one of the world's most expensive places to do business.

Most notable among Rousseff's efforts is the expansion of existing tax break legislation for IT companies to include Brazil-based tablet and tablet accessories makers. The new provision entitles these companies to an 80 percent tax reduction on industrialized products and eliminates a 10 percent government safety-net tax. To promote ongoing benefit to the region, the law also stipulates a minimum amount of locally produced parts, and an annual investment of 4 percent of net revenue into research and development. In all, it is expected that the legislation will yield a 31 percent reduction in the price of locally produced tablets, spurring domestic sales. Currently, Brazil is the third largest market for computers in the world and the fifth largest market for cellphones.

To date, 11 companies have reportedly qualified for tax breaks under the new legal framework, including Samsung, Motorola, Research in Motion, and a joint venture among China's SinoHub, the United States' Ciao Telecom, and Taiwanese technology manufacturer Foxconn, which already have three sites in the region. Foxconn also recently announced an agreement with Brazil's wealthiest man, Eike Batista, to jointly invest a total of $1 billion to build a factory in the Brazilian state of Rio de Janeiro, which will produce solar panels, efficient street lamps, and batteries.

Though Brazil is often referred to as an emerging region, in reality it has one of the most advanced industrial sectors in Latin America. More than 50 percent of the population is characterized as "middle class," and 80 percent live in urban areas. With the increased wealth and development expected to arise from the growing manufacturing presence in the region, demand for consumer electronics is forecast to increase to $44 billion by 2016, according to Research and Markets. In short, it is a region teeming with opportunity for the electronics sector, and the government is beginning to get a handle on many of the common pitfalls of the "typical" emerging market.

For our part, Avnet Inc. (NYSE: AVT) has maintained a presence in Brazil since 1999, and we continue to expand our business, including the launch of our newest integration center in Joinville to complement our integration center in Jundiai near São Paulo, a regional center of commerce and finance in Brazil. These integration centers provide value-added services similar to those offered by Avnet's integrated service centers in North America, Europe, and Asia, to support our customer and supplier strategies in those indigenous markets.

There is no question that doing business in Brazil requires a high degree of diligence and close attention to the risks that doing business in emerging markets exposes multinational companies to. But the opportunity is huge and growing steadily. So, what do you think? Does Brazil's market potential outweigh the Custo Brasil?