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On October 13, after months of erratic negotiations, Brasilia finally reached an agreement with Foxconn, the largest global manufacturer of electronic components, to build iPads in Brazil. Production is now set to begin in December, backed by a $12 billion investment drawn in part from Brazil’s national development bank, known as BNDES. The country’s business class celebrated the deal as a turning point for Brazil’s technology sector, which has long been marred by excessive protectionism and a deficit of engineers. Unfortunately, their optimism is misguided: Even if production goes off without a hitch (a big if), the iPad will not put Brazil on a path to becoming an international technology giant. In fact, rather than competing in oversaturated markets aimed at high-income consumers, Brazil would benefit far more by leading the developing world in designing affordable technology for low-income markets. With the iPad, Brazil is putting all of its chips in the wrong device.
The technology sector in Brazil has a rocky history, which explains why the iPad contract is so attractive to some. Brazil only began to industrialize its economy in the 1940s, so it missed the semiconductor wave of the 1970s and 1980s, which was a boon for Asian economies. Until just recently, Brazil had to import every single microchip it used. Decades of restrictive policies hampered innovation. The pain of the protectionist 1984 “Informatics Law,” which for eight years prohibited foreign investment and imports in the computer and software industries, is still being felt today.
Although Brazil has moved away from its protectionist tendencies of the past, challenges to technology development, and to the Foxconn deal in particular, are still considerable. When Brazilian President Dilma Rousseff spoke about the agreement in May, she said it would create 100,000 jobs, 20 percent of which would be for engineers. But Brazil might not even have 20,000 engineers available for hire. A recent government study reported that approximately 70 percent of the roughly 750,000 Brazilians who studied to be engineers work in professions unrelated to their degree. The study indicates that Brazil is fast approaching an engineering deficit, especially considering that if professional migration and present growth continue, some 330,000 engineers will be in demand by 2015. To make matters worse, Brazil’s university system is particularly uninviting to international students and faculty, making it difficult to spur local development with international talent.
Brazil’s complicated tax structure has also stifled innovation. State governments often take one another to court based on a law mandating that tax incentives for business be granted exclusively on a national level. The law is often neglected by the states, which are always under pressure to promote new investment. As such, Brazil’s Federal Supreme Court ruled in June 2011 that the tax benefits in 14 Brazilian states were unconstitutional. This has made attracting business harder.
Some progress is afoot: In 2005, Brazil’s congress approved a new incentive package for companies to invest in research and development. More recently, it extended tax breaks to manufacturers of tablets, including the iPad. The tax breaks alone are expected to reduce the retail price of tablets manufactured in the country by ten to 15 percent and were crucial in securing the Foxconn deal.
Brazil’s government is now looking to the iPad deal to help the country overcome its lackluster technology record, by creating jobs, boosting local capacity for similar projects, and laying the groundwork for future innovation. The deal also has personal appeal for Rousseff, who has a habit of flaunting her iPad at public events. With a local production plant, government funds, and tax breaks, the iPad will most likely become a hit product among Brazil’s upper classes, which will be happy to save a few dollars by buying locally.
But staking the future of Brazil’s technology sector on Apple’s device -- as opposed to focusing on affordable technology that could be consumed by more people domestically -- will not encourage development. Exporting the iPad to high-income markets abroad may not work, since steep local taxes will still make prices uncompetitive. (This is part of why the negotiations have taken so long.) Moreover, because Apple tightly controls the iPad’s technology, Foxconn’s plant will hardly lay the foundations for long-term innovation through the spread of technological prowess.
Instead of building an industry around rich consumers, Brazil could encourage the development of technology products for lower-income populations -- what the World Resources Institute calls the “next four billion.” These long-overlooked markets, as opposed to the oversaturated markets for high-end consumer electronics, have enormous untapped potential.
Take, for example, the Chinese manufacturers Wei and Eyo, each of which produces its own iPad spin-off. Both companies produce technology items that are either unknown to or rejected by traditional reviewers but are hugely popular among lower-income consumers. In Brazil, they sell for only $140 (as opposed to the iPad’s $930). They run Android, an open-source software developed by Google. Their success is proof of the substantial demand for lower-end technology products: They are popular not only in China but with low-income populations worldwide, especially in emerging markets in Africa, South America, and Southeast Asia.
Brazil’s technology sector would do well to learn from these Chinese companies, which operate in clusters based on an open-hardware policy of sharing designs and circuits. This encourages new business, makes manufacturing easier, and keeps the cost of the final product down. Their affordable products are not merely copycats, as many reviewers insist. By designing such products as cell phones that can be used with multiple mobile providers and have powerful built-in speakers -- both popular features in Brazil’s urban favelas -- Chinese companies innovate and satisfy the preferences of the low-income market.
This market is in plain sight of Brazil’s leaders, but the strong lure of Apple’s products have blinded them to it. They still associate technology with the wealthy, even when Brazil’s low- to middle-income majority is relying more and more on technology; there are already more cell phones than people in the country. With smarter policies, Brazil and other emerging-market countries could become laboratories for experimentation.
One solution would be to create a media lab -- a collaborative research initiative among universities, companies, and government -- aimed at meeting the technology needs of lower-income populations through original, cheap designs in hardware and software. These innovations could include applications specifically for the urban poor, such as crime-reporting tools and applications that would allow people to evaluate basic public services and infrastructure. The media lab could develop local versions of the iTunes store, through which Brazilian music and television shows could be sold outside of Apple’s closed loop, stimulating local entrepreneurship and providing entertainment for Brazil’s poorer and less internationally oriented population.
Brazil could also provide incentives for local companies to partner with many global manufacturers besides Foxconn to produce low-cost products under an open-hardware policy. There are plenty of international researchers, engineers, and designers passionate about this goal -- people like Nicholas Negroponte, the co-founder of the MIT Media Lab, who has been championing the One Laptop per Child project for years. With little cost, Brasilia could attract international talents to Brazil and offer them partnerships with universities and local businesses.
As much as Brasilia would like to believe it, Brazil’s path forward does not run through an Apple store. The country has a real opportunity to develop high-tech products for its own people, at a price they can afford. Rousseff may love her iPad, but Brazil can do better.