Insight: Brazil's iPhone investment falls short on promises of jobs, lower prices

LITE-ON TECHNOLOGY

13/04/2015 12:00

(Repeats to additional subscribers without changes to text) 
    By Brad Haynes 
    ITU, Brazil, April 13 (Reuters) - The Brazilian iPhone was 
meant to mark a new era. 
   When Taiwan's Foxconn Technology Group agreed in April 2011 
to make Apple products here, President Dilma Rousseff and her   
advisers promised that up to $12 billion in investments over six 
years would transform the Brazilian technology sector, putting 
it on the cutting edge of touch screen development. A new supply 
chain would be created, generating high-quality jobs and 
bringing down prices of the coveted gadgets. 
    Four years later, none of that has come true. 
    Foxconn has created only a small fraction of the 100,000 
jobs that the government projected, and most of the work is in 
low-skill assembly. There is little sign that it has catalyzed 
Brazil's technology sector or created much of a local supply 
chain.     
    The iPhones now rolling off an assembly line near São Paulo, 
the only ones in the world made outside China, carry a retail 
price tag of nearly $1,000 for a 32-gigabyte iPhone 5S without a 
 contract - among the highest prices in the world and about 
twice what they sell for in the U.S.  
    That Brazil has so little to show for the Foxconn investment 
underscores the shortcomings of its industrial policy, defined 
by costly tax incentives that have driven a widening government 
budget deficit without spurring growth. The economy currently 
hovers close to recession and the productivity of Brazil's 
workforce is stagnant. 
    Apple Inc's  AAPL.O  iPhone sales in Brazil have still been 
rising. Wholesale shipments increased more than 40 percent to 
2.9 million last year, according to research firm Gartner. 
    Apple declined to comment for this story. Representatives 
for the Brazilian government and Foxconn declined to comment on 
why the investment fell so far short of initial projections. 
    With wages rising quickly in China, home to most of its 1.3 
million employees, Foxconn is trying to control costs by using 
more robotics and expanding its global footprint to make more 
electronics in markets where they are sold. 
    But navigating politics and managing expectations beyond 
China has been tricky for Foxconn, whose flagship listed unit is 
Hon Hai Precision Industry Co Ltd  2317.TW . 
    For instance, Indonesia's government has said for years that 
Foxconn would invest up to $10 billion, but plans remain in 
limbo due to political snags.  ID:nL3N0L111A   
    In Brazil as in Indonesia, politicians and government 
officials were the ones making the big forecasts after 
conversations with Foxconn, which has been more circumspect in 
its own public statements and projections. 
     
    CITY OF EXAGGERATIONS 
    Still, as Foxconn ramped up assembly of iPhones and iPads in 
Brazil during 2012, reaping tax benefits, the company made a 
public commitment. The company pledged an initial investment of 
1 billion reais ($325 million) to anchor an industrial park 
producing components locally within two years. 
    The location: Itu, a sleepy tourist town in São Paulo state 
nicknamed "The City of Exaggerations." 
    Today the site remains an empty expanse of dirt, where 
bulldozers have been leveling the land since late last year. 
    City councilor Givanildo Soares da Silva, who helped lead 
the push to donate nearly 100 acres of land to Foxconn, has 
since turned against the project. 
    "People are really frustrated," Silva said. "We were 
expecting all these jobs by now and it's still just empty 
promises." 
    The Itu mayor's office said in a statement it had given all 
the support necessary to bring Foxconn to the city, declining to 
comment on reasons for the delay. 
    Foxconn said in a statement the facility should be 
operational by the end of this year, bringing its Brazilian 
workforce to more than 10,000, though it did not provide a 
specific number of jobs or disclose how many are working on 
Apple products. 
    Apple's official list of its top 200 suppliers, accounting 
for 97 percent of materials and manufacturing costs, includes 
just two companies in Brazil: Foxconn and fellow Taiwanese 
electronics company Lite-On Technology Corp  2301.TW . 
    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ 
    For a map of key Foxconn sites in São Paulo state, see:  
    http://link.reuters.com/cuf54w     
     ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>  
   
    Foxconn currently has five facilities in the country that 
make products under contract for various technology companies, 
including just one unit producing Apple devices in Jundiaí, 
about 30 miles (50 kilometers) east of Itu. 
    "Foxconn continues to invest in our operations in Brazil," 
the company said in a statement. "We are committed to our goal 
of introducing innovative technologies that enable our employees 
in Brazil to focus on high value-added elements." 
    Workers interviewed outside the Jundiaí plant said they had 
yet to see that skilled work. 
    "You hear 'Foxconn' and 'Apple' so you think it's something 
special. But there's no glamour in there. It's a dead-end job," 
said Andressa Silva, 19. 
    Silva tests iPhones at the plant for about $80 a week, just 
$15 above the minimum wage. She and several colleagues 
complained of monotonous work and a lack of promotion 
opportunities. 
    Evandro Oliveira Santos, the head of the local metalworkers' 
union, told Reuters the union was organizing for a strike at the 
factory. It would be the fourth in as many years.  
    The union wants better working conditions and professional 
development for the roughly 3,000 workers at the facility. 
    Foxconn turned down a request to tour the plant, but said in 
a statement it worked to meet international workplace standards, 
cooperated with unions and listened to feedback from employees. 
     
    ALL THE DANCING 
    When Terry Gou, the founder and chairman of Foxconn, 
discussed Brazilian labor in the past, his take was withering. 
    "Brazilian workers' wages are very high. But Brazilians, as 
soon as they hear 'soccer,' they stop working. And there's all 
the dancing. It's crazy," he told the Wall Street Journal in 
2010.  
    Those comments made few Brazilian friends for Gou, who 
deftly built a manufacturing empire in China, but the underlying 
complaint was familiar to business leaders here. 
    Economists consider low productivity one of the chief 
reasons for the steep cost of consumer goods in Brazil, along 
with high tariffs and interest rates. 
    Analysts who follow Foxconn say the company may have 
underestimated those challenges during talks in early 2011 with 
Brazilian officials. 
    One of the clearest signs that the announcements in Beijing 
were premature came when a proposed deal for Foxconn to make 
touch screens in Brazil fell apart the next year. 
    Foxconn pushed to make cheaper screens rather than use the 
latest screen technology, and the company was reluctant to 
commit its own capital, according to press reports at the time. 
    "There was a misunderstanding," said Maria Luisa Cravo, the 
head of investments at APEX, Brazil's federal agency promoting 
foreign trade and investment. "Brazil expected one thing and 
Foxconn expected something else. But talks have restarted on 
this," she told Reuters. 
    Officials at three Brazilian ministries involved in the 
project declined requests for interviews about Foxconn's 
investments. 
    A spokeswoman at Brazil's science and technology ministry 
said the tax breaks benefiting Foxconn require it to reinvest 4 
percent of Brazilian revenue in research and development. Local 
content and assembly contribute at least 20 percent of the value 
of the devices that Foxconn makes in Brazil, she added. 
    With that, an industrial sales tax of around 15 percent and 
a value-added tax of about 9 percent on imported iPhones and 
iPads are largely eliminated when the products are made in 
Brazil, tax experts said. In addition, locally made devices 
avoid heavy import duties, and a Sao Paulo state consumption tax 
would be less than half the 18 percent levied on foreign goods.  
   Some companies have passed the lighter tax burden along to 
consumers. For example, camera company GoPro said in November it 
would cut prices by up to 30 percent on models that contract 
manufacturer Flextronics started making in São Paulo state. 
    Apple enthusiasts have had no such luck. 
    At the time the Foxconn investment was announced, Aloizio 
Mercadante, then the minister of science and technology, said 
the price of iPads in Brazil could fall as much as 30 percent.  
    Four years ago a ten-inch iPad with 16 gigabytes of storage 
and no cellular card cost 1,549 reais. Today a new device with 
those specifications costs 1,599 reais ($520). In the U.S., it 
would cost $399. 
    "If we're buying it at that price, then why would they bring 
it down?" said Luzangelo de Jesus, 23, a technical support 
analyst looking over the latest iPad at a São Paulo mall. "I 
don't even know what the next iPad does, but I know I need it." 
    ($1 = 3.09 Brazilian reais) 
 
 (Additional reporting by J.R. Wu in Taipei, Eveline Danubrata 
in Jakarta and Anthony Boadle in Brasilia; Editing by Todd 
Benson and Martin Howell) 
  
((For a map of key Foxconn sites in São Paulo state: http://link.reuters.com/cuf54w)) 
 
Keywords: FOXCONN BRAZIL/APPLE (INSIGHT, PIX, TV, GRAPHIC, R