'Brazil cost' may dim Foxconn's iPad dreams

JUNDIAI, BRAZIL: The non-descript stretch of asphalt is an unlikely symbol of Brazil's attempt to lift its economy into a new high-tech era.

If officials in the industrial town of Jundiai get their way, it will soon be named Steve Jobs road -- in homage to the late Apple Inc co-founder and a nod to the expected windfall that producing iPads and iPhones here will bring.

Brazil's government has loudly proclaimed a deal it says is worth $12 billion for Taiwanese technology giant Foxconn to produce iPads and build a whole new industry based around screens used in an array of consumer electronics from smartphones to televisions.

But the infamous "Brazil cost" -- shorthand for the bureaucracy and high taxes that plague business in the country -- is already overshadowing the deal, complicating negotiations with Foxconn over the broader investment plan. The likely need for large state subsidized loans to lure Foxconn also revives concerns about the state's heavy hand in Brazil's economy.

The deal's transformative potential for Brazil is clear -- a home-grown technology industry could move the commodities giant up the value-added chain to join the likes of Taiwan and South Korea, reducing its dependence on manufactured imports from Asia.

Yet critics say Brazil's shallow labor pool and poor infrastructure make it ill-prepared to make the leap to high-end work and that it risks being stuck at the low end -- assembling components designed and made elsewhere. At first, Foxconn will have to fly in most of the key components such as semiconductors, modems and screens from China, as Brazil attempts to raise its ability to produce more of them locally.

"We are selling our market very cheaply, giving tax incentives for a company to come and produce something that is already developed in the world market," said Joao Maria de Oliveira, a researcher at the government-linked Institute for Applied Economic Research, or IPEA. "It's not something that adds much value and it won't leave much here."

The amount of value added to Apple products by Foxconn's approximately one million workers in China is a mere $10 or so per device, according to a study by researchers at the University of California, Irvine.

Brazil has cut taxes and duties on tablet production in a move that should reduce the retail price by about a third and is phasing in production requirements to foster a local components industry.

Separately, it is in talks with Foxconn on a package of incentives, including priority customs access, more tax breaks and subsidized loans from state development bank BNDES to secure the bigger investment in high-end screens.

It isn't hard to see what's in it for Foxconn, Apple and other foreign companies, including Motorola Mobility Holdings Inc and Samsung Electronics Co Ltd that have expressed interest in making tablets here.

Apple will gain better access to Brazil's voracious consumers, who have faced high prices for its products due to hefty import tariffs, and will create a jumping-off point for other rapidly growing Latin American countries.

Foxconn, the world's largest contract electronics company, with around a third of the global market, would gain a vital foothold in Latin America's largest economy and reduce the risks of having so much Apple production in China.

Producing in Brazil would also give Foxconn and Apple preferential access to Brazil's partners in the Mercosur customs union -- Argentina, Paraguay and Uruguay.

But the "Brazil cost" raises doubts over whether Apple will be able to make the iPad cheaply enough for the Brazilian market and use it as a major base to export to the United States and Latin America.

Brazil's consumer market is a huge draw for companies such as Apple, but analysts say the domestic industry will likely take years to move beyond assembly to higher-end production.

"It will take at least five, six years to create the entire ecosystem there," said Satish Lele, vice president, consulting, Asia Pacific at Frost & Sullivan in Singapore.

"I don't think they (Brazil) are ready to support huge growth as far as the electronics sector is concerned.