 | Issue: | Latin America IV 2001 |
| Article no.: | 13 | |
| Topic: | Industrial Policy – The Role of the Government in Shaping The Telecommunications Industrial Sector in Brazil | |
| Author: | Salomão Wajnberg | |
| Title: | President | |
| Organisation: | TELECOM – Associação Brasileira de Telecomunicações | |
| PDF size: | 24KB |
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Article abstract
The electro-electronic industry underlies the ‘new economy’. The influence of the industry upon the economy, its growth rate, the rhythm of its technical progress and its consolidation as a global economic activity mark it as a strategic factor in economic competitiveness.
Full Article
In the United States, the billings of the industries that comprise the electronic complex already exceed the traditional chemical, and automobile industries and account for 7 per cent of the Gross Industrial Product. In Japan, Korea, Taiwan, Sweden, Finland and other European nations it accounts for more than 23 per cent of industrial production. The world’s electronic industry has been developing, accelerating, rapidly for 50 years. In the European Community, for example, these industries expanded at an average rate of 15 per cent per year during the 1980s. Currently, the industry is growing by 9 per cent per year, or about two times the world’s overall economic growth. Brazil’s communications sector will, during the next few years, have difficulties in obtaining supplies to sustain its growth since the country’s industrial infrastructure for electronic component manufacturing is weak. In 1974, when Brazil was building the National Telecommunications System and ramping up to produce colour televisions, these sectors were responsible for 10 per cent of Brazil’s imports. This, combined with the effects of the petroleum crisis, limited cash, and a negative trade balance left Brazil with few choices. The only alternatives were to suspend these critical projects or adopt an industrial policy to stimulate the development a local infrastructure to supply the products and materials these projects required. When a new industrial policy was adopted, importation by the electronic industry dropped within 3 years to 20 per cent of the 1974 levels. Within 10 years, 93 per cent of the value of major electronic equipment produced in Brazil was aggregated locally. If the Brazilian Government had made a gradual transition between the closed market model this industrial policy was based upon and today’s open, competitive market, the sector would have been able to adjust to the new economic scenario. Instead, by the end of 2001 Brazil’s 39 billion dollar electronics market was importing approximately $9.5 billion’s worth of goods per year; 16.5 per cent of its total imports. The electronics sector has been Brazil’s leading importer for the last 6 years, surpassing petroleum that had been the leader for many years. Components accounted for US$3.5 billion of the sector’s total in 2000, quite a bit more than the average of US$2 billion in the preceding years. The demand for components promises to increase exponentially in the coming decade due to the introduction of several new communications technologies. The introduction of digital TV should create a demand for 100 million TV receivers during the decade to replace existing TVs. New cellular systems-PCS, GSM and UMTS-and the substitution of thousands of telephone switches (exchanges) for packet switching equipment and all the equipment associated with these changes will drive new imports. New services such as multimedia and broadband, new software and applications demanding increasingly powerful computers and the need for new systems for use in business, medicine, e-government, finances, among many others, as well as the natural growth of the electronic infrastructure will all put considerable pressure on imports. The evolution of Brazil’s industrial policy in the last half century, its successes and failures has left Brazil’s leaders with the experience and maturity to see that there is only one real alternative. Products in large-scale mass production, and most of their components, will have to be produced in Brazil. If not, the country’s economy will suffer severe losses. These factors, added to the currently low value of the local currency compared to the dollar, opens a variety of opportunities for manufacturers to invest and enter the market. The return on such investments is practically guaranteed to be great, as the currency will tend to rise in value as the imbalance caused by excessive importation is overcome. The evolution of Brazil’s electronic complex in the decades of the 1970s and 1980s was quite expressive as a result of certain basic factors: o significant government incentives and investment in the sector; o the establishment of a protective environment for local industry based on an industrial policy to substitute imports with local products and by markets divided and reserved for local producers; o restrictions against foreign capital and technology in specific areas already occupied by Brazilian companies; o ample investment in research and development. As a result of this policy, by 1986 the indices of local integration were high and imports were restricted to those components and materials not yet produced in the country. By 1987, the first signs of industrial slowdown appeared. This slowdown reflected Brazil’s rapidly growing inflation and a constantly rising tax burden that made productivity gains irrelevant. Good financial management had become the key survival skill for many companies. Prices kept increasing to offset expected future inflation and the country’s scorchingly high interest rates. The gradual loss of the population’s purchasing power forced industries to become increasingly dependent upon the demand of government-controlled industries. This allowed them to overcome the hardships of inflation, high interest and loss of popular purchasing power; they just passed the costs on to their biggest buyer-the Nation! This guaranteed their survival without great sacrifice or effort, but the technological isolation and lack of competition fostered by the nation’s industrial policy made these industries sluggish and inefficient. At the end of the 1980s, local industries were barely competitive, supplying outdated goods at prices higher than those available internationally. At the beginning of the 1990s, the situation of these companies deteriorated rapidly as the result of the liberalisation and modernisation programmes adopted by the government of the, then, recently elected President Collar. The measures included: o the rapid elimination of the reserved and divided market and of the barriers which inhibited free initiative and competition in the marketplace; o liberation of importation and the gradual reduction of duties; and o reduction of foreign investment and technology barriers. These measures created a rapidly growing competitive environment. Industries, to reduce their costs, began to ‘de-nationalise’ their products. The high cost of local products, the increasing value of Brazil’s currency and reduced duties led manufacturers to import almost all the components and supplies necessary for production. The speed with which the reforms were introduced did not give Brazil’s industries time to adapt to the new scenario. As a result, the Brazilian industrial sector that produced components-particularly for microelectronics-and materials, as well as the supply infrastructure for the equipment industry, was almost driven to extinction. The equipment industries, as a defensive reaction, began to restructure their operations profoundly in an effort to reduce costs and achieve international standards of competitiveness. To reduce costs and risks, investments in the development of new products with local technology were cut. This period was marked by the search by local industries for ways to become internationally competitive. It was also marked by the arrival of new international groups in Brazil. Even so, Brazil’s industry was barely competitive and required government help to stay alive. The so-called ‘ Law of Informatics’ and subsequent decrees and regulations provided tax breaks for companies that essentially built a good part of their own equipment and components in the country. To qualify for the tax benefits, these companies also had to invest at least 5 per cent of their gross billings in research and development. Although this was a useful mechanism at the time, it is no longer sufficient to guarantee reasonable levels of locally added value. These incentives helped keep the industry alive and persuaded many companies to manufacture in Brazil. In this way the demand for most finished consumer electronics and a good part of computer and telecommunications products, was met. The lack of a strong components industry, though, meant that these finished products had to be made with a high percentage of imported components. Between 1990 and 1995 importations grew at the rate of 50 per cent per year. The introduction of cellular telephony and the start of large-scale data communications pushed importations even higher. The exponential rise in importation, starting in 1995, seriously threatened local industry. “The Ministry of Communications’ plans to introduce a strongly competitive model for the sector in the post-privatisation era, and the introduction of new services such as cellular and data communications, obliged service providers to quickly opt for high-technology equipment not yet manufactured in the country.” In 1994, with the advent of Brazil’s current government, an accelerated process to liberalise and privatise the Brazilian telecommunications sector began. The Ministry of Communications, prior to privatising Telebrás-the government-owned telephone system, instituted an ambitious investment plan to valorise it. The plan called for $47.6 billion in investments between 1996 and 1999 and another $43.2 billion by 2003. No plans were made, though, to prepare local manufacturers to meet this demand. The 26 local operating companies of the Telebrás system were not prepared to absorb this volume of investment. They had to contract integrators, manufacturers and service providers to install the needed services and equipment on a ‘turn-key’ basis. In practice, the large manufacturers of telephone switching equipment, since they would not supply their equipment to integrators, dominated the market and limited the growth of smaller companies in the sector. The Ministry of Communications’ plans to introduce a strongly competitive model for the sector in the post-privatisation era, and the introduction of new services such as cellular and data communications, obliged service providers to quickly opt for high-technology equipment not yet manufactured in the country. The industrial organs that, in the past, might have co-ordinated the integration of local manufacturers so that, together, they could achieve industrial scale local production of these products no longer existed due to the government’s policy of non-interference and liberalisation. The relaxed control of importation, strong local currency, low duties and lack of locally produced products led local suppliers to import and sell branded equipment from abroad. The manufacturers of this equipment, now with well-established markets, bought many of the local manufacturing companies and, having entered the market without risks, now operate successfully in Brazil. These large international companies tended to assemble parts produced by their group or bought in bulk abroad. The drop in local purchasing forced the closing or shrinkage of the remaining manufacturers of electronic components. The introduction of Band B cellular services in 1996 greatly increased importations. The new concession holders, anxious for a quick return on their multi-billion dollar investments, did not take time to evaluate local producers. They imported entire systems and contracted installation services abroad. The large foreign operating companies that bought Brazil’s privatised operating companies used their large-scale purchasing power and bought most of their equipment abroad where they obtained better prices for the very latest technologies. Today, Brazil imports US$1.7 billion in integrated circuits, US$360 in diodes and transistors, US$500 in TV picture tubes, US$220 in printed circuits, US$300 in capacitors and resistors and US$120 in liquid-crystal displays. The value and volume of importations will continue to grow with the introduction of new technologies, digital TV for example, unless action is taken to stimulate local production. Brazil’s electronic complex will offer excellent investment opportunities this decade. In addition to the above-mentioned products, other electronic consumer goods and supplies that do not yet appear in the statistics will offer excellent business opportunities. Brazil’s policy, nowadays, is to attract new manufacturers by offering incentives and compensation to groups interested in bringing new technology to Brazil. The Government’s choice of the GSM standard for PCS mobile phones was not just a technical decision. The companies who produce this equipment abroad committed themselves to producing this equipment in Brazil. The government’s choice of a digital TV standard, currently being studied, will be strongly influenced by agreements to manufacture equipment locally. Conclusion The government’s monetary policies, particularly foreign exchange, will have a strong impact upon the success of the current industrial policy of encouraging local production. The decision to let exchange rates fluctuate freely now makes it more advantageous to produce goods locally than to import them. The more the value of the local currency drops the cheaper it becomes to produce locally and the more expensive it becomes to import. This self-regulatory mechanism has proven to be quite effective in 2001.
