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

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.

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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’s 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. 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.

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.

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.”

Reuters