Challenges for the Electrical and Electronics Industry 95 The article highlights features of Brazil’s electrical and electronics industry, and the challenges it has faced in recent decades. Although reliance on imported parts is still heavy, the industry has achieved positive results, with good prospects for significant growth and job creation.
stablished in 1963, the Brazilian Electrical and Electronics Industry Association (Abinee) represents the nation’s elec- Etrical and electronics industry. Its mission is to ensure the industry’s competitive development, uphold its legitimate interests and strengthen its community relations. Currently, over 600 Brazilian and international industries of all different sizes and specializations are represented by Abinee. Their gross revenues account for about 4.8% of Brazil’s gross domestic prod- uct (GDP). Due to the many and diversified product lines, these industries are divided into 10 business areas: Industrial Automation; Electrical and Electronic Components; Industrial Equipment; Power Generation, Transmission and Distribution; Computers; Electrical Supplies; Tele- communications; Electronics Manufacturing Services; Electrical-Elec- tronics Systems in Buildings, and Household Appliances. The products manufactured by these industries include telephones (cellular and land), hermetically sealed compressors, computers, electri- cal and electronic components, electric motors, car radios, transform-
97 ers, commercial and industrial automation equipment, circuit breakers, plugs, outlets, alarms, surveillance cameras, etc. For ease of understanding, the various areas in the electrical and electronics industry may be divided into two groups, based on the tech- nological level of their products, their manufacturing procedures and their competitive advantages. The first group comprises electrical goods, such as Industrial Equipment; Power Generation, Transmission and Distribution Equip- ment; Electrical Supplies and consumer goods (major appliances and small appliances). These are considered mature technology products. The second group embraces electronics goods characterized by rapid technological development, periodic releases of new products and constant innovation. Here are included areas such as Industrial Auto- mation; Electronic Components; Information Technology; Electronics Manufacturing; Building Electrical-Electronics Systems; Telecommuni- cations and consumer electronics devices. The technology underlying electrical products is accessible and change is relatively slow. Here, the ability to compete is directly linked to cost-management capability and the competitive structure in the country itself. These industrial sectors are therefore greatly burdened by the so-called “country cost” of doing business in Brazil, due to high taxes and tariffs, which adversely affects their performance. Since the opening up of the economy in the early 1990s, difficul- ties experienced by these industries in the face of competition brought about investment—but this was primarily in business administration. Only secondary consideration was given to expanding plant capacity and implementing new industrial designs. Demand for new products was largely met by imports, often procured by the industries them- selves.
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Beginning in 1999, this industry was especially favored by the currency devaluation which contributed to improving its competitive position in both the domestic and international markets. However, there remain to this day, the drawbacks associated with heavy taxes on their products. Large-scale production is also an indispensable factor in reducing costs and putting the industry on a competitive footing. A growing domestic market is therefore an important stimulus to industrial devel- opment, and that again reemphasizes the need to find solutions for cor- recting inefficiency in order to encourage new investment in Brazil. Electronic goods manufactured in Brazil began, in 1991, to benefit from a rollback of nationalistic domestic content requirements. Also eliminated were the attendant regional disputes and missed opportuni- ties for adding national value. These were replaced by a Basic Produc- tion Process certification system. Special conditions were also created, favoring electronic compo- nent imports by established companies operating inside the Manaus Free-Trade Zone. The 88% reduction factor on import tariffs, however, tilted the playing field against local components and parts manufactur- ers, unlike what happens in most countries.
99 These procedures placed the parts manufacturing industries on an unequal footing in the marketplace, since they allowed end-product manufacturers to import complete products in the form of semi - or completely knocked down kits (SKD/CKD), which drove out of the mar- ket products made by local companies, even the ones with competitive prices, quality and shipping times. Among the outcomes were the closing down of important vendors supplying Brazil’s electronic manufacturing capacity, layoffs of highly specialized personnel and the exclusion of parts and components man- ufacturers from product development processes. There is no denying that hardware technology is becoming increas- ingly concentrated in components. That means that the cost of end-
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100 products is converging on the sum of the costs of their constituent parts. Without a local industry producing a long list of components in volumes sufficient to meet internal market demand and earn hard cur- rency from exports, there is no way to have finished-goods industries that are competitive in the long run. Furthermore, the electronics industry has suffered significant losses because of illegal imports in the so-called gray market, which nowadays accounts for a large fraction of all products sold in the com- puter market, for example. In the case of personal computers, that fraction amounts to approximately 65% of the total market. Additionally, the widespread dissemination of electronic technol- ogy has led to the replacement of mature technology products by other, leading-edge products, again increasing imports to the detriment of local production. As we have seen, today’s electrical and electronics industry is heavily dependent on imported content—especially electronic compo- nents—which make up more than half of the industry’s total imports. Preliminary data available to Abinee indicate that in 2005, pur- chases of products from overseas came to $14.8 billion, while exports remained at $7.6 billion, for a trade deficit of $7.2 billion. Imports of electrical and electronic components alone were valued at $9.5 billion, of which amount $2.9 billion were spent on semiconductors. As a response to this situation, Abinee has recommended adop- tion of an Industrial Policy to beef up local components manufactur- ing industries and enhance their competitive strength to the point of attracting international semiconductor and component parts manufac- turers to Brazil. Abinee also has serious commitments regarding issues such as the devaluation of the Real, which has created competitive difficulties
101 for Brazilian manufacturers, lowering interest rates—which are still at astronomical levels—and continuing progress toward tax reform. For some of the products in our industry the tax burden exceeds 40% of the price paid by the consumer. This discourages consumption and reduces our consumer base. Beginning in the latter part of 2003, the Brazilian economy has been picking up steam, and the resulting growth is generating invest- ment in industry. However there is still some uncertainty as to the continuity of these investments as a result of the political crisis and delays in implementing government programs, such as the Industrial Policy program. Despite all difficulties, in 2005 the electrical and electronics indus- try tallied up billing revenues of R$94 billion—a nominal growth rate of 15% (8% real growth) compared to 2004. This happy result was lever- aged by a 30% nominal growth rate in telecommunications, as a result of excellent performance in the cellular phone segment in both foreign and domestic markets. The industry is expected to end the year with 133,600 workers on the payroll, slightly more than in December of 2004. A recent survey by Abinee puts expected nominal growth for the industry in 2006, again at 15%, with revenues close to R$108 billion. Real growth—corrected for inflation—is expected to be about 9%. The large gain in the currency exchange rate has not had a dis- cernible effect on exports, but it has increased imports, increasing the pressure of competition on local products. The most severely affected sector has been Components, in which imports have increased 22% compared to 2004.
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103 Growth in the sector is being driven primarily by strong perfor- mance in the Telecommunications, Computer Products and Industrial Automation segments. Other contributing factor include the Computers for Everyone pro- gram, stepped-up enforcement targeting piracy in the gray market, and continuing increases in exports. The large trade deficit in electrical and electronics industry prod- ucts has prompted Abinee to again petition the Brazilian government to do something to encourage technological development, increased production, job formation, expanding exports and competitive substi- tution of imports. Brazil cannot go on indefinitely financing growing trade deficits in this industry. Among the suggestions are concerns regarding the imminent move to a digital TV system. Regardless of which system is chosen, we believe that consideration should be given to establishing manu- factures of components, parts and content to supply that segment’s domestic and export demand in Brazil. Attracting and developing the components industry is not only good strategy for the future of Brazil’s electrical and electronics plant capacity, but will also make it possible to reverse the increasing depen- dence on imports. It is never too much to clarify that this does not mean we should replace imports regardless of cost. The idea is to meet the pricing, qual- ity and shipping time requirements of a globalized market. We also propose improved standards for establishing Basic Pro- duction Process (PPB) requirements originating in the Information Technology Law and applied to the Manaus Free-Trade Zone, in order to increase national added value. We believe in constantly increasing
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investment in research & development and technological innovation, and in setting priorities which reflect market requirements. Another important policy Abinee is backing is decisive action by government enforcement agencies to curb sales and imports of bootleg products and other unfair trade practices. Finally, we continue our efforts on behalf of a broad industrial policy to strengthen companies already established here, to attract new investment and provide for the nation’s continued, sustainable development. We reaffirm our preference for the industries that believe—and invest—in Brazil; companies that improve their product quality, add value, create jobs and generate income.
Ruy de Salles Cunha President of the Brazilian Electrical and Electronics Industry Association (Abinee) www.abinee.org.br
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