DePaul CDM Study Abroad December 2008 - Brazil

Network Economy of Brazil

When compared with other parts of the world, Brazil has a relatively young economy.  The country of Brazil was discovered only eight years after America in the year 1500, but the Portuguese did not actively start developing the colony until the 18th century.  In the beginning, Brazil was only used for its raw materials and did not become industrialized until the 19th century.  In fact, the country of Brazil was primarily an exporting economy until the middle of the 19th century.  Brazil’s Gross Domestic Product (GDP) is 10th in the world and dominates the economies of South America (ACIF presentation).  But how is Brazil’s economy adapting to the Internet?  The benefits of a networked economy are many and have been well-established for many developing countries.  Our group traveled to Brazil and met with representatives of eight companies that represent various diverse industries.  After meeting with these companies, we are in a position to assess the readiness of the networked economy of Brazil.  This analysis is modeled after the Framework in the Readiness Guide developed by the Center for International Development at Harvard University.

The first step in assessment of Brazil’s networked economy comes by reviewing ICTEmployment opportunities. As stated in the Readiness Guide, “ a thriving job market for ICTprofessionals provides added incentive for growth of ICTadoption, training programs and overall use of information and communication technologies within the economy.” (Readiness Guide 16). Information technology has a long history in Brazil. The first IT company in Santa Catarina state was named CETIL, which was founded in 1969 and was focused on the textile industry. Workers from this company went on to become technology entrepreneurs. In 1986, the first technology incubator was formed (ACATE) and in 1992 another technology incubator named Blusoft was formed in Blumenau. In the year 2000, a project named Gragalos (“bottleneck”) was launched to help identify and solve issues pertaining to IT. At the time, it was difficult to find hardware in Brazil and software was not perceived as being easy to use or develop. In addition, network costs were high due to a lack of necessary infrastructure. Financing for IT initiatives was considered to be very difficult. Since 2000, many of these problems have been addressed to some degree. Network costs have decreased dramatically with the spread of fiber optics under railroads and privatized highways. SOFTEX is a program that was designed to foster export of Brazilian software, which has especially embraced building upon open source projects. Growth in the software industry has led to slow expansion in the area of professional services. Financing has become easier as government, universities, and private organizations have stepped in to fill the void. However, many of the problems identified in Project Gargalos still remain. A networked economy cannot be nurtured without workers who have developed the necessary skills. Because many jobs in the IT field are highly trained positions, basic education is only the first step in developing workers. Education is well regarded in federal universities, but post-secondary education is unequal and lacking in many parts of the country. As a result, it is very difficult to complete a higher level of education at a Brazilian university without having had access to proper resources. An example of this competitive disadvantage can be seen at the Laboratório Nacional de Computação Científica (LNCC). The LNCC is an excellence center in Brazil that performs research in areas that include scientific computing, control and filtration of dynamic systems, biosystems and bioinformatics computational modeling, flow and transport computational modeling, and equilibrium and optimization problem computational modeling. Working at the LNCC is very desirable because of its access to resources and the relationships it has forged with researchers around the world. However, there is a very limited group of well-trained professionals with the credential of a Masters or Ph.D. to teach or perform research at the institution. Workers who attempt to join the IT industry are also held back by outdated labor laws that were originally designed to maintain the growth of old industries and protect from outside capitalists. In some cases, these laws are more than sixty years old. As a result, it becomes more difficult for Brazilian businesses to grow a domestic IT force, and many of the traditional advantages foreign companies would acquire when outsourcing their IT positions are not possible in Brazil. This makes it more difficult for Brazilian companies to harvest and grow their intellectual capital. The country of Brazil also misses out on outsourcing possibilities enjoyed by countries like China and India. In some cases, existing Brazilian companies find it very difficult to adapt their businesses to incorporate the new role of IT. Diário Catarinense, a local newspaper in the state of Santa Catarina, is having difficulty transitioning from a “broadcast” medium to more of a niche market because the current structure of the company has separate reporting for TV, paper/radio, and the Internet with people and advertising under each category. They are working towards simplifying the company’s structure with less duplication, but in some cases are having trouble retraining their workers with more IT focus and specialization of skills. Taxes of various kinds levied by the Brazilian government are a major impediment to the growth of IT. Taxes correspond to 40% of GDP, which is the largest in the world (ACIF presentation). 58 different taxes exist in Brazil, and sometimes these taxes cascade upon each other. The gasoline tax, for example, adds 55% to the price of gas in Brazil. It is still costly to obtain computer hardware in Brazil because of high import taxes. Employment taxes are also very expensive in Brazil. For every real paid to an employee, a real is supposed to be paid to the government. The IT industry is especially hard hit because the higher salaries commanded by these positions require much more tax to be paid. As an example, the IT industry in Floranópolis, Santa Catarina paid the 3rd highest amount of ISS taxes for financial and professional services (ACIF presentation). However, even with all these disadvantages, the IT industry in Brazil is still managing to grow. In Santa Catarina, there are 300 software companies and 100 hardware companies, with 4,000 direct jobs and 60,000 indirect jobs. This results in R$800 million IT sector that is currently expanding by 20-30% a year. With all the disadvantages, how does the Brazilian IT industry manage to expand? One way is through the use of technology incubators that are designed to nurture IT companies. Audaces, a company that develops CAD systems for the apparel industry, is one such successful IT company that collaborated with an incubator. Audaces was founded in 1992 by computer science students who were studying mechanical engineering at a federal university. The company started receiving help from incubator in 1995, and in 1996 began the business of fashion automation software. Audaces uses CRM that was produced by another incubated company. Neki Technologies, a boutique IT firm founded in 2002, is a software company that specializes in the development of open source Java solutions and received its start through the LNCC. Neki University, an onsite-mentoring program, provides Neki employees the training they need throughout the lifecycle of a particular project. Even though it is challenging for a small company like Neki to recruit and retain employees, they leverage a multitude of strategic partnerships including the Woodrow Alliance, and the Red Hat Business Partnership. They also rely on a special alliance with a local organization named Petrópolis-Technópolis. A “Technópolis” is a loose confederation of institutions, governments, and companies that help small companies grow and succeed. These confederations are affiliated with companies all over Brazil. All have similarities, but are locally structured to allow flexibility and quick change. Petrópolis-Technópolis is affiliated with over 75 companies and is just one example of the Technópolis movement. A Technópolis is considered to be more than just a partner, and more comprehensive than the concept of a technology park. We think of technology parks as concentrations of companies in a central space, which may be affiliated with universities and are normally focused on technology. A Techópolis, on the other hand, is an organization that is affiliated with universities and uses both public and private funding to encourage a multitude of different companies. Desirable companies are actively shaped and recruited, must be connected with the economy and the local community, and focus on social and economic development. A Technópolis is purely focused on strategy. The goals for Petrópolis-Technópolis are the growth of IT jobs, fiscal incentives for companies, and the building of infrastructure (such as broadband in the mountainous region of Petrópolis). These incubators work to create the jobs that are needed for Brazilian businesses to be successful in the IT space. In the context of the Readiness Guide, our experience suggests that Brazilian companies are generally between stages 2 and 3 in the area of ICTemployment opportunities.

Besides technology incubators, Brazilian companies and organizations are working to create and improve business to commerce (B2C) opportunities. The Associação Comercial e Industrial de Floranópolis (ACIF) association in Santa Catarina provides public information about businesses in Santa Catarina, such as access to marketing information and a public job bank. An example of a company which utilizes the Internet to greatly expand their customer base is Eliane Ceramic Tiles in Santa Catarina state. Eliane was founded in 1960, when Maximiliano Gaidzinski transformed a brick factory into a plant for manufacturing glazed ceramic wall tiles. Over the past 40 years, Eliane has grown domestically to produce ceramic tiles in 12 factories, with total production capacity of more than 30 million square feet per month. The company currently employs 2,200 employees and has estimated annual sales of $180 million dollars. This is currently the biggest tile industry in the Americas. With its products sold by more than 15 thousand outlets worldwide, Eliane is Brazil's largest exporter of ceramics. Its sales in 2004 were over $67 million. The company's headquarters and four of its plants are in its hometown of Cocal du Sol. It employs approximately 2,400 hundred professionals, including 200 internationally located sales agents. Classified ads are a very important moneymaker for Diário Catarinense. The local paper is going after more lucrative markets, such as cars, real estate, and travel. In order to connect on the Internet with these potential customers, they launched a new Internet portal named hagah (http://www.hagah.com.br) in 2006. It is billed as a city guide aimed at the south region of the country, which advertises cars, real estate, routing services, local events, and services. In the context of the Readiness Guide, our experience suggests that Brazilian companies are generally between stages 2 and 3 in the area of B2C opportunities.

Many of the same problems and solutions in B2C can be seen in the area of business to business (B2B) interactions. For example, ACIF provides services to businesses such as insurance, legal assistance, and access to business-oriented seminars and training courses. In general, companies we visited do a good job at using the Internet to advertise services to businesses, but not so well at tapping into the international business market. One hindrance is the language barrier. Since Portuguese is not well spoken in areas outside of Brazil, it is difficult for customers who do not speak Portuguese to use websites that are not translated into other languages. For example, Audaces has distributors in much of Latin America and are the markets leaders in the part of the world. However, they only have a few distributors in Europe and Asia. Global competition exists in countries like France, Israel, and the US, and well as local players in China and India. The typical Audaces customer is a small to medium sized company in Brazil. Their website is translated into English and Spanish, with Turkish under construction, but product support does not seem to be tailored well to customers outside Brazil. Historically, Brazil has been seen as having a disadvantage on the world economic stage because it uses high import taxes to give Brazilian industries a domestic advantage. It was thought that Brazilian markets would be enough to grow the economy, but this is not the case because so many Brazilians live below the poverty line and do not have high buying power. For Diário Catarinense, advertising revenue is not as important as it is for papers in the US. The company has general metrics on web access but not much specific information to offer to advertisers. Rio Deserto, a mining concern in Satna Catarina, supplies a large majority of steel mills in the United States with their coal. The orders come via two separate programs that were developed internally by one employee who has no formal support or training in IT. If something were to happen to their employee or to the ordering system, they have no disaster recovery plan. Therefore the company is at risk, and needs to invest in IT to improve the ordering system they depend on. In the context of the Readiness Guide, our experience suggests that Brazilian companies are generally at stage 2 in the area of B2B opportunities.

Lastly, the Readiness Guide focuses on the role of government in the development f a country’s networked economy. We did not visit any governmental institutions, but some of the organizations we visited have both direct and indirect governmental ties. We did not visit any organizations e-government opportunities: The LNCC was started (and is funded by) the Brazilian government. The LNCC maintains strategic alliances with firms all over the community, and attracts bright students from different regions of Brazil to pursue interests in scientific computing. In addition, Petrópolis-Technópolis works with government at all levels (federal, state, and municipal) as an informal liaison between organizations and the government. According to Ann Yates, who completed a comprehensive review of Information Technology in Brazil in 2003, governmental websites allow many kinds of bureaucratic tasks to be handled online, such as requesting a passport, updating your address, or filing taxes (Yates, para. 3). In some cases, tasks cannot be handled online but forms can be downloaded and printed out by Brazilian citizens. Most governmental ministries have an online presence of some sort, where contact information can be obtained. In the context of the Readiness Guide, our experience suggests that Brazilian companies are generally between stage 2 and 3 in the area of e-government.

In conclusion, our experience suggests that the Brazilian economy is at a high stage 2. However, this is likely not representative of the entire country of Brazil, because our experience is only with a handful of companies in two Brazilian states. Brazil is a huge, diverse country with a mix of very rich and very poor citizens. This inequality can cause society as a whole to suffer, or at the very least not develop to its full potential. The southeastern section of Brazil is the richest part of the country, with São Paulo contributing a full 50% of the GDP and Rio de Janeiro and the south region contributing most of the rest. Not surprisingly, this is where most of the technology clusters in Brazil are located. The north of the country needs more investment and wealth distribution, and collected taxes are not being distributed in an equitable manner. Until these issues can be addressed, the progress of Brazil’s networked economy will always be at risk.

Ann Yates. “Information Technology In Brazil.” American University December 2003 http://www.american.edu/initeb/ay5376a/egovernment.htm

Apresentacao_Petropolis_Tecnopolis. PowerPoint presentation. Petrópolis-Technópolis visit, 15 December 2008.

“Audaces. A tecnologia da moda.” Audaces. 2008 http://www.audaces.com

Oral presentation. Ricardo Valls and Carlos Eduardo Nascimento. Associação Comercial e Industrial de Floranópolis visit, 19 December 2008.

Oral presentation. Claudio Thomas. Diário Catarinense visit, 18 December 2008.

Oral presentation. Marcelo Carius. Neki Technologies visit, 18 December 2008.

“LNCC – Laboratório Nacional de Computação Científica.” Laboratório Nacional de Computação Científica . 2000 http://www.lncc.br/ingles/estrutura/default.php

Oral presentation. Avenida Getúlio Vargas. Indústria Carbonífera Rio Deserto visit, 17 December 2008.

Oral presentation. André Gaidzinski. Eliane Ceramic Tiles visit, 17 December 2008.

Readiness For The Networked World: A Guide For Developing Countries. Information Technologies Group, Center for International Development at Harvard University http://cyber.law.harvard.edu/readinessguide/guide.pdf