A fascinating article about BRAZIL on CNET

[TotallyOz]

SAO PAULO, Brazil--Drive through the Morumbi neighborhood and you'll see luxury homes and one of the city's best hospitals. But head just two blocks further and you will find yourself in Paraisopolis, one of the city's many slums.

No wonder that tech executives see the Brazilian market in equally divergent terms.

Brazil is the world's fifth-largest PC market and is part of the influential BRIC (Brazil, Russia, India, China) that always gets talked about. Yet for all its strengths, it does not have the cash influx of either India or China, nor does it have those countries' strong education systems, cheap labor forces or access to capital.

"We always joke that the BRIC is really IC," said Claudia Fan Munce, an IBM executive who grew up in Brazil and focuses on IBM's venture efforts in emerging markets.

From where Intel Brazil general manager Oscar Clarke sits, Brazil is doing just fine.

"Besides China, Brazil is the beautiful lady in the party when we talk about emerging markets," Clarke said.

As a PC sales market, Brazil is unquestionably strong--having passed countries like Germany to become the fifth-largest computer market in the world. It's also a hub for banking technology and open-source software. At the same time, it is a place where abject poverty abounds, meaning that there are millions whose needs are much more basic than a new PC.

On the consumer PC front, Brazil owes much of its recent growth to broader availability of financing. Indeed, at many middle-class department stores, the PC price advertised is the monthly price with financing as opposed to the total price being paid over two to three years.

In some cases the interest rates are still high, but in many other cases rates are as low as 5 percent or 6 percent per year. That's compared with just a few years ago, when credit was scant and could be more like 5 percent a month, says Intel's Clarke.

A big part of this has been a government-backed "PC for all" program that subsidizes the interest rate for some models, though only those with Linux qualify.

"They do not accept Microsoft," Clarke said.

That said, some estimates show as many as 18 or 19 out of every 20 machines sold with Linux ultimately are converted to some form of Windows.

"There was a retailer in one of the countries that sold their systems with Linux," said Gartner analyst Luis Anavitarte. "They made a survey of clients within the first 30 days; 95 percent were already on Windows."

You will find global PC makers such as Hewlett-Packard and Dell, though the country also has some homegrown brands, most notably Positivo. Among the less well-known brands is Itautec, actually an offshoot of a leading Brazilian bank. According to Wikipedia, it was Itautec that was the first PC maker in Brazil to sell Windows 3.1 preinstalled and localized in Portuguese.

Brazil is also a key spot for Google, being a stronghold for the company's search and Gmail businesses as well as one of the only places where its Orkut social-networking service is a leader.

For a variety of cultural and economic reasons, Brazil will probably never rival India or China or even places like Vietnam as a place for labor arbitrage. However, it has made gains in other areas, such as access to capital.

"Venture capital is something quite recent in Brazil," said Augusto Cesar Godelha, secretary general of Brazil's ministry of science and technology. He noted that it is not a notion that is well-established in Brazilian culture and has been a stumbling block. "It was very difficult to find venture capital to use it to develop new companies. This has been changing," Godelha said.

"Venture capitalists are starting to come, not only from outside Brazil to Brazil, but even inside Brazil, there have been groups forming," he said.

One of the largest efforts is FIR Capital, a Brazilian firm that started in 1999 to invest in emerging technology companies. Last year, U.S.-based VC firm Draper Fisher Jurvetson took a shareholder interest in FIR.

Striving to improve education

Another key issue, along with capital, is Brazil's educational system. While strides have been made, both those in the system and outside it say it still has a long way to go.

The first step, Godelha says, was making sure that every child is being encouraged to go to school. Now, he says, the country is working on improving the quality of education. It is still the case, for example, that most students go to school for just four hours a day.

"It is not only the universality," Godelha said. "It has to be good quality."

Brazil is also a country with a huge gap between rich and poor, with favelas (slums) located throughout the country's largest cities.

"Brazil is a beautiful country," says Internet cafe owner Fernando McCray. "But you have some problems--some economic problems."

Unemployment is a huge issue, accentuated by the huge number of young people who enter the working-age population each year. "We need to open every year 2 million jobs," McCray said.

But even with where Brazil's education and venture capital are today, large multinational companies are finding big opportunities. IBM, for example, has 11,000 workers in Brazil.

Chip design software company Cadence has been working to help develop a microelectronics industry in Brazil.

In May, the company had a summit that included hundreds of government and technology leaders, including Brazilian President Luiz Inácio Lula da Silva and Advanced Micro Devices' Hector Ruiz. Cadence also has worked to develop a one-year post-graduate program in commercial chip design aimed at training 1,500 designers over the next several years.

Wendy Reeves Dunn, who is Cadence's vice president of worldwide alternate channels, said Brazil has seen much value coming into the country in semiconductors made elsewhere and is eager to get in on the act.

While chip manufacturing plants are expensive, Dunn said the country has eagerly embraced the idea of designing more chips in Brazil, even if they are made elsewhere.

Some of Brazil's most successful efforts, Dunn said, have focused on chips unique to the Brazilian market. One example is an RFID (radio frequency identification) chip that caters to the country's huge agribusiness economy. "They are actually designing chips for cows' ears," Dunn said. "They are new for Brazil and they are designed in Brazil."

That's already a large market, given that Brazil has more cows than any other country. But it's just the start, Dunn said, adding that Brazil has a mandate that automobiles also get tracking chips. "Those same RFIDs, those will go into cars."

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