Foreign Firms Flood Market, Making Local Industry Reel

BRAZIL is emerging as one of Latin America's largest markets for multinational personal computer firms.

After years of protectionist legislation aimed at developing an indigenous computer industry, Brazil has lowered tariffs and opened its markets. The multinationals have flooded in, and consumer prices have dropped. As a result, critics say, industry employment has declined 55 percent and Brazilian-controlled research and development has been virtually eliminated.

Brazil has an estimated 1.5 million to 2.5 million PCs, says Roberto Pinto, business-development manager at International Business Machines Brasil Ltd. Because of the large amount of contraband smuggled in every year to avoid taxes, no one is sure of the exact number. ``Annual PC sales will reach about 400,000'' this year, Mr. Pinto says, with IBM controlling about 10 percent of the market.

Beginning in 1984, the Brazilian government sought to develop a local computer industry that would compete with the United States and Asia. But tariffs reached 70 percent on some products, and combined with other taxes, PCs cost four to five times more than US computers. These policies shut multinationals out of the market unless they set up Brazilian partnerships.

In the early '90s, Brazil boasted more than 60 computer-hardware firms. Then, in October 1992, under pressure from the US, Brazil instituted free-market reforms that lowered tariffs to 35 percent. (Within the next few years, tariffs will likely fall to 20 percent.) The result was shocking for the local computer industry. Most of the 60 hardware companies folded. Today, six remain, and all but one have joint agreements with multinational firms.

``The attempts to develop an independent computer industry failed for sure,'' says Ilan Goldman, president of ASSESPRO, the Rio de Janeiro software trade association. ``The hardware companies never developed new technology.'' So when prices came down, consumers went for brand names such as IBM, Compaq, and Sharp.

Brazilian software faced a similar fate. Today, Mr. Goldman estimates that foreign firms such as Microsoft sell 90 percent of the new programs bought in this country.

Consumers, meanwhile, benefited from the reforms. Software prices run only slightly higher than US prices. Imported hardware now costs about 30 percent more than Brazilian-made PCs of the same quality, says Airiel Bergher, president of the retail company Soft Express. But Brazil is also experiencing some of the downsides of multinational firms dividing up the market. One computer retailer, who requested anonymity, says IBM is selling its Brazilian-assembled PCs at very low prices and offering favorable financing. He claims they sell the computers at below their cost of production. ``They are dumping to build up market share,'' he says. ``No one else is doing that.''

Pinto denies the charge, saying IBM's prices are ``low because we are producing locally in an efficient plant.'' He adds: ``We expect IBM's sales to grow by about 200 to 300 percent this year compared to 1993.''

The collapse of most of the country's hardware companies resulted in more than a 55 percent loss in employment in the computer industry, says Paulo Tigre, an economics professor at the Federal University of Rio. ``The loss of manufacturing jobs was devastating, especially in a country with already-high unemployment,'' he says. Brazilian companies had developed some innovative research and development projects in the financial sector, Professor Tigre says, but ``that was discontinued when foreign firms took over the market.''

Brazil is far from being a completely open market. Tariffs and taxes still add about 70 percent to the price of a foreign-made PC, encouraging multinationals to set up local manufacturing. Locally made products are exempt from import duties and some local taxes. IBM, Digital Equipment Corporation, and Compaq Computer Corporation have or will soon open plants here, providing jobs for thousands of Brazilians. Brazil's tax system ``forces you to produce locally,'' Pinto says.

Brazil's local software industry is starting to recover from the shock of open markets, Goldman says. Brazilian-owned companies are localizing programs in Portugese and developing smaller programs that use less computer memory. ``We've learned to look for the niche markets,'' he says.