Potential for growth puts spotlight on EMSs in Brazil

Despite a recent cooling off in subscriber growth, Brazil represents an increasingly attractive market for outsourced manufacturing in consumer electronics in general and mobile phones in particular.
Brazil’s embrace of free markets, a regional free-trade agreement and the long-term growth of its economy, among other factors, may induce top-tier handset vendors to turn to electronic manufacturing services, or EMSs, to ramp up production volume for the country’s domestic market and for regional exports as well, according to iSuppli Corp.
Though four of the top five handset original equipment manufacturers (OEMs) already manufacture their products in Brazil-
according to analysts, Sony Ericsson Mobile Communications L.P. is the lone exception-EMSs offer advantages that could attract more business, said Adam Pick, iSuppli analyst for ODM and EMS services.
Brazil is one of the so-called BRIC countries-Brazil, Russia, India and China-whose economies and populations are large and growing rapidly, drawing a healthy share of foreign investment. OEMs that invest in manufacturing by EMSs, which typically produce electronic products, in whole or part, to their clients’ exact specifications, can ramp up production without the capital required for their own manufacturing.
Thus, a handset OEM such as Sony Ericsson-in concept, at least, though it has announced no such plans-that decides to pursue production of large volumes in emerging markets to gain market share could use EMSs to move rapidly in that direction, without a commitment of capital required to go it alone. Sony Ericsson just announced a new relationship with two EMSs in India, Foxconn and Flextronics, that also operate in Brazil. A spokesperson was not immediately available to discuss the company’s current business model in Brazil.
“Should Sony Ericsson become more aggressive in tackling the low-cost sector in Latin America, then it would have to consider reliance on its EMS partners,” said Jeffrey Wu, another ODM and EMS analyst at iSuppli.
Brazil’s wireless revenue last year totaled $3.2 billion, including handsets and infrastructure, Pick said. Growth is projected at 17 percent for the next five years, 2007-2011. The handset business in Brazil is a $530 million annual market, growing at the same pace as wireless overall. The country has about 92 million mobile phones in use in a country with a population of 188 million.
“There’s room to grow, but not on the scale of an India or a China-those are different animals, based on population size and growth rates,” Pick said.
Nokia Corp., Samsung Electronics Co. Ltd. and LG Electronics Co. typically do their own manufacturing. But Nokia, for instance, despite its own expertise in manufacturing efficiencies and famous of late for making healthy margins on low-end phones for emerging markets, has had long-term relationships with EMSs-Jabil Circuit and Elcoteq-that also work in the Brazil market. Samsung and LG, in contrast, have recently have made changes in their telecom executive suites and are seeking to reinvigorate their global market share, which also might lead them to increase production in a market such as Brazil where EMSs offer an efficient model for ramping volume.
The drivers are two-fold, said Pick. One is Brazil’s modernization and ambitions and the other is the needs of specific OEMs.
“Given the protectionist history in Brazil, the country’s leaders want to stimulate innovation, because they had fallen behind,” Pick said. “They’re now looking to stimulate the electronics industry and grow the market for these types of products and be a regional leader.”
Brazil is also likely to take advantage of its membership in MERCOSUR, a South American trading bloc that includes Argentina, Uruguay, Paraguay, Chile, Bolivia, Peru, Colombia and Ecuador and is forging cooperation to develop the transfer of technology among its members.
Then there’s the profit motive for individual companies seeking to take advantage of an improved climate in Brazil and its region.
“Hey, everybody is looking for growth, everybody is looking for opportunity,” the analyst added. “An OEM never wants to buy manufacturing equipment, especially if they outsource to begin with. The OEM benefits from the use of the EMS.”