BRAZILIAN IT INDUSTRY OVERVIEW 2010

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Economic and political ovErviEw on BrazilBrazil is one of the countries which experienced the fastest recovery from the downturns caused by the financial crisis in 2008. This success results from a combination of solid macroeconomic basis and a stable political scenario, which differentiates Brazil from most developing countries.

The increase in the purchasing power of the new Brazilian middle class was also a promi-nent element for the recovery of Brazilian economic growth. Since 2002, more than 30 mil-lion people have migrated to the middle income segment in Brazil, which currently repre-sent 53.6% of the population (103 million people). In that sense, redistributive initiatives promoted by the government, such as the Bolsa Familia program and the increases in the minimum wage played an important role in improving the purchasing power in Brazil.

After overcoming the period of turbulence in 2009 and recording a slight decrease of 0.2% in the GDP, it is estimated that in 2010 Brazil will reach an economic growth rate of 6.5%. With this positive outlook for economic growth, companies have resumed investment plans, reflecting directly in the decrease of the unemployment rate, which reached 9% at the height of the crisis, and now returns to pre-crisis levels of 7.6%. Regarding foreign trade, Brazil has generated export surpluses since 2002, reaching the export amount of USD 152 billion in 2009. By the beginning of the global economic crisis, the positive trade balance could be explained primarily by strong global demand for commodities (agricultural products and iron ore), natural resources (oil) and the high prices of these products in international markets. The strong economic growth in the country during this period also boosted the growth of imports, which grew at an even faster pace than exports. Therefore, thanks to domestic savings and the high trade surplus rates, Brazil has increased its international reserves at unprecedented levels. In December 2009, the amount of Brazil’s interna-tional reserves reached USD 241 billion. This indicator of liquidity is an important instrument for the Brazilian Central Bank to adjust foreign exchange rate and stabilize the domestic economy when its balance of payments is affected by external shocks. Besides the consistent economic results tied to inflation targets, stable interest rates, low unemploy-ment rate and good prospects for foreign trade despite the appreciation of the Brazilian currency, the country also counts on a consolidated democratic regime. The country’s political stability is a result of a transparent and fair electoral process that preserves the pluralism of political parties. In this sense, the consolidation of democratic values should minimize the inherent political risks in the change of government in an election year. The good economic and institutional fundamentals of Brazil resulted in the achievement of invest-ment grade by Standard & Poor’s and Fitch in 2008. The international risk rating is among the lowest in history, raising the confidence level of foreign investors and the volume of capital in the country.In 2008, at the pre-crisis period, the country registered a record FDI of USD 45 billion becoming the main recipient of foreign investment in Latin America and ranking the third position among the BRICs, ahead of India. In 2009 due to the global economic downturn, the amount dropped to USD 25 billion, however, for 2010 it is expected to recover the FDI at levels above the 2009. The large do-mestic market and the economic growth rate in the recent years were the main factors for attracting foreign investments into the country.

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In addition to having become a major FDI destination, Brazil has also increased investments abroad in recent years, becoming a relevant capital exporter, especially in Latin America. According to the Fundação Dom Cabral, in 2009 the 20 largest transnational companies in Brazil totaled USD 108 billion in assets abroad, representing 63.9% of the total stock of Brazilian capital abroad.

Regarding the forecast of investments in infrastructure and in the production chain, the expected in-vestment in Brazil has already surpassed the pre-crisis levels. According to a survey of BNDES, which mapped investments planned by the industrial sector, infrastructure and construction sectors, Brazil will invest BRL 1.324 trillion (USD 735 billion) between 2010 and 2013, 54.6% higher than the amount invested between 2005 and 2008. This will allow an annual growth rate of 5% in coming years.

Investments durIng the perIod 2010-2013

Source: BNDES (Brazilian development bank)

The two most important sport events in the world which will be held in Brazil in the coming up years, the World Cup (2014) and the Olympic Games (2016) are going to leverage significant financial con-tributions in transportation, construction areas as well as in the upgrading of the telecommunica-tions network with the deployment of new technologies (3G, digital TV and Wimax), increasing the number of cities with Internet access and the speed of data transfer. The estimated investment for telecommunications infrastructure during 2010-2013 is around BRL 67 billion (USD 36 billion).

Bearing in mind the Brazilian position in the international sphere, the economic, institutional and political stability in the country paved the way for a growing international role of Brazil as a reliable interlocutor in issues related to trade, finance and technology, both in South America and in mul-tilateral forums. In South America, Brazil has been very active in promoting the integration of the subcontinent, as well as closer political and economic relations with African, Asian and Middle East countries.

thE Brazilian it sEctor The Brazilian ICT sector has a peculiar and unique profile: the penetration of information technology services is above the world average, with excellence in many sectors, such as e-commerce, financial sector, e-gov, games and software management.

Regionally, Brazil’s leadership is incontestable. The country has the largest base of computers in Latin America. More recent data indicate that the country currently has 72 million computer termi-nals, and it expected to double this number by 2014.

Selected induStrieS Brl Billion uSd Billion

industrial sEctor 549 297

infrastructurE 310 167

construction 465 251

TOTAL 1,324 715

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The Brazilian IT-BPO market, the 8th largest and among the most mature in the world, has been evolving in size, coverage and complexity over the last few decades. In 2008 this sector turned over US$ 59.1 B. The private sector and the Brazilian government share ambitious goals to position the country as an increasingly relevant and strategic global player in IT-BPO.

Source: FGV, Teleco, Ibope Nielsen According to an IDC report, Brazilian IT spending in 2009 reached USD 31.8 billion, an increase of 17% compared to the previous year. Revenues from software and IT services amounted to USD 15.5 billion. During this year, exports of software and IT services totaled USD 3 billion. Although Brazilian

IT exports correspond to a small share in the global market for IT services and outsourcing, the average annual growth rate of exports grew strongly and steadily in recent years. Brazilian IT service exports increased tenfold from USD 300 Million in 2005 to USD 3 billion in 2009, which underscores the great potential of Brazil in this sector.

Figures in telecom industry also reinforce the dimension and the potential of the Brazilian market. In late 2009, Brazil had around 174 million mobile phones subscribers, positioning it as the fifth largest in number of mobile phones in the world. Broadband connections finished the year with 21.6 million subscribers, with a penetration of broadband connections per 100 inhabitants of 5.8%. The acceler-ated growth between 2007 and 2008 can be attributed mainly to the spread of the 3G broadband connections through mobile phones and laptops.

The strong demand for technology in Brazil in recent years can be explained mainly because of the favorable exchange rate, combating the gray market (computers with unknown origin), fiscal incen-tives and easy credit to the consumer.

Moreover, the ICT industry was selected as strategic in the government´s industrial policy (PDP), and therefore, there are several instruments supporting the IT industry in Brazil (credit facilities, measures to consolidate companies through M&As, R&D, fiscal incentives, specific credit lines), especially focused on IT service exports. Such industrial policy aims to increase the IT exports to USD 3.5 billion in 2010.

As a result of its regional importance and its large domestic market, Brazil counts with the presence of major global players, benefiting particularly the expertise in providing IT services. Besides the presence of major multinational IT companies, Brazil has also competitive domestic IT companies that provide complex and customized applications in several business areas.

In this sense, the internationalization of Brazilian companies has benefited the country, promoting the interaction of domestic firms to international competition, leading to higher competitiveness levels, innovation and technological development and consequently to the increase in IT services

SuBScriBerS / connectionS

/ EquipmEnt (million) 2003 2005 2007 2008 2009

industrial sEctor 46.4 86.2 121 150.6 174

infrastructurE 1.2 3.9 7.7 10 21.6

construction 19.4 32.1 44.9 53.9 63

TOTAL 21.9 30.3 45.3 56.6 67.6

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exports to the global market. Brazilian companies have expanded their operations abroad, mainly to North America, Europe, Latin America and Africa.

Following the global trend, the domestic ICT companies are in the consolidation process. In 2009, the ICT industry was the sector that had more M&A transactions, with 53 of a total of 456 operations. For 2010, it is estimated that this number will be even greater due to the resumption of companies going public and the improved economic prospects in Brazil and abroad.

Another highlight of Brazil is related to the widespread IT use in the financial system. The country has one of the most sophisticated and integrated clearing and settlement systems. The Brazilian Pay-ment System is regarded as one of the most efficient systems in the world, which through its network connects financial institutions to the Central Bank, performing its interbank transactions in real-time and with high safety standards.

Regarding the innovation and science and technology indicators, Brazil is investing in 2010 around 1.5% of the GDP on research and development (R&D) activities. It is the highest level of investment over the last eleven years. Of this total, 0.65% will be invested by private and state companies, a similar percentage to the disbursement of the public sector.

In order to encourage innovation and attract investments, the country counts on a regulatory frame-work for intellectual property that provides higher levels of protection than those required by the WTO. In this sense, BSA (Business Software Alliance) and the IDC data have confirmed the active role of Brazil in combating piracy, with the reduction of piracy rate in recent years.

In line with its economic growth, Brazil has invested in the last two decades to the universalization of education. The latest data indicate that 98% (27 million) of children (from 7 to 14 years) are at-tending the basic education of 9 years. Secondary education, whose length is three years, gathers 9.4 million students. The professional education totaled 6 million people. A survey of the Ministry of Education conducted in 2008 revealed that there were 4.355 technical and graduation courses, directly related to information technology in Brazil. These courses qualify more than 85.794 people each year to enter the market. According to the Brazilian Ministry of Science and Technology, the number of graduated Masters and PhDs has been also increasing in Brazil. In 2008, 36,000 Masters and 10,700 PhDs were graduated. The educational system in the country has also had a fast growth in Scientific Publications, which has increased 11.3% per year, about 4.8 times the world average, representing 2.12% of the world’s production in 2008.

In summary, it is noteworthy that Brazil has achieved a leading position in ICT market and is pre-pared to become a global player in the industry, especially when taking into account the need to decentralize ICT activities from more politically and institutionally instable countries to more stable and predictable ones.

Besides the economic performance in terms of growth rates, characteristics such as macroeconomic consistency, reliable regulatory framework, solid political and institutional order, appropriate infra-structure, a large domestic market, experience in high value added services and widespread informa-tion technology diffusion have become key elements for long-term business strategic decisions.In all these respects, Brazil has had excellent performance in recent decades and it has clear condi-tions to maintain this performance in the coming up years and decades. For this reason, besides the country’s capacity in ICT area, Brazil is certainly a safe harbor for the global ICT activities.

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Brasscom´s goals and ExpEctations on this EvEntDuring three days (08 – 10 June 2010), the event BRASSCOM Global IT Forum to be held in Sao Paulo and Rio de Janeiro will aim to show to a selected group of executives of global IT-BPO compa-nies the potential that Brazil can offer as a strategic player in the IT-BPO sector.

To implement this initiative, BRASSCOM joined Gartner (world’s leading research and consulting company in information technology) to promote an event in Brazil, which will occur in parallel to the event Gartner Outsourcing Summit 2010 - Latin America and will include lectures from important players in the Brazilian IT market, whose contents will provide information on the political, economic and sectoral scenario of the country, as well as indicate future trends and opportunities in this mar-ket. The agenda also will include visits to financial institutions and large IT companies located in the country.

In addition, organizers will promote meetings between investors and IT-BPO companies established in the country, aiming at the establishment of business partnerships and investments.Due to the successful experience of the last event in New York in 2009, BRASSCOM believes this event will contribute to generating business, promoting the Brazilian IT industry as well as the imple-mentation of effective actions to ensure the compliance with the goal of industrial policy of exporting USD 3.5 billion in the sector in 2010.

The event is part of the IT export and investments promotion project that BRASSCOM runs in part-nership with Apex-Brazil, the Ministry of Development, Industry and Trade, the Ministry of Science and Technology, and has the support of the National Bank for Economic Development (BNDES).

invEstor’s opinion Although there is still room for more incentives to reduce operating costs, government initiatives such as the tax exemption on the payroll was a favorable element for increasing competitiveness of the Brazilian IT services exporters in recent years. By fostering competitiveness gains in a scenario that has as main IT services suppliers, India and China, Brazil is favorably positioned to meet the BRASSCOM´s export targets.

Whereas the IT services industry is guided by the growing flexibility of labor relations, it is necessary to continue the efforts promoted by BRASSCOM and the Brazilian government to reduce costs and expand the Brazilian competitiveness in the global market for IT, so that Brazil can compete on more favorable terms with its major competitors.

In that sense, the events and roadshows aimed at promoting Brazilian IT market in the major de-manding countries such as the United States and European countries is of great importance to expand business opportunities and the knowledge of Brazilian expertise in this sector.

José Labate - IT Director - Citi´s Technology Captive Center in Brazil, serving United States, Latin America and Europe