Brazil's $12 Billion iPad Deal Is in Trouble

A much-hyped $12 billion plan for Taiwanese manufacturer Foxconn to produce iPads in Brazil is "in doubt" due to stagnant negotiations over tax breaks and Brazil's own deep structural problems such as a lack of skilled labor, government sources tell Reuters.

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The proposal to build Apple's

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[AAPL  Loading...      ()   ] sleek tablet computers in Brazil was first announced in April by President Dilma Rousseff during an official visit to China. Senior officials hailed the deal as a sign of growing economic ties with Asia, and proof that Brazil was moving up the value-added manufacturing chain as its economy grows.

Yet the idea for a "Brazilian iPad" prompted immediate skepticism back home, where factories have struggled for years with high taxes, an overvalued currency and a lack of qualified workers due to poor education and a tight labor market.

The expected start date for production was first set for July, then delayed to November. Now, it is unclear whether the project will ever get off the ground, at least in the form that it was originally envisioned, the officials said on condition of anonymity.

"The talks have been very difficult, and the project for a Brazilian iPad is in doubt," one official said. "(Foxconn) is making crazy demands" for tax breaks and other special treatment, the official added.

Several calls to a representative for Foxconn in Brazil were not immediately returned.

Folha de S.Paulo newspaper reported on Thursday that funding for the Foxconn project from the BNDES state development bank — without which the initiative would likely collapse — was in danger of being withdrawn. A BNDES spokesperson told Reuters the bank had no comment.

If the project does fall through, it could become symbolic of Brazil's struggle to meet high — and perhaps unrealistic — growth expectations this year. After expanding 7.5 percent last year, the economy is now forecast to grow just 3.5 percent in 2011, which could put it last in the BRICS group of large emerging markets, and near the bottom of Latin America.

The issues holding back the iPad — high taxes, bad infrastructure and a shallow labor pool — are routinely cited by business leaders as the main obstacles to higher growth.

There are still plenty of incentives for both parties to make concessions and cut a deal in coming months.

Brazil's consumer market, with 190 million people and a high rate of Internet use by developing-world standards, is considered under-served in the tablet market. One reason is the high cost of imports. Because of tariffs and taxes, an iPad 2 with 16 gigabytes of memory currently retails for about $900, nearly twice the $500 list price in the United States.

Meanwhile, Rousseff has touted tablet computers as a relatively low-cost way to increase Internet access to the poor — a major priority of hers — and to nurture a homegrown high-tech industry.

Brazil's Own Problems

Other foreign companies including Motorola Mobility

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[MMI  Loading...      ()   ] and Samsung Electronics have expressed interest in efforts to produce tablets in Brazil. Positivo Informatica, Brazil's biggest domestic computer maker, launched its own tablet just last week.

Yet none of the other initiatives to date have the cachet offered by Apple products or the same scale of investments.

Science and Technology Minister Aloizio Mercadante, the government's point man in the Foxconn talks, admitted on Monday that the talks were difficult because of a wide range of issues — some of them on Brazil's side.

Government officials say the original proposal by Foxconn, whose main listed company is Hon Hai Precision Industry, had called for the construction of a new industrial complex outside Sao Paulo. It would be an "intelligent city," potentially with its own energy facility, roads and other infrastructure.

Brazil is already struggling to execute big building projects related to the World Cup in 2014 and the Olympics in 2016, and independent experts expect only about half of the $1 trillion in planned infrastructure investments over the next decade to be completed on time.

"The negotiation is rather complex. The situation for structure, technology, energy, logistics, it's all very complex," Mercadante told reporters.

Local media have reported that Foxconn is also seeking priority treatment at Brazilian customs, which is notoriously slow even by the standards of emerging markets.

The biggest difficulty was finding Brazilian companies to partner in the effort and bear some of the costs, Mercadante said. "It's a requirement to have Brazilian partners, (but) in the technology area the partners we have do not have the financial muscle for investments near that value," he said.

Mercadante also alluded to a possible outcome in the talks, saying that the final investment might not be as big as the $12 billion figure Rousseff first floated in China in April.

One option could be for Foxconn or a Brazilian partner to simply assemble foreign-made parts to the iPad, rather than producing screens and other components locally. Other steps could also be taken to reduce the project's scale, which may simply have been too ambitious for all parties.

"We're dealing with a lot of issues, like the (Taiwanese) trying to figure out how to do business in Brazil ... and Brazil figuring out how to produce these complicated products," a second government official told Reuters.

"Maybe we will end up starting with something smaller."