Economic growth, wealth redistribution and credit are increasing demand for gadgets among Brazilians on low incomes.
Apple’s launch of a smaller, cheaper iPad this week generated a global hullabaloo, but for one Chinese businessman in Brazil, it cannot have seemed quite so extraordinary.
Paulo Xu had been there and done that – a year earlier and for half the price – with a 300-reais (£100) tablet computer that has brought the internet into hundreds of thousands of low-income homes for the first time.
The technology may have been less advanced, but the simple device showed how new combinations of manufacturing nous and marketing opportunities are changing the face of the electronics industry in emerging economies.
With the European market in crisis and production costs rising in China, Latin America is an increasingly attractive proposition for many major firms seeking new areas of growth. In recent weeks, BMW, Foxconn and Hyundai have announced major new investments in Brazil.
Xu arrived many years earlier and has since built one of Brazil’s fastest growing computer companies.
Born Xu Wei to a middle-class family in Nantong, Jiangsu province, he came to Brazil in 1994, adopted the name Paulo, and started out in the kitchen of a Japanese restaurant, where he says he worked 17 hours a day and earned 450 reais a month.
But like his idol, Li Ka Shing – Asia’s richest man – he had ambitions to become an entrepreneur. Xu opened a restaurant, then a gift shop, then moved into consumer electronics by forming a new company, Digital Life, in 2004.
He started out with car audio equipment and moved into the tablet business a few years ago, getting technical advice from manufacturers in China. Many components are made in his homeland, but all the assembly work is done in Brazil, which enables him to qualify for generous tax breaks.
To avoid competition with higher-end devices made by multinational brands, Digital Life aims at the growing niche of low-income consumers.
Thanks to strong economic growth, government wealth redistribution polices and – sometimes alarmingly – extended credit lines, this group are starting to buy smartphones, motorbikes and other products that were unavailable to them before.
Digital Life’s cheapest tablet computer, which retails for 300 reais (£93), has an 800 MHz processor, four gigabytes of memory, an 18cm (7in) screen and a wireless modem. Unusually for a tablet, it also has a port for a cable connection because many purchasers do not want to pay extra for routers.
Despite a slowdown of the Brazilian economy in 2012 to about 2%, Xu expects sales of his low-price tablet to increase tenfold this year to 1m units, and to rise to 2.5m by 2014.
“When it comes to the Chinese and Brazilian markets, my advice is to bet on the economy and work honestly. That always gives a return,” he says.
His business owes much to the model that made China the workshop of the world: importing hi-tech components from overseas and assembling them cheaply.
In his case, this is being done on a medium scale at a factory in Minas Gerais. But multinationals are starting to follow suit.
With costs rising in China and the Latin American market growing, several big manufacturers are expanding their operations in Brazil.
Taiwan’s Foxconn, which assembles products for Apple and others, is moving more of its operations from China. Since opening its first factory in Brazil last year, it has ramped up production. Last month, it announced a 1bn reais plan to build its seventh plant in Brazil. The megafacility in São Paulo will assemble smartphones and tablet computers and provide 10,000 jobs.
China’s Chery Automobile recently unveiled a $400m investment in a new factory in São Paulo that will have the capacity to produce 150,000 vehicles per year once it is finished towards the end of 2013.
This week, BMW announced plans to build its first car plant in Latin America. Construction will begin next April on the $264 factory in Araquari. South Korea’s Hyundai and Samsung are also working on new factories in Brazil.
Brazil is in dire need of more manufacturing to rebalance an economy that is over-reliant on exports of commodities such as soy, iron ore and oil. China is its main customer for raw materials and greatest competitor for manufactured goods. For most of the past decade, cheap Chinese goods have dominated.
This has been a similar story in much of Latin America, but there are signs that this may be changing as the costs of doing business in China start to rise because of improved labour regulations and a stronger currency. According to a recent study by JP Morgan, labour costs in Mexico and China are now almost equal – a dramatic change since 2003, when the latter was three times cheaper.
But Brazil still has to catch up. Compared with China, Xu says, Brazil has more bureaucracy, less developed supply chains and weaker industrial promotion policies.
Nonetheless, with the Chinese market more saturated and competitive, he sees the greatest future opportunities in Brazil.
“The Brazilian market is very big and diverse because Brazilians like new things, especially technology. Chinese consumers are more conservative,” he says. “All the expansions that we are planning will be made right here in Brazil.”
Additional reporting by Carolina Massote
• This article was amended on 28 October 2012 to correct Paulo Xu’s given name.
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