Dell in Brazil
Dell Computer Takes Long View on Brazil Investment
Mar. 8 (Austin American-Statesman/KRTBN)--MIAMI--For Latin America,
1997 couldn't have been a better year. Intel Corp. picked Costa Rica
over Ireland as the site for a new $300 million operation, while
Chrysler chose to build a giant new plant in Brazil.
What's more, a growing middle class developed a voracious appetite for personal computers, creating a boon for U.S. computer companies.
But then the Asian flu took hold and the Russian economy collapsed,
sending Latin America's economies into a tailspin as foreign investors became increasingly hesitant to invest in emerging markets.
This economic turmoil pinched consumers' ability to buy electronics,
affecting the volume and profit margins of U.S. computer makers.
So why -- against such a grim backdrop -- would Dell Computer Corp. want to pump as much as $125 million into a Brazilian operation over the next six years?
Because, as Dell officials will attest, it's the long-term outlook
that really drives any successful company's plans.
"Brazil is an untapped market, and so the new operation we have
planned there is a long-term strategic decision as part of our global
expansion," said Dell spokeswoman Deborah Cromer. "Certainly we're
watching the financial situation in Brazil, but it hasn't gotten to the point that we've made changes in our long-term strategy."
The Round Rock-based company has signed an agreement with the
industrially powerful Brazilian state of Rio Grande do Sul to construct a sales and manufacturing center there, possibly by the end of the year.
Eventually, it will employ up to 260 people and serve as a hub for
sales throughout the Southern Common Market known as Mercosur, which
includes Brazil, Argentina, Uruguay and Paraguay.
To Dell officials, it makes perfect sense to establish a site in
Brazil, even if its $800 billion economy is headed toward a severe
recession. Almost as large as the United States, Brazil is home to 164 million potential consumers.
More importantly, Brazil's personal computer market remains a
lucrative one that's valued at $2.7 billion annually.
And, certainly, Dell's no stranger to Latin America. Company officials are quick to point out that Round Rock is closer to Mexico City than it is to Denver.
Dell made its first foray into the region six years ago by opening an
office in Mexico. On its heels were offices in Chile and Colombia.
And Dell's investments in the region aren't expected to end there.
Next on the horizon for Dell could be a fifth office in Argentina.
Dell's largest Latin American market is Brazil, followed by Mexico,
Argentina, Colombia and Chile.
"Argentina is showing big growth, and it's become a very important
long-term market for us," said Daryl Robertson, vice president for Dell Latin America.
Most Latin countries export heavily to Brazil, meaning they're likely
to be dragged down by Brazil's instability. As a result, most U.S.
computer companies have struggled to guard their turf in a
slower-growing market. IBM Corp., for example, has increased its
spending on advertising to the region's small and medium-sized
businesses.
The growth rate of PC sales in Latin America has slowed by almost half -- with last year's growth estimated at just 10 percent over 1997's 3.7 million computers sold.
But Dell officials are anything but pessimistic, insisting the demand for their products in Latin America has surpassed company forecasts.
They're confident they can replicate the success they've enjoyed in
North America, where Dell has earned some 13 percent of the PC market.
"Dell has been seeing growth in Latin America that's several times the market growth rate," Robertson said, declining to be more specific.
But even Dell officials admit that success in developing markets is almost always built on risk, especially in the mercurial world of high technology.
Thanks to tightening credit and plunging currencies, the vast majority of Brazilians, for example, haven't been able to afford a car payment in recent months, let alone a computer.
"Over the next decade, Brazil will be a very valuable market for U.S.
consumer products, but right now people are hesitant to buy anything in the midst of so much economic and political uncertainty," said Don
Bowler, regional director for Latin America for the Economist
Intelligence Unit in London.
Brazil's government has failed to sharply reduce its massive debt,
which threatens to thrust the economy back into the nightmarish days of the 1980s, when unemployment was widespread and annual inflation soared to 2,000 percent.
As it tries to muscle its way into this high-risk region, Dell is an underdog.
In 1998, the company garnered only 2.6 percent of the Latin American
PC market, compared with 19 percent for Compaq Computer Corp., 10.5
percent for IBM Corp. and 7.5 percent for Hewlett-Packard Co.,
according to Dataquest Inc., a U.S. technology market-research
firmcompany.
What's worse is that local producers such as Vitech America Inc. could turn out to be even more formidable competitors than the big-name multinational players.
According to a Wall Street Journal article published in September,
Vitech is poised to become the No. 1 seller of PCs in Brazil this year.
Vitech ranks second in Brazil behind Houston-based Compaq. By
assembling many of its products in Brazil, Vitech has gained ground by pricing computers as much as 10 percent lower than the well-known
computer companies.
But Dell officials say they have their own salvo to fire -- selling
directly to Latin Americans via the Internet and over the telephone.
"When customers buy through us, there's no middleman involved, so they pay lower prices," Cromer said.
Dell also has a competitive delivery time for products to the region
--eight days or less. The time will shorten even more once Dell's
factory in Brazil is finished.
Experts say Dell's strategy is sound, although it may be years before direct-selling catches on in Latin America the way it has in the United States.
Latin Americans are not generally prone to making large purchases
without seeing and touching the merchandise first.
"Right now, Latin Americans simply don't pick up the phone and order a $2,000 computer," said Luis Anavitarte(CQ), senior analyst for Latin America at Dataquest. "The region and its infrastructure have to mature a bit before this model is effective."
Also on the downside is Dell's dependence on a variety of delivery
services to ship orders straight to buyers. These delivery services
tend to be slower and less reliable than those in the United States.
But, in general, Anavitarte said Dell's on the right track by
investing in a region where the penetration of PCs is still so small.
Experts estimate there are only 20 to 30 computers for every 1,000
people in Brazil.
"The PC in Latin America is becoming like the television was 25 years ago," he said. "Eventually, every household in Latin America will have a personal computer.
"IBM's been doing business in Latin America for decades now," he
added. "So it may take time, but the rewards for Dell will be there."
By Shelley Emling
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