With The Economist in Brazil this week focused on where Brazil is heading in the next decade, IT Decisions is commenting on a series of points raised during discussions in our LinkedIn forum. This chapter of our report State of Brazil IT comments on the measures being taken to increase the attractiveness of Brazil as an IT services hub for foreign companies.
One of the key issues covered by IT Decisions in the past few months is the relatively low amount of IT exports from Brazil, compared to the absolute size of the industry.
According to data from Brasscom, there was $165.7bn spent on ICT in Brazil last year and $85.1bn of that was on software and IT services – Brazil is on track to soon be the fourth largest ICT market in the world. But only $2.4bn of ICT services was exported last year, meaning almost all this IT work is consumed locally.
There are many reasons for this, but one of the key issues is the local tax regime. It’s not easy to make a profit delivering services remotely from Brazil because of the taxes you need to pay to export those services.
So what has the government been doing to try helping companies in this field?
They are making some progress. The Congress just approved the Provisional Measure 540/11 on 26th October, which establishes payroll tax reductions for business software and IT services by 2014.
The objective of the measure is to reduce costs and increase the competitiveness of Brazilian industry in the world of IT and reduce red tape. The bill now goes to Senate approval, and then, presidential approval.
The payroll tax relief is one of the actions of the Brazil Maior plan, announced in early August, which brought in a benefits package to enhance competition from Brazilian companies facing international competitors. The plan included only four segments of the economy, including IT. The proposal reduces costs and aims to increase the competitiveness of the Brazilian industry in the local and foreign markets.
The MP 540/11 amends the social security contribution of the IT industry, replacing the 20% tax levied on the payroll for a charge of 2.5% on sales of companies providing IT services. However, this does not include hardware manufacturers.
Brasscom has welcomed the new measure as a more ethical and healthy environment for business to operate – shifting the tax burden from payroll to actual sales is a popular move amongst the business community here. But, bureaucracy and red tape in the tax system is endemic in Brazil. Any measures to improve this are welcome, but is this payroll tax benefit just tinkering at the edges of the problem?
When IT Decisions recently spoke to Anthony Miller, co-founder of analyst firm TechmarketView, he summarily dismissed the offshoring opportunity in Brazil. Though he documented a strong market with great opportunities in Brazil, all his research points to a focus on the local market because of the costs associated in exporting.
The CIO of General Motors in Brazil, Claudio Martins, went further and said that countries like India have been forced to develop an export market for IT services because their domestic market is very weak. Martins has a good point, with Brazil consuming more ICT services each year than India and China combined, there is not presently much incentive for local IT specialists to seek out foreign customers.
One of the key issues for Brazil in this regard is that offshoring is still seen as a cost reduction strategy. Large organizations in the US or Europe, seeking to buy IT services are generally only prepared to go through the transformation required of a major outsourcing program if there are some savings at the end of the tunnel.
In Brazil, it’s hard to offer those savings. IT services here can often cost just the same as Europe, so the export approach has been focused on defining the difference between value and cost. Brazil has a great value proposition, with world-leading expertise in a number of business domains, so the question is how to ensure this message is the one understood by foreign CIOs.
The government does remain committed to the concept of trying to develop more of an IT export market. Even with strong growth in Brazil now, who knows what the future holds? Europe teeters on the edge of an economic collapse and the US is barely bumping along on a rocky road to recovery. It is a wise decision to steer Brazil IT away from only being a self-serving industry and becoming part of a thriving global IT community because clients can come from any market.
IT policy secretary Virgilio Almeida of the Brazilian Ministry of Science and Technology (MCT) told IT Decisions: “What we want is to have a qualified workforce of an international standard. International requirements are, at times, more stringent than the local frameworks, so the idea is to leverage on exports to improve quality levels, both for the international and local markets.”
But at a more practical level, the industry will serve the customers first and worry about the future later. This is reflected in what Brasscom president Antonio Gil said to IT Decisions when asked about the cost of service exports and the role of Brasscom in positioning Brazil IT globally:
“We change our role on a daily basis. There is no five-month plan, let alone a five-year plan. We have to change every single day. Today, exporting IT services from Brazil is less attractive, but people are focusing more on the total cost of ownership. If you buy a service from Brazil and you are in New York, you know there are hundreds of direct flights here – not a journey across the world with 2 or 3 stops,” said Gil.
It’s clear that the analyst and supplier community think that the immediate future for Brazil remains in serving the domestic IT demand. The government is slowly responding to industrial demand and making the changes necessary for Brazil to fit into a global technology supply chain, but legislation takes years to enact.
Companies are going to go where the money is located and will diversify into the export market tactically, when overseas clients see world-beating expertise in Brazil that they cannot locate elsewhere. Exports are increasing, but it’s steady as she goes.
Look out for the full State of Brazil IT report, to be published on this website later this week.
Photo by John Gcaptain licensed under Creative Commons