| RIO DE JANEIRO
RIO DE JANEIRO The prospect of a mammoth $12 billion investment by iPhone maker Foxconn Technology Group has sent Brazilian government officials scrambling to rethink the country's industrial policy.
The aim is to nurture a high-tech industry that will slash Brazil's costly dependence on tech imports and create a complete production chain in Brazil to feed rampant demand for products like smartphones and tablet computers.
An incentive package being discussed by a special government taskforce could mark a bold shift in policy spurred by the Taiwan firm's announcement last month that it is considering a major expansion in Latin America's largest economy.
Development of an electronics production chain would help ease one of Brazil's most serious economic imbalances -- a huge trade deficit with China and other countries in high-value manufactured products that create the smarter, higher-paying jobs that Brazil wants.
Government officials told Reuters they plan to use the Foxconn opportunity, which they say could be the single biggest foreign direct investment in Brazil, to encourage a home-grown industry centered on the production of LCD screens used in a swathe of products from high-end televisions to tablets.
Foxconn -- whose main listed flagship is Hon Hai Precision Industry -- could start producing Apple's (AAPL.O) iPhones and iPads at its existing factory in Sao Paulo state by July, Brazilian officials said. But the bulk of the $12 billion is to build an "intelligent city" production center to make screens, said Ricardo Schaefer, deputy vice minister at Brazil's trade and industry ministry.
"LCD technology is dominated by Taiwan, Korea, Japan and a growing part in China. We are thinking of the next step that will allow us to catch up with these countries -- we are designing a new industrial policy," he said.
The network of services to support the new factory, such as broadband Internet and energy, could be compared to that required by the auto industry, he said.
To achieve this production chain the government is willing to give high-tech companies special treatment on tax and other incentives to make their products in Brazil, helping to counter common complaints about high labor costs, red tape and poor infrastructure.
Heavy Chinese demand for commodities such as iron ore and soy has boosted Brazil's economy in recent years but fueled concerns about a lopsided trade relationship.
A wave of manufactured Chinese imports, which have quintupled in size since 2005, has badly hurt Brazilian manufacturers and become a political headache for President Dilma Rousseff.
Brazil's commodity and consumer-driven economy imported $22.2 billion worth of electronics equipment last year, up nearly 43 percent from 2009, trade data show. Its trade deficit in "high-technology" goods grew more than 11 percent in the first three months of this year to $6.8 billion.
The new Foxconn investment in Brazil, which CEO Terry Gou discussed with Rousseff during her trip to China in April, would help tech companies sidestep hefty import tariffs on products that drastically raise prices for consumers.
An iPad in Brazil retails for double its U.S. price. Despite such lofty prices, an emerging middle class is fueling strong sales of computers and cellphones. Sales of computers reached 3.6 million units in the first three months of this year, up 22 percent from a year ago, according to technology research firm International Data Corp.
Firms have been ramping up domestic production in recent years, albeit from a low base.
"It's in its infancy but it's really growing fast," said Andy Grouwstra, the head of development for California-based microchip designer Perceptia, which has invested about $900,000 in its small Brazilian operation.
Perceptia's three Brazilian chip engineers are based in Campinas city in Sao Paulo state, considered Brazil's "Silicon Valley" for its cluster of high-tech firms.
"In five years it's gone from people just talking to people engaging in real projects," he said.
Aside from Apple, Foxconn's clients include Hewlett Packard, Sony and Dell. It has yet to give details on its Brazil plans but officials say the $12 billion investment would be over 5-6 years and create 100,000 jobs.
As a first step to encourage the 12 firms it says want to expand production of tablet computers in Brazil, including Samsung Electronics and LG Electronics, the government passed a provisional law on Monday to cut taxes on those products that should slash prices by around a third.
Schaefer, who has been directly involved in talks with Foxconn, said the government was "very close" to agreeing the next step -- a reduction in the industrial products sales tax that would be tied to requirements to source components in Brazil in the coming years.
"There is a huge interest in producing tablets in Brazil," he said. "I think companies will have enough information and incentives to bring together their business plans and start production in Brazil."
The government taskforce composed of three ministries and the BNDES national development bank is discussing other requests for incentives from Foxconn, including possible BNDES loans and priority customs treatment at airports and ports.
Executives in Brazil's nascent tech sector hope that Foxconn may provide the battering ram to smash barriers that have held back growth and prevented the industry from putting down deeper roots.
Grouwstra described Brazilian customs as a "complete nightmare" that often resulted in long delays for deliveries of equipment and components. "Any way they can help the industry that would be huge," he said.
Heavy labor regulation also makes it as expensive for Perceptia to employ an engineer in Brazil as in Silicon Valley, despite significantly lower productivity.
"The productivity isn't there yet," Grouwstra said, adding it would likely take five to 10 years to reach U.S. levels.
(Editing by Andrew Hay)