Foxconn Factory Stalled

The development of Taiwanese company Foxconn's new factory has been halted, following a dispute with the Brazilian government over the type of technology to be used in Foxconn's displays. The Brazilian development bank, BNDES, has a 30% stake in the project and will not provide the US$4bn financing agreed unless its demands are met. Given the sluggish demand, Foxconn is under little pressure to concede quickly, while the government sees the project as essential for stimulating the development of the consumer electronics sector. Therefore, BMI believes Foxconn is a stronger negotiating position than the government, although this may change as consumer electronics demand inexorably rises.

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The project is worth US$12bn in total, with the LCD factory representing part of this. While the government wants the electronics producer to use the latest organic light-emitting diode (OLED) technology, Foxconn plans to bring older technology to the country. The company said it is willing to provide only the technological expertise, not additional financing, for the project, which will further limit its continuation. The Brazilian Minister of Industry, Commerce and Development, Fernando Pimentel, flew to China on July 16, demonstrating that the government is proactively searching for a quick solution.

There have been a number of difficulties since the project was announced in April 2011, with Foxconn showing little willingness to negotiate. In October 2011, the continuation of the project was thrown into doubt due to disagreements over tax breaks and a lack of skilled labour in the country. The government eventually conceded in January, announcing a decree stating that companies investing in tablet research and development qualify for IPI (excise tax), PIS (social contribution tax) and COFINS (federal contribution tax) incentives, conforming with Foxconn's demands.

However, BMI believes the government should have other concerns regarding Foxconn in Brazil. In April, 2,500 workers at the company's plant in Jundiaí threatened to strike over poor working conditions, reminiscent of the problems reported at the company's Shenzen plant in China.

Although Foxconn may be winning this battle at present, BMI believes the government's bargaining power will increase given the high levels of expected growth in the smartphone and tablet markets. Therefore, BMI believes the government should make attempts to leverage this power in future, in order to ensure good working conditions and leading technology to ensure Brazil becomes a leader in consumer electronics production.

This article is tagged to:
Sector: Consumer Electronics
Geography: Brazil, Brazil, Brazil, Brazil

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