In this special country focus, we look at how local tax laws have shaped what is now the world’s fourth largest market for smartphones.
In the summer of 2014 armed thieves pulled off an audacious and very successful armed raid of Samsung’s factory in Campinas, Brazil. They loaded seven trucks with notebooks, tablets and smartphones worth a reported R$80 million ($36m). Fortunately, nobody was hurt.
You might think Samsung would re-consider locating its factory in Brazil. Or wonder why it was there in the first place.
But Samsung, like Motorola and LG and more recently Xiaomi, has no choice but to ‘go local’ if it wants to sell phones in Brazil. The reason? A tax policy called ‘Lei do Bem’ or Good Law.
In 2013, the authorities introduced the policy to boost demand for mobile/digital technologies while stimulating the local economy. They did it by reducing two key taxes. The first was COFINS (Contribuição para o Financiamento da Seguridade Social), a social security contribution which is usually 7.6 per cent. The second was PIS (Programa de Integração Social). This funds employee savings and is usually 1.65 per cent.
Under the new regime the two taxes were reduced to zero on locally-produced smartphones priced under R$1500, or just over £300. It seems to have worked. In 2014 alone, according to market watcher Pyramid Research, 54.5 million smartphones were sold in Brazil, making it the fourth largest market in the world.
Law-makers recently decided to extend Lei do Bem to the end of 2018.
To repeat, the tax regime has succeeded in compelling overseas OEMs to set up shop in the country. Alongside Samsung, LG opened a factory in Taubaté, Motorola outsourced manufacturing to Flextronics in Jaguariúna, while Microsoft makes Lumias in Manaus.
Even Apple, which doesn’t exactly like to dance to another’s beat, sells iPhones made by its partner Foxconn in the city of Jundiaí.
And still the process continues. Earlier this year, China’s Xiaomi opened a local facility (its first outside Asia) to make its Redmi 2 handset. Xiaomi is hoping to repeat its huge success in Asia Pacific with the move, and one of its great advantages is its own global vice president.
Hugo Barra was a senior exec at Google before he became the public face of Xiaomi. He’s a Brazilian and has a lofty status in his home country. His task now is to take market share from the big incumbent OEMs (Samsung, LG, Motorola, Sony, Apple, Microsoft) who reportedly sell 95 per cent of all smartphones in Brazil. There are also a small number of local handset makers active in the market – Positive, Multilaser – though they have made more impact in the tablet space.
What Xiaomi has on its side is price. The Redmi 2 retails at R$500 ($156), which is around a quarter of the price of a Samsung S6. The firm plans to sell its stock online despite the fact that hardly any Brazilians buy this way. However, Barra has said he expects one out of every five phones sold in Brazil will be sold online by the end of this year.
For the moment, Brazil remains a very Android-centric market. Data for July 2015 shows Android with a 77.7 per cent share of smartphone sales against 15 per cent for iOS and 4.3 per cent for Windows. The country’s best selling phone is currently the Moto G, which sells for around $220. Its success has helped Motorola double its market share to 18 per cent of unit shipments, says IDC.
Perhaps Brazilians are becoming especially cost-conscious because of the difficult macroeconomic climate and the weakness of the local currency against the dollar. After years of stellar growth, smartphone sales in Brazil have now started to decline.
IDC noted that 4.86 million smartphones were sold in Brazil in April 2015 – one per cent down year on year. In May sales were 3.89m – down 16 per cent on May 2014. As a result, IDC adjusted down its projected sales for 2015 from 63.5 million to 54 million units.
High data prices don’t help. A report in Forbes last year noted that the average data plan for phone users in Brazil costs about $35.80 per month – barely less than US rates. Meanwhile Mexicans pay $19, South Africans pay $21.90, and Indians pay $3.40.
For all that, the current slowdown in smartphone sales is just that: a slowdown. The fact remains that Brazil is still selling a huge number of these devices, and that the overall penetration rate is estimated to reach 42.5 per cent by 2017. That’s 85m people with a smartphone.