Brazil is often called "the China of Latin America" due to its low labor costs. And because of that, increasing numbers of CEMs are calling Brazil home, including Pemstar Inc., the latest contractor to set up shop there.
While most of Pemstar's competitors have established themselves in Brazil through greenfield facilities, ac-quisitions, or purchases of OEM locations, Pemstar has entered the country through a two-year-old corporate
park in Hortolandia. Called IBM Tech Town, the park is owned by longtime Pemstar customer IBM Corp. Pemstar's company there, Pemstar Brasil Ltda., will begin shipping products to customers later this quarter.
"It's a great place," said Allen J. Berning, president and chief executive of Pemstar in Rochester, Minn. "We're pleased to move into an existing facility [in the corporate park]."
Brazil has become a hot spot for CEMs looking to tap into Latin America's fast-developing wireless-communications market. Pemstar joins APW, Benchmark, Celestica, C-MAC, Flextronics, Jabil, SCI, and Solectron, CEMs that have flocked to emerging high-tech cities such as Campinas, Contagem, Guarulhos, Hortolandia, and Sao Paulo.
The CEMs are responding to the call of telecom OEMs. Last month, Toronto-based Celestica Inc. signed a deal with Finland's Nokia Corp. to make GSM basestations in Brazil for the Latin American market. In July of last year, Celestica purchased a plant in Guarulhos from Japanese computer maker NEC Corp. to manufacture communications infrastructure equipment.
In November, APW Ltd., a Waukesha, Wis., CEM, purchased the enclosure manufacturing assets of Industria Metalurgia Bagarolli Ltd. in Campinas.
"A large market exists for technology products in Brazil, providing an excellent opportunity for EMS providers," said Jerry Labowitz, an analyst at Merrill Lynch & Co. Inc. in New York.
Brazil is ripe for a technology boom. Fewer than 10% of the population own a phone, and less than 1% a computer. The Brazilian government, according to Labowitz, plans to invest almost $90 billion over the next five years to develop the country's telecommunications infrastructure and services.
"Most of the production in Brazil is earmarked for domestic consumption, as high tariffs and duties on technology hardware products make it extremely costly to import these goods," Labowitz said.
Said Pemstar's Berning, "Pemstar Brasil Ltda. will serve not only the Brazilian market, but also the other member countries of the Southern Common Market, the fastest-growing trade bloc in the world."
Pemstar's new facility further cements ties between IBM and the CEM. Pemstar was established six years ago, when IBM closed its disk-drive manufacturing operations in Rochester, Minn. Pemstar became a publicly traded company last August.
In November, the CEM doubled the size of its Guadalajara, Mexico, plant to snare more business from telecom and optical-equipment OEMs.
Branching out to the Hortolandia business center will allow Pemstar to tap the expertise of Marcio Pavageau, a Brazilian and former executive of IBM Brasil Ltda. who has been appointed managing director of Pemstar Brasil Ltda.
"We were pleased to be able to put together a package [with IBM] that included the facility and Marcio Pavageau," Berning said. "It's a great combination."
However, the deal does not include a supply agreement with IBM, which is one of Pemstar's top five customers.
But Pemstar has at least six customers that are interested in having their products manufactured in Brazil, according to Berning.
"Many of our global customers are obviously doing business in Brazil," Berning said. "We've been encouraged to set up operations there from our telecommunications customers, such as Motorola."
Before choosing IBM Tech Town, Pemstar looked at a number of alternatives , including full greenfield. Ultimately, "we came up with this hybrid [solution that is neither a divestiture nor a straightforward acquisition]," Berning said.
While IBM executives affiliated with Tech Town were not available for comment, Berning believes the Armonk, N.Y., company would like to have the business center offer additional services such as sheet metal, plastics, and other technologies.
"They are in the initial stages of developing a plan," Berning said. "We envision the start of a tech community in Hortolandia that will have customers and potential suppliers."
To get going, Pemstar Brasil Ltda. plans to hire 50 to 100 employees. Besides telecommunications, Berning expects the new facility to offer contract manufacturing for computer and peripheral products.
"We're spending our time finding a strong management team to launch with," he said.