Dell Computer Corp. could never have imagined that doing business in Latin America would be so difficult. The PC maker, which has several sales offices in Chile, Columbia, and Mexico and a manufacturing operation in Brazil, has high hopes for driving its signature direct sales model from its base in the Texas heartland to new customers in Central and South America.
But the import tariffs and burdensome paperwork necessary to clear Dell's products in the region have proved to be a constant challenge. Argentina and Brazil in particular impose duties of 40% to as high as 60% of the landed cost of finished goods, according to the company.
"We've had our goods stopped at the border on a daily, if not hourly, basis, and they can stay there for days," said Robert Van Landingham, senior manager of Dell's Latin America Supply Chain.
Dell's experience is shared by so many companies in the electronics industry that the sector is lobbying Washington to speed up its negotiation of the Free Trade Area of the Americas (FTAA) agreement, which could lead to a Nafta-like open market for virtually the entire Western Hemisphere.
With the goal of creating one of the largest free trade zones in the world, the FTAA proposes to eliminate trade and investment barriers and phase out tariffs and customs duties. Negotiations will resume in April when heads of state meet in Canada to continue debating terms of the agreement. A final draft of the FTAA is to be concluded no later than 2005.
According to industry insiders, the FTAA would give the electronics industry a fighting chance to further expand into new markets.
"With the exception of Mexico, the U.S. has made zero progress in lowering the costs of getting our goods into Latin America," said Tim Bennet, senior vice president of international affairs at the AEA (formerly the American Electronics Association). "Our best vehicle is the FTAA, because over a period of time yet to be negotiated, you would have total elimination of duties throughout the Western Hemisphere."
The promise of growth
The benefits of expanding the Nafta trade agreement that exists among Canada, Mexico, and the United States were underscored last week with the AEA's publication of new data that shows U.S. high-tech exports to Mexico in 2000 grew by 30%-the highest rate in a decade. At the same time, U.S. high-tech exports to Latin America, which sports a tiny fraction of the contract manufacturing centers that populate Mexico, grew by only 14%.
Dell's Landingham believes that his company would not only reap greater profits from the FTAA, but that such an arrangement would streamline the cumbersome customs process. "That would be a significant advantage to Dell and to our customers when you look at the impact of landed costs today. I would imagine there would also be a definite advantage on cycle times," he said.
In fact, at a time when most areas of the world are experiencing a downturn in PC demand, Dell said its fourth-quarter sales in Latin America were more than five times the industry's average growth rate of 18% for the same period last year. The PC market should remain strong throughout Latin America despite a downturn in the U.S. economy, according to research firm IDC, Framingham, Mass. By the end of 2001, the total number of desktops and notebook PCs shipped into the region is expected to reach 9.24 million units valued at $9.4 billion, according to IDC.
With a fertile marketplace on the rise, some companies don't want to wait to expand their market share in the region.
EMS provider C-MAC Industries Inc. is following the lead of rivals such as Flextronics International Ltd. and Solectron Corp., which have established manufacturing facilities in Brazil to minimize or eliminate duties by operating under the umbrella of Mercosur, a trade agreement among Argentina, Brazil, Paraguay, and Uruguay.
While the Montreal-based company estimates that it will pay one-and-a-half times more to import raw materials into Brazil, C-MAC is moving ahead with plans to open its first manufacturing facility there in April.
"Our revenue from Latin America is only around $1 million. We believe that in two years time, we will improve that to about $20 million," said Anthony Byk, vice president of the company's electronic components division. "I hope that the FTAA is implemented soon, but in the meantime our plan is to eventually purchase our raw materials from local Brazilian suppliers so we can eliminate the high transportation and customs costs."
Dell's Landingham said that without a break on trade rules, the company has had to move on several fronts to smooth the flow of goods south of the U.S. border. For example, his division has had to examine the import requirements of each of the more than 30 destinations to which it ships products in order to standardize documentation.
Faced with the uncertainty of exactly when its products will arrive at their final stop, the company has also developed stronger relationships with its logistics providers by asking them to work directly with Dell customers.
"I would say our challenges today are certainly in those countries where we have to go direct to customers," Landingham said. "In most cases, the customer has to stand up and take responsibility for the import of record, which means I have to get customers directly involved in the importation process."
FTAA is no silver bullet
Yet while Byk, Landingham, and many others are looking forward to a tariff-free region, Latin America must also address some fundamental problems that won't necessarily be solved by the FTAA. One case is the difficulties that confront IBM Corp.'s plant in Guadalajara, Mexico, which produces laptops and commercial desktops for markets in Canada and Latin America.
According to Daniel Delfin, procurement manager at IBM's Guadalajara plant, air transportation is so underdeveloped that finished goods are flown to Miami International Airport, where freight forwarders route them to Central and South America. The impact of a poor transportation infrastructure is also taken into consideration at the production level, where shipping schedules are developed according to customer location.
"Let's say we receive orders for a given month of production from Latin America or Canada. [First] we would build ... products for Central and South America to make sure that by the middle of the month, we ship the products to those countries," Delfin said. "The second half of the month would be dedicated more to Canada and Mexico."
Another problem the FTAA will not address is certificate of origin requirements. Argentina is seeking to restrict non-WTO/GATT goods, primarily from China and Taiwan, and requires that all imports bear a certificate from the manufacturer. Landingham said Dell has had goods turned back because they were made in Taiwan or China. As a result, only U.S.-made products are shipped to Argentina. Landingham said Dell will open its first sales operation in Argentina in May to take advantage of the less-restrictive trade rules under Mercosur.
"It's a nuisance because most of the merchandise that you're getting is not inventory controlled by what country provided it," said John McGovern, customs manager at Sun Microsystems Inc., Mountain View, Calif. "You may have the same part number from Taiwan, China, or Malaysia, but it's all co-mingled in your inventory, and being able to distinguish it for the mere purposes of shipping to the single country of Argentina is nutty."
Nevertheless, with all its troubles, Latin America still holds great promise. A recent IDC survey of more than 400 IT managers in Argentina, Brazil, and Mexico revealed that technology-related spending continues to grow in those countries, increasing from 1.4% of GDP in 1998 to an estimated 1.8% in 2002.
"Dell's plans moving forward are to continue to grow market share," Landingham said. "Our intention is to be No. 1 in Latin America."