Bbk brazil ict industry 11 2013 by Switzerland Global Enterprise

Opportunities and Challenges

ICT INDUSTRY IN BRAZIL

OFFICIAL PROGRAM

PARTNER

ICT INDUSTRY IN BRAZIL This report provides an overview of the Information and Communication Technology industry in Brazil as of October 2013 with a focus on business opportunities and threats for small and medium sized enterprises from Switzerland. Language: English Number of pages: 85 Editor: Matthias Büttner – Swiss Business Hub Brazil Author: Nadia Gasparotto – South Partners (São Paulo) Liliana Conde – South Partners (São Paulo) Other Reports: Are you interested in reports for other sectors and countries? Please find more reports here: www.switzerland-ge.com/reports

Contents

3.10. Summary of Brazil’s ICT Sector in Numbers ______ 37

Summary

4. CASE STUDIES OF BRAZILIAN ICT COMPANIES 38 4.1. GVT 38

ACKNOWLEDGEMENTS ________________________8 EXECUTIVE SUMMARY _________________________9

4.2. Vesper ________________________________ 40 4.3. Prime Systems __________________________ 41 4.4. Peixe Urbano ___________________________ 41

KEY DATA OF THE BRAZILIAN ICT MARKET ______10 1. INTRODUCTION ____________________________11

4.5. Bematech ______________________________ 43

5. INTERESTING MARKETS FOR SWISS SMES ____ 44

2. CASE STUDIES OF FOREIGN ICT COMPANIES IN

5.1. ICT for the TV Market in Brazil _______________ 44

BRAZIL 12

5.1.1. Open Broadcast TV and Digital TV ____________ 44

2.1. Albis Technologies ________________________ 12

5.1.2. Subscription TV or Pay TV _________________ 45

2.2. Coresystem Brazil ________________________ 15 2.3. Citel Group ______________________________17

6. THE ELECTRONIC SECURITY MARKET IN BRAZIL50

2.4. Axis Communications _____________________ 18

7. DATA STORAGE & CLOUD SOLUTIONS ________ 53

2.5. Carenet _______________________________ 20

7.1. The Cloud concept maturing _________________ 54

2.6. Aremo ________________________________ 22

7.2. Datacentres ____________________________ 54

3. A BRIEF HISTORY OF BRAZIL’S ICT INDUSTRY

7.3. Personal Cloud __________________________ 56 7.4. Big Data _______________________________ 56

AND ITS REGULATORY AFFAIRS _______________25 3.1. The Emergence of the Telecom Sector in Brazil _____ 25

8. GPS & TRAFFIC DIRECTION SOFTWARE (M2M

3.2. The Development of Brazil’s Telecomm Sector Since

SOLUTIONS) _________________________________ 57

1998

8.1. M2M Solutions __________________________ 57

3.3. IT History of Brazil _______________________ 29

8.2. GPS and Traffic Direction Software Solutions _____ 59

3.4. Broadband in Brazil _______________________ 30

8.2.1. The GPS Market Drivers ___________________ 61

3.5. Interconnection __________________________ 32

8.2.2. GPS Market Trends ______________________ 61

3.6. Network quality __________________________ 33 3.7. Internet and the Law ______________________ 34

9. E-HEALTH _________________________________ 63

3.8. MVNO - Mobile Virtual Network Operator _______ 35

10. UTILITIES AND METERING __________________ 67

3.9. It-Telecom Integration and Convergence _________ 36

10.1. Water and Sewage _______________________ 67

Contents

10.2. Gas Metering ___________________________ 69

13.3. Intelectual Property and royalty payments _______ 90

10.3. Smart Grid / Smart Metering _________________71

13.4. Work Permits for Technical assistance and training staff91

11. MARKET ENTRY STRATEGIES _______________73

14. CONCLUSIONS ___________________________ 93

11.1. Market Analysis _________________________ 73 11.2. Startup _______________________________ 74

15. TABLE OF ABBREVIATIONS ________________ 94

11.3. Mergers And Acquisitions __________________ 75

16. APPENDIX ________________________________ 97

11.4. Local Partner ___________________________ 75

16.1. ANNEX I ______________________________ 97

11.5. Strategies for Swiss ICT Companies In Brazil _____ 76

16.2. ANNEX II _____________________________ 99

11.6. Import Authorization Application Support (RADAR) 76

16.3. ANNEX III ____________________________ 101

11.7. Import Procedure Brief Overview _____________ 77

16.4. ANNEX IV ____________________________102

11.7.1. Hardware ____________________________ 77

16.5. ANNEX V ____________________________ 104

11.7.2. Software _____________________________ 78

16.6. ANNEX VI ____________________________105

11.8. Main Associations________________________ 78

16.7. ANNEX VII ___________________________ 106

11.9. Main Events____________________________ 79

16.8. ANNEX VIII ___________________________ 107 16.9. ANNEX IX ___________________________ 108

12. BRAZIL´S ICT CLUSTERS ___________________81 12.1. Manaus Free Trade Zone ___________________ 81 12.2. The Computer Science ACT _________________ 81 12.3. Technology Parks ________________________ 82 12.4. Cities that have some sort of ICT Cluster ________ 83

13. LEGAL, TAX AND REGULATORY ISSUES ______85 13.1. A brief introduction into brazil’s tax complexity ____ 85 13.1.1. Some common pitfalls for foreigners in Brazil ____ 85 13.1.2. Overview of indirect taxes and ICT specific duties at federal level _______________________________ 87 13.1.3. Indirect taxes at state level_________________ 88 13.1.4. Indirect taxes at municipal level _____________ 88 13.1.5. Special tax considerations in the ICT sector _____ 88 13.2. Product Homologation by Anatel _____________ 89

16.10. ANNEX X ___________________________ 109

List of Tables

Table 1: Operators .............................................................................................................................................................................. 27 Table 2: Internet, Pay TV and Telephony Market Indicators ............................................................................................................37 Table 3: Pay TV Service Providers per Technology........................................................................................................................... 47 Table 4: Pay TV Subscribers Distribution per Technology. .............................................................................................................. 48 Table 5: Telecommunication and Pay TV Providers. ........................................................................................................................ 49 Table 6: GPS Market Main Players. ................................................................................................................................................... 60 Table 7: Current and Projected Revenues / Market Potential.......................................................................................................... 60 Table 8: Health Services in Brazil Registered with the MS. ............................................................................................................ 64 Table 9: Smart Grid Market Main Players. ....................................................................................................................................... 72 Table 10: Computer Science Goods and Automation in General ..................................................................................................... 82 Table 11: Computer Science Goods and Automation Developed in the Country ............................................................................. 82

List of Figures

Figure 1: Landline............................................................................................................................................................................... 27 Figure 2: Mobile Operators Market Share ........................................................................................................................................ 28 Figure 3: Vivo and TIM Mobile Coverage ......................................................................................................................................... 28 Figure 4: Claro and Oi Mobile Coverage ........................................................................................................................................... 29 Figure 5: Mobile Network Architecture............................................................................................................................................. 32 Figure 6: World Digital TV Standards ............................................................................................................................................... 45 Figure 7: Pay TV System. ................................................................................................................................................................... 46 Figure 8: Brazilian Datacentre Map. ..................................................................................................................................................55 Figure 9: M2M World of Connected Services ................................................................................................................................... 58 Figure 10: Distribution of Revenues Among the Value Chain Players. ............................................................................................ 60 Figure 11: E-Health Summary. .......................................................................................................................................................... 63 Figure 12: The Homecare Application is Accessed Using a Software-as-a-Service (SaaS) Model Residing in the Cloud. ............ 66 Figure 13: Sanitation Cycle. ............................................................................................................................................................... 67 Figure 14: Telemetering System. ....................................................................................................................................................... 68 Figure 15: Map of Natural Gas Distributors in Brazil. ...................................................................................................................... 70 Figure 16: Smart Metering / Smart Grid. ........................................................................................................................................... 71 Figure 17: Brazilian Technology Parks .............................................................................................................................................. 83

List of Graphics

Graphic 1: Brazilian IT Market ...........................................................................................................................................................37 Graphic 2: Pay TV Subscribers Distribution per Technology. .......................................................................................................... 48 Graphic 3: Leading Economic Groups Market Percentage. ............................................................................................................. 49 Graphic 4: Latam - M2M Subscribers Forecast 2010-2016, per Vertical Segment. ........................................................................ 59 Graphic 5: Latam â&#x20AC;&#x201C; Projected Total Revenues per Application 2012-2015..................................................................................... 59 Graphic 6: Hospitals in Brazil. ........................................................................................................................................................... 64 Graphic 7: Brazil Market Entry. .........................................................................................................................................................73

Acknowledgements Switzerland Global Enterprise would like to thank the following persons and companies for their valuable contributions to this report (in alphabetical order of last name):

Roberto Furtado Senior Sales Consultant for Albis Technologies Brazil Lucas Hubacher General Manager of coresystems Brazil Harald Jung CEO of Albis Technologies AG Zürich Switzerland Maria Inês Fuzita Karakanian Partner and lawyer of Dannemann Siemsen, São Paulo, Brazil Dr. Nilson Lautenschlager Jr. Partner and lawyer of Lautenschlager, Romeiro e Iwamizu, São Paulo, Brazil Immo Paul Founder and CEO of Carenet, São Paulo, Brazil Renê Ramos Partner at EMDOC São Paulo, São Paulo, Brazil Dominique Schweingruber and Lodovico Brioschi Founding Partners of AREMO São Paulo, Brazil

ICT INDUSTRY IN BRAZIL

Executive Summary It took surprisingly long until, perhaps around the year 2008, the world at large really started to notice Brazil’s economic rise in the last two decades. A lot of foreign investments have poured into the country to the point of overvaluing the currency, which is one reason why many foreigners travelling to Brazil perceived Brazil as surprisingly expensive. Yet, many foreign ventures have failed in Brazil, large ones and minor ones. Brazil is definitely quite a difficult country to do business in, let alone to startup a new business. This report will not hide this reality and will not make any fabulous claims about business opportunities in Brazil. However, one always has to be cautious when generalizing about Brazil or using any kind of “average” to describe this huge and diverse country. While economic growth was rather disappointing as of late, the ICT sector has been growing around 7% per year, and many foreign and local companies have seen growth rates of 20% or more per year. Also, there is a widespread consensus that emerging markets will be the main contributors to global growth in the next decade. Yet, only 1,5% of Swiss exports go to Brazil, which ranks 19 in Switzerland’s export statistics, all the while Brazil may soon be the world’s fifth biggest economy. This does not seem to be right for a country like Switzerland that exports half of its GDP. There are interesting opportunities and niches to be found in Brazil, and this report will outline some of them but not all of them in the ICT sector. Mobile Virtual Network Operators may find here “fruits” as low hanging as they can possibly be in the Brazilian context. E-commerce is very promising in a country that has a rather fragmented and inefficient supply chain of wholesalers and retailers, let alone the tax burden. E-learning looks like a very promising solution for a country where most citizens feel scorn for the way (public) schools have prepared them and their children for life, and where the lack of skilled employees on all levels is perhaps the biggest growth bottleneck for the economy. E-health can provide interesting solutions in a country where the constitution promises universal health care to its citizens but falls short on delivering emergency care, let alone prevention and treatment of chronic diseases. Brazilians’ passion for watching TV provides many interesting opportunities in this age of conversion and quadruple-play packages. Brazil’s sad prevalence of violent crime and thefts creates an ever growing demand for access security solutions. The allegations around the NSA spying on the nation’s president and one of its “flagship” companies Petrobras has profoundly changed the perception of internet privacy, the need of safe iCloud solutions and they will probably even lead to a new law requiring that servers with data about Brazilian citizens (e.g. Facebook) have to be located in Brazil. To use a metaphor, Brazil’s economy has long been like a classic car’s engine that lacked electronic fuel injection and computer chips. But this is changing rapidly and is generating many interesting opportunities for foreign ICT companies (and people with advanced ICT knowledge). The main obstacles to doing business here are the stifling bureaucracy (also with regard to regulatory affairs) and the Kafkaesque tax and labor laws, about which all Brazilian business men from small to big also bitterly complain. But the good news is that they are not as difficult to overcome as many Swiss companies commonly believe, if (IF!) the Swiss get good advise, find an experienced Brazilian business partner or key employee, have a lot of patience and are rather conservative in their financial planning. This is perhaps the most important message of the case studies in chapter 1. Swiss companies have advantages not only due to their innovative technology, but also with their different perspective, business values and ways how to manage a business. If they are able to blend this with some necessary adaptations to the Brazilian context, the chances for success are actually surprisingly high.

ICT INDUSTRY IN BRAZIL

Key Data of the Brazilian ICT Market Source: Estimates for 2013 by the Economist Intelligence Unit, in USD



Population of Brazil: 197 mio



GDP of Brazil: USD 2’377 bio (=“Milliarden”)



Turnover ICT market:



Telecoms: 65 bio USD (4th biggest in the world!)



IT spend: 54 bio USD (comparison: Germany: 99 bio USD)

Annual Growth Rate ICT market (in USD): 

Mobile Telecom Revenue:

+4%



Fixed telecom revenue:

- 9%



IT spend:

+5%



Devaluation of BRL: -4%

Annual investments in the ICT sector: 

Telecoms: 9,5 bio USD (0,4% of GDP)



IT hardware spend in the whole economy: 33 bio USD (1,4% of GDP)

Which are the most important sub-sectors of the Brazilian ICT sector? 

Mobile telecoms revenue:

48 bio USD



Hardware spend:

33 bio USD



Fixed telecoms revenue:

17 mio USD



IT services spend:

13 bio USD



Packaged software sales:

8 bio USD

Main business opportunities for Swiss SMEs in the Brazilian ICT market:

ICT INDUSTRY IN BRAZIL



Mobile Virtual Network Operators (MVNO)



Data storage and cloud solutions (NSH-safe!)



E-health, m-health



ICT applications for TV market



Electronic security



M2M solutions (GPS not so much)



Smart grid / smart metering

1. Introduction To write an ICT industry report for Brazil is somewhat of a daunting task: for one, the ICT sector worldwide is a rather broad and diverse group of different technologies and business models. It is going through rapid change which is at the same time also profoundly changing the way we are doing business and living our lives all over the world. Add to this Brazil’s own breathtaking dynamics and complexity, and you may understand why writing an ICT industry report for Brazil is not a simple task. To write an overview and scoping report of such an industry inevitably involves making some choices about its content and focus. For example, this report will give a somewhat bigger attention to the telecom side of the ICT spectrum than to the IT side. While a report like this has a natural tendency to take a high-level view, in this case, quite some effort was made to provide practical, “ground-level” insights that are relevant for Swiss SME here. Therefore, a number of interesting case-studies of reallife companies in the ICT sector in Brazil were chosen, and six particular industry sectors were chosen for a more detailed analysis. Thus, the editor opted for more depth at the expense of breadth. In general, business intelligence is much less publicly available in Brazil than in Switzerland. Information that may seem to be rather basic from a Swiss perspective can sometimes be a precious “good” in Brazil, especially if is confirmed and reliable. To make things worse, business intelligence also tends to be outdated quickly in Brazil. Thus, in writing this report, the authors had to carefully judge in what kind of information and what level of depth to invest their limited resources in. Given that TheEconomist Intelligence Unit provides a very good report1 for USD 200 with important, general statistics about the Brazilian ICT market, the editor saw no need to reproduce these numbers here, and strongly recommends the EIU report as a supplementary source of information. This report is different by focusing on real-live cases and practical aspects of doing business in the ICT sector here, as well as providing plentiful of references and local technical peculiarities in the annex. As a consequence, this report cannot claim to be complete or exhaustive. It cannot cover all trends, opportunities and risks that may be relevant for Swiss SME evaluating the Brazilian ICT industry, nor substitute the detailed research that is mandatory for any serious business plan for Brazil. Furthermore, given the fast-paced nature of government regulation and change in general in Brazil, some information in this report risks being outdated the minute it goes to print. Last but not least, the editor is aware that some trends described in this report with regard to Brazil are certainly also happening in other countries around the world and he therefore avoided delving on global trends (such as conversion). Nevertheless, where trends or certain technological issues are very relevant for Brazil, they will be explained in some detail and in their Brazilian context, at the risk of explaining too much of something that an informed observer of the global ICT industry may already know.

http://store.eiu.com/product.aspx?pubid=1497114949&pid=1597096959&gid=1497114949 or search for “EIU report Brazil telecoms”

ICT INDUSTRY IN BRAZIL

2. Case Studies of Foreign ICT Companies in Brazil This chapter intends to give a “real life” portrait of the ICT business in Brazil with case-studies of foreign companies in Brazil (or Brazilian companies with foreign co-founders or owners). Most of the text here was written by the founders or key executives of the respective companies and is largely unedited (except for Citel and Axis, which is an outside perspective written by the main authors). It therefore reflects the views and opinions of these authors and not necessarily the views of the Swiss Business Hub Brazil or Switzerland Global Enterprise, with the exception of the “Key Insight” textboxes, which were written by the editor.

2.1. ALBIS TECHNOLOGIES2 Type of company: High-tech products and solutions for telecom operators and ISPs

KEY INSIGHT Albis Technologies decided to use a step-by-step approach to enter the market. After an initial market analysis, it was decided to select a distribution partner. The next step was to have a trustful “native expert” for support – while keeping open the option to have a local legal entity after a successful business ramp-up. Patience to overcome the bureaucratic, financial and tax challenges as well as a good dose of personal perseverance is essential to be successful in Brazil.

Patience is essential to succeed in the Brazilian market – yet ”jeitinho“3 always helps The telecommunications industry has always been in the front row of new developments, technologies, trends and new ideas. Albis Technologies AG, an innovative, medium sized Swiss based technology company, and an established provider of enterprise access and mobile backhaul solutions as well as multimedia products like IPTV set-top-boxes was looking for regional expansion and decided in 2010 to prepare for marketing its products in Brazil. Based on an innovative product portfolio and an exciting market volume projection, a project was initiated to enter the Brazilian market. Although challenges due to cultural difference were anticipated, the patience of the whole team was stretched to the limits. After several initial visits, it was decided, that the market approach would be managed via a distribution partner concept.

Harald Jung CEO Albis Technologies

Albis Technologies is used to working in highly dynamic markets, but South America was a complete new territory and therefore, after an initial participation in a Switzerland Global Enterprise Latin America event in Zurich, the next step was a detailed analysis of potential channel partners together with Switzerland Global Enterprise’s office The Swiss Business Hub in Brazil. Switzerland Global Enterprise recommended a very experienced local expert in São Paulo, which advised the Albis Technologies team to better understand the very complex import and tax system in Brazil. Unfortunately

Albis Technologies Albis was founded in 2008 by a team of telecom experts via a MBO from Siemens’ R&D center in Switzerland. Yet our history goes back almost 100 years, when on the same campus Protos - later Albis Werke - developed and manufactured telephones. Today our office is still located in the Albis Technology park next to the Albis mountain range and the innovative IT data centre for Zurich municipalities. Today Albis Technologies focuses on telecom and multimedia products, solutions and services. With 20 years international experience in access technology, plus 10 years of knowhow in IPTV set-top boxes; Albis Technologies is recognized for reliable and future-proof products and end-to-end solutions, and an ideal partner to enable differentiating triple-play services with customized solutions for telecoms, cable operators and ISPs. Based on Swiss engineering, our entrepreneurial spirit, Albis Technologies strive to fulfill the expectations of each customer. Supported by innovative partners, sales and marketing teams, together with our highly skilled team of experts; Albis continues to offer tailored, flexible and reliable support. 3

The word "jeitinho" comes from the expression “dar um jeito”, literally "find a way." It implies the use of resources at hand, as well as personal connections and creativity. A US version of the same concept could be “implement, adapt and overcome!”

ICT INDUSTRY IN BRAZIL

these rules and regulations regarding the import of goods are not at all stable and a constant adjustment of the business case is necessary. Import of goods Brazil is an impressive market and in the telecom field still growing in innovative fields. Yet, in order to import telecom products, costs in the magnitude of 80% on top of the landed cost have to be expected. This high amount is mainly due to local taxes like PIS/COFINS, IPI and ICMS. Depending on the distribution structure and the individual state, a certain portion of this tax can be claimed back or used as a tax credit when reselling– comparable to a VAT (value add tax) approach. A number of quite complex Excel exercises resulted in a detailed business case to enable a sound business decision process, which included definition of the sales volume when a local manufacturing should be considered. Business Partners To find a suitable and reliable business partner was the next step. Here again, SWITZERLAND GLOBAL ENTERPRISE through its recommended local expert helped with a pre-selection, and finally - after several meetings - one out of three distributors was selected. The next hurdle was to negotiate a suitable distribution agreement, offer training to the partner’s technical team and support them to participate on RFI’s (request for information) and tender processes of the different end-customers respectively Telecom operators.

“Albis has decided to homologate its products in the name of its distributors, which seemed to be the easiest way, but today would rather register it under its own legal entity or a legal representative.” Harald Jung CEO Albis Technologies

Product Homologation In Brazil – like in most of the other countries – each telecom product needs to go through a certification process to get the so called ANATEL (Agência Nacional de Telecomunicações) homologation. Authorized by the Ministry of Communications, ANATEL is responsible for granting, regulating and supervising telecommunications in Brazil. This homologation process in itself is quite difficult and requires numerous technical documents including circuit diagrams and measurement reports. Of course, all documents have to be translated into the local language. The ANATEL certificate has to be requested and registered by a local Brazilian company, which could be either a distribution partner or some sort of a local legal representative4 or the Brazilian subsidiary of the mother company in Switzerland. Albis choose to register its products in the name of its new distributor, as this seemed the easiest way back them. Furthermore, Albis also decided to start its own legal entity in Brazil, which is not so complicated any more and in the case of Albis, it took approximately three months to have the local company established and also registered at customs to import goods, yet it required the appointment of two legal representatives in Brazil. The risk with registering the products in the name of a distributor is that in case Albis Technologies wanted - for any reason - to change to another distribution partner in the future, the current distributor would have to agree to transfer the registration to a new distributor, or the new distributor would have go once more through the whole homologation process. Today, Albis Technologies would select a local legal representative to hold the ANATEL certification, as this will give a lot more flexibility in selecting e.g. different sales partners in different regions.

The term “legal representative” here refers to a law firm or a consulting form that offers the service of “hosting” product registrations in his name and thus allows the Swiss company the be independent of its distributor with regard to the ANATEL homologation and registrations.

ICT INDUSTRY IN BRAZIL

Major Milestones Finally – after having received the ANATEL homologation and the related certificate, the real hunt for customer projects started. Today the Brazilian telecom operators use a very sophisticated RFQ processes including ebidding. To be able to participate in these tenders, in addition to the ANATEL certification, a long technical homologation process including various laboratory tests as well as field trials are required. Here, a technically well trained and experienced partner is of highest value, as his support will reduce substantially the effort of the technical support team in the R&D labs in Switzerland. In the beginning of 2012, a local executive sales consultant with industry expertise and a very strong network was hired to support the selected distributor and to develop additional sales opportunities both with the existing products as well as in addition our newest IPTV set-top-boxes.

„In a way, it is actually surprisingly simple, even in Brazil: you just have to find a pragmatic approach to bring your customer and partner as well as your own enterprise into a “win-win” situation, and then implement the common plan on a trust basis.” Harald Jung

A first contract with our business access portfolio was won in mid 2012 through our local distribution partner. This contract came almost one year later than initially expected. Now, almost 18 months into the contract, the overall sales volume is – as quite common in Brazil - expected to be less than 50% of the contract volume, which was originally foreseen based on the tender documents. Yet, this was the first major contract with a tier 1 telecom operator, and gives Albis Technologies the credibility to participate in other tender processes. Future Expansion After participation in a few trade shows and reacting quite fast to the newly evolving market for IPTV set-top-boxes, Albis has now won first contracts with local partners and isshipping set-to-boxes to Brazil as well. As an IPTV pioneer with a strong foundation and deep knowledge in the end-to-end aspects of IPTV solutions, Albis Technologies is an ideal partner to enable differentiating triple-play services with customized solutions for telecoms, cable operators and ISPs, and based on the expected quantities and in the dawn of the world soccer championship in 2014 and the Olympics in 2016, we are now evaluating a local setup including SKD - or local manufacturing.

Set-top Box - Albis Technologies

Cultural challenges As soon as you start to get in closer contact with Brazilian people, which often includes a warm hug after a successful business conclusion, you begin to realize that there are a variety of different cultures mingling in one country. Not only will you meet a lot of people with completely different family roots, going back to Europe or Asia, but as well a lot of “locals” who still hold a lot of empathy for foreigners because of their own ancestors.

ICT INDUSTRY IN BRAZIL

Overall, it is not more complicated to do business in Brazil than in many other countries, if you are willing to openheartedly jump into this adventure and to accept that some rules are different. Bureaucracy and all topics related to financial systems including taxation and duty are complicated, but with the right local advisor, you will be able to manage them. The whole concept of “time” seems to be different, as punctuality for a meeting or dinner invitation is not common, and a timely definition of a deadline is completely differently interpreted by Brazilians versus e.g. a Swiss engineer approach. If you check the translation for “mês que vem” than you will find “next month”, but according to Stefan Meister’s time-dictionary there are only three meanings for month in Brazil: this month, the month(s) which have already passed, and the next month, which includes (!) all the following months. To make it absolutely clear, next month means “one of the following months”. But if you speak Portuguese respectively Brazilian - or have a reliable native partner, if you are open minded, extremely flexible, very patient and willing to get personally involved, the Brazilians will surprise you with impressive and very positive results.

2.2. CORESYSTEM BRAZIL5 Type of company Standardized additive solutions for SAP SME products

KEY INSIGHT The case of coresystems reveals some basic but nevertheless very important points about doing business in Brazil: speak Portuguese (or have a delegate who does so); have a good lawyer and a good accountant; avoid overhead costs, for example by having a lean office infrastructure; be patient and flexible; and invest in building up good relationships, which are of tantamount importance in Brazil.

Expanding a Business in Brazil In 2011, after successfully expanding the business to European countries, the US and China, Switzerland-based coresystems ag decided to enter the Brazilian market. To that end, Lucas Hubacher, Brazilian and Swiss national with experience in IT and Telecom, was hired in January 2012. One and a half years later, coresystems Brazil can count on more than 20 customers (250 users) and has the perspective of doubling the number of users within the next months. After one and a half years in the Brazilian market, we can derive some conclusions about the key success factors in doing business in Brazil. As stated in an article from 2012 by Swiss newspaper NZZ, Brazil is no country for beginners. There are some particularities that you have to consider before entering this continental market, one of the top 10 economies in the world.

Lucas Hubacher, GM of Coresystems Brazil

coresystems ag, which is headquartered in Windisch, Switzerland, was founded as a sole proprietorship in 2002 and has traded as a corporation since 2006. With over 7,500 customers (75,000 users), the software specialist is a leading provider of standardized additive solutions for SAP SME products worldwide. The company is a certified SAP GOLD (SSP) and Microsoft ISV Silver Partner. The customers of coresystems include small and medium-sized firms and large companies in a range of industries. The innovative coresuite solutions provide optimal, non-stop support to business processes. To achieve this, the apps access local information in the ERP environment and combine it with value-added applications in the cloud, which are suitable for mobile use (e.g. on an iPhone). coresystems currently employs about 140 persons and has additional locations in Freiburg im Breisgau, Waardenburg, London, New York, Miami, São Paulo, and Shanghai. In addition, the company maintains support centers in Galway and Copenhagen and a development center in Cluj-Napoca. Moreover, coresuite solutions are distributed worldwide by over 350 qualified partners. Additional information can be found at www.coresystems.ch and www.coresuite.com.

ICT INDUSTRY IN BRAZIL

Registration and set-up process First of all, you need someone at the local branch who fluently speaks Portuguese. Do not expect people to speak English in business or elsewhere. Only highly qualified professionals speak English, but they are a minority. In this context, it is important that the product, the trainings, the manuals and other material are available in the local language. While in Switzerland you can register a new company in half an hour, in Brazil the whole process will take months. Compared to Brazilian standards, the startup “coresystems softwares limitada” was almost fast, it only took two and a half months. Our recommendation is to check the legal requirements for setting up a subsidiary in Brazil. The country is famous for its laws that change almost on a daily basis and also for one of the most complex fiscal systems in the world. The best choice is to get a good lawyer to support you in the opening of the subsidiary. In addition, a good accountant and a reliable ERP software to cover your administrative needs will also make your life a whole lot easier. The accountant can help you find out about when to pay the various different sales taxes and will also keep you up-to-date on the latest rules. Office location and infrastructure When setting up a branch in Brazil, you also need the office infrastructure to start working. First, you have to decide on a location. Brazil is a huge country and the economical power is concentrated in the South of the country, especially in the South East, and more precisely in the city of São Paulo. This is why coresystems decided to set up its branch in São Paulo, as this is also where most businesses have their headquarters. In our case, we sell our solutions through SAP Business One partners. Most of them are located in the state of São Paulo and very few in other regions. The second decision regarding office infrastructure is about the office itself “It is very important to have a and the IT infrastructure. To save time, money and nerves, the best option trustworthy local business for a new branch is to start working from a shared office space. There are partner and manager who is many providers and also many levels of quality. You can start with a desk Brazilian and knows the culture and minimal IT infrastructure, such as a printer, telephone and internet. Shared meeting rooms are also available and working in a big office gives and language.” you the opportunity to network with other companies working in the same Manuel Grenacher, environment. Another benefit of these office spaces is the high degree of CEO coresystems ag flexibility: You can start with a desk and expand to a room. If your business grows very fast, you can also start building your own infrastructure. However, if you decide to look for your own office, be sure to calculate some effort. In general, Brazilian services are not of very high quality, so it will take some time until everything is up and running. Building a network After the set-up phase, the next step is to build a network and start selling. To this end, you need to be clear on which market you want to enter and what audiences you want to target. Good opportunities to network are IT events, vertical events, the chamber of commerce and shared offices. coresystems’ main target audience so far are SAP partners and its small and medium sized customers. One advantage that we had from the beginning is that through our contact with SAP, we got the first contacts to the Brazilian SAP B1 partners. In this particular market, not only product quality and value proposition count, but also the relationships. In fact, you need to invest a great deal of time in building up relationships to decision makers: To be able to sell your product, it is vital that they trust you. Building up trustful relationships in Brazil is not easy. Since Brazil is a fairly new democracy and an emerging market, there is a lot of mistrust between people and between companies. It often takes some time to win the trust, and often you can destroy it with just one action. You need to carefully measure your words and actions and make sure not to hurt people’s feelings when doing business with them. For coresystems, some partnerships took more than a year to result in good deals.

ICT INDUSTRY IN BRAZIL

Patience and flexibility Regardless of your target market and target audience, in Brazil you need to be patient and flexible to succeed. For example, people often do not show up to meetings on time or sometimes they even do not show up at all. It can also happen that you leave for a meeting in time, but because of situations you can’t control you also arrive late. Be patient with regards to bureaucracy. Not only the government is bureaucratic, sometimes companies are as well and as a result, decisionmaking processes are usually slow. In addition, you need to be able to interpret if people really are interested in your solution or if they are just being polite. People usually do not say “no”, so you have to be careful not to lose time by believing what people say.

“To be able to sell your product in Brazil, it is vital that your customers trust you. Yet, building up trustful relationships here is not easy and requires the investment of a lot of time” Lucas Hubacher, General Manager coresystems Brazil

Brazilian SME culture regarding IT Specifically for the IT landscape, it is important to know something about the Brazilian SME culture. The vast majority of SME owners still see IT as a cost and not yet as an investment. This means that IT models with monthly subscription fees (OPEX) have a higher chance to succeed in the Brazilian SME market than models that require a big first investment (CAPEX). So if you are in the cloud space, the opportunities in the SME market are numerous. If you are in the traditional on-premise business, you will probably need to consider bigger SME companies or enterprise companies in Brazil. But don’t worry, there is enough market for everybody.

2.3. CITEL GROUP Type of company IT Consulting Services

KEY INSIGHT Citel Group’s key to success in Brazil was its strategic partnerships and its willingness and capacity to adapt to Brazil’s peculiarities and culture, while bringing in its technology and business model from abroad. Many foreign companies in Brazil tend to emphasize the fact that they are from abroad in order to insinuate that they are more innovative or otherwise better. While that is congruent with Brazilian’s brand perception, the case of Citel shows that there is also merit in morphing into a Brazilian company, appealing to the patriotic feelings and sympathy of Brazilian customers and government. The Citel Group was created in Italy in 2000, in order to work in the field of IT consulting services, systems integration, development, and outsourcing. The company was founded as a consortium with a system integration logic consisting of five companies operating in the fields of Automation, ICT, Infrastructures and Networking. In 2002 there was the structure completion. Since 2002 CITEL has been directly active in Client Relations Systems, Business Intelligence, Administrative – Management Systems and Automation Systems for production. In 2004 they set up a Research and Development Centre in Naples for the development of innovative solutions and applied research in the Automation and IT fields. In 2006 they consolidated some foreign markets and set up a subsidiary, Citel Informática Ltda., in Rio de Janeiro, Brazil. The Group operates in Brazil and Italy, with a technical team of over 250 specialists in four venues and respective software factories. They currently have two business offices in Brazil, one in Rio de Janeiro and another one in São Paulo. Their services portfolio comprises CRM, Business Intelligence, Mobile applications, Social Media, Web portals and Intranet, e-commerce, elearning, ERP, etc. They also create and integrate software. Their expertise is leveraged by strong partnerships with renowned software companies, like Red Hat, SAS, Oracle, Liferay, Teradata and Qlikview.Due to that experience, the Group operates in the telecommunications, finance, retail, government and industry and have acquired relevant clients like Telecom Italia (TIM), OI, Vivo, Teradata, SAS, HP, BT, EAV, Alpha Romeo, Fiat, Wind, Magneti Marelli, Band, Ansaldo, Ferrero, Comau, SirtiSistemi, Inpesit, and SNL.

ICT INDUSTRY IN BRAZIL

Stressing the strategy of association, in 2011 SAS and Citel Group entered into a partnership to work in joint projects in Brazil. They had similar agreements in Italy. Thus, opportunities were created for deployment of new applications (e.g., at TIM, a new BI customer), aiming to automate processes, reduce the time of analysis, standardization of information and correctness of the business rules. Today, applications range from generating simple reports to managing interactive marketing campaigns, provisioning and mining. The market for Information Technology services in Brazil is heated and Citel Group wants to expand its presence in medium and large corporations. To achieve that, they opened different fronts. One involves the negotiation of partnerships with local manufacturers of tablets to insert CRM, BI and ERP applications to be sold to corporations. Another front was to work to try to change its image in order to become a more “local/Brazilian” company rather than an Italian multinational. "We are developing applications based on Open Source, especially in the CRM area, which have been requested by customers in Italy. Software today is global, but we're bringing together the Brazilian and Italian knowledge," says Gabriele Lins, director of Citel. The two executives are the only Italians in the Citel Group staff. "We are proud to be an Italian company, but we know we need local knowledge to have a more active presence here. We want to speak the language of business," says Valerio D'Angelo. And with the strategy to increase market share and fight companies like Oracle, SAP, IBM and others, Citel Group invests in specific solutions. The telecom market has been the IT services providers’ major segment. Not just with TIM Brazil, a company controlled by Telecom Italia, but with other telcos, among them Vivo and Oi, in the data warehouse and data mining area. But Telecom is not the only target. New verticals gain attention, among them retail, and this approach requires a high spirit of innovation and always being at the market and technology trends forefront, and also meeting high quality demands. With that in mind, the group developed, for example, an ERP-oriented solution for retail. "We are convinced that our solution puts us in a differential action and we grow a lot of it with the tropicalisation for the Brazilian market," argues D'Angelo. "Tablets have also gained business and if we can put together a hardware and software solution we will have great potential opportunities," said Valerio D'Angelo, CEO of Citel Group in Brazil. In large companies, the expectation is for the approval of the company's solutions by Vale and Petrobras. Mobility is also a challenge. Citel Group is a shareholder of Kiui, a company specialized in applications development and integration with social networks. The smartphones are being targeted - there are already locally adapted applications, but tablets are now the “hot Item” in the market. Considering that cloud computing is on the rise in the IT sector, the model of software as a service, SaaS, is also already being tested and will be integrated to mobility. Citel considers that there are key areas that bring competitive advantages to the company’s success in the local market: Social Business, Business Intelligence and Scrum (the SCRUM methodology works with the interaction and sharing of tasks between the various professionals for creating a project. Customers, analysts, managers and professionals responsible for the project work on the same line to set the direction and terms of an objective). Citel Group grew 35% in 2012 in Brazil. In 2011, the company's revenue was R$ 16.8 million, 15% of which was allocated to innovation. But their path to this success was not a bed of roses. One of the biggest challenges has always been the lack of skilled labour and qualified technical professionals. To address this issue, they negotiated partnerships with local universities. Another strong entry barrier was – at least initially - the outragously complex tax system, where even tax lawyers often stumble.

2.4. AXIS COMMUNICATIONS Type of company Security Systems

KEY INSIGHT The Axis case shows how important it can be for a foreign ICT company to have its own eyes and ears in Brazil, even if initially only through a small rep office and one Country Manager. It also shows that this does not mean that the foreign company has to do everything itself. Axis continued to rely on local sales partners and indeed treated them as very important partners, indeed. But it took charge of certain strategically important activities, such as marketing, branding, training, after-sales support, tax planning and legal issues. By getting closer to the market, it happens frequently that new sales partners are added and some others are let go.

ICT INDUSTRY IN BRAZIL

Axis is a Swedish company and a global leader for video monitoring solutions and professional security. Founded in 1984, it is present in over 30 countries, has over 1200 employees and global presence through resellers and system integrators in more than 179 countries. Its portfolio includes monitoring systems via digital networks focusing on cameras to be installed in various markets such as schools, retail, airports, businesses, government, etc. The company developed the first IP video camera in 1996. It has been using a strategy for global market access via indirect channels, working in partnership system with distributors, resellers and integrators. It began operations in Brazil in 1996 with a distributor using a model of “reactive approach”. At this time, the market of Brazil and Latin America was crawling, since it did not have a network data infrastructure and an appropriate telecommunications network which are fundamental for Axis’ solutions. Between 1996 and 2005, the company maintained its presence in Brazil through dealers only and counted with a Distribution Manager located in Europe. In 2006 Latin America’s socio-economic environment changed rapidly mainly due to political progress and economic stability, which attracted the attention of the company's headquarters in Sweden. The company then decided to start a regional base with offices in Chile, serving also Brazil, initially with a single employee responsible for prospecting market integrators. In 2007 the company put a greater emphasis on operations in Brazil by hiring a Country Manager,. At that time, the company relied on two sales partners. Shortly thereafter, the Country Manager assumed the regional coordination in Latin America, increasing its prospecting in this market and, consequently, its assessment of business opportunities. In the same year, it began the gradual increase of local operation with the structuring of an Engineering Management and a closer relationship with the specialized dealers, Anixter especially to South America, and CNT in Brazil. This move has been essential the company's success, and it reflects Axis’ strategy to treat these partners more than mere dealers, but practically as an extension of business AXIS. A reflection of this is also the fact that in late 2007, the company still had only a small office in São Paulo in the premises of the Swedish Chamber of Commerce - Swedish Trade Council. This office also acted as facilitator in legal issues. In 2007, AXIS embarked on strong branding effort in Brazil, including media interviews and publicity via press agencies. The growth of operations required always a presence close to customers, which has led to the restructuring of the company's After Sales System that had been rather inefficient until then. This restructuring was also important to improve the process of importing products and systems. To sum up, the period until 2008 can be considered as an initial, cautious phase of getting Axis’ “hands on” the local market, while still largely depending on local sales partners. In 2008, Axis entered a new stage with a new business plan that intended to expand its own presence in Brazil. More local staff was hired and the affiliate was granted more autonomy from headquarters in Sweden. The rest of Latin America was also going to be administrated from the Brazilian subsidiary. The business plan had ambitious growth targets and therefore also allocated more resources for that purpose. Another important action was to increase the number of distributors in Brazil as well as the structure of import and logistics areas, and to strengthen Pre-Sales and Engineering Support for the sales partners. An important feature in the company's success is due to its long-term planning philosophy, focusing on sustainable growth, detailed planning with five-year plans and treating sales partners as strategic partners and give them full support. This strategy proved to be very competitive and efficient against competitors which mostly consisted of dealers who imported products themselves. These competitors were not as close as Axxis to the market and hence had less understanding of how it works and its peculiarities. Another key success factor were aggressive brand marketing and advertising campaigns, and active participation in national and international fairs and other important industry events. It currently has local structure in Santiago, Buenos Aires, Bogota and Lima, and in Brazil already has a network of its own regional offices for national coverage, with employees registered by the company.

ICT INDUSTRY IN BRAZIL

2.5. CARENET6 Type of company Startup in the field of digital health, “wearables”

KEY INSIGHT While it is still early to judge the success of Carenet, it is an interesting example of the growingly vibrant startup community in São Paulo / Brazil. Long before the internet boom, some Brazilians with a global outlook made a fortune by spotting interesting business trends abroad (most often in the USA) and “import” and adapt them to Brazil, often long before the trendsetters from abroad set up shop in Brazil. Carenet is an interesting case of two foreigners doing something similar, by picking up an emerging trend and skilfully adapting and even developing it for the Brazilian market. This case also shows of how foreigners, in this case two Swiss citizens with experience in Brazil, can capitalize on their unique knowledge, education and cultural values where they seem to be rather different from Brazil. São Paulo is becoming a startup hotspot Superficially, it may seem as if Carenet is a rare case of business venture, a Brazilian startup with Swiss founders, but upon closer examination it becomes apparent that São Paulo hosts a growing community of Swiss and international entrepreneurs and startups. São Paulo is the center of the startup scene of Brazil. There are more startups and VCs in São Paulo than in any other city and if you are into building your own ICT business in LATAM, it’s probably the place to be. A recent Genome's Startup Ecosystem Report 2012 ranked São Paulo as number 13 among the most active startup scenes in the world based on criteria including entrepreneurial mindset, trendsetting, support, talent, funding and more. Immo Paul, CEO of Carenet

Ranked in front of cities like Moscow, Berlin, and Singapore, Sao Paulo does an excellent job on entrepreneurial mindset where great entrepreneurs are visionary, resilient, have a high appetite for risk, a strong work ethic and an ability to overcome the typical challenges startups face.

“This is my third startup company in Brazil since I arrived here in 2009. Although everything here is always a little bit harder than in Switzerland, the upside potential will make up for all the grievance.” Immo Paul, CEO Carenet

The biggest weak spot of São Paulo is talent, a criteria taking into account age, education, experience, industry domain expertise, ability to mitigate risk and previous startup success rate. This startup hub has a very short supply of entrepreneurs that have ‘done this before. Entrepreneurs in São Paulo are 59% less likely to be serial entrepreneurs compared to entrepreneurs in Silicon Valley. This talent gap, due to a historical cultural aversion to entrepreneurship amongst top graduates (who tend to migrate towards consulting, banking, and oil and gas), makes it difficult to rapidly scale businesses and manage the transition to growth-stage. The other critical area is trendsetting. The criteria is measuring how quickly the ecosystem adopts to new technologies, management processes and business models. Many entrepreneurs here are still caught in the ‘me too’ mentality. While this type of approach can indeed reduce learning curves in

Carenet was founded in October 2012 by two Swiss serial entrepreneurs with Brazilian and international experiences. The company provides mHealth solutions, which help to understand the human body and promote users to become active participants in their wellness + healthy living. Provide people with information about their actions in real time (or close to it), and then give them an opportunity to change those actions, pushing them toward better behaviors. Carenet offers the core monitoring technology, wrapped in a device - a lovely little piece of design - wrapped in a service. The startup company is located in São Paulo and expects to launch its first product in September of this year. The software component of the service will be available on the Apple App Store (iPhone, iPad) + Android Google Play. The company is currently in a Series A funding process and is expecting to raise USD 1 million over the next 3 months to scale the project and reach critical mass. Additional information can be found at: www.carenet.com.br

ICT INDUSTRY IN BRAZIL

a country like Brazil, entrepreneurs must be diligent in recognizing trends that can be consistent in the long run, and avoid those that are already showing signs of doubt in other markets. Opportunities for Swiss entrepreneurs in Brazil Swiss entrepreneurs seem to be able to overcome some of these gaps identified by the Startup Ecosystem Report. A solid Swiss education often enhanced by strong experiences from working in consulting or in senior management positions at multinational companies worldwide provide Swiss entrepreneurs in Brazil with a valuable differential. Many of our colleagues here already demonstrated the vision to think up new value propositions and the skills to get complex startup projects off the ground. Open minds due to extensive travelling, global benchmarks and international best practices allow Swiss entrepreneurs here in Brazil often to identify new business opportunities a little bit earlier then the rest of the crowd. On the other hand, Swiss entrepreneurs find here a market that is receptive to new and innovative products and services. Brazil has a rapidly growing, consumption-oriented middle class that now represents over half of the population. Approximately 88 million people are currently online, and by 2016 broadband and 3G penetration are projected to increase by 32% and 103% respectively. Brazil’s internet users are also highly engaged: despite having only 46% of its’ population online, Brazil ranks number three worldwide in numbers of Facebook users, and two for Twitter users.

“The excess of laws, regulations, taxes, paperwork and time to fulfill the requirements when opening or running a business is one of the reasons why 40% of Brazilian startup businesses do not survive for more than two years after opening, according to data revealed by the end of 2011 by IBGE, Brazil's main government research institute.“ Dr. Michael Kronenberg, CIO Carenet

Many of the startups in Brazil today are being created, and invested in, by non-Brazilians. At this point, the Brazilians don’t necessarily seem to mind. Companies run by Americans or the Swiss are seen as interesting, not as a threat to the local Brazilian start-up scene. The trend just continues the multi-cultural aspect of Brazil’s cities like São Paulo. Put all these trends together and you get a very attractive addressable market for innovative Swiss entrepreneurs, acting in industries as diverse as nutraceuticals, fashion, personal hygiene, software and many more. Carenet is in the business of changing habits Carenet is an example for trendsetting and innovation as well. As part of a global wave of mobile Health ventures, the company solves specific Brazilian needs that have not yet been addressed. The market potential for mobile Health applications in Brazil is very promising, the concept is innovative and largely untapped and the value proposition is attractive to many B2C and B2B customers. A recent study by PWC and GSMA expects the Brazilian mobile Health market to reach USD 725 million by 2017. What makes this new segment of converging wellness and health solutions possible is the maturation of the digital world technologies - ubiquity of smartphones, bandwidth, pervasive connectivity, gamification and social networking. Beyond this, the perfect digital storm includes immense computing power via cloud server farms, sensors and tracking devices, genome sequencing, and innovative health information systems.

iPhone App of Carenet

ICT INDUSTRY IN BRAZIL

The new tracking devices are a taste of the not-so-distant future, when monitoring tools now typical of a hospital's intensive-care unit will be transformed into wearable gadgets that are unobtrusive and effortless to use. Compared with the limited snapshot of health that is captured during an annual visit to the doctor's office, these tools and techniques

reveal the measures of someone's health in context, and with a much richer resolution. Consumers are curious to try out these latest tracking tools and illuminate the human body. Carenet’s vision is to be pioneering the self-tracking market with a unique lifestyle ecosystem that will change the way people in Brazil monitor, understand and share their personal wellness and health data, and ultimately allows them to live a healthier life through small actions and behavioral changes. What starts as a simple way of tracking your activities and sleep patterns, shall soon become a first generation cybernetic personal health coach. How to make it happen in Brazil with little resources What has been particularly helpful for Carenet was the founders country specific experience as serial entrepreneurs in Brazil, a deep understanding of the national consumer market and a global network of experts and support, that can be tapped whenever required. For any startup company wherever in the world, resources are always scarce and the daily challenge of the founders is to get as much as possible out of the invested capital. São Paulo is an expensive place to live and do business in, but if an entrepreneur is willing to manage initially without its own office place, he will find cheap co-working facilities and enough Starbucks coffee shops in São Paulo to bridge the first couple of months. A whole set of free or cheap online tools allow startup companies today to kick off with a very lean budget, building virtual operations, structures and networks, and hiring freelancers for specific project related activities. Social media helps to bring people together and engage future customers early on in the project. Nevertheless, in the case of Carenet the founders went one step further and outsourced the whole software development to a team in India, which did the same job for a quarter of the costs in Brazil. But this also requires cultural experience to manage such third-party suppliers, personal relationships, close management and intense communication on a daily basis. Website and software design was still done in Brazil to assure that the product meets the local preferences. Although communication with India has been difficult and tedious, also due to the time difference, the strategic decision to outsource to India allowed the company to invest more money into marketing and communication. Getting the word out is a great challenge in a country with continental size like Brazil What is very true about Brazil is the need to schmooze your counterparts to get things done and whine quite a bit (“chorar”) to achieve the best possible prices. Good negotiation skills come handy on a daily basis. The importance of interpersonal relationships is critical and sometimes becomes a fulltime job. Many meetings still need to be conducted personally, loosing valuable time cruising through the traffic jams, intermediary are always part of the game and commitment is sometimes very volatile. Be aware of lame excuses and sly dogs and signing an NDA is best practices before revealing critical information.

2.6. AREMO Type of company e-Fashion Startup in Brazil

KEY INSIGHT The case of AREMO is another example of a startup in Brazil with Swiss citizens as co-founders, who have a certain experience in Brazil and are keenly aware of the necessity to adapt to the local context. Same as in the case of Carenet, AREMO is still on the way to lasting success, and a major challenge has been to deal with the rampant bureaucracy and tax complexity here. A good accountant and corporate lawyer are necessary to navigate through these complexities but are not sufficient. The entrepreneur must have a lot of patience and perseverance to set up a company in Brazil but the founders of AREMO assert that the opportunities (in e-commerce) have never been better than now.

ICT INDUSTRY IN BRAZIL

AREMO is Brazil’s first online-only fast fashion brand, launched in January 2013 by a group of Swiss and Brazilian entrepreneurs. AREMO’s mission is to disrupt the predominant correlation between high-end branding and high prices in Brazil. AREMO is different than most eCommerce companies in that it is completely vertically integrated and sells exclusively its own brand. To ensure a superior experience to our customers we manage every aspect of our business except production and shipping. Product design, logistics, IT, marketing and customer service are all managed in-house. After operating for 10 months, AREMO has shipped to more than 7’000 clients in every state in Brazil, and is experiencing double-digit month-over-month growth rates.

Dominique Schweingruber, Founder of AREMO

Lodovico Brioschi, Co-Founder of AREMO

Why e-Commerce in Brazil? During the first semester of 2013, online sales reached R$ 13bn, a 24% increase in relation to the same period in 2012. In the first semester of 2013 alone, nearly 4 million Brazilians purchased for the first time online. Fashion and accessories are, for the first time, the largest online category with a market share of 13.7%. Furthermore, Brazil is extremely social: among BRIC countries it is the country with the highest Facebook and Twitter penetration and the daily time spent on Facebook by Brazilians is second to none. Brazil’s economy may no longer be as hot as it was in 2008, but the mega-shift from offline to online that the local retail industry is experiencing is here to stay and the opportunity is immense. Brazil is not the easiest country to set-up a business, but the macro factors at play create an opportunity well worth the hassle. Opening a Local Company Setting-up a company in Brazil is no harder than in other emerging markets, but it requires a good deal of patience, perseverance and ability to deal with the omnipresent bureaucracy. The first step of this process is to think about the desired legal structure, especially in the context of an international holding company. While for subsidiaries of an existing Swiss company this step is mostly straightforward – shareholder of the Brazilian company will be the pre-existing “mother” – for greenfield startups the possibilities are many. If the entrepreneur expects to finance his venture with international investors, it is recommended to create a foreign holding company that will own most of the shares of the Brazilian operating company. We recommend thinking about this aspect already at the outset and to set-up the local legal entity after having opened the foreign holding company. Doing this may slightly increase the time needed for setting up the local company but it saves time and money down the road as no changes in the shareholder structure are needed. The opening of a legal entity is a lengthy process that requires a good amount of paperwork. Any good corporate lawyer or large accounting firm can support the entrepreneur step-by-step in this process. With relations to lawyers and accountants it is worth to mention that both professionals are essential to successfully master the complexities of the local legal and fiscal regulations. It is recommended to work with professionals who speak English and who have worked with foreign-owned companies. Furthermore, it is essential that both lawyer and accountant understand your industry, given the very complex and ever changing regulations. Dealing with Local Banks One of the biggest challenges we faced was dealing with local banks. Local banks, even the largest ones, are not used to foreignowned startups. Given the time needed to open a bank account, we recommend to do this as soon as the legal entity is formed, especially if the local company will receive foreign investments. Pre-revenue startups are usually allocated to the lowest client segment in any bank, where the knowledge of the relationship manager is oftentimes very limited. The best way to get around this is to get an introduction from an established company to its bank manager so that the startup can already deal with a more qualified manager. We recommend working with at least two banking institutions so not to be at the mercy of a single bank. Ideally, one of the two is a large local bank, useful for daily banking needs, while the second is a global financial institution that will come in handy for FX transactions and other more complex needs. Dealing with Local Suppliers Brazilian suppliers are traditionally very risk-averse. Their attitude towards technology companies is very different than the one an entrepreneur would encounter in the United States or in Switzerland. The pre-revenue company is not seen as a partner that

ICT INDUSTRY IN BRAZIL

could grow and develop into a larger company but is instead seen as a risky client who will likely not pay the bills. It is therefore essential to build a personal relationship with suppliers and other business partners. Good relationships are the basis for every good business but are even more important in a country like Brazil. Recruiting Talent In recent years Brazil has seen record low unemployment, especially for young and well educated Brazilians. The negotiating power in the job market is very much in the hands of the employees who change jobs easily and frequently, most of the time in exchange for a small increase in salary. As a vertically integrated company we had to build a team of both operational employees to manage logistics and highlyqualified employees with specific backgrounds in information technology, fashion and marketing. The challenges in recruiting and retaining these two groups of employees are various. On the one hand, it is easy to find bluecollar workers but the turnover tends to be high and finding trustworthy, hardworking employees is far from easy. On the other hand, qualified professionals in new industries such as online marketing or e-commerce are a rare find. The best way to go along the recruiting and hiring of specialized professionals is through contacts and via personal recommendations. Logistics and Shipping The success of an e-Commerce operation is driven by multiple aspects, ranging from marketing to merchandising to customer service and finally operations and logistics. The inherent challenges for some of these processes are present in every country; however especially logistics and customer service pose very specific challenges in Brazil that would not be encountered elsewhere. The sheer size of the country and the lack of infrastructure and security in many areas pose considerable challenges to a company that delivers to clients in every corner of Brazil. Delivery delays and mishaps are inevitable especially in more remote areas. However there are also modern courier companies able to deliver in less than 18 hours within the largest urban centers of S達o Paulo and Rio de Janeiro. It is therefore essential to choose the most suitable carriers for the different regions of the country and to keep a very close control on every order. Another aspect of logistics is warehousing and inventory management. Most e-Commerce companies outsource this strategic process to third-party companies which oftentimes leads to mistakes in inventory and delay in product onboarding. At AREMO we decided from the outset to manage our inventory and warehouse in-house. This has allowed us to control our products much better and has given us the required flexibility and agility that are at the basis of a successful fast-fashion supply chain.

ICT INDUSTRY IN BRAZIL

3. A Brief History of Brazil’s ICT Industry and its Regulatory Affairs 3.1. THE EMERGENCE OF THE TELECOM SECTOR IN BRAZIL The history of Brazil’s telecommunications sector goes far back in time. Already in 1876, the Brazilian emperor, Dom Pedro II, took note of Graham Bell´s invention of the telephone. This happened at a fair in Philadelphia, at which the United States’ 100 years of independence were celebrated. Dom Pedro II became interested in the physicist’s work and wanted to try it. The first telephone was brought to Brazil already in 1877. In the 1950s, the private sector began to invest in telecommunications companies, and telecom regulations were divided among federal, state, and municipal authorities. Soon afterwards there were more than 1,000 independent telephone companies throughout Brazil. Many of them were tied to specific cities, so the service quality varied, often in function of the size of the company providing the service. To get the wide divergence of service quality under control, the federal government decided to intervene and enacted the Brazilian Telecommunications Code (Código Brasileiro de Telecomunicações), which set up the segment’s legal and regulatory framework for the first time, and also got the government much more involved in this important sector. The Code led to the creation of Embratel in 1965, the first government-owned telecommunications company to provide longdistance services. As Embratel grew stronger and started to connect the entire country by microwave and other means, state and municipal companies became weaker and did not have the financial strength to invest in updating and improving their infrastructures. To address these shortcomings, and perhaps following its historic penchant towards creating large, state-owned “champions” in key industry sectors, the government nationalized all telecom companies in 1972 under newly created Telebrás. It consolidated all the various smaller companies into one telecom company for each state of the federation, i.e., Telesp in São Paulo, Telerj in Rio de Janeiro, etc. The state-level companies would provide local and state-wide services, while long-distance services would be provided by Embratel, which was also part of the Telebrás system. For 26 years Telebrás held a monopolistic control over the provision of local, long-distance and international telecommunications. Despite the improvements, a home telephone line was still a luxury item. Installation costs put it out of reach of the general public and one had to wait years to have a line installed. Even public payphones were insufficient and had long waiting lines. On December 30th, 1990, Brazil’s first mobile telephone network started operating in Rio de Janeiro with capacity for 10,000 lines, and it became soon evident that Telebras would be unable to meet the large demand for this new telephone technology. In 1995, the new administration conducted a comprehensive analysis of the telecommunications scenario in Brazil. The analysis showed that in 1994 there were 13 million landlines and 800,000 mobile lines in Brazil, in comparison with 2 million landlines in 1972. During the time of the survey, 98% of home phone lines were installed in homes of families in the top 20% income bracket. The remaining 80% of homes, both rural and urban, were basically deprived of telephone lines. As a result, the government set a goal of 33 million telephone lines in Brazil by the end of 2001, an increase of nearly 3 million lines per year. Given that Telebrás had installed only 1.5 million phone lines per year during the past 22 years, the government realized that substantial changes were in order. External investments were necessary, and support for privatization began, which was certainly also fostered by the worldwide trend to privatize state-owned monopolists in the telecom sector, and also by the opening of Brazil to the world economy which started in the early 90s. In 1996, the law that liberalized mobile services was enacted. This law set the basis for today’s regulatory landscape. Brazilian telecommunications model was built on three pillars: competition, universalization and quality. This law was soon followed by the enactment of the General Telecommunications Act of 1997 (hereinafter, “Telecommunications Act”, or “LGT”), which called for the creation of the National Telecommunications Agency (Anatel) as a regulator and established guidelines for the

ICT INDUSTRY IN BRAZIL

privatization of the monopolistic telecommunications provider, Telebrás. The LGT sought to provide equality among the population, attract investments, and provide entrepreneurs with stability and trust. In essence, Anatel is an administratively independent and financially autonomous entity. It is not hierarchically subordinated to any government body. Disagreement with Anatel’s decisions can only be pursued judicially. Anatel’s regulations are subjected to public consultation and are accompanied by formal explanations of their logic. In certain cases, public hearings are held. The minutes of Anatel’s board meetings are available to the public at Anatel’s library (www.anatel.gov.br). The new law effectively ended the state’s role as a supplier of telecommunications services and changed it from supplier to regulator. And the huge pent up demand finally met adequate supply, as shown in the graph below. The increase in fixed telephone lines was big, but it appears almost nothing when compared to the huge increase in cell phones, spurred by pre-pay cards, which came to substitute fixed phones for millions of Brazilians. The number of landlines is expected to decrease, and according to some industry experts has already been decreasing in the last five years, which does not seem to be the case according to the statistics of ITU displayed in the graph below.

,300

mio of subscribers

,250 ,200 BR-Cel ,150 ,100

BR-Fix-Tel

,50 ,0

Source: ITU : http://www.itu.int/en/ITU-D/Statistics/Pages/stat/default.aspx The complete privatization process, as mentioned above, ended in 1998 (almost a decade later than in Mexico and Argentina) and accomplished something that had been unthinkable five years earlier: the privatization of Telebrásm which was at that time the largest telecommunications company in Latin America and the 11th largest in the world. The privatization of Telebras was also highly emblematic of Brazil’s opening to the world after decades of import-substitution policies and large state-owned companies in strategic sectors. In the 90s, many state-owned banks sitting on huge amounts of bad debts in large part due to cronyism, were also privatized and often sold to foreign banks. Many other companies in private hands were also sold to foreigners, such as the icon “Brastemp”. The 90s were a decade that profoundly changed Brazil’s economy and business processes. The Brazilian Telecommunications history is very recent and the post-Telebras era is just 15 years old. The privatization has resulted in a boom in the sector but also in a number of new problems.

3.2. THE DEVELOPMENT OF BRAZIL’S TELECOMM SECTOR SINCE 1998 In 1998, the government sold off 100% of its stake in Telebrás. Immediately following privatization, Anatel worked diligently to establish grounds for competition in several market areas. Anatel divided the country into a series of operating regions. In the first 18 months after privatization, the regulator successfully introduced duopoly competition into every landline and mobile operating region in Brazil. Presently, all landline operators have one competitor in the region in which they operate, in addition to two competing mobile companies. The market was open to full competition in 2002. On the mobile side, the government 7

ITU(= International Telecommunication Union) is the United Nations specialized agency for information and communication technologies.

ICT INDUSTRY IN BRAZIL

started auctions that year for the introduction of Personal Mobile Service (C, D, and E Band; for further details regarding frequency bands, please refer to Annex I). The geographical distribution of the landline operators and their development since privatization are shown on the maps below: Figure 1: Landline Landline Operators after Privatization 1998

Landline Operators 2013

Source: Southpartner (January 2013)

The equivalent evolution for the mobile systems coverage cannot be demonstrated in a similar way (on maps) due to the many changes and multiplicity of players involved. Soon, four dominant players emerged often out of the main operators of landlines: Vivo, Tim, Claro and Oi. The table below shows their connection with landline operations and their controlling entity behind:

Table 1: Operators st

1 nd 2 rd 3 th 4 th

5 th 6 th 7

Mobile Operator Vivo Tim Claro Oi

Landline Operator Telefônica Intelig (Long distance) Embratel (Long distance) Oi

Algar Telecom Sercomtel Porto Seguro

Algar Telecom Sercomtel

Controlling Entity Telefônica Telecom Itália AméricaMóvil AG, LaFonte, BNDES, Investment Funds, and Portugal Telecom Grupo Algar Londrina Town Hall / Copel Porto Seguro ( MVNO)

Source: Southpartner (January 2013)

Chapter 3 will portray the rise of GVT and the demise of Vesper, two mirror companies in the landline sector, with GVT rising to a truly “convergent” telecomm company, providing landlines, mobile phones, broadband internet and even TV content in a growing part of Brazil.

ICT INDUSTRY IN BRAZIL

In terms of market share, as of March 2013, Vivo, Tim and Claro are competing closely with each other, with Vivo being the leader with 29%, TIM following with 27%, Claro with 25% and Oi with 19%. Their evolution of their market shares in recent years is illustrated below:

Figure 2: Mobile Operators Market Share Mobile Operators Market Share

Source: Teleco (2013). Available at: http://www.teleco.com.br/mshare.asp

Individual mobile operators’ coverage areas with their respective frequency bands are shown on the maps below. It should be noted that the “L Band” is not operational in Brazil; therefore, Vivo (Market leader) does not have national coverage, being absent from the Northeast of Brazil. This area is marked in green on the map below, on the left. On the other hand, as seen on the map below on the right, TIM has national coverage. Figure 3: Vivo and TIM Mobile Coverage

Source: Southpartner (January, 2013)

Based on Claro’s coverage map below, it can be seen that Claro lacks coverage in the Northern Region (again marked in green). The last entrant, Oi, mainly uses D and E bands and has full national coverage. Please note that another frequency band (the M band) is being deployed only in the city of São Paulo. ICT INDUSTRY IN BRAZIL

Figure 4: Claro and Oi Mobile Coverage

Source: Southpartner (2013)

Apart from the Big Four, there are also small operators in Brazil. Algar Telecom (CTBC) is a traditional player and a very strong company in its region (the West of Minas Gerais). Although it is small in Brazilian terms, Algar Telecom has around 1 million subscribers in its network, which is not that small in European terms. The second small player, Sercomtel, only operates in one city, Londrina, and is also the only company that is partly government-owned. Another small operator is AEIOUâ&#x20AC;&#x2122;s (Unicel) which only holds licenses but is currently not operational. Another key characteristic of the Brazilian mobile market (and indeed elsewhere in Latin America) are pre-pay cards, which were an important driver in the huge growth of mobile subscriptions. Algar Telecom launched the first prepaid service in Brazil in 1996. By the end of 2012, 80.5% of the mobile subscribers (211 million) had prepaid mobile lines, in comparison with 51 million post-paid mobile line subscribers. Prepay Cards have allowed millions of lower income Brazilians to access telephone services, allowing users to control costs while eliminating the credit risk for operators. Prepay clients are also important for operators, given the higher revenue per minute in comparison with post-paid mobile line users (and also in comparison with the US and western Europe). Moreover, when prepaid mobile line users take calls, the operator can obtain revenues from other operators due to interconnection fees.

3.3. IT HISTORY OF BRAZIL The development of Brazilâ&#x20AC;&#x2122;s IT industry can be largely broken down into two phases: The first phase, from 1958 to 1975, when most of the equipment and components were imported mainly from the USA, and local consumption was mainly of big machines. At that time there were no Brazilian manufacturers. Only during the 70s computer volumes justified the growth of manufacturers in Brazil.

ICT INDUSTRY IN BRAZIL

In 1972 the first Brazilian computer was developed. In the same year a commission entity named CAPRE (Commission of Coordination for Electronic and Process Activities) was created which resulted in the infamous “Reserva de Mercado de Informática” Act (protected domestic computer market act). The national industry development represented the second phase of the history. COBRA was the first Brazilian computer manufacturer created in 1974, owned by the government. Between 1977 and 1991, with the protected domestic computer market act in effect, only companies with Brazilian funding could work in the sector, computer import duties grew significantly and the government increased customs control. The objective was to foster a national computer industry and innovation, but it resulted in a massive failure and may well have been one of the drivers that led to the policy change in the 1990s to open up Brazil’s economy. But there are still some sympathies for the “Reserva de Mercado”, and they like to point out that during the 80s, the IT market grew at a rate of 30% per year and that in 1986, at a time when Brazil was not yet among the 10 biggest economies of the world, Brazil was ranked the sixth biggest IT market and the fifth largest manufacturer. It can be debated whether this was due to or despite of the “Reserva de Mercado” policy. According to the MCTI (Brazilian Ministry of Science, Technology and Innovation) the “Reserva de Mercado de Informática” policy resulted in around one thousand new companies, seven hundred being from industrial areas. However, concentration was important and only 4% of those 1,000 companies corresponded to half of the internal IT market. But an undisputed downside of this policy was that Brazil had some of the most expensive computers in the world, while at the same time using outdated technology. There was very little innovation and R&D largely focused on imitating new technologies from abroad. To make things worse, not a few of the cherished national manufacturers smuggled important components into the country without paying the high import duties that were meant to protect them. And the demise of the “Reserva do Mercado” liberated a huge pent up demand and allowed for the modernization of many business processes in Brazil. Some critics however point out that whatever little bit of R&D that was done in the old days, seems to have completely vanished, and Brazilian manufacturers largely rely on importing foreign components or forge partnerships with foreign companies, where the Brazilians provide access to their market and the foreigners provide the technology. The “Reserva de Mercado” policy is an interesting case-study of the Brazilian government’s notorious desire to promote the emergence of innovative companies in Brazil or “national champions” by protectionism. Despite the bad experience with this policy, the lessons do not seem to be sufficiently learned, and up until today, the government is pursuing similar policies, instead of creating a business-friendly and innovation-friendly environment and otherwise step out of the game.

3.4. BROADBAND IN BRAZIL Brazil ended 2012 with nearly 90 million broadband subscribers, ca. 70 million of which were mobile users and about 20 million had landline access. The government seems to consider broad-band interent as a “public good” and makes some effort through its PNBL program (The National Broadband Program) to make broad-band internet accessible to a large part of Brazilians. The irony may be that the unprecedented mass protests in June of this year were spurred by the large increase in internet access and the use of social networks.

ICT INDUSTRY IN BRAZIL

90% 80% 70% 60% 50% 40% 30%

CH-%-useinternet BR-%-useinternet

20% 10% 0%

Source: ITU

The graph above shows the huge increase of the percentage of Brazil’s population that use the internet, be it broad-band or not. It is also interesting to note that a country like Switzerland has also seen a similarly strong increase in the same period, although at a higher level. It shows that Brazil still has a long way to go to reach the Swiss level. Nevertheless, Brazil’s fast rise here is quite impressive for a country of continental size marked by generally poor infrastructure, big inequality and insufficient education. But in order to really transform the society as much as it has done in developed countries, it is essential that access to broad-band internet becomes widely available. While it seems to be still a matter of public debate in some advanced countries like Germany whether broad-band internet should be a public good and as such a high priority for the government, this is beyond any doubt in Brazil, whose government treats this issue with quite some importance. However, the various government plans described below have often failed to deliver the somewhat grandiose ambitions behind them. In 2008 the federal government launched the “Broadband in School Program” as part of the universalization plan. Despite the progress achieved since then, according to Anatel, by January 2013, only 43% of elementary schools had internet access. The Northern region has the lowest internet penetration, with only 19%, followed by the Northeastern region with 25%. The Southeast has a 72% penetration, the Midwest 73%, and the South 74%. Broadband in Brazil reached 89 million subscribers in November 2012 according to Anatel, which represents a growth of 147% from December 2010. In 2012 alone, over 6 million Brazilian homes incorporated internet access, and Brazil is now the 5 th largest online market in the world and the 7th in internet audience. The largest broadband growth was in the mobile segment, which jumped from 2 million subscribers in 2008 to 69 million in November 20012. The landline broadband growth was more modest and grew from 11 million subscribers in 2008 to nearly 20 million in October 2012. An important governmental initiative is the National Broadband Program (PNBL - Programa Nacional de Banda Larga). The PNBL program was created in 2010 to expand telecommunications infrastructure to all Brazilian cities. The original plan had a goal of 30 million landline broadband subscribers by 2014, but it has now been increased to 40 million subscribers. Unfortunately, with the metrics adopted, the PNBL impact was limited. In one year (2012), out of a total of 32 million internet activations in Brazil, only one million came from the PNBL. We can point out that an update of the plan known as “PNBL 2.0” is in phase of approval at the Brazilian Congress, which is expected for the second semester of 2013. The plan contemplates long-term actions until 2022, but with targets until 2014 and revisions every three years. In this version, the government's goal will be to assure broadband Internet access for 90% of the Brazilians within five years. In August 2013, according to IBGE (Brazilian Geography and Statistics Institute), around 40% of the Brazilian households have fast Internet access.

ICT INDUSTRY IN BRAZIL

The government's strategy will be to assure fast Internet access with small-size technologies, such as radio signals, to a wider range of households, and later implement a high-quality system based on optic fibre. The idea is to combine fibre, radio and satellite and then carry on within a ten-year term. The optic fibre demand for broadband universalization might reach 30 million kilometres. Brazil has about 20 thousand kilometres of fibre available in the so-called backbones, serving two thousand Brazilian cities. Part of the funds for the PNBL 2.0 will be public; basically, investments in Telebras and the Brazilian geostationary satellite. The other part would come from counterparts included in radiofrequency auctions, much the same way it was done in the 3G band auctions and repeated in the 2.5 GHz/450 MHz bands. This model is consensus within the government, according to the minister of Telecommunications Paulo Bernardo. As far as technology is concerned, updates are needed in order to meet the population's demand. We believe that the PNBL 2.0 initiative is necessary to meet the new capacity demands of today’s Internet usage and technological advances. With the government’s support in tax exemptions and cost reductions for operators that reach the set targets, the goal of the plan may be reached. This will generate investments and new opportunities for foreign players in Brazil. It should be noted that the PNBL program has generated substantial local investments by the government, representing important business opportunities for new players providing HW, SW and services. It is important to remember, however, that the government prefers to buy products from companies established in Brazil. The goal is to provide broadband access to 40 million Brazilian homes by 2014, with a minimum throughput of 1 Mbps, at a price of BRL 29.00 per month, net of taxes.

3.5. INTERCONNECTION Network interconnection is an important topic, since it affects costs directly and thus impacts prices paid by end users. In 1998, Anatel created the General Interconnection Regulations (RGI – Regulamento Geral de Interconexão), which established the basic rules for interconnection among telecommunications service providers. Figure 7 exemplifies the network interconnection architecture for mobile networks, which occurs at the MSC. Figure 5: Mobile Network Architecture

ICT INDUSTRY IN BRAZIL

Source: Southpartner (January 2013) To make competition work in the public’s interest, Anatel approved in November 2012 the General Plan of Competition Targets (Plano Geral de Metas de Competição - PGMC). It mandates the sharing of networks among operators and the de-aggregation of networks for those interested in offering services that the network owner does not want to offer.

Telecomm operators hardly share their interconnection infrastructure with competitors, as is the case in many developed countries. This is a major cost driver and reason why cell phone calls are so expensive in Brazil. The government is addressing this issue with ever more regulation, but some critics point out that there is actually too much regulation, and inconsistent regulation on a federal, state and municipal level. In practice, the PGMC regulates the rates charged by each player and reduces the basic subscription price, which benefits end users. Some scholars believe that the criteria used for the PGMC definitions may impair companies which operate in several markets but hold lower shares in one of them, and that the competitive market self-regulates itself, without the need of any type of governmental influence. ANATEL defends that, if there were no regulations on interconnection amounts, the companies holding higher power will not allow competition in the sector by smaller companies in need of sharing. Operators believe that the PGMC benefits companies that did not invest in networks in Brazil, as the amounts would be regulated. The General Competition Target Plan will be subject to public consultation until September 2013, and the agency’s forecast is to have it approved before the end of 2013.

3.6. NETWORK QUALITY The huge increase in the availability of mobile and landlines has been a notable success and has improved the life of millions of Brazilians. Nevertheless, the after-sales services provided by the Big Four cell phone companies is almost scandalously bad. A very good account of this experience was recently given in a blog post of the São Paulo correspondent of TheEconomist (see link), that went quite a bit viral even outside Brazil. Telecoms companies top the list of customer complaints. To put it bluntly, one could argue that Brazil’s telecomm industry has gone from extremely bad in the Telebras days to still “quite bad” today. But what may be a great annoyance for its customers can also be a great business opportunity for ICT companies from Switzerland. For Brazil’s telecom and ICT industry in general has a huge need for technology and know-how of all sorts. But this does not mean that selling them, and especially importing them from abroad, is an easy task or “quick win”. There does not seem to be a broad consensus as to why the telecom services are so deficient in Brazil; instead, a variety of reasons are being hotly debated: outdated regulation, lack of investments, a very slow and unpredictable judiciary system, excessive government intervention, lack of competition, cities impeding the construction of important antennas and even Brazilians’ conflict-averse nature. It is beyond the scope of this report to analyze this question in depth and provide conclusive answers. But for anyone wanting to enter the Brazilian telecom market, it is important to be aware of these problems, as they may present both threats as well as opportunities. In July 2012, customer complaints reached such a high level that Anatel took an unprecedented measure: it temporarily suspended SIM cards sales by the operators Oi, Claro and TIM in several Brazilian states as long as they would not present a clear plan how to get their service level at least reasonably closed to what is promised to customers. It is common that internet speed (MBPS) are at only 10% of the level that was promised. Coverage of mobile telephony is not available where it was promised. And to top it off, customers biggest complain were about billing errors or incomprehensible bills.

ICT INDUSTRY IN BRAZIL

Anatel’s measure was a bang heard all over the country and was very well reported in an article in TheEconomist. The decision was considered extreme by the operators, of course, as it affected nearly 70% of the market. However, it was well received by Brazilians and prompted the submission of investment plans by operators in order to improve networks. Anatel also created EAQ – Entidade Aferidora de Qualidade, (Entity for Quality Measurement), which measures internet speeds as experienced by end users and evaluates service providers, and took some other measures. The government expects that these measures willo increase competition among operators, reduce landline internet prices, and provide better information, so that end users can choose among providers. According to the new rules which came into force in October 2012, operators with more than 50,000 users must provide a minimum average throughput of 60% of the advertised throughput. This proportion must increase every year until reaching 80% by 2014. This is a significant increase, as currently the average speed experienced by consumers is approximately 10% of contracted speed. Data collected will be published monthly by Anatel and will be used to evaluate whether operators are achieving the established quality goals. If operators fail to meet these goals, they will be subject to warnings, required to make investments, and may even be subject to sales suspension.

The bad quality and service of most Telecom providers has caused widespread furore and prompted the government to take this issue much more seriously, after having focused for perhaps too long more on qualitative aspects (availability of telephone lines throughout the country).

3.7. INTERNET AND THE LAW KEY INSIGHT: Like elsewhere, internet regulations in Brazil are polemic and have divided the Brazilian National Congress. A resolution is expected in 2013. Brazil’s Ministry of Justice and the Fundação Getúlio Vargas School of Law are working in partnership to create a set of laws that will define the rights and obligations of Brazilian internet users. The goal is to protect users and limit abusive actions from access providers and technology companies. The main topics covered are: Privacy, freedom of speech, and neutrality. - Privacy: Private contents must not be commercialized and cannot be shared or used without the concerned party’s authorization. - Freedom of speech: All types of information are published on the internet, and this must continue. - Neutrality: This is the most difficult topic. Neutrality considers the network as being a transport tool, regardless of contents, destination, or any other criteria. The analogy is the postal service, which delivers its packages without responsibility for their contents, sender, or recipient. Around the world some countries have their own neutrality rules but there is no global decision, as various countries are in a similar situation as that of Brazil. The Internet Civil Milestone establishes the Internauts' rights and obligations, and gained momentum with the denouncement of the US Government spying on emails and telephone calls from Brazilians.

ICT INDUSTRY IN BRAZIL

Some analysts believe that, as the Milestone does not overlap the Constitution, it will be more like a series of rules to bureaucratize the development in Brazil even further,. The Milestone should be deemed as a juridical topic, as in other countries, and the criminal code itself could be used to defend the citizens, without a requirement of specific rules. Operators’ representatives, on the other hand, consider that the milestone must be approved as soon as possible, but after serious discussions on the network neutrality term. In Brazil, Justice is slow in decision making and one of the project’s objectives is that the milestone accelerates criminal discussions.

3.8. MVNO - MOBILE VIRTUAL NETWORK OPERATOR A Mobile Virtual Network Operator (MVNO) is an operator that does not have a network or spectrum to provide services. There are MVNO success stories in other countries, such as Virgin in the United Kingdom and PostMobile in Italy. In Brazil, there are few MVNOs so far. At the end of 2009, Anatel conducted a public consultation for the MVNOs regulation. Anatel has received inputs, particularly from current operators, and is creating the final rules. Various companies, such as Pão de Açúcar, Carrefour, Banco do Brasil, GVT, Abacom and Spring Wireless have shown interest in this market. In 2010, Anatel authorized the operation of MVNOs in Brazil. According to newspaper Folha de São Paulo, insurer Porto Seguro and TIM signed a network-sharing agreement in order to launch the first MVNO in Brazil. TIM will provide the network, and the agreement covers all Brazilian states. TIM informed that it is also in advanced talks with other potential MVNOs. According to Anatel, our business and regulatory model was inspired by India’s and its goal is to increase service availability and quality. In essence, an MVNO is an operator that buys at wholesale rates and sells at retail rates, sometimes adding value that traditional operators cannot offer. MVNOs must have a strong brand, a customer service infrastructure, sales and marketing capabilities, but they do not need technical expertise in engineering and IT. MVNOs are expected to focus on market niches that have not been served well by traditional operators. They are also expected to specialize in non-traditional distribution channels which can provide good subscriber acquisition costs. To receive authorization, an MVNO must apply with Anatel. Once approved by Anatel, the MVNO must look for a network partner. The network partner must answer the MVNOs request within 60 days and, if it rejects the MVNO’s request, it must provide a justification to Anatel. For traditional operators, the advantages are an increase in revenues and obtaining additional subscribers at a lower cost, given that MVNOs have commercial and customer assistance structures. There more than enough reason to think that in a country the size of Brazil, there is room for more MVNOs. And considering that Switzerland has several MVNOs in operation, this is probably the most interesting business opportunity highlighted in this report.

ICT INDUSTRY IN BRAZIL

3.9. IT-TELECOM INTEGRATION AND CONVERGENCE In October 2006, TheEconomist published a special report about the “Telecoms Convergence”. The title of one article “Your Television is ringing” is an amusing metaphor and explanation what convergence is all about. It seems that even in the year 2013, it is not yet quite clear where the trend to conversion will lead major ICT players even in mature markets like the USA, much less so in Brazil. As will be explained in Chapter 6 about “ICT for the TV Market”, most telecom companies already provide broad-band internet and pay TV, what has become to known as “triple play” or “quadruple play” worldwide. This may be particularly important in Brazil given the population’s immense love for TV entertainment. Even Netflix is available in Brazil, as opposed to Switzerland, although the content is just a fraction of that in the USA. And George Sorros is investing in 4G internet access to homes with its company ON, launched in the Campinas region. And many individuals and companies use voice-over-the-internet solutions to save the high telephone costs in Brazil. According to Frost & Sullivan Consulting, emerging markets grow twice or three times faster in IT infrastructure than mature markets. The growth forecast for Europe is 3% until 2014, and Latin America expects a 7% annual growth in the same period. Convergence is a key driver behind this growth. Conversion also affects Telecom integrators and distributors in Brazil. Only five years ago, companies like Phonoway, Sigmafone and Plantronics were dedicated to the voice market, while others, such as Ingram Micro, Mude and Westcom, were dedicated to data. In the wake of convergence, this lines are blurring and are remixing the sector where foreign companies look for partners in the market entry to Brazil.

ICT INDUSTRY IN BRAZIL

3.10. SUMMARY OF BRAZIL’S ICT SECTOR IN NUMBERS Below there is a summary/overview of the ICT sector in Brazil and its development in the last eight years. Table 2: Internet, Pay TV and Telephony Market Indicators

INTERNET Percentage of Households with internet Percentage of Households with access to Broadband Percentage of Households with computers Access to Broadband in million Landline Broadband in million Mobile Broadband (3G) – in million PAY TV

2005

2006

2007

2008

2009

2010

2011

2012

13%

14%

17%

20%

24%

27%

38%

12%

16%

21%

33%

17%

20%

24%

28%

32%

35%

45%

89.1

19.89

69.23

2005

2006

2007

2008

2009

2010

2011

2012

FEATURE

Access in million

4.2

4.6

5.3

6.3

7.5

9.8

12.7

+63.3% since Dec/2010 FEATURE

TELEPHONY

2005

2006

2007

2008

2009

2010

2011

2012

Landlines in Million

39.8

38.8

42.1

43.5

43.7

44.1

Mobile users in million

86.2

99.9

121

148.6

169.4

196.9

234.4

246.7

FEATURE

+6 million households in 2011

+147.5% since Dec/2010 th *5 online market th • 7 internet audience

+25.3 since Dec/2010

Sources: ANATEL (Agência Nacional de Telecomunicações), and CETIC (Centro de Estudos Sobre as Tecnologias da Informação e da Comunicação). Available at: http://www.mc.gov.br/sala-de-imprensa/todas-as-noticias/170-sem-categoria/26283-quadro-resumo-de-indicadores-do-setor-de-comunicacoes

According to BRASSCOM (The Brazilian Association for Information Technology and Communication companies) the Brazilian IT market statistics are as follows: Revenues: US$ 123 billion, 4.5% of GDP, and the world´s 7th largest internal market. Graphic 1: Brazilian IT Market

Hardware 35.3

54.0

Software 9.5

3.0

5.8

15.4

Service BPO Exports IT in-house

Source: Brasscom (2012). Available at: http://www.bmfbovespa.com.br/empresas/download/Brasscom-Apresentacao-Bovespa.pdf

Additional, more detailed data can be found in ANNEX III.

ICT INDUSTRY IN BRAZIL

4. Case Studies of Brazilian ICT Companies In this chapter, five Brazilian companies in the ICT sector are briefly presented, with the key question behind being: what can a small to mid-sized Swiss company learn from these companies, which have generally grown fast and are large today? With Vesper, a case of failure is also being prsented, as one often can learn more out of failures than out of success stories. Not all of these companies are not purely Brazilian, though, as they often had foreign investors behind them. Nevertheless, due to their size, they probably had a management team largely composed of Brazilians, and they have positioned and branded themselves as Brazilian companies.

4.1. GVT Type of company Operator Global Village Telecom (acronym: GVT) is a Brazilian telecommunications operator. It was created in 2000 by a consortium formed by Dutch Global Village Telecom (78%) and the American companies ComTech Communications Technologies (20%) and RSL (2%). On September 30, 1999, they obtained a license from Anatel. GVT was the last “mirror” wireline carrier to start operations in Brazil. As a “mirror” of Brazil Telecom (see page 5), GVT began serving 24 cities in the states of Rio Grande do Sul, Santa Catarina, Paraná, Mato Grosso do Sul, Mato Grosso, Goiás, Tocantins, Rondônia, Acre and the Federal District. The company focus was primarily on serving high-consumption households and businesses. Currently it has 8.17 million lines in service and the highest Internet penetration rate (90%) in its customer base. Their nominal broadband speeds were also the highest ones launched in the market. It was the first telecom operator to enter the Bovespa Stock Market. The first strategic innovation was to implement the charging of calls on a perminute basis rather than by pulse, a complex and imprecise system that was then used by the other providers. Another distinctive strategy of GVT was the adoption of flat rate charges for long distance calls between sites under GVT coverage and also for cities inside other operators’ domains, regardless of the time and distance of the call. They also developed a new concept of service referred to as National Number which was a hit for consumer services nationwide as it allowed sharing the connection cost between the client and the final user.

“What stands out with the GVT team, from top to bottom, is its capacity to move quickly, change if necessary, and do what is necessary to get results.” (Valor Econômico, a major newspaper in Brazil March 18th 2013)

These strategic moves were very well received by customers and were jet fuel for GVT’s fast rise in the market. They also are a very interesting example of how innovation and differentiation can work indeed in Brazil, where not a few business men complain that innovation is a futile endeavour and focus should always be on low costs. Even more interesting, the GVT case shows that reducing complexity in Brazil can be an important route to success. Foreign companies tend to think of the bureaucracy and complexity in Brazil mostly as an obstacle, impossible to change, but they can also be an opportunity, particularly if they are “home-made” in the private sector of the economy, and not imposed by the government. On the other hand, their solid progress and innovative services have not been achieved without hurdles and difficulties. They had no infrastructure of their own (it was implemented from scratch), so at the start the main technology used to reach the customers was a radio-wave transmission system named Wireless Local Loop (WLL). Moreover, the company didn’t get support

ICT INDUSTRY IN BRAZIL

from other operators to have long distance networks installed, as the law and regulation did not support agreements among competitors to share networks, which is known in technical jargon as "unbundling". Therefore, GVT had to count on partnerships with infrastructure providers such as Geodex or energy companies such as Copel and Network, concessionaires with already implemented fibre networks. Another challenge was client approach, as the GVT brand was totally unknown in the market and Brazilian users normally feel very uncomfortable adopting or swapping for someone new in certain services such as telecom. In 2009, GVT was bought by the French Vivendi group for 7,7 bio BRL which was considered a quite impressive amount back then. The economic and financial results demonstrate that GVT has been a successful enterprise and is also on the right path. It closed 2011 with a jump in earnings, which grew from BRL 479.7 million in 2010 to BRL 776.5 million in 2012. The number of lines in service increased 49.5 percent and reached 6.32 million, which is due to the company’s territorial expansion and the strong adherence to landline telephone services and broadband in cities where it operates. In 2011, GVT launched additional operations in 22 cities in the Southeast, Northeast, South and Midwest, reaching 137 cities, servicing all market segments. GVT currently offers landline telephony, landline broadband, and pay TV (DTH and IP TV) services. It was the only “mirror” operator to survive in Brazil, focusing on the right market with the newest technology, innovative ideas and high value products, with aggressive plans and rates. In

KEY INSIGHT GVT’s key to success was that they managed to change the market dynamics to their advantage through offering different, creative and very attractive services packages for end users. This is very promising news for MVNOs! Perhaps, the most interesting take-away from the GVT case is that a major route to success in Brazil’s ICT market can be to simplify something that has always been complicated and bureaucratic in Brazil (and often is considered more difficult to change than it really is). Foreign companies tend to think of the bureaucracy and complexity in Brazil mostly as an obstacle, but they can also be an opportunity.

ICT INDUSTRY IN BRAZIL

4.2. VESPER Type of company Operator Vesper was established in 2000 as a “mirror” company in the Telemar and Telefônica regions (see page 5). Their shareholders included Velocom (a consortium based in Denver, Colorado, USA), Qualcomm (a major handset maker and CDMA patent holder ), and Bell Canada International. In January 2001 Vesper already had 500,000 customers, had invested approximately USD 1.5 billion and served 80 cities in 17 states of Brazil, besides counting on 25 call centres and 800 transmission towers. Vesper had an innovative technological project. Its technology was based on radio and was similar to the cell phone technology that would be used for installing a large wireline infrastructure in a record time. Thus Vesper expected to gain in a short time a large customer base, while avoiding high expenditure in infrastructure such as cables, wires, poles, pipes, etc. The system adopted by the company, WLL, worked by installing radio towers with a frequency of 1.9 GB, the same as mobile telephony. These towers were connected to the hub via the company's broadband connections. Therefore, residents with homes around the tower didn´t need anything but to connect the telephone to the power outlet. It was quite innovative because it eliminated the need of extension wires to the customer's home. However, the system had some rather dramatic limitations: The first was that it was still an experimental system and would frequently fail when connecting Vesper to other phone carriers. Another important limitation was the fact that Vesper´s lines only allowed connection to the Internet at very low speeds, something around 14.4 Kb, a speed already overcome by dial-up speeds around 56 Kb that could be achieved with the competitor's line. Despite investments running in the billions, the infrastructure was insufficient and its operating and backup systems (billing, etc.) were simply inadequate. In early 2000, when it went into operation, there were already dark clouds on the horizon for Vesper. Only about 60 towers were up and running in 17 states. Many locations lacked any tower at all. In the city of São Paulo, densely populated and with a strong demand for services, it had only one tower. Hence, on its launch date, the company could serve no more than 120,000 potential customers across the whole country. In cities like São Paulo with 18 mio inhabitants in the metropolitan area, this service capacity was limited to 70,000 homes. To make things worse, Vesper spend an outrageous amount of money in marketing campaigns, but it turned out to be like a large consumer goods company launching a great new product, but customers could not find it in the supermarkets. Coupled with other shortcomings, revenues plunged and costs rose, resulting in the demise of Vesper in 2003.

KEY INSIGHT The main reasons for Vesper’s demise were the launch of a risky, untested technology; a misguided marketing strategy and questionable conduct. Above all, the main reason may have been unrealistic expectations about the Brazilian market and too much hurry in getting a return on investments, which may have been driven by the influence of its US-based investors, which may well be an important reason why the main players in Brazil’s telecom market today are mostly owned by non-US investors.

ICT INDUSTRY IN BRAZIL

4.3. PRIME SYSTEMS Type of company Software Company The company was founded in 1996 as Seculus Technology to meet the internal demands of IT infrastructure, basically providing outsourcing and developing automation applications for their sales team. Its operations then expanded with a focus on providing mobile solutions to meet the demands of companies from the most diverse segments, i.e. from steel makers to large retailers. The main applications consisted of field automation processes, sales force and trade marketing, and a platform for sending SMS, as well as other services. Today, Prime Systems is now a benchmark in the mobile technology segment and has emerged as one of the leading national companies in the development of mobile technology.They are based in Belo Horizonte, with branches in São Paulo and Porto Alegre. Their strategy was based on the decision to change focus from outsourcing and move to mobility services designed to run on PDAs, BlackBerry and Palm devices. The original idea was to use the operators as sales channel, commissioning the operator sales team and charging for the system installation plus a monthly fee. However, they had to overcome important barriers, like the challenge to convince potential operators about the value that could be added jointly with their services, and also training their sales force accordingly. Another one was the high level of investment required for the billing systems to become integrated with that of its partners. Nonetheless, the potential gains from employing the system were massive and, through their strong network and access to top decision maker within the operators, Prime was successful in getting its message across to them. Thus the overall effort combined with a steadfast determination yielded the desired outcome, namely the concept “buy-in” by the operators. In 2012 the company revenue was BRL 15 million, 70% gathered from mobile applications. Currently the company has about 250 corporate contracts with an average of 200 users per customer.

KEY INSIGHT Prime Systems’ key success factor was probably its excellent relationships with key executives at the operators, which resulted in the creation of strong and innovative partnerships with leading telecom operators in Brazil. Relationships are worth gold in Brazil and are often a critical success factors for selling even very attractive solutions. Such relationships are built up over time and a foreign company entering the Brazilian market should either partner with a Brazilian company that has these contacts, or it should hire their best people.

4.4. PEIXE URBANO Type of company E-commerce The group purchasing model was created in the USA by Groupon in late 2008 and was an immediate success. It was designed with the purpose of offering discounts on services and products to groups of buyers, using a technique of promotion to attract new consumers. In Brazil Peixe Urbano pioneered this model. The company was founded in 2010 by Emerson Andrade and Alex Tabor. It is headquartered in Rio de Janeiro and is present in the main capitals of Brazil. Major international investment companies such as Morgan Stanley Investment Management and T. RowePrice Associates invested in the company. Later other investors, both Brazilian and international, including a celebrity, Luciano Huck, joined in. Peixe Urbano offers discounts at restaurants, salons, hotels and aesthetic clinics. The fever of collective purchases led to the multiplication of the companies wanting to become part of Peixe Urbano’s offerings. Soon, however, what was happening with Groupon in the USA also happened in Brazil: many new companies offering similar services entered the market, causing a crowding out effect, with Peixe Urbano not really gaining a first-mover’s advantage, at first.

ICT INDUSTRY IN BRAZIL

But then, Peixe Urbano reacted very cleverly by diversifying its services and entering into other segments. This was done by a combination of acquisitions and strategic partnerships with various companies. In February 2012 it bought Zuppa, a website allowing customers to make online reservations at restaurants. In March it acquired “O Entregador” (the deliverer), which was a delivery food order website present in five major cities in the states of São Paulo, Minas Gerais, and Rio de Janeiro. To strengthen its financial liquidity, Peixe Urbano sold its operations in Argentina, Chile and Mexico, which also enabled it to focus its efforts on the Brazilian market. In late 2012, it opened its own travel agency. The new operation focuses on the same model that established the group buying website, but now with specific offerings geared to tourism. The company is also aiming to increase its stake in e-commerce tourism. Furthermore, competitor Groupalia was bought and, finally, a strategic partnership was entered into with Azul airline in October 2012. Currently, Peixe Urbano has over 16 million users and over R$ 100 million in revenues per year.

KEY INSIGHT In the internet business all over the world, companies can never sit still and rest on their laurels, as there are always competitors copying successful business models or coming up with better ones, and customer preferences are constantly changing. In Brazil, this process is particularly accentuated, as insufficient protection of intellectual property fosters imitations and the rising middle class having access to internet quickly changes the market. Peixe Urbano shows how important it is to be flexible, creative and react quickly to new situations unfolding in the market. This does not seem to be a real strength of Swiss ICT companies and should probably on the “weakness” side in a SWOT analysis.

ICT INDUSTRY IN BRAZIL

4.5. BEMATECH Type of company Hardware Bematech is a provider of complete technology solutions for the retail segment through integrated solutions composed of management systems, equipment, services and training applied to diverse market needs. It was established in 1990, being the first company to manufacture mini-printers in large scale and the first to provide integrated printer blocks for autonomous terminals. In 1999 a very significant event took place which massively impacted sales volumes: the government enacted a law making it obligatory for all commercial establishments to issue sales bills. This in itself generated a huge demand for printers. Another important event took place in 2002: The election was now to be done via Electronic Ballots and Bematech won a single order to supply 75,000 printers to Unisys, which got the order from the Election Authorities. Bematech made an IPO in 2007 and obtained funds of approximately BRL 400 million, which made it cash strong and able to start acquiring interesting companies. It was now able to expand its product portfolio with complementary items such as bar code readers, checkout counter software, PCs, etc. They increased their production capacity by building a plant in Manaus and opened subsidiaries in the major towns and cities in the country. Through these actions they managed to change their offerings by focusing on business automation solutions, delivering complete outlet equipment sets, technical services, and management systems. Along this line, in 2008 it completed eight acquisitions, the major one being the American company Logic Controls, which has international operations and produces touch-screen sales terminals. The company also acquired the CMNet control, serving the hotel industry, Snack Control and Mister Chef, specializing in the food segment. In September in the same year, Bematech signed an agreement with Elavon, administrator of credit cards and debit cards, which brought extra boost to its sales. Though they suffered some problems along the way, these were overcome and today Bematech is the clear market leader in its segment. Its distinctive feature and competitive advantage is its offering of a “one-stop-shop” solution to the markets it serves.

KEY INSIGHT Bematech key to success was to provide a “one-stop-shop” offering to a niche with a real need for such solutions. This may seem to be a no-brainer, but it is generally difficult to sell services in Brazil, where customers are very price-oriented and short-term focused. Moreover, by shortening the “product to customer chain”, it came closer to end-users, reduced dependence upon distributors while increasing gross margins. All of this is quite a performance in the Brazilian context.

ICT INDUSTRY IN BRAZIL

5. Interesting Markets for Swiss SMEs 5.1. ICT FOR THE TV MARKET IN BRAZIL HIGHLIGHTS Brazilians love watching TV, so anything related to the television market can potentially be huge. Important changes are taking place as the open broadcast TV system is migrating from analogue to a Brazilian digital system â&#x20AC;&#x153;inspiredâ&#x20AC;? on the Japanese standards. Currently Pay TV serves only 27% of households and is expected to expand strongly in coming years.

The first relevant fact to be mentioned is the TV system regulation covered by the Telecommunications General Act, the LGT (see chapter 1). By TV Market we are referring to Open or Broadcast TV and Subscription or Pay TV. Culturally, television is a real passion for Brazilians. In a typical Brazilian household, a family turns on the TV as the first thing that they do when returning home from work or school. The penetration of Broadcast TV is huge and according to the IBGE (Brazilian Institute of Geography and Statistics) in 2011 over 96% of Brazilian households had a television set. This is mainly because the television local content has excellent appeal to the general population. Local productions such as soap operas and reality shows are very popular. 5.1.1. Open Broadcast TV and Digital TV Digital TV is the same as Open broadcast TV and transmits the same audio and video information through digital signals over analogic ones. The system is free for users who have the receivers. The Brazilian Digital Terrestrial Television System (SBTVD-T) was established in 2006, by Decree no. 5280, which defined the guidelines for the transition from the analogue to the digital broadcasting system. It has been decided that the analogue transmission will cease in 2016. Until then, both analogue and digital broadcasting will be transmitted. The frequency channels used for analogue transmission will be returned to the State, permitting it to use these channels for other important applications, such as LTE 4G, etc. The main benefit of digital TV is interactivity, which is made possible by using a return channel (broadband, fixed or mobile line). This will enable users to answer questionnaires and surveys, vote in elections, obtain virtual information and public services (e-government), and buy on ecommerce and surf the internet in the near future. There are different digital television standards in the world. The Brazilian standard is based on the Japanese one and is also different from the European and North American standards. It means that products such as converters and so on have to be customized to the local digital standards in order to be commercialized in Brazil. Below there is a map with the Digital TV standards around the world.

ICT INDUSTRY IN BRAZIL

Figure 6: World Digital TV Standards

Source: Wikipedia. Available at: http://en.wikipedia.org/wiki/File:Digital_broadcast_standards.svg

5.1.2. Subscription TV or Pay TV The Pay TV service is a telecommunication segment based on monthly fee payment, in which the subscriber receives video and/or audio signal transmissions from different technological bases such as cable, satellite, etc. Each technological base has its own infrastructure (distribution form) which is, in turn, regulated by Anatel. There are interesting opportunities in the Pay TV segment for companies wishing to enter this market in Brazil. Penetration is still low and it is something of high importance for (telecom) operators in Brazil. Besides major companies, there are many small and medium-sized companies seeking innovative solutions to gain market share.

ICT INDUSTRY IN BRAZIL

Below there is a figure illustrating the main Pay TV common systems operation. Figure 7: Pay TV System.

Source: LCA – Diagnósticos, Cenários e Ações para o Setor de Telecomunicações no Brasil, 2014-2020. pg. 178 (July 2011)

Cable TV: In this case, the TV signal consists of a sum of signals sent by programmers to satellite uplink centres. This signal is then sent to a receiving central, which generates processes and relays the signal to subscribers (home or business networks) through an optical fibre network and coaxial cables. The terminals require a converter unit, decoder or terminal capable of decoding itself (cable-ready) which converts, decodes and then fits the signal to compatible frequencies with the device buffer. Compared to other technical solutions, this technology has the highest installation costs per household (transmission path, infrastructure costs, network expansion and maintenance) which restricts service availability to large urban centres. On the other hand, once installed, the network enables the device exploitation for other economic purposes, such as broadband Internet access and telephone services. However, it is necessary to use bidirectional technology, capable of both receiving and transmitting information and data to the subscriber. It is important to highlight that Cable TV is exclusively intended to private telecommunication services, meaning that besides not having a “universalization” obligation these services are offered on a subscription basis. MMDS: Similar to the Open TV transmission, this system uses a specific range of frequencies instead of the above system cables. Due to the high frequency (microwaves between 2500 to 2680 MHz), the coverage range is limited, starting from the 30 to 50 km antenna. The uplink / satellite signal (programming) is converted to UHF waves, which are transmitted to receiving antennas of households and businesses. To be displayed at the terminal points, the signal must also be decoded by an

ICT INDUSTRY IN BRAZIL

appropriate device. Compared to cable, the MMDS provides a lower number of channels due to the narrow radio spectrum width available for transmission. DTH: In this technology the signal downlink is done directly from the satellite to subscribers´ antennas, requiring only a satellite dish and a decoder linked to the buffer device. Because of this, DTH has a better area coverage than previous technologies (national or even continental extent). It also has a reduced cost for installation / maintenance with capacity of channels. However, it is necessary to rent a satellite bandwidth and develop a retail distribution network (almost always the outsourcing target by operators). This constitutes barriers to services expansion under this modality. UHF: This system is similar to Open TV with the difference that it uses a single UHF channel (Ultra high frequency). This model was unsuccessful, since its signal coincided with the frequency of those transmitted by Open TV. Indeed, Open TV went on to transmitting part of its programming this way and passed from 25% in 2003 to 45% presently. On the other hand, the UHF technology, which reached 24,000 subscribers, dwindled in 2012 to only 3,595 subscribers. IPTV is a technology to transmit video signals through the internet. It is increasingly being used by broadcast and pay-TV and for video-on-demand. It is especially interesting for telecom operators that seek ways to increase customers’ demand for broadband internet solutions. Usually, the telecom operator offers broadband services where one part is dedicated for data and the other part for video. But a strong fiberoptic network is crucial for this technology to work. Today, the operators Vivo (Vivo firba), GVT and Oi offer this kind of service. Some Internet Service Providers are also preparing themselves to offer this service. The case of Albis in the Introduction chapter illustrates the opportunities that can arise in this field for Swiss companies. Albis has a solution called set-top box which is installed in the customer’s home and converts the internet signal for the TV. Subscription TV Market in Brazil Pay TV subscribers grew from 3.4 million in 2000 to more than 16.1 million in 2012. By the end of 2012, the Pay TV density in Brazil reached 27.2 per 100 households, which is a low penetration compared to other countries. Its penetration has reached a saturation point in Canada and the US (according to Digital TV Research - Simmon Murrey). Moreover, in Colombia, for example, 84.4% of the country's inhabitants had access to it by the end of 2012 (according to LAMAC – Latin America Multichannel Advertising Council). Even though the Pay TV service is still growing, its penetration rate is timid compared to that of other telecommunication services. Table 11 below shows how many providers there are per technology. Graph 2 illustrates the size of each system in terms of subscribers. Table 3: Pay TV Service Providers per Technology.

Technology

No. of Providers

MMDS

Cable TV

MMDS and Cable TV

DTH

Cable TV and DTH

TVA

Total

153

Source: ANATEL - Panorama dos Serviços de TV por Assinatura, p. 4 - 49th Ed. (2012).

ICT INDUSTRY IN BRAZIL

Graphic 2: Pay TV Subscribers Distribution per Technology.

15%

17%

MMDS

TV a cabo

MMDS e TV a Cabo

57%

DTH TV a cabo e DTH TVA

Source: ANATEL - Panorama dos Serviços de TV por Assinatura, p. 4 - 49th Ed. (2012).

The Pay TV coverage has been limited by the restricted geographical coverage. Many areas, including mid-size towns, in the interior of the country simply do not have coverage. The growth potential is hence huge. Just to illustrate it, Brazil has 5,564 cities and only 464 of them have Cable TV coverage (see table 6) Table 4: Pay TV Subscribers Distribution per Technology.

Service MMDS TVC TVC MMDS Total

Districts 207 148 and

109 464

Source: ANATEL - Panorama dos Serviços de TV por Assinatura, p. 8 - 49th Ed. (2012),

Competition in the Pay TV Market Anatel granted the incorporation of NET by Embratel and of Abril (a publishing company) by Telefônica, thus changing the competition scenario in Brazil. The main company is the NET / Embratel group which by the end of 2012 accounted for 53.83% of the market, equivalent to 7,824,438 subscribers, followed by the Sky/Directv group with 30.79%, comprising 4,475,837 subscriptions, followed by the others with 15.38%, totalling 2,234,908 subscribers. Graphic 4 shows this distribution.

ICT INDUSTRY IN BRAZIL

Graphic 3: Leading Economic Groups Market Percentage.

Sky / Directv

7% 31%

Net + Embratel Telefônica + Abril Oi

54%

Others ( GVT,Algar ,Viacabo, Ohters Groups)

Source: ANATEL - Panorama dos Serviços de TV por Assinatura, p. 14 - 49th Ed. (2012).

Due to the competitive scenario, operators in Brazil have to be creative and provide a variety of value added solutions. Hence, it is common to include in their offerings a bundle of services such as landlines (voice), broadband (data), and Pay TV. This is a common feature in big cities like São Paulo, Belo Horizonte, Rio de Janeiro, etc.

Conclusion: The telecom operators in Brazil are associated with TV operations. Table 7 shows the relationship between telecommunication operators and Pay TV services groups. Table 5: Telecommunication and Pay TV Providers.

Mobile Operator Vivo

Landline Operator Telefônica

TV TVA Company

Controller Telefônica

TIM

Intelig (Long Distance)

Telecom Italia

Claro

Embratel (Long Distance)

NET

Oi TV

Algar Telecom

ISP TV

America Móvel AG, LaFonte, BNDES, Investment Funds, and Portugal Telecom Grupo Algar

BOX TV Sercomtel

Londrina Town Hall /Copel

1 2 3 4 5

Sercomtel Sercomtel Source: Southpartner (March 2013).

Besides large groups offering Pay TV services, there are many small companies in Brazil using different Pay TV technologies; some of them have licenses but are not in operation yet, being opportunities for foreign companies. Details: Annex VI.

ICT INDUSTRY IN BRAZIL

6. THE ELECTRONIC BRAZIL

SECURITY

MARKET

HIGHLIGHTS The electronic security market reached sales of USD 1.6 billion in 2012 and is expected to grow significantly in the coming years. Since this ICT sector is less regulated than other ones, a substantial part of it is in the informal sector which also disguises estimates of its size. Its main trend are CCTV systems used for a variety of applications. According to ABESE (Brazilian Association of Electronic Systems) the segment continues to rise and grew over 12% in 2012, reaching USD 1.6 billion. The trend is to keep growing in 2013 and reach USD 1.8 billion. "The electronic security market has shown growth with the information technology evolution, both in domestic and corporate security, as well as in the public sector. This tendency is expected to persist, especially with as the World Cup and the Olympics approach," says Oswaldo Oggiam, director of Abese. In an interview conducted for this report, Mr Rogério Reis (Communications Director of ABESE and industry entrepreneur), points out to internal studies showing that CCTV (Close Circuit TV) represents around 40% of the market. This share might increase with the creation of “Smart Digital Cities” in Brazil and also with the preparation for the big sports events that will need to integrate the recording of images, videos, database, etc. Besides, the security of the stadiums, hotels, public buildings and streets will also be more controlled. In 2011, in the city of São Paulo alone one million of new cameras were added, 1 for every 10 inhabitants. The figures are expected to double by 2014. In Brazil there are over 12,000 domestic companies in the electronic security systems sector. They provide alarm systems, closed circuit television, access control, automatic doors and gates, perimeter protection, fire-fighting equipment, metal and explosive detection, revolving doors and locks, biometric identification devices, vehicle and human tracking. Out of the total, 49% are retail resellers and installers, 30% are integrators and listeners, 12% are wholesale distributors, and 9% are manufacturers. The consumer market is diversified and ABESE uses the following segmentation: 50% of the clients are composed by stores or retail establishments in general, and the remaining 50% are residential buildings and individual residences. The association estimates that there are about 710 thousand properties monitored by electronic security systems in the country. New technologies have permitted the integration of various types of security systems resulting in the phenomenon of “crossselling”, e.g., access control connected to an alarm system or CCTV, etc., thereby boosting sales of Electronics Security Equipment (ESE) products. However, high technology systems require qualified professionals with the technical knowledge to carry out the projects and perform installations. In a country like Brazil, finding such professionals can be a major challenge. Another important fact is that the sector is based on imported products, making it vulnerable to exchange rate variations. Moreover, the absence of specific regulations for electronic security products is a barrier to the proper development of the sector, as low quality products are sold, and it also fosters the informal sector. The information presented in this report is based only on data from legal and established companies. It is important to mention that according to newspaper Folha de SP and to industry experts, the smuggling of cameras and security devices illegally entering Brazil can have the same size of the formal market in terms of financial transactions. An important development may place more order and structure in the segment in the coming future. Presently Draft Act no. 1759/2007 that will regulate electronic security systems and companies is being analysed by the Congress and the Senate. It will define exclusive activities and products for companies registered in this industry. This means that monitoring alarms, surveillance cameras, access control systems, fire detection and others are exclusive activities of companies in the industry.

ICT INDUSTRY IN BRAZIL

Complementary activities are comprised as well, such as maintenance, technical assistance, monitoring and inspection of electronic equipment technical signals, people and goods tracking. Until the final version of the Act is approved, ABNT (Brazilian Association of Technical Standards), which is responsible for the standards, has made available a technical base which can be used as a reference by the market. Nevertheless, products in Brazil are commercialized without any certification. ABNT is the Brazilian official representative of the following international organizations: ISO (International Organization for Standardization), IEC (International Electro technical Commission), and the regional standardization entities such as COPANT (Pan American Standards Technical Commission) and AMN (MERCOSUR Standardization Association). There are suppliers of electronic security systems all around the country. However, as the products and services are more appropriate to densely populated localities, the demand is more concentrated in large cities, of states such as São Paulo, Minas Gerais, Paraná, Rio Grande do Sul, Goiás, the Federal District and Rio de Janeiro. The Brazilian Electronic Security market key drivers are: -

High and increasing crime rate and property damage in larger cities. Development of commercial sectors driven by the two major international sporting events (2014 FIFA World Cup and 2016 Olympic games). Growing foreign investment in industrial sectors and employees and facilities safety concerns. Government investment and increasing focus on safety regulations.

As the Brazilian Electronic Security market is growing fast, there are opportunities for a variety of new products and services.

The main protection and electronic security segment products are: Intrusion Alarm Systems: Intrusion Alarm Systems involve a set of control devices (panels, keyboards), internal sensors (motion detection, opening, temperature, etc.), and external sensors (peripheral and perimeter). These systems can be monitored through different transmission technologies (landline or mobile phones, radio waves, satellite, communication networks, etc.) connected to a monitoring centre which receives the signals to control events or emergencies and takes the adequate action as indicated by the customer. Fire Detection and Suppression Systems: There are many elements to be considered in a Fire Detection and Suppression system. These are alarm panels, buttonholes, heat detectors, smoke detectors, linear, sirens, among others. Detectors and sirens are mainly imported, while alarm panels and buttonholes are produced in Brazil. Any “public venue” has to have Fire Detection Systems duly installed by the Fire Department. As these laws are defined on a city level, they vary from place to place. Video Surveillance Systems (CCTV): CCTV is responsible for over 40% of revenues in the electronic security systems market. It is very popular against criminality, and therefore more common. This kind of solution works as an inhibitor of illegal actions by internal and external agents. They have to be integrated to other systems, like sensors and a command centre. The basic equipments used are video cameras and television monitors. However, for the system’s proper functioning and efficiency it is necessary to have a combination of items recording images and displaying multiple images on the same monitor, storing the information for later use if required. Additional devices are all involved in an integrated system. Beside cameras of varying degrees of quality, the rest of the infrastructure is also of great importance. Devices for storage, recording, and transmission such as Ethernet or 3G solutions, ICT INDUSTRY IN BRAZIL

point-to-point (P2P), point to multipoint, or wireless links with mesh technology accounting for a major share of the investments. There are opportunities for foreign companies to enter into most of the above mentioned systems and items. In particular, one area which we believe to be promising is video content analyses (VCA). Very few companies currently provide this service. Though CCTV has existed for many years in Brazil, the growth opportunity is so high that telecommunication operators identify the segment as one of the major data traffic drivers for years to come. The Telefônica/Vivo group has a company called TESB (Telefônica Safety Engineering of Brazil), which is focused on the information security and asset monitoring segment. Many of the solutions are related to CCTV. The Algar Group has a subsidiary, Algar Security, operating in asset security, electronic security, and document management. Access Control Systems: The low qualification of doormen and security guards combined with their cost has been stimulating strong growth in access control demand by both commercial and residential buildings. Within the mobility technology trend we foresee that NFC (near field communication) may arrive soon, replacing keys and access cards, besides mobile payments. Access cards and biometrics are already common in office buildings in Brazilian cities where visitors must identify themselves when entering. Nevertheless, they can be further developed in the non-physical sphere. For example, when a person enters into a building with their access card, their computer login and access to priviledged information could be done automatically, etc. Vertical buildings for hospitals, shops, services represent the fastest growing segment for access control equipment in Latin America. It is estimated that these sectors represent 55% of a USD 180 M market, according to a study published in 2012 by IMS Research. In our view, the telecommunications segment has the highest sales opportunities in access control equipment. Much of this sector’s growth refers to controlled access to external elements such as antennas, towers, substations and containers at remote locations. These sites need to be protected against theft, vandalism, etc. Antitheft Protection Systems: An antitheft system is any device or method used to prevent or stop the unauthorized appropriation of items. From the invention of the first lock and key until the introduction of RFID (Radio Frequency Identification) and biometric identification tags, antitheft systems continue to evolve as a result of the incorporation of new technologies. A typical example is the security tags attached to products at stores. Smart tags were developed with different technologies, and the choice of the most suitable one will depend on the application and on each client’s specific needs. Trends According to Rogério Reis, mentioned above, this segment is open and a major software trend is to turn the CCTV into a solution encompassing several of the aforementioned systems. For example, enabling access control through facial recognition installed in a CCTV system. Another example is to use a CCTV to activate intrusion alarms. In a country with serious security problems like Brazil, the electronic security market is almost by definition very interesting. But the research conducted for this report suggests that technological changes as well as the industry dynamics make it particularly attractive, also for foreign companies. This market has many medium and small-size companies, often operating not very efficiently and not well prepared to deal with the technological innovation in this field. This fact is both an entry obstacle as well as an opportunity for foreign companies. For example, opportunities may arise from the strong interest of Brazilian companies in this field in interest in developing partnerships or even in mergers and acquisitions.

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7. DATA STORAGE & CLOUD SOLUTIONS Being an incipient market, reliable quantitative and qualitative Data Storage and Cloud solutions market data are not easily obtained. As there are no associations or official information available, companies commission their own researches. As a result, there are significant differences in the obtained and utilized figures The only institute that makes some important research in this field is IDC Brazil, but even they don’t publish estimates or actual numbers of the Data Storage and Cloud solutions market in Brazil. According to a study of F&S Analysis, a consulting firm, the major drivers and entry barriers in this sector are highlighted below. Drivers: Datacentres Services (F&S Analysis) -

Reduce the major CAPEX Investments in hardware and software necessary to store and process information, such as accounting, billing systems, etc. Instead, the company can contract (OPEX) the services of a Data Centre. Data Centres always utilize the latest and most updated technology. The Service is highly reliable, easily accessible from anywhere, and has “redundancy”, as data are stored at various sites. Reduce the company’s need to have a strong internal IT support with expensive professionals; also lowers the company’s vulnerability to loosing these professional due to the industry’s high “turnover” rate. Allows the company to focus on its "core business".

Market drivers according to the end users’ perception in Brazil (F&S Analysis): -

Cost Reduction: 84.0% Green IT: 12.0% Operational elasticity: 56.0% Business Continuity: 42.0% Ease of use: 32.0% Shorter “time to market”: 36.0%

Barriers: Culturally we can say that there is a lack of understanding of the cloud concept in Brazil. Another factor is the issue of data security and data retention. The disadvantage is that you don’t have, theoretically speaking, the data physically with you, which generates a feeling of insecurity. As a result, these types of companies only use cloud for non-sensitive and non-critical data. Activities such as CRM and ERP still resist to the changes, with the exception of cases in corporate networks, as there are some doubts regarding legal and privacy issues. Finally, there is the issue of the weak internet infrastructure in Brazil. There are many regions which simply don’t have any internet coverage whatsoever. There also is lack of reliability of internet services, if any all. In the prestigious Jardins area in São Paulo, at times one may find oneself unable to connect to internet. The above infrastructure barrier naturally makes cloud solutions a less attractive option, as it is intrinsically dependent on reliable internet connections.

The most important barrier to the widespread use of cloud solutions and to the adoption of data centers in Brazil by small and medium enterprises is the broadband infrastructure lack of reliability, and security concerns.

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Despite the aforementioned important barriers, it seems that the drivers are even stronger. In a survey published by UOL in January 2013, the main IT trends in Brazil for 2013 were: Mobility, Big Data, Cloud Computing, and Social Networking. Likewise, the Gartner Institute predicts that Brazilian organizations will invest 134 billion dollars in IT in 2013, a 6% increase compared with the 126 billion dollars spent in 2012. The four forces in the companies’ agenda were: Cloud Computing, Social Networking, Mobility, and Big Data.

7.1. THE CLOUD CONCEPT MATURING According to F&S Consulting, the cloud concept has undergone a wave of receptivity, and we will see major projects in the area in the near future. E-commerce is one of the applications that generating the most demand for Data Storage and Cloud Solutions. And e-commerce is growing strongly.

A proof of this trend is the case of Ancar Ivanhoe Group, which controls more than 20 shopping malls countrywide. The company wants to simplify the operation and gradually move from data centres to the cloud. "We started this process and adopted Google Drive", says Fernando Wanderley, manager of Ancar's IT department.

Companies having logical security solutions (firewall, anti-virus, etc.) may find great opportunities in the cloud solutions segment.

7.2. DATACENTRES Presently Brazil has 16 datacentres located in nine regions providing top-level services. São Paulo Alog - (Colo, Hosting, Managed Hosting, E-mail, Firewall, Cloud, etc.) - http://www.alog.com.br/ Locaweb JK (High level of security, 40 Gbps connectivity, high level of energy efficiency, ecological gas-based and intelligent HSSD system.) - http://www.locaweb.com.br Locaweb Itapaiuna (High level of security, 40-Gbps connectivity, and CGI.Br-approved IXP, high level of energy efficiency, ecological gas-based , intelligent HSSD system) - http://www.locaweb.com.br Matrix (Tier III, Carrier Neutral, a full-building 40,000 sq. ft. (4,000 sq. m.) datacentre in São Paulo, Brazil) http://www.matrix.com.br Tamboré, (the largest datacentre in Latin America, the Tamboré datacentre was built to meet all quality and safety demands) - http://www.uoldiveo.com.br Glete (the Glete datacentre is located in the central region of São Paulo, allowing access to a reliable supply of electricity and redundant connectivity with leading telecom operators in the country.) - http://www.uoldiveo.com.br Ascenty catacenter (Tier III datacenter offering colocation, hosting, cloud computing, and connectivity) http://www.ascenty.com/ Rio de Janeiro Alog – RJ (hosting, managed hosting, email, firewall, cloud, etc.) - http://www.alog.com.br/ Global Crossing Rio (Co-location available in Rio de Janeiro at Level 3 / Global Crossing. - http://www.level3.com/ KingHost (located in the south of Brazil, it has connections with three carriers, PTT-RS, PTT-SP, and PTT-PR.) http://www.kinghost.com.br Uberlândia Algar technology - http://www.algartecnologia.com.br Joinville GRVX Host - http://www.grvxhost.com.br/ João Pessoa

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HostDime Brazil (one of eight international branches operated by HostDime.com, Inc (HQ: Orlando, FL, USA). http://www.hostdime.com.br/

Goi창nia Link Datacentre - http://www.linkdatacenter.com/ Curitiba Asaweb - http://www.asaweb.com.br/ Belo Horizonte Ativas Datacentre - http://www.ativas.com.br/ Figure 8: Brazilian Datacentre Map.

Source: Datacentre Map. Available at: www.datacentermap.com

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7.3. PERSONAL CLOUD The possibility of sharing tools like Dropbox and Google Drive, among others, created a kind of user detachment from hardware such as personal computers. It is common for users to have a variety of devices, such as a personal computer, notebook, IOS, and Android based on multiple technologies. It would be nearly an insurmountable challenge for these devices to share the same data if the above mentioned sharing tools did not allow synchronization among the devices. The Gartner Institute believes that the cloud will house all aspects of a person's life. The nature of this model is so vast, versatile and flexible, that "no platform, technology or seller will dominate you".

7.4. BIG DATA According to Frost & Sullivan, Big Data is now at the same stage at which the cloud was two years ago. "Some companies still do not understand the model and how it can be applied in business," according to Researcher Company. It is a technology that transforms data into intelligence, making it possible to project future trends and scenarios. A survey by Frost & Sullivan indicates that the Brazilian market represents almost half of the big data revenues in Latin America. It is expected to grow 71% from 2012 to 2013, totalling USD 576 million and 33% from 2013 to 2014. Solutions based on BIG DATA are a growing trend in Brazil and possibly represent a potential market for foreign companies. Big Data projects are becoming more economical for companies, partially thanks to low cost servers and CPUs, according to Gartner. Strategic Big Data, believes the research institute, will make users no longer run isolated projections. Companies will incorporate the analysis of large mass data into more of the activities they perform. The AMCHAM (American Chamber of Commerce) undertook a research in partnership with IBOPE. 214 senior executives from differently sized companies in different regions of Brazil were interviewed. Among respondents, 58% said that investments in IT in 2013 especially focused on Business Intelligence (BI).

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8. GPS & Traffic Direction Software (M2M Solutions)

HIGHLIGHTS Communication between machines is one of the ICT sector trends in the coming years, and will drive new forms of data traffic for operators and service providers. There is a vast number of possibilities and applications; we will highlight only some of them, such as GPS, E-health, and telemetry focused on utilities.

8.1. M2M SOLUTIONS Before addressing GPS and Traffic Direction Software, we would like to start with the M2M segment, as it probably holds more opportunities for foreign companies. The main M2M segments are: -

Telematic & Asset Tracking: Monitoring and tracking, GPS systems, navigation, fleet management Utilities: Meter Reading, also known as Telemetry, for Electricity, Gas and Water utilities. Home Automation: Energy, remote sensors, etc. Finance: Mobile payments, point-of-sales Healthcare: Assisted environment, patient monitoring, medication management, fitness Security and Surveillance: Intrusion detection, commercial surveillance, access control Industry: Remote maintenance, process control Consumer services: Tablets, e-books, modems, digital frames

An important characteristic of this market is the complex value chain, and it is critical that the company knows exactly where it is positioned within it. A generic value chain:

Source: Southpartner based in M2M Market Outlook 2012-2015, Berg Insight (2012).

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Figure 9: M2M World of Connected Services

Source: Beecham Research. Available at: http://www.beechamresearch.com/article.aspx?id=4

Demand According to Berg Insight Consultancy, Latin America had 6.6 million M2M subscribers by the end of 2011 and Brazil corresponded to the largest and most advanced market, representing around 70% of the total.

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Graphic 4: Latam - M2M Subscribers Forecast 2010-2016, per Vertical Segment.

Source: M2M Market Outlook 2012-2015, Berg Insight (2012).

Graphic 5: Latam â&#x20AC;&#x201C; Projected Total Revenues per Application 2012-2015.

Source: M2M Market Outlook 2012-2015, Berg Insight (2012).

8.2. GPS AND TRAFFIC DIRECTION SOFTWARE SOLUTIONS The vehicles production volumes in Brazil increased from around 1.5 million units a year a decade ago to over 3.6 million in 2012, making it the 6th largest manufacturer in the world. The industry counts on the presence of nearly all world players, both in terms of vehicle makers and component suppliers. Production volumes are forecast to reach nearly 5 million units in 2016. To nourish the strong increase in volumes, investments of over USD 25 billion are in the pipeline.

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As the GPS market is closely tied to the general automotive segment, the above figures and forecast show that this will be an increasing market. Picture of the GPS Market Main Players Table 6: GPS Market Main Players.

Customers

Global automotive brands

Channels

Direct sales, Telematics SPs, Tier 1 auto suppliers, technology suppliers

Devices

Factory installed, maintenance by car repair shop

Services

GPS, 2G/3G/4G connectivity, call centre/ response, data management

Drivers

Security, fleet management, Act 245

Source: M2M Market Outlook 2012-2015. Berg Insight (2012).

Table 7: Current and Projected Revenues / Market Potential.

Year Brazil

Revenues (â&#x201A;Ź M) 2012 2015 18 74

SIMs (k) 2012 100

2015 800

Car Sales 2012 3600

Source: M2M Market Outlook 2012-2015. Berg Insight (2012).

Considering that the total Brazilian vehicles fleet amounts to around 35 million units, the above forecast is clearly conservative and actual sales figures might be substantially higher in coming years.

Figure 10: Distribution of Revenues Among the Value Chain Players.

Source: M2M Market Outlook 2012-2015. Berg Insight (2012).

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8.2.1. The GPS Market Drivers Meeting the vehicle makers’ demand will be done by tier 1 players. These, in turn, will buy from wireless module makers (Cinterion, Telit, Wavecom). Hence, we don’t see any opening for new small independent players to supply their products for new vehicles. There is , however, the aftermarket (AM) for the existing fleet. The main drivers for the AM market are: - Commercial Fleet Fleet management Road charging (toll collection) Compliance reporting - Stolen vehicle recovery Passenger cars Commercial vehicles Trailers and cargo - Insurance/Finance PAID insurance Car loans Vehicle leasing/rental

8.2.2. GPS Market Trends The GPS segment is definitely enormous and will continue to expand, but It should be noted that it already has a number of large competitors operating therein. In our opinion, only specialized niche applications are interesting for small and medium players to enter. Inside the communication connectivity between M2M machines, without a doubt this is the largest sub-segment and still has a great growth potential in Brazil. However, some facts should be noted: - Legislation: The resolution regarding vehicle tracking system is no. 245 dated July 27th, 2007. This resolution does not address the parameters and technical standards of antitheft equipment. Such equipment approval is under responsibility of ANATEL and DENATRAN (Brazilian Department of Motor Vehicles). The resolution implementation has been repeatedly postponed over the last few years, and the most recent date is July 2013. Given the past experience, it remains to be seen whether this will happen. There were not only political forces causing the delays of the resolution's entry into force, much was due to technical issues. A major issue was the SIM card that should come with no carrier definition. The car buyer should have the option of choosing which carrier/operator to use. Technically it was an issue that took years to be solved because of the SIM card's configuration with manufacturers. The issue was finally solved in the following way: the DENATRAN acquired a platform that will set a remote configuration for the SIM card already installed in the vehicle. At the time of the vehicle’s purchase, the user may select its insurer and that insurer will already have partnered with a provider.

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Even if the antitheft device is not activated at the time of purchase, the vehicle will be licensed for use after defining the insurance company. DENATRAN will remotely download the parameters set up, and at that moment it is defined which operator will provide the service. - Competition: As GPS Tracking is the most consolidated sub-segment, it also has the largest number of competitors, both foreign and domestic. The business model is a fee to activate the device, plus some monthly fee included in the general insurance policy. As the hardware device is basically a high-volume commodity, it is a highly price-sensitive product with differences in cents influencing the purchase choice. What differs the players are the used software characteristics and the service quality provided by each company. Any new entrants must be fully aware that they are entering a highly competitive market. In our view, only highly specialized niche players with very specific services would have a chance to succeed. Other modalities of GPS Tracking With similar software characteristics, but with different hardware customizations, it is a growing market for tracking cargo containers, pets, people, and so on. Companies with tracking solutions should consider other applications rather than vehicle tracking, as this segment is becoming saturated. There are, however, other promising segments, such as tracking cargo containers, people, pets, etc. Besides vehicle tracking services, there are other types of applications for this type of technology which could potentially be interesting, as everything can be tracked. This market is still under formation in Brazil. The demand is not easily measured, but as the lack of safety issue in Brazil needs no introduction, there are multiple applications in big cities. Cargo tracking could also be an interesting segment with a variety of applications, such as leasing of machines, refrigerators in bars and restaurants, school transportation, etc. Chinese products such as anklets and bracelets for detainees are selling well. The technological challenge in these cases is the development of long-duration batteries to be installed in the devices.

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9. E-Health

HIGHLIGHTS Private companies and the government are working together to develop the E-Health segment. In this chapter we will focus on Telemedicine and Telecare opportunities.

Figure 11: E-Health Summary.

Source: Telco 2.0 Research. Available at: http://www.telco2research.com/articles/PR_m2m_Telef么nica_cloud_nov11

Conceptually, Telemedicine is the provision of services related to health care, in which distance is a crucial factor. Such services are provided by health professionals, using information and communication technologies for the exchange of valid information for diagnosis, prevention and treatment of diseases and the continuing education of health service providers, as well as for research and evaluation purposes (Figure 14). As a large country, Brazil has an immense potential for everything related to remote care. The main drivers and motivators are related to: costs of maintaining service units with qualified professionals, inefficient public health care system, difficult access in several areas, the high cost of equipment, the outbreak of new diseases and the transmission of knowledge and experience. In fact, there are many factors involved, and the biggest investor is undoubtedly the government. The major benefit from this new technology is that the executed services scope increases vastly at a relatively low marginal cost.

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Numerous initiatives - public and private - have been developed, and the Ministry of Health, through its Ordinance No. 2546 (October 27th, 2011), "redefined and expanded the National Tele-health Network of Brazil", with the objective of strengthening the " Health Care Network" in the SUS (Unified Health System). In Brazil, initiatives are under the domain of the Federal Medical Council, which issued specific resolutions on the subject (Res. CFM no. 1643/2002 and 1890/2009, governing Telemedicine and Teleradiology as medical acts). In the "Global Markets for Technology in Telemedicine" study, the BCC Institute indicates that the hospital telemedicine and clinics segment accounted for USD 8 billion in revenues. It is expected to more than double by 2016, reaching approximately USD 18 billion in 2016. If we include home care, the figure becomes USD 12 billion and USD 27 billion, respectively. The Brazilian healthcare system records a total of 240,385 health service stations registered with the Ministry of Health, with over 70% private and the rest public (See the table 10 below). Distribution of Health Services Stations among the Sectors Table 8: Health Services in Brazil Registered with the MS.

CITY ESTATE FEDERAL PRIVATE TOTAL PUBLIC TOTAL PRIVATE GRAND TOTAL

63,521 2,588 304 173,972 66,413 173,972 240,385

Source: CNES - April/12 – MS: Ministry of Health. Available at: http://cnes.datasus.gov.br/ Similar proportions between private and state hospitals can be observed though the quantities, as expected, are much lower. According to Brazil’s Ministry of Health there are 6,704 hospitals in the National Registry of Health Establishments (CNES), out of which 4,693 are private and 2,011 are public (Graphic 7). The total number of hospital beds (public and private) is nearly half a million beds available. Further details can be found in Annex VII. Graphic 6: Hospitals in Brazil.

Source: Southpartner. Data: CNES – April/12 - Ministry of Health. Available at: http://cnes.datasus.gov.br/

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Telecommunication operators are observing the e-health market with attention. Symptomatically, Telefônica/VIVO bought Axismed in early 2013, a major player in the medical services field. Part of its portfolio is to remotely provide close monitoring of chronically ill patients. A qualified body of medical professionals call up the patients to remind them when to take their medicines, ask diagnostic questions, duly register all contacts made, information obtained, etc. As all these services are done either by phone, SMS, or e-mail, their clients´ dependency on the Telefônica/ VIVO is enhanced. It also increases the fidelity of this client base. Although not in the same segment, but still related to it, there is “wellness”. For a low monthly fee, their operators provide customers who enjoy healthy living with advice on what kind of food to eat, recommended physical activities, health consumer products, monitoring heartbeat, etc. It is important to note that products and services for the “wellness” segment do not need approval by ANVISA, hence they are a quick startup. Monitoring Vital Signs Recently, telemedicine has been helped by advances in mobile communication and by the adoption of tablets and smartphones. For example, it's now easier to reach older patients whose medical access is often hampered by physical constraints. Moreover, mobile communications and portable devices permit monitoring of vital signs, no matter the patient's location. Tele-homecare is already being implemented in São Paulo by the company Unit Care Health Services, which is using a technology developed by the Brazilian startup Ip Access Technology Ltd. to capture vital signs. Electrocardiograms, blood pressure meters, oximeters, thermometers, scales, glucometers, pedometers and spirometers are connected via Bluetooth to a tablet or smartphone that transmits information over a mobile network or the Internet to a cloud storage where a medical centre can access and analyses the data. Besides medicines, the Brazilian legislation mandates that all medical equipment should be approved by ANVISA (Brazilian Health Surveillance Agency). This is a bureaucratic and very drawn out process which often requires years. Consequently, players who want to commercialize medical equipment have to take a long term view, and it can be expensive. Using cloud computing, medical professionals can communicate with several medical centres, if needed, via Web services. They analyse the vital signs of their patients (visualized using Java applets), perform diagnoses, send alerts to the tablet application, and even contact patients via teleconference — all that using a Web browser at the medical centre, which provides on-demand access to the main application in the cloud (based on the Java EE computing platform). The shared technology and infrastructure allow for lower costs, as indicated in Figure 15. The goal is not to replace a medical appointment, but rather complement and expand the service, offering guidance and monitoring from a distance.

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Figure 12: The Homecare Application is Accessed Using a Software-as-a-Service (SaaS) Model Residing in the Cloud.

Source: Telco 2.0 research. Available at: http://www.stlpartners.com/telco2_index.php

Encouraging Prevention One of the goals for using tele-homecare is to encourage prevention and health promotion through the patient's interaction with advanced technological tools. In line with the concept of social networks, tele-homecare lets patients interact with other people with similar medical situations, encouraging information exchange and commitment to self-care. Patients are encouraged to take an active role in their healthcare. For example, a diabetic patient could periodically check his own blood sugar and adjust behaviour, such as an excessive intake of sugar. Additionally, the patient can optionally subscribe to an exclusive social network offered by the solution/health provider and focused on diabetes. There, patients can interact, post disease educational videos or materials for common access, discuss their health problems, and even compete with each other on getting badges (like in Foursquare) as they post their diabetes measurements and the disease keeps stabilized over time.

High-quality hospitals in Brazil are concentrated in S達o Paulo and the Southern Region. Hence, the best way to provide national coverage of qualified and professional services is by using telemedicine. Several major foreign companies have been trying to establish themselves within this segment. However, there is still much room for growth, since less than 5% of hospitals and health centres are using telemedicine technology. Applications and devices are not commoditized yet, since management systems are very specific and thus need to be customized (bespoke) for telemedicine usage.

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10. Utilities and Metering

HIGHLIGHTS M2M solutions have a major potential for public utility companies to remotely measure consumption. Telemetry will be a key issue for years to come for the utilities companies to measure consumption of electricity, water and gas. There are some relevant factors in each sector that should be taken into consideration. As consumer electricity bills for consumers are many times higher than those of water and gas, the electrical segment receives vastly more funds for investments in major projects to increase supply. Another relevant fact is that the Water and Sewage Company system is government-owned, while Electric Power and GLP gas Companies are privately owned, making the commercial and profitability interest more relevant for the latter compared to addressing social issues for the former.

10.1. WATER AND SEWAGE Composed mainly by companies owned by the State or Federal Governments, the services they provide include water treatment and distribution and sewage handling. The state government sets the policy for these companies, which are often more concerned with the growth of its network to reach higher percentage of households. Water utility companies in Brazil are utilizing telemetry system for the main reservoirs. This technology implantation follow the logic of moving from the larger units to the smaller ones and only in the future they will reach individual households. Presently, the focus is on the plant and treatment centres remote control. By far the biggest and most advanced company in terms of utilizing updated technology in the sector in Brazil is SABESP, of the state of SĂŁo Paulo. Figure 16 shows the architecture of the system it uses. Here is a picture of the sector architecture: Figure 13: Sanitation Cycle.

Source: Benemar Movikawa Fee â&#x20AC;&#x201C; Telemetering at Sabesp â&#x20AC;&#x201C; SABESP (2012).

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The main elements of SABESP’s telemetry system are shown below: Figure 14: Telemetering System.

Source: Benemar Movikawa Fee, Telemetering at Sabesp – SABESP (2012).

It is important to note that in Brazil 36.1% of households are not supplied with water through the general network, 17.2% of the volume of water distributed does not receive treatment, and 47. 8% of cities do not have sewage services (IBGE). As a result, a major problem in Brazil is the loss of revenues by companies due to illegal, unrecorded consumption. Likewise, also as a result of “informality”, a significant amount of sewage is irregularly (illegally) disposed of into rivers, resulting in that treatment centres receive more sewage than they were dimensioned to. To enhance revenues, an adequate action is to have individualized consumption measurement. The sewerage overconcentration should be addressed by installing telemetry to remotely read information from sensors and other measuring devices and send this information to the control centre so that adequate counter-measures can be taken. Individualized measurement requires water meters with batteries and a radio communication system as basic infrastructure for direct transmission to energy dealers or to central data collectors. It is necessary to have operational systems capable of remote data collection, allowing the water supply interruption (or reconnection) in the event of non-payment, and also providing reading and issuing bills quickly and easily, minimizing the current costs related to billing and mailing.

There is a lack of suppliers of utility telemetry in Brazil. These are providers of measurement systems (meters) of water, gas or power consumption, supervisory systems, transmission devices with GPRS or other connectivity, small local printers for printing bills, etc.

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10.2. GAS METERING The Brazilian gas market can be divided into liquefied petroleum gas - LPG, and Natural Gas – NG. LPG is supplied in cylinders and distributed by trucks, either for home (heating, cooking, etc.) or industrial uses. NG is distributed by pipelines. LPG LPG distributors deliver gas to industrial customers on specialized gas tank trucks. They are also responsible for building and maintaining the infrastructure at the customer’s site. All safety regarding tanks maintenance and explosion hazards on site is under the gas supplier's responsibility

For GLP distributors, logistics optimization is the main systems telemetry driver.

In October 2011 an explosion resulted in three deaths and seventeen wounded in a cafeteria in downtown Rio de Janeiro. The accident occurred with a cylinder installed inside the cafeteria and the distributor was a company called Supergasbras, the largest distributor in Brazil. After this accident, the government and the companies became more aware of the risks of not maintaining and monitoring LPG facilities, creating stricter rules and encouraging all distributors to install security systems and consequently introduce telemetry in their facilities. Distributor ULTRAGAS, one of the market leaders, was the first to start the process of deploying telemetry for their industrial users. The other companies are following the same trend, and practically all of them have pilot installations. Telemetry systems designed for LPG use devices powered by INMETRO-certified batteries, ensuring that they are intrinsically safe, guaranteeing no risk of explosion. These devices are connected to flow meters measuring the volume inside gas tanks, and through a radio system connecting then to concentrators which, in turn, send the information through mobile networks to the providers' operational control system. One of the difficulties faced by the industry is that the complete system is composed of many different elements and there is no “one-stop-shop” with high competence in all key components. For instance, one of these types of shops might claim to be able to offer the complete solution, but in reality it only dominates item “A” well; another one might be competent in item “B’. This kind of situation complicates matters for both the client and suppliers. For a list of all LPG distributors in Brazil, please see ANNEX VIII.

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Natural Gas Map of companies distributing NG:

Figure 15: Map of Natural Gas Distributors in Brazil.

Source: Ministry of Mines and Energy. Available at: http://www.mme.gov.br/

The activities related to NG telemetry are very similar to the ones implemented in the water and sewage sanitation system. The system consists of flow meters with batteries and connection via GSM and GPRS, and it likewise requires INMETRO certifications due to the risk of content explosion. It is worth remembering that NG is one of the energy sources with the fastest growing consumption in Brazil, with many business opportunities and a huge market that can be defined by multiple industry users. More detailed information, such as market size and detailed company information, can be found in Annex IX.

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10.3. SMART GRID / SMART METERING Figure 16: Smart Metering / Smart Grid.

Source: Google Images. Availables at:http://goo.gl/L53Tjf, http://goo.gl/4IcA1H, http://goo.gl/ExxWdi

“Smart grid” generally refers to a class of technology the people are using to bring utility electricity delivery systems into the 21 st century, using computer-based remote control and automation. These systems are made possible by a two-way communication technology and computer processing that has been used for decades in other industries. They are beginning to be used on electricity networks, from power plants and wind farms all the way to electricity consumers at homes and businesses. They offer many benefits to utilities and consumers - mostly seen in big improvements in energy efficiency on the electricity grid and on energy for homes and offices. For a century utility companies have had to send workers out to gather much of the data needed to provide electricity. The workers read meters, look for broken equipment and measure voltage, for example. Most of the devices utilities use to deliver electricity have yet to be automated and computerized. Now, many options and products are being made available to the electricity industry to modernize it. The “grid” means the networks that carry electricity from the plants where it is generated to consumers. The grid includes wires, substations, transformers, switches, and much more. Much in the way that a smartphone these days means a phone with a computer in it, smart grid means “computerizing” the electric utility grid. It includes adding two-way digital communication technology to devices associated with the grid. Each device on the network can be interfaced to sensors to gather data (power meters, voltage sensors, fault detectors, etc.), plus twoway digital communication between the device in the field and the utility’s network operations centre. A key feature of the smart grid is automation technology that lets the utility adjust and control each individual device or millions of devices from a central location. The number of applications that can be used on the smart grid once the data communications technology is implemented is growing as fast as inventive companies can create and produce them. Benefits include enhanced cyber-security, handling sources of electricity like wind and solar power and even integrating electric vehicles onto the grid. The companies making smart grid technology or offering such services include technology giants, established communication firms, and even brandnew technology firms.

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Table 9: Smart Grid Market Main Players. CUSTOMERS

UTILITIES, METERING SPS, SYSTEM INTEGRATORS, METER MANUFACTURERS

CHANNELS

DIRECT SALES

PARTNERING

ITRON, LANDIS+GYR, SILVER SPRING, MOBIX, NATIONAL METER VENDORS, UTILITIES ICT

DEVICES

INSTALLATION ONCE, 15 YEARS LIFESPAN, MAINTENANCE BY UTILITY STAFF

SERVICES

POINT-TO-POINT OR BACKHAUL 2G CONNECTIVITY, METERING DATA MANAGEMENT

DRIVERS

REGULATIONS, EFFICIENCY, ROI

Source: Source: M2M Market Outlook 2012-2015, Berg Insight (2012)

Current Overview of the Brazilian Energy Sector The electricity sector faces the opportunity to evolve and find practical solutions reflecting the reality of consumers and energy companies of the 21st century. Operational efficiency, new sources of energy, lower carbon emissions, adjusted fares and greater consumer participation are just some issues that present themselves as challenges to be overcome by the segment. The Brazilian Reality The Brazilian electric system is unique in the world, and, over time, has proven to have very particular characteristics. Its energy matrix is mainly based on renewable energy and the level of integration of watersheds and infrastructure for energy transport, for example, reached continental heights not yet hit by European countries and the United States. It is necessary to further reduce the infrastructure gap in this country. The interconnection of systems in the Brazilian territory was the natural way found to get a better balance and maintain the security of energy supply - when unavailable in a region, it is compensated by other region most favoured momentarily. On the other hand, the more interconnection points, the more complexity in the system management. Regarding power distribution to consumers, the social-economic differences of the Brazilian territory represent a great challenge. The country covers areas with high population density and others with very low density. The key issues are to overcome challenges from social and technological perspectives, with different solutions that can balance costs and benefits.

Smart Grid: Technology for Modernity in the Electricity Sector The present moment points to an increasingly long list of technological possibilities which the sector needs to understand in a way that it evolves in technical features that allow the overcoming of challenges. It is necessary to establish an evolutionary vision and aggregate value with technologies and innovative applications to the electricity network and at the same time preserving existing investments. It is possible to predict that technology will play an increasingly relevant role in all areas of the cycle: Generation, transport, trading and use of energy. The concept of Smart Grid or intelligent networks creates an environment that facilitates the use of technology throughout the energy cycle. It is a comprehensive concept that will most likely undergo a fundamental transformation in the next few years. The Smart Grid reality will turn the electric system into a modern network that will enable utilities and consumers to change the way Brazil consumes and provides energy. The most visible part of this development currently is in the large-scale use of the electronic energy meters, which will in the short term foster new tariff arrangements and new consumer behaviours. Telecommunications, sensing, computing and information systems, combined with the existing infrastructure, shall constitute an increasingly powerful arsenal that can make a difference. To achieve a new level of efficiency, the technologies previously used to support the electrical infrastructure will be essential, such as information and communication technologies (ICTs), which will support the widespread use of electronic meters and sensors. This new technology infrastructure will allow a better management of the electric system assets, energy and consumer services, thus resulting in greater technical, economic, social and environmental efficiency. Annex X shows the energy companies in the country.

ICT INDUSTRY IN BRAZIL

11. Market Entry Strategies 11.1. MARKET ANALYSIS When a foreign company considers a market entry in Brazil, it is good to start with a SWOT analysis. This report has so far pointed out to some of the opportunities in the ICT market in Brazil, while also mentioning some of the obstacles or threats. Of course, each company has to do the SWOT analysis in detail for its business. The research conducted for this report suggests that the main obstacles for foreign companies are largely the same as for Brazilian companies, and that tariff or non-tariff trade barriers are much less of an obstacle as foreign companies often believe, if one puts them in perspective with the many other obstacles. The research also suggests that the main obstacles are largely the same for ICT companies than for other business sectors. The graph below shows the main business obstacles for mid-sized, mostly local companies, in Brazil and compares them with China in order to understand them better. Graphic 7: Main business obstacles for mid-sized companies in Brazil vs. China

,35.0 ,30.0 ,25.0 ,20.0 ,15.0 ,10.0 ,5.0 ,0.0

Brazil 2009 Size Medium (20-99)

China 2012 Size Medium (20-99)

Source: http://www.enterprisesurveys.org, The World Bank

For anyone who has done some business in Brazil, it will not come as a surprise that tax rates and tax administration are perceived to be as such a big obstacle. Foreign companies often believe that this affects them more as local companies, as they overestimate the proportion of import duties. But as will be shown in the chapter about legal issues, there is a large diversity of different sales taxes, and they apply to local and foreign companies. It is generally true though that Brazilian companies deal better with the ambiguities in the tax and legal system here and exploit more aggressively tax loopholes or do part of their business in the informal sector. Brazilian companies and business men have also learned long ago how complex the tax system is in Brazil and how to deal with it, which is often a major challenge for foreign companies coming to Brazil for the first time.

ICT INDUSTRY IN BRAZIL

One way to deal with this tax complexity for a foreign company is to export to Brazil (as opposed to starting its own affiliate), while clearly defining net prices with their Brazilian clients (not gross prices, as is common in Brazil) and making it clear in the contract that the Brazilian company has to take care of all taxes and duties in Brazil. This may seem obvious but is often not done properly, for the simple reason that the term “price” means gross price for Brazilians and net price for most foreigners. If an export sale is closed largely on an email-basis without a proper contract, the ambiguity of the term “price” can lead to unpleasant surprises later on. The informal sector is probably a bigger problem for companies from countries where the informal sector is very small, as they are not likely to venture into the informal sector in Brazil. But if their target market in Brazil has a share in the informal sector, they will be in a competitive disadvantage, as their competitors in the informal sector pay less taxes and avoid some of the stifling bureaucracy here. Therefore, this is an important point to be considered in a market analysis when defining a market entry strategy for Brazil. The authors are unaware of any surveys about the size of the informal sector in Brazil’s ICT industry, but dare to say that it is probably much more of an issue on the B2C side than in the B2B side, and within the B2B side, it is more of a issue with smaller clients than with large clients. The main entry options, as will be explained in the subsequent sections, are: Green/brown field startup Acquisition/JV with a local company Find and operate through a local partner

11.2. STARTUP In the startup scenario, which may or may not be less expensive than a local company acquisition, an advantage is that the mother company keeps control of its local operations, securing its interest and rights. Another advantage is that it can develop and assure the same corporate culture in the subsidiary than that of the mother company. A disadvantage is that the startup process may take longer than an acquisition/JV, as it is necessary to start developing the company from scratch, e.g., build up the organization, gain market share from competitors, etc. These demands can often take time and consume many resources from the local management. It should be noted that in Brazil opening a legal entity takes a very long time in comparison with elsewhere. Depending on the segment the company will operate in, a timeframe ranging from 90 to 120 days or more after filing the bylaws at the business registry. For example, an LLC (Ltda.) in the service sector can be opened within 30 to 40 days, as it does not need the state level tax payer number (IE, Inscrição Estadual). If the company is to import, export and commercialize products, the necessary time is around 45 days. Then a bank account needs to be opened, a process which now, due to recent legislation changes by the Central Bank, takes 30 to 60 days at least. The above steps do not consider the additional ones necessary in order for a manufacturing firm to have all necessary permits to operate. The latter are approvals by the fire department, the environmental agency, the Labour department, etc. At least 90 days can be added to the above timeframe, assuming that the production premises have already been identified. The LLC main steps are the following: -

Determine who the shareholders would be Identify the Brazilian Subsidiary manager or managers Obtain the legal address Determine the initial capital Prepare the Corporate Charter draft in English Provide three names for the Brazilian Subsidiary for submission to the Business Registry Send power of attorney drafts to C for review and execution Execute powers of attorney before a notary public and legalize them at the Brazilian Consulate, sending the final copies to SP Approve the Corporate Charter draft in English

ICT INDUSTRY IN BRAZIL

Prepare and execute the Corporate Charter Portuguese version Prepare the accompanying forms for the LLC organization, to be submitted to the Business Registry File the Corporate Charter and forms with the Business Registry Register the LLC with the income tax authorities

When establishing a company in Brazil, we recommend the following: -

As the legal and economic environments in Brazil are complex, it is important that your local partner be serious and honest. Hire a good lawyer and a trustworthy accountant. Identify a local administrator you can really trust.

11.3. MERGERS AND ACQUISITIONS The M&A option has advantages and disadvantages, with are opposite to those of the Startup. The main advantage is the entry speed of entry combined with the fact that the company already has a market share. The first disadvantage is the fact that an acquisition/JV can be, though not necessary so, quite an expensive deal. This investment could be better used for a cheaper startup. Another weakness of this option is that the acquired company’s culture may be vastly different from that of the mother company, creating frictions, conflicts, misunderstandings. These factors may also lead the company to lose its key professionals, thus lowering its value. Another challenge is to make sure that the company undergoes a detailed due diligence, as hidden fiscal and/or labour liabilities are common in Brazil.

11.4. LOCAL PARTNER The local partner option is the most common for small and medium-sized companies. Though the reasons vary, we can mention the facts that it might be the most cost-effective solution, while permitting an immediate start combined with local market and production knowledge. Depending on your chosen partner, there may also be the possibility of flexibility depending on how the relationship and the business develop. The disadvantages are that the partner may have a different focus and important cultural differences. There is even the possibility that it has other “hidden objectives”, hence the importance to choose it with care and attention. Comments Even if the basic pros and cons of the different entry strategies are the same in Brazil as elsewhere, there are important differences which should be highlighted. The Brazilian culture differs from the European’s, especially from Switzerland´s. People in Brazil tend to “stretch the truth farther” and minimize or hide “bad facts”, and often expect to get away with it. There are various cases in which foreigners thought their local partner (or administrator) was operating in good faith while, in fact, he/she clearly wasn´t. Due to this possible problem, we reiterate the importance of working with competent local specialists throughout the entire process. This type of specialist could help to find a good local partner in the pre-operational phase and act as an extended arm of the foreign company. Among the activities, the “extended arm” would analyse the attractiveness of the different entry options, obtain marketing intelligence and look for local partners, customers, and can also be a representative in case it be interesting for both sides. The objective of having an extended arm is to minimize risks, costs and time to market, in order to start closing deals.

ICT INDUSTRY IN BRAZIL

11.5. STRATEGIES FOR SWISS ICT COMPANIES IN BRAZIL According to Harvard professor Michael Porter, at a very fundamental level, there are three generic strategies that companies can pursue: differentiation, low-cost or a focus on niches. It seems to us that a focus on niches may be particularly rewarding strategy for Swiss SME in the Brazilian (ICT) market. For one, one of the core strengths of Swiss SME often is the focus on a niche as a result of their high degree of innovation in a particular field of technology. Another reason is that Brazil is not exactly strong in innovation. Its import-substitution policy practiced for decades intended to protect and foster a local ICT industry but turned out to be a failure on a rather massive scale, as it resulted in expensive and weak technology burdening the progress of the economy in general. This policy has changed, perhaps much more so in the ICT sector than in other sectors. Despite some occasional protectionist backlashes, the country is ever more opening up to the world. Brazilian companies understand the need to partner with foreign companies in order to become competitive or survive at all. No need to say that this can represent a big opportunity for a Swiss SME willing to go beyond a basic export business and to consider some kind of strategic partnership with a Brazilian company or licensing out some of its technology. But to find this particular niche and the right partner(s) in Brazil requires quite some extensive research and planning. Somewhat to our surprise, Swiss companies sometimes want to skip this part and jump straight into the search of a partner/distributor who is falsely expected to be a “one-stop-solution” providing all the answers. In such a fast-paced and incredibly dynamic industry like the ICT sector worldwide, one should not expect a Brazilian distributor to have all the answers or the adequate competence to fully understand the advantages of a Swiss company’s technology, let alone to sell it. Another major opportunity for Swiss SME may simply be to provide cash flow or financing to an innovative startup company in Brazil. It is an old wisdom of corporate finance that significant value can be generated when a cash-rich company with low growth perspectives joins forces with a cash-strapped company with high growth perspectives, even more so if they have important synergies. Although fast growing ICT companies all over the world are notorious for their cash flow problems, it is conceivable that Swiss SME may be in a much more comfortable position than Brazilian SME. For access to bank financing is very restricted in Brazil, real interest rates are among the highest in the world and venture capital is yet more of an emerging phenomenon here. A Swiss SME with strong cash flow or ease to find financing may therefore have important bargaining power when negotiating a deal with a Brazilian partner. Another advantage of Swiss companies that does not seem to be used to the extent it deserves is the availability of export credit risk insurance, even sponsored by the government itself, as is the case of SERV in Switzerland. We find that these advantages are often underestimated by Swiss SME, which is also partly due to their reluctance to make major cash outlays in a risky and relatively unknown market like Brazil. Even worse, many Swiss SME often even insist on advance cash payments, thus strangulating major sales opportunities.

11.6. IMPORT AUTHORIZATION APPLICATION SUPPORT (RADAR) In Brazil, foreign trade transactions are mandatorily registered in the so called SISCOMEX – Integrated Foreign Trade System (Sistema Integrado de Comércio Exterior), which is an electronic data processing software instrument integrating online all registration, follow-up and operations control acts. The system is administrated by the SECEX – Foreign Trade Secretariat (Secretaria de Comércio Exterior) - together with the SRF - Brazilian Federal Revenue and Customs Administration (Secretaria da Receita Federal) and the BACEN - Brazilian Central Bank (Banco Central do Brasil). In general, the customs forwarding dispatch must be performed in the system known as SISCOMEX. Gaining access to the system is referred to as receiving a RADAR – Performance Tracking System of Customs Operators (Sistema de Rastreamento da Atuação dos Intervenientes Aduaneiros). The RADAR is a password to the SISCOMEX coming together with a determination of the maximum allowed foreign trade transactions (imports or exports) during every six-month period. The transaction limit will be determined by the SRF taking into account the documentation submitted in the process, such as the Brazilian company’s financial strength, including liquidity and paid-in equity (capital social integralizado). When preparing the RADAR application, a number of interactions with the mother company will be necessary thereto, in order to find a reasonable level of expected foreign trade transactions in the Brazilian subsidiary and to financially prepare the subsidiary for these operations. Below there is a summary with the main points referring to the RADAR Habilitation modalities. • For individuals: Habilitation will be granted to individuals in case of imports for OWN CONSUMPTION, objects for personal collections, or, in case of exports, to artisans, rural producers, and artists.

ICT INDUSTRY IN BRAZIL

• For legal entities: Habilitations will be granted in the following sub-modalities: • EXPRESS, for companies listed in the Stock Exchange, companies authorized to use the Blue Line, public companies or private and public companies, public agencies and consulates, domestic or international companies which will operate in the 2014 World Cup, and companies which will exclusively work with EXPORTS. The fiscal analysis term will be two business days counted as from docketing. • UNLIMITED, is the former Ordinary Habilitation, in which the company must evidence its physical existence and operational capability; however, the most significant alterations in this modality are: Analysis term reduced from 30 to 10 (consecutive) days, and the company DOES NOT need to inform its import estimate, as the Revenue Service itself will perform the import estimate by analysing the company’s financial capacity to operate with foreign trade. • LIMITED, is the former Small Amount Simplified Habilitation, a modality enabling the importer to carry out imports up to USD 150,000.00 per semester. The significant change is that the company, besides having to evidence its physical existence, will have to evidence operational capacity, submitting the Corporate Capital paying up in the last three years. The analysis term will be ten consecutive days. Southpartner Observations These new rules were implemented in October 2012, and our experience shows that before such date the term to obtain the RADAR was 90 days. We currently consider a 30-day term, already counting on a security margin.

11.7. IMPORT PROCEDURE BRIEF OVERVIEW 11.7.1. Hardware There are three import models, to wit: • Import on Own Account (Importação Própria): The importer looks for suppliers, imports the merchandises (it is responsible for all logistic procedures) and distributes them throughout Brazil. Under this model, the importer is the owner and proprietor of the goods. It funds the operation with his own resources, paying the applicable taxes, and contracts the currency exchange directly. The importer undertakes the activity risks and enters into commitments with the vendor abroad, sometimes through a distribution agreement or a purchase agreement, and promotes sales within the domestic market. • Import by order of Third Parties (Importação por Encomenda); Similarly to the above model, the importer is also the owner and proprietor of the imported goods and is responsible for funding the operation. However, in this format, there needs to be a local buyer who orders the product and whom the goods are purchased for and is jointly responsible, with the importer, for the custom taxes payment. The importer sells the merchandises to the local buyer and has no risk regarding the imported goods subsequent sales and distribution within the domestic market • Import on behalf of Third Parties (Importação por Conta e Ordem de Terceiros): In this model, a purchaser interested in a particular commodity looks for a service provider - the importer - to import the goods on behalf of the interested buyer. The bill of lading is consigned to the importer, who holds the imported product, while the ownership belongs to a third party (purchaser/buyer) who funds the operation. Such party has the option of making sufficient advance payments to pay the operation taxes and other expenses. The purchaser contracts the currency exchange and the importer only provides the services. The purchaser and the importer are jointly responsible for the taxes charged over the imported goods. Customs Clearance There are many variables involved in the Import Procedure, and considering “Customs Clearance” having a good luck can also be a parameter. The requested documents have to be absolutely pursuant to the Law, and these documents in Brazil are more detailed than in other countries. For example, in Brazil all documents have to be signed with a blue-ink pen. If someone signs a document in black ink, the documents may be rejected.

ICT INDUSTRY IN BRAZIL

The average period to complete the “Customs Clearance” process in Brazil is five days, in case of the Green Channel, when clearance is automatic. Yellow channel – is when the custom clearance is not automatic, the Brazilian customs check papers only. Red Channel – it happens when customs clearance is not automatic, and the Brazilian customs check papers and goods; finally, the Grey Channel – it means problems, the goods are stopped for prices to be checked, if this procedure is ok. Otherwise, the company has to correct the prices of its goods and needs to pay fines and surcharges.

To provide a precise calculation of all the taxes and duties due at import is a very difficult task that often surprises Swiss companies. Expert advise is very much recommended, as these costs have a big influence on pricing decisions and therefore on the viability of a market-entry in Brazil. Just for illustration, an example of such a calculation can be seen in Annex XI.

11.7.2. Software The first step before commercializing imported software in Brazil is to specify the type of software in question. According to the government, “off-the-shelf” software are the ones licensed by downloading (without physical support), which have no import taxes, no import PIS/Cofins, or ICMS and IPI. Conversely, the withholding of taxes has to be considered (it is explained below). If the software is imported with physical support (e.g. media), there are two invoicing options. In case a company detaches the corresponding parts on the import invoice (e.g., 30% hardware and 70% software), for the physical part (hardware) import tax, import PIS/Cofins, ICMS, and IPI have to be considered. If the import invoice doesn´t show any separation, the above duties will be considered over the whole amount. Another tax to be considered for imported software is the withholding tax (which refers to the amount sent to the provider), unless there is an agreement between Brazil and the host country to avoid double taxation of the exporter or if the software is purchased for resale (“off-the-shelf” software). For standard situations, the income tax is 25% over the value remitted abroad. There is, however, an exception for that rule according to another duty known as Cide Royalties, which are due in cases in which the nature of payments is based on technology transfer (e.g., for technical service the income tax must be withheld at 15% plus 10% of Cide Royalties).

11.8. MAIN ASSOCIATIONS ABINEE – The Brazilian Association of the Electronic industry http://www.abinee.org.br/ ABEPREST – The Brazilian Association of ICT Solutions http://www.abeprest.org.br/ TELEBRASIL - The Brazilian Association of Telecommunication Operators http://www.telebrasil.org.br/ BRASSCOM – The Brazilian Association of information Technology and Communication Companies http://www.brasscom.org.br/brasscom/Portugues/ ABESE - The Brazilian Association of Electronic Security Companies http://www.abese.org.br

ICT INDUSTRY IN BRAZIL

11.9. MAIN EVENTS Futurecom - October 21 to 24 - Rio de Janeiro 2013 www.futerecom.com

     



The most qualified Telecommunication and IT Event in Latin America. In 2013 it will be the 15th edition; most of the important players in the market will attend. The last edition had representatives from 48 different countries. Participants’ profile: 72% CEOs, Officers, and Managers. The congress had six rooms with simultaneous presentations, over 280 foreign and Brazilian speakers. All media and specialized press will be covering the event. Presence also members of Government, Anatel and Ministers.

Edition 2012

State Rio de Janeiro

Exhibition Area 21,000 m²

Visitors 12,000

Sponsors 300

Speakers / Panellists 280

Netcom - August 27 to 29 – São Paulo 2013 www.arandanet.com.br/eventos2013/netcom

   

This event focus on products and solutions for private communication networks, local networks, wireless products and solutions, infrastructure, cabling, wimax, IP technology, etc. Participants’ profile: Technical and business people from network companies, telecom and field professionals. Exhibition admission is free. The next edition will be the 6th, in which the fair and the congress will be happening simultaneously.

Edition

State

Exhibition Area

Visitors

Sponsors

Congress

2012

São Paulo

50,000 m²

45,000

700

ICT INDUSTRY IN BRAZIL

12. Brazil´s ICT Clusters All over the world, competitors in the same business have the somewhat akward habit of being close to each other, most often so in the retail sector, where two or three large furniture stores are often on the same road. But in an industry like ICT, which is highly innovative, fast paced and complaining about a lack of qualified people all over the world, the tendency to flock together in “clusters” is very dominant. The classic example is of course the “Silicon Valley” in California. How does this look like in Brazil? Is there something like a Silicon Valley there? The short answer is no, but there are several cities and regions that are aspiring to be a major cluster of some parts of the ICT business. For a Swiss company planning to enter Brazil, it is therefore important to know the main ones and perhaps chose its location there. We will see that there are often heavy handed industry policies of the government behind such clusters.

12.1. MANAUS FREE TRADE ZONE The oldest and most well-known incentive area in Brazil is in Manaus, capital of the State of Amazonas. This area is known as “Manaus Free Trade Zone”. There are around 235 companies in different sectors. All these companies have had their projects approved by a government agency (SUFRAMA) in order to qualify for tax benefits. Concerning only electrical equipment, electronic and communication devices, there are 79 companies. Manaus is not exactly an ICT hotspot, but it offers rather attractive tax breaks, which may especially interesting for manufacturers of hardware: -

Reduction of 88% of the import duty (II) on imported parts; Tax exemption on IPI; Reduction of 75% of Income Tax and non-refundable additional, calculated based on profits; Tax exemption for PIS/PASEP and COFINS internal operations at the “Manaus Free Trade Zone”; ICMS refund from 55% to 100%, depending on the Project.

There are disadvantages in operating from Manaus, the biggest one certainly being the long distance from the Southwest of Brazil, which is where the bulk of the demand is located, and as result high logistics costs. There is still no good road from the Southwest to Manaus, and typically, products are being transported by ship or airplane to other parts of Brazil.

12.2. THE COMPUTER SCIENCE ACT Another important incentive in the ICT sector concerns the Computer Science Act. Companies which can qualify for this type of benefit: -

Companies investing in information technology research and development (R&D) activities in Brazil. Companies producing scientific, automation and telecommunication goods, in compliance with the Basic Productive Process – PPB (see below). PPB: Processo Produtivo Básico (Basic Productive Process) is the minimum set of manufacturing operations in carried out locally. The local content requirement varies according to product type.

Computer Science Act Benefits: -

IPI reduction in the commercialization of benefitted products. Preference in the acquisition of benefitted goods by organizations and entities of the direct or indirect Federal Public Administration. IPI suspension in imported and locally-purchased subcomponents. ICMS reductions in the State of São Paulo and in some other states.

ICT INDUSTRY IN BRAZIL

  

ICMS reduction to 7% in operations inside the State. ICMS suspension in the import and/or acquisition of goods inside the State. ICMS special tax regime for several computer science products (credit grant).

IPI Reduction The IPI rate usually ranges between 10% - 15% and is the benefit with the highest impact. Table 10: Computer Science Goods and Automation in General

Period

IPI Reduction

2004 to 2014

- 80%

2015

- 75%

2016 to 2019

- 70%

Source: Computer Science Act – PPB presentation (2013). Available at: www.geosync.com.br

Table 11: Computer Science Goods and Automation Developed in the Country

Period

IPI Reduction

2004 to 2014

-100%

2015

-90%

2016 to 2019

-70%

Source: Computer Science Act – PPB presentation (2013). Available at: www.geosync.com.br

This mechanism’s benefit in general terms works in the following way: a company obtains a tax reduction of, say, one million dollars. This can represent up to 20% of gross turnover. On the other hand, the company has to invest in R&D 4% of total gross turnover. Hence, there is a significant gain for the company, amounting to 16% in this example. R&D investments have to be in compliance with specific rules in order to keep this benefit. It is therefore necessary that the company submits on a yearly basis an update on how the investments in R&D are actually being done. Generally it takes 6 months to qualify to get a PPB for a product. More details regarding the Computer Science Act can be found in Annex IV. PPB does not represent a cluster, as it can be obtained in different cities. To be competitive in Brazil supplying products there are some manufacturing options, like setting up at the Manaus Free Trade Zone, or adapting to the Computer Science Act.

12.3. TECHNOLOGY PARKS An important incentive by the government for the research and technology generation is the “Technology Parks”. As they are physical areas with the appropriate infrastructure, this can be considered in line with the concept of “technology cluster”. These areas are close to or inside universities, where the companies can use the technologies of research labs and qualified manpower at lower costs when compared to big centres such as São Paulo or other cities.

ICT INDUSTRY IN BRAZIL

The aim of Technology Parks is to stimulate and manage the flow of knowledge and technology among universities, R&D, companies and their markets, facilitating the creation and consolidation, incubation and “spin-off" process, and providing other added value with quality, space and infrastructure. There are 31 major technology parks scattered throughout Brazil, which focus their work on different sectors of the economy. Other 17 are under implementation, and 32 are planned. The concentration of high technology companies and associated institutions, and the presence of quality universities and modern research centres create an environment conducive to innovation and bring economic benefits to companies located in the parks. Figure 8 shows the technology parks locations in Brazil. Figure 17: Brazilian Technology Parks

Source: Google Maps (January 2013)

The model adopted in Brazil is the same as in North America and consists of creating technology parks sheltering incubators to encourage entrepreneurs to install themselves therein. Despite its limited experience in this field, Brazil has varies success stories when it comes to this type of installations. We can mention the following parks which have positively contributed to various segments of the economy: The Rio Technology Park, in Rio de Janeiro (RJ), The Tecnopuc, in Porto Alegre (RS), The Sapiens Park in Florianópolis (SC), The São José dos Campos Technology Park (SP), The Digital Port of Recife (PE).

12.4. CITIES THAT HAVE SOME SORT OF ICT CLUSTER Recife – PE: Despite its relatively short history, the Digital Port of Recife Technology Park, headquartered in the city of Recife, had gained sufficient standing in 2011 with its turnover of BRL 1 billion. Just to give you an idea, the technology industry in the state, which represented 1.6% of the state GDP in 2001, currently represents 4%.

ICT INDUSTRY IN BRAZIL

In 2012, the establishment of an office in São Paulo (SP) to attract companies from other parts of the country further reinforced the prominence of the Digital Port and it is now considered to be a model of success. Founded in 2000, it is the only one outside the Southern and Southeastern regions of the country containing facilities of leading companies, such as IBM, Microsoft, Accenture and Ogilvy. In 2012, Polo Pernambuco was elected the best technology park in Brazil, receiving the National Award for Innovative Entrepreneurship, held by Anprotec. (National Association of Entities Promoting Innovative Enterprises). The area is home to over 200 companies in the software and technology areas. Campinas – SP: Campinas holds 32 units of the 500 largest companies in the world in this technology branch, such as Lucent Technologies, IBM, Compaq and Hewlett-Packard (HP). Campinas has 13 institutions of higher education and three technology poles, CIATEC I and II (Development Company Pole Campinas High Technology), established in industrial areas around the campus of the well-known and renowned UNICAMP University. The last one is the Centre for Research and Development (CPqD), created by the aforementioned Telebrás for the telecommunications industry in Brazil. Santa Rita do Sapucaí – MG: In the town of Santa Rita do Sapucaí, in the State of Minas Gerais, several technology companies have emerged around the National Telecommunications Institute (Inatel), and it has being nicknamed as the Electronic Valley. Florianópolis – SC: The IT sector in Florianópolis is growing at an average 20-30% per year and is today at least three times bigger than the local tourism industry, which used to be the city’s main economic engine. This pioneer city in the creation of incubators also offers advice to entrepreneurs and is campaigning for further tax reductions or exemptions. Furthermore, many Brazilians appreciate the high quality of living in Florianópolis, with a city that is not too big and does not have the traffic problems of São Paulo and Rio de Janeiro, in with some very beautiful beaches and entertainment options nearby. Conclusion There is not yet something like a Brazilian version of the “Silicon Valley”, but several regions bring together universities, technology parks and leading companies at the same place, and are therefore locations for Swiss ICT companies coming to Brazil. One of them may eventually turn out to be Brazil’s Silicon Valley.

ICT INDUSTRY IN BRAZIL

13. Legal, Tax and Regulatory Issues This chapter has received important input of the lawyers Nilson Lautenschleger, Maria Inês Fuyita Karakanian and Renê Ramos. Please see also the acknowledgement in the beginning of this report. It has been noted several times in this report already: Brazil’s tax system, laws and bureaucracy are the main obstacles of doing business here, both for local companies and even more so for foreign companies. If the reader is wondering why exactly, he should know after this chapter. A Brazilian peculiarity that puzzles many foreigners is how quickly laws and regulations can change here, sometimes without adequate consultation of the stakeholders involved or careful consideration of how the law will be applied in practice. As a consequence, there is often quite some confusion after a new law is enacted, and neither experts nor the relevant government agency quite know what the new law really requires. This opens the doors for arbitrary decisions of public employees and even judges. And it also explains why certain laws just never get really implemented and disappear into a black hole from which no word is ever heard again, although they still exist in theory and are law. Not surprisingly, this is fertile soil for corruption. As a consequence, it may not surprise that Brazilian companies and even some foreign companies do not follow all the laws and rules, and sometimes deliberately wait to see whether a new law is serious or will just fade out after some time. This can be mindboggling for Swiss companies which are keen on strictly following all laws and rules, and this can also result in serious competitive disadvantages with competitors who are not following certain laws or are bribing their way out. It is difficult to give advise here, as a weak law is still the law. Brazilian lawyers often face this difficulty when advising foreign clients. A Swiss company will have to carefully assess how to deal with this peculiarity of Brazil and prompt its Brazilian lawyer to be very explicit about this. Few of the laws here create explicit entry-barriers for foreign companies (which may get Brazil also in trouble with the WTO, whose current president is a Brazilian), but indirectly, many government agencies adapt a more or less explicit policy to support or even promote local companies, often at the expense of foreign companies. The minds of Brazilian politicians and even the public in general still seem to be hardwired to view foreign companies as a necessary evil that have to be managed and controlled tightly in order not to destroy the fragile ecosystem of Brazil’s economy. There are some signs though that this attitude is changing slowly, perhaps particularly so in the ICT sector. For all these reasons, please read carefully the text box below: The information below is not to be taken as legal advise. It serves to direct the reader’s attention to issues that need sound legal advise in case your company plans to enter the Brazilian market. This information was written in large part at the beginning of October 2013.

13.1. A BRIEF INTRODUCTION INTO BRAZIL’S TAX COMPLEXITY 13.1.1. Some common pitfalls for foreigners in Brazil Traditionally, governments of less developed countries rely much more on the tax revenues coming from indirect taxes such as custom tariffs, sales taxes and VAT. More developed countries rely more on direct taxes such as income taxes of individuals and companies. Brazil has are a particularly big variety of indirect taxes, some of them are even labelled as some kind of social contribution or profit sharing plans, and some of them unique for the ICT sector only. Differently from Switzerland as well, the federal government defines the direct taxes on a national level, while the states command the most important VAT here, the ICMS, which also results in quite some complexity with interstate sales.

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As a consequence, tax optimization in Brazil has much more to do with indirect taxes and such issues like in which state you import, in which state you invoice, and in which state your end customer really is. Differently from Switzerland, if you import in place A, invoice in place B, and deliver in place C, the goods really have to be shipped along this route; it is not enough to ship just the paperwork. This is one reason that explains why Brazil’s highways are often clogged with trucks which is absurd from a Swiss perspective. The importance of indirect taxes also explains why choosing the right location (city) to start a company is much less relevant in Brazil than in Switzerland from a income-tax-optimization point. Another peculiarity of Brazil’s tax system that newcomers to this country have a hard time to understand is the fact that sales taxes are applied on gross prices, not on net prices. As a result, one pays taxes on taxes. To make things worse, the many different indirect taxes that apply here when importing and reselling something enter into each other’s calculation base. To give an example, the PIS, COFINS, IPI and ICMS taxes are all owed on import duties. As a result, an import duty of 15% can be 24% effectively, including all the other taxes. Note that this “cascade effect” of paying taxes on taxes is currently a hot legal issue being ruled by the Supreme Court. Another hot issue is the harmonization of interstate sales taxes, an issue that has become to be known under the name of “Guerra dos Portos”, and the political pressure around this is so high that Congress is issuing a new law almost every two months in an attempt to solve this. For all these reasons, calculating taxes and therefore gross prices for the end customer is a very complicated matter that involves complex Excel spreadsheets. To make things worse, many lawyers do not really work with these kind of spreadsheets and just give general advise on whether a given tax applies or not. An accounting firm is more likely to provide this kind of calculation, but the competent ones are a minority, and their employees often don’t speak English (except for the Big Four, which are rather expensive for a Swiss SME), nor are they always up-to-date about the latest changes in the law or about any possible loopholes. From a Swiss perspective, it is surprising that the profession of tax advisor (“Steuerberater”) does not exist in a country like Brazil, and this task is often divided between a lawyer who is gun-shy with Excel spreadsheets and an accountant whose home turf is statutory accounting for local retail,dentists, pizza parlours and the like. Luckily, a few lawyers and specialized accounting firms can be found who are up to this job, but who will charge quite some money for what may erroneously be seem as a relatively simple task from a Swiss perspective. But note that such apparently trivial matters like where to import and through which city to invoice can result in substantial tax savings, and of course, experts are not likely to give away such advise for free. As a consequence of all this complexity, prices in Brazil are almost always gross prices, be it in a restaurant or in B2B sales, and when a Brazilian negotiates prices with a foreign supplier, he will most likely think in terms of gross prices. If this point is not explicitly addressed in a negotiation or in a contract, it can lead to unpleasant surprises later on, when the foreign company receives much less money than it expected, as the Brazilian client deducted all the taxes owed. Even if net prices are defined in a contract, there can still arise some confusion later on about taxes, as the law requires some taxes to be paid by the foreign supplier, not by the Brazilian client. In practice, this payment is done by the Brazilian client, but they may deduct it from the payment made to the foreign supplier. Therefore, a contract should make it very clear that the Brazilian client has to pay all the taxes and tariffs that may arise in Brazil as a result of the export/import. The Mercosul area has its own nomenclature of tariff codes, the so called “Nomenclatura Comum do Mercosul”, abbreviated as NCM. While the first four digits are generally the same as in the HS code, the other four can vary, in some cases even between countries of Mercosul. The NCM classification is much more complex in Brazil than in Switzerland, as this classification is a major instrument for the government to protect sensitive sectors of the economy through high import tariffs or –depending on the case- exempting some products that may not even exist in Brazil. As can also be seen in other countries, a small and exclusive group of experts, often former public employees with experience in this area, are thriving on this complexity. In the case of Swiss companies sophisticated technical products or software, this complexity is often beyond the exporting to Brazil competence of lawyers and accountants who advise on all matters around import, and should clearly define net they have to subcontract one of the rare experts who is really competent in this field, prices and emphasize which adds substantial additional costs to a landed cost analysis.

that the Brazilian client must take care of all taxes and tariffs.

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In fact, such expert advise is often recommendable even for more simpler products. That’s because the correct NCM classification is not only relevant to know the right customs tariff, but also to know all the various different indirect taxes that follow. One wrong digit in the NCM classification can have surprisingly big consequences for the

indirect taxes and consequently for the gross price to end customers. And this in turn has a great impact on the marketing plan and (price) positioning. Furthermore, a wrong NCM code can also lead to products being barred entry at customs upon arrival in Brazil, or a tax auditor showing up years later and claiming that a company has worked with the wrong NCM code and therefore owes huge back taxes and penalties. There is an alternative to hiring an expensive expert in order to find the right classification. It is also possible to make a formal request to the “Receita Federal”, the federal government agency that takes care of all federal taxes, including import duties and customs procedures. Such a request takes usually between three to six months time to be answered, which is almost fast by Brazilian standards. The great advantage is that this official assessment is definitive and there should be no confusion later on at customs or in a tax audit. The disadvantage is that this assessment is, well, definitive and cannot be contested. This is why some companies, if they are in doubt between a more favourable classification and a less favourable one, first make a test by importing a small volume of the product with the favourable classification. If customs accept this more than once, they can still change their classification later on, but then they have to explain why it should be different all of a sudden, and this is fodder for a good tax lawyer.

13.1.2. Overview of indirect taxes and ICT specific duties at federal level I.I. - Imposto de Importação (The Brazilian Import Duty) The Brazilian Import Duty (I.I.) is a federal tax payable upon foreign goods customs clearance at the moment when the import declaration (DI) is registered, in respect of the goods “customs value” according to the General Agreement on Tariffs and Trade (GATT). Regardless of the import model, the taxpayer is the importer who promotes the entry of goods into the Brazilian territory. The I.I. rate varies according to the imported goods classification pursuant to the Brazilian External Tariff Code (TEC), which includes the same classification system as the Harmonized System (HS) as determined by the World Customs Organization (WTO). The I.I. is a non-recoverable tax; therefore, it is a cost for the importer. PIS – Programa de Integração Social (Social Integration Program) Instituted in 1970, it finances unemployment insurance for workers earning less than two minimum wages. Calculated at 0.65% of gross revenues. COFINS – Contribuição sobre a Remuneração dos Empregados e Contribuintes Individuais (Contribution on the Compensation of Employees and Individual Contributors) Created in 1991, it finances social security and healthcare. It is calculated at 3% of revenues. IPI – Imposto sobre Produtos Industrializados (Tax on Industrialized Products) Created in 1988 and applied on national or foreign products FISTEL – Fundo de Fiscalização das Telecomunicações (Telecommunications Supervision Fund) Created in 1966, it finances federal government expenses for the regulation of telecommunications. It has two components: Taxa de Fiscalização de Instalação (TFI), which regulates installations, and Taxa de Fiscalização de Funcionamento (TFF), which regulates operations. TFI applies to telecommunication services providers at the time of issuance of a license for the operation of their stations. The value is determined by Anatel. TFF is paid annually by telecommunication services providers and is calculated at 50% of TFI. FUST – Fundo de Universalização dos Serviços de Telecomunicações (Fund for the Universalization of Telecommunication Services) Created in 2000, it finances universal service provision obligations. It is calculated at 1% of gross monthly revenues generated by the provision of telecommunication services. This tax must be specified on customer invoices. FUNTTEL – Fundo para o Desenvolvimento Tecnológico das Telecomunicações (Fund for the Technological Development of Telecommunications). Created in 2000, the goal is to stimulate technological innovation. It is calculated at 0.5% of net

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revenues, which exclude cancelled sales, discounts, ICMS, PIS, COFINS and FUST. This tax must be specified on customer invoices. 13.1.3. Indirect taxes at state level ICMS – Imposto sobre Circulação de Mercadorias e Serviços (Tax on Circulation of Goods and Services) Each Brazilian state has its own rules for the application of ICMS. The table below shows the different tax rates per state: 35% Rondônia 30% Mato Grosso, Pará, Rio de Janeiro and Paraíba 29% Goiás, Mato Grosso do Sul and Paraná 28% Pernambuco 27% Alagoas, Bahia, Ceará, Maranhão, Rio Grande do Norte and Sergipe 25% Other states (Acre, Amapá, Amazonas, Distrito Federal, Espírito Santo, Minas Gerais, Piauí, Rio Grande do Sul, Roraima, Santa Catarina, São Paulo, and Tocantins). 13.1.4. Indirect taxes at municipal level ISS – Imposto sobre Prestação de Serviços de Qualquer Natureza (Tax Provision of any kind). Each city establishes its own rates, which vary from 0% to 5%. Telecommunication services, IT consulting and software are subject to this tax. Note that direct taxes on income and profits are regulated on a federal level and the rates are the same all over the country. As a consequence and very differently from Switzerland, states and municipalities do not have much leeway to attract new companies through attractive tax rates or tax deals, although they still exist in some cases, for example for car manufacturers opening a large plant in a remote area. However, states and municipalities try to attract new companies by offering land and other non-tax benefits, which can be substantial and should therefore be considered when deciding where to open a new company, especially if it will create many new jobs. 13.1.5. Special tax considerations in the ICT sector In Brazil as in other countries as well, software is treated as a copyright (direito de autor) and not as a patent. Despite this legal definition, the author may request the protection of the source code with the Brazilian Patent and Trademarks Agency (INPI). This is relevant if royalties for those copyrights shall be paid from Brazil to outside the country. Please note however that the tax burden for the remittance of royalties out of Brazil is substantial, which is one more reason why careful tax planning must be part of any market-entry plan to Brazil. Another point that merits careful analysis is to what extent software sales can be treated as service sales, in which case the tax burden is substantially lower as for (tangible) products. Foreign software companies that decide to operate in Brazil may be considered innovative and thus be eligible to certain benefits that are granted to companies that have technological research and development facilities (R&D). Federal Law 11.196/2011 (the so called Welfare Law / Lei do Bem ) extends tax incentives to companies that primarily carry out scientific and innovation activities. According to this law, technological innovation is the conception of a new product or manufacturing process or the addition of new functions/features to the product or manufacturing process that results in an improvement and a quality/productivity gain. The rules to be eligible for the benefits are quite broad and require in-depth analysis in each case. The main benefits under the Lei do Bem are: 

Deduction of R&D expenses from the Corporate Income Tax base;



Reduction of 50% in the Tax on Manufactured Products (IPI) due on equipments, machines, apparatus and instruments used in R&D;



Full depreciation8 in the year of purchase of the new machines, equipment, apparatus and instruments used in the R&D in the calculation of the Corporate Income Tax and Social Contribution on Net Profit;

The rules only allow depreciation up to the cost of purchase of the product and may only be applied as of the date on which the good is installed, placed in operation or ready for manufacturing.

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

Accelerated amortization of the disbursements incurred with the purchase of goods used exclusively in the R&D activities, in the Corporate Income Tax calculation;



Zero Withholding Income Tax (IRRF) on the foreign remittances for the registration and maintenance of trademarks and patents that are related and/or result from the R&D activities.

To be eligible to the tax regime under the Lei do Bem the company must fulfill the following additional requirements: (i) the company has adopted the “real profit” (“lucro real”) method to calculate IRPJ and CSLL tax bases; (ii) the company most not have had a loss in the base year; and (iii) the company must not have any tax debts. These conditions require the company to maintain an advanced accounting system that specifies in detail all R&D expenses. The use of benefits does not require any previous registration with any government agency, and often requires only a relativley simple presentation of projects and/or schedules. However, note that this presentation can be binding and in case of incompliance, the benefits can be cancelled and taxes can be charged retroactively, plus interest and penalties. Furthermore, companies in the software sector may also be eligible to incentives based on the Plano Brasil Maior (“Great Brazil Plan”), launched by the Federal Government. The Plano Brasil Maior foresees the reduction of payroll taxes and social contributions, which were replaced by a fixed rate on gross revenues (excluding export revenues): for IT companies (including technical support in computer and related equipments in general, installation, configuration and maintenance of computer programs and databases) this rate is 2%.

13.2. PRODUCT HOMOLOGATION BY ANATEL Anatel’s homologation is mandatory for most ICT products. This process is bureaucratic and is often considered a considerable entry barrier for foreigners. Soon after Anatel was created in 1998, the agency defined rules and procedures for product homologation, which exist in many other countries as well. However, as so often is the case with many of the regulatory agencies created in Brazil in the 90s, the process suffers from bureaucratic zeal and a hidden agenda to promote some kind of industry policy. On the positive side, they tend to reduce the informal sector, which is also a powerful competitor for foreign firms and local firms which are compliant. It is important that foreigners understand this process very well and plan accordingly, including the substantial costs and timeline involved. Products that require homologation are: 1) 2) 3) 4) 5)

Transmission Products: Transmission, emission or reception, wired, radio electricity, optical means or any electromagnetic process of symbols, characters, signals, written, images, sounds or information of any nature. Telecommunication Products: Equipment, devices or elements necessary or sufficient for telecommunications completion. Telecommunication Products Category 1: Equipment terminals intended to be used by the public to access telecommunications services. Telecommunications Products Category 2: Equipment not included in Category 1, i.e., making use of the radio-electric spectrum for the transmission of signals, including antennas and those categorized in specific regulations as restricted radiation radio communications equipment. Telecommunication Products Category 3: Any products or equipment not included in categories 1 and 2, and needed to: a) Guarantee interoperability of support networks for telecommunication services. b) Reliability of support networks for telecommunication services. c) Guarantee electromagnetic compatibility and electrical safety.

ICT INDUSTRY IN BRAZIL

The Homologation Process The application can be submitted by the product manufacturer or by its sales partner in Brazil. Foreigners (without their own legal entity in Brazil) must appoint a representative with a legal entity in Brazil, which will be responsible for the consequences of selling the product and for providing adequate assistance to Brazilian users of the product. The Appointed Certification Body (OCD) is an official technical institution which by law and delegation from ANATEL conducts telecommunication the conformity certification and issues the corresponding certificates of conformity, which are a necessary requirement to get Anatel's homologation for the purposes of commercialization and legal use of these products in Brazil. There are 13 OCDs, and the complete list is in Annex II. In the entire ANATEL’s homologation process, the certification of OCD is probably the most complicated step: Main Stages: 1) Hire an OCD – a Certification Entity, designated by Anatel 2) Choose a laboratory for testing 3) Shipment of samples for testing 4) Shipment of documents (technical specifications, manuals, photos, labels, information of commercial representative in Brazil, etc.) 5) Testing and engineering evaluation 6) Issuance of certificate of conformity 7) Submission of homologation request to Anatel 8) Homologation obtained and formalized by being published at Anatel’s website 9) Anatel’s label on the certified product 10) Maintenance: Periodically, the certificate must be maintained by undergoing a similar process to the initial process, which will include upgrades and updates. The homologation process usually takes between 60 to 90 days, excluding testing, and in many cases tests performed outside Brazil are not accepted, as Anatel does not have mutual agreements with foreign certification organizations such as CE or FCC. Even if a Swiss company has its products certified in Europe, it is necessary to go through the process in Brazil. The only exception is if Brazil does not have relevant domestic lab equipment to run the tests. In such cases, the foreign test results may be recognized, but one still has to go through the homologation process.

13.3. INTELECTUAL PROPERTY AND ROYALTY PAYMENTS The Brazilian Patent and Trademarks Agency (INPI) plays an important role for foreign ICT companies coming to Brazil, for the following reasons: 1)

If royalties have to be paid, especially out of Brazil, it is mandatory that the owner of the intellectual property registers the patent or copyright with INPI, otherwise it may be impossible or illegal to get the money out of the country. Please note that in Brazil, like in other countries as well, software is not a patent but a copyright. Nevertheless, it If a Swiss company can be registered with INPI. But this process is complex, time-consuming invites Brazilian clients to and can be subject to decisions that may seem arbitrary from a Swiss perspective. Please note that a registration of software with INPI is only Switzerland for training, mandatory if source code and other key technology is transferred to Brazil. a service contract needs to In case of a “simple” software sale without such technology transfer, no be registered with INPI registration is needed, unless for the reasons mentioned below.

If a foreign company sends a technician to Brazil for installation, repair, maintenance or even training, this technician needs a special visa (see next section for more about this); the foreign company needs to have a formal service contract with the Brazilian client; and this contract needs to be registered with both the INPI and the Central Bank (Bacen), the latter controlling all money flows in and out of the country.

As so often in Brazil, registering such a contract is not a simple, straightforward matter, and certain formal and technical questions have to be observed, for which a specialized lawyer is recommended.

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and the Central Bank in order for the client to send money out of Brazil.

For tax purposes, the Brazilian client can only deduct the expenses paid to a foreign company for technical assistance and training if the contract is registered with INPI.

13.4. WORK PERMITS FOR TECHNICAL ASSISTANCE AND TRAINING STAFF Business Visa and Visa-Waiver for Tourists and Businessmen Swiss business people travelling to Brazil do not need a visa if they want to participate in meetings, conferences or pursue sales activities for a short period of time. This is because there is an agreement or understanding that Brazilian business people do not need to request a visa from Swiss authorities to pursue the same kind of activities in Switzerland. Citizens of countries that require a visa from Brazilian business people or tourists (such as the USA) indeed have to request a business visa before travelling to Brazil. In the case of Swiss citizens, they are allowed to stay 90 days per year in Brazil for tourism or for the general business purposes as mentioned above, in which case they must not receive any kind of remuneration for their activities in Brazil. These 90 days can be prolonged by another 90 days on request, which is a rather easy and fast process for Brazilian standards. However, the simple fact that a Swiss citizen does not receive any remuneration for his business activities in Brazil does not mean that he can just enter with the normal tourist/business “visa-waiver” status. For certain activities, a special visa is necessary, even if they are not remunerated in Brazil. Visa for technical activities (“Visto técnico”) If a foreigner (including Swiss) travels to Brazil in order to provide technical services , such as the installation of hardware or software, the execution of repair and maintenance services, or conduct training, a “visto técnico” is required, in which case it is still strictly forbidden for him to receive any kind of remuneration in Brazil. If the technician is an employee if a Swiss-based company, the Brazilian company will pay the Swiss company, in which case a service contract has to be registered at INPI and the Central Bank as mentioned above. If the technician is self-employed, he will also have to make arrangements that his services are treated like a service export from Switzerland. Given the nature of the ICT business, it is almost certain that a foreign ICT company will have to request such a “visto técnico” for its employees who conduct after-sales services such as installation, training, repair&maintenance. The “visto técnico” has several durations: 30 days, 90 days or one year. Normally, a visa for one year should be requested, which also allows a foreign technician to enter Brazil on short notice. This is important as the process of obtaining a “visto técnico” takes around 60 days. The one-year visa can be renewed and allows the visa-holder to bring his family to Brazil. The main requirements for this visa are some written proof (such as a contract) of the services to be provided by a foreign company for a Brazilian client; the description of the essential training to be provided to Brazilian employees; and an appraisal of the professional experience of the foreign technician.

The process of obtaining a visa for technical activities usually takes around 60 days, so Swiss companies need to plan ahead their after-sales activities in Brazil.

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The 90-day visa is easier to obtain, as it requires only an invitation letter of a Brazilian company where the technician will perform his activities. The disadvantage of this visa is that it is only valid for 90 days (and still requires 60 days to be issued), that it can not be renewed and that family members of the technician do not benefit from this visa (which is less necessary if a technician only stays up to 90 days). The 30-days-visa is only granted in cases of emergency in order to fix problems that may cause substantial harm to the health and life of people, to the environment, to the assets of a company, or that may cause a severe disruption in the productions process (or in providing services) of a Brazilian company. The nature of this urgency has to be proved or documented in one way or the other to obtain this visa. The advantage is that

this visa can usually be issued by the Brazilian Consul General, for example in Zurich, and is issued much faster than the normal 60 days. But this visa is not renewable, is really only meant for emergencies and not for installation or training or regular repairs, and it goes without saying the family members of the technician do not benefit from this visa. At last, as is so often the case with the law and regulation in Brazil, the regulation of foreigners working in Brazil is subject to frequent changes. Therefore, please donâ&#x20AC;&#x2122;t take the above mentioned information as legal advise, and make sure to check with a competent lawyer whether your company (or employees, to be more precise) need a special visa for the activities you plan to pursue in Brazil. Not a few foreign companies do not care much about these work-visa issues and send their technicians to Brazil as regular business men. But this is against the law, and while there are some laws in Brazil that are not applied in practice, the laws around immigration issues and work visas are taken seriously here. And if a Brazilian company wants to pay a foreign company for technical services, a contract has to be registered with INPI and the Central Bank, and a proof may have to be given that the services were effectively rendered by a person who had the appropriate visa for doing so. Many foreign companies who neglected the work-visa issue had bad surprises when the moment of receiving the payment had come. This is an important reason why the work visa issue must be considered when exporting ICT products or services to Brazil.

ICT INDUSTRY IN BRAZIL

14. Conclusions The most important advise of this report is the importance of taking time to understand the peculiarities of the Brazilian market and plan carefully before entering. This also involves a careful review whether the classic approach of working with one exclusive distributor as a “one-stop-solution” is really the best approach. More likely, the managers of a Swiss company will find that they themselves have to get their hands on. The good news is that this may be less difficult and expensive as one may initially expect from Brazil, provided that one heeds good advice and has patience. Another key message that was sent repeatedly in this report: while Swiss (or foreign) SME can gain a lot by bringing in their technology, business practices and even business values, they also have to be very much aware of the particularities of doing business in Brazil and will have to adapt in important ways if they want to avoid a quick failure. The demise of Vesper, a telecom provider largely backed by North American Telcos and investors, shows the perils of pushing too hard a new technology in Brazil that was not yet sufficiently tested, and to press for a return on investment as fast as possible. And even large multinationals frequently get huge fines for not complying with the local tax code. The main reason for this is less the prevalent corruption among tax auditors, but that these companies often steadfastly refuse to deviate from their “Global IT Standards” in order to adapt to the manifold peculiarities of Brazil’s tax system. They often do so despite expensive advise from excellent lawyers and consultants. A Swiss company should also balance carefully to what extent it wants to promote its “Swissness” and to what extent it should go local, become somewhat of a Brazilian company and please the patriotic feelings of Brazilian customers and government. In a nutshell, this report claims that while doing business in Brazil is a challenge, it can be done; and while some foreign companies have failed here, many others have prospered; and finally, despite Brazil’s meager growth forecast, there can be very attractive growth opportunities for Swiss companies in Brazil’s ICT market.

ICT INDUSTRY IN BRAZIL

15. Table of Abbreviations -

ABEPREST: Associação Brasileira de Empresas de Soluções de Telecomunicações e Informática

(Solutions

Brazilian Association) -

ABESE: Associação Brasileira das Empresas de Sistemas Eletrônicos

ABINEE: Associação Brasileira da Indústria Elétrica e Eletrônica (Electronic industry Brazilian Association)

ABNT: Associação Brasileira de Normas Técnicas (Brazilian Association of Technical Standards)

AM: Amplitude Modulation

AMN: Associação Mercosul de Normalização (Mercosur Association of Normalization)

Anatel: Agência Nacional de Telecomunicações (National Telecommunication Agency)

ANPROTEC: Associação Nacional de Entidades Promotoras de Empreendimentos Inovadores (National Association of Entities Promoting Innovative Enterprise)

APEX Brasil: Agência Brasileira de Promoção de Exportações e Investimentos (Brazilian Agency for Promotion of Exports and Investments)

BI: Business Intelligence

BNDES: Banco Nacional de Desenvolvimento Econômico e Social (National Bank for Economics and Social Development)

BOVESPA: Bolsa de Valores de São Paulo (São Paulo Stock Exchange)

BRASSCOM: Associação Brasileira de Empresas de Tecnologia da Informação e Comunicação

(Brazilian

Association of information Technology and Communication Companies) -

CAGR: Compound Annual Growth Rate

CDMA: Acesso Múltiplo por Divisão de Código (Code Division Multiple Access)

CETIC: Centro de Estudos Sobre as Tecnologias da Informação e da Comunicação (Centre of Studies on Information and Communication Technologies)

CFTV: Circuito Fechado de TV (closed circuit TV)

CIATEC: Companhia de Desenvolvimento do Polo de Alta Tecnologia de Campinas

CNES: Cadastro Nacional de Estabelecimento de Saúde (The National Health Facilities Census)

COFINS: Contribuição para Financiamento da Seguridade Social (Tax for Social Security Financing or Social Contribution on Billings)

CONMETRO: Conselho Nacional de Metrologia, Normalização e Qualidade Industrial (National Council of Metrology, Standardization and Industrial Quality)

COPANT: Comissão Panamericana de Normas Técnicas (Pan American Standards Commission)

CPQD: Centro de Pesquisa e Desenvolvimento (Research and Development Centre)

CRM: Customer Relationship Management

DENATRAN: Departamento Nacional de Trânsito (National Traffic Department)

DTH: Direct to Home

EAQ: Entidade Aferidora de Qualidade

EBITDA: Earnings Before Interest, Taxes, Depreciation and Amortization

ICT INDUSTRY IN BRAZIL

ERP: Enterprise Resource Planning

ESSE: Equipamento de Segurança Eletrônica (Electronic Safety Equipment)

FIFA: Fédération Internationale de Football Association

FISTEL: Fundo de Fiscalização das Telecomunicações (Telecommunications Fiscalization Fund)

FM: Frequency modulation

FNDCT: Fundo Nacional de Desenvolvimento Cientifico e Tecnológico (National Science and Technology Development Fund)

FUNTTEL: Fundo para o Desenvolvimento Tecnológico das Telecomunicações (Technology Development of Telecommunication Fund)

FUST: Fundo de Universalização dos Serviços de Telecomunicações (Fund to Improve the General Access to Telecommunications Services)

GLP: Gás Liquefeito de Petróleo (Liquefied Petroleum Gas)

GN: Gás Natural (Natural Gas)

GPRS: General Packet Radio Service

GPS: Global Positioning System

GSM: Global System for Mobile Communications

IBGE: Instituto Brasileiro de Geografia e Estatística (Brazilian Institute of Geography and Statistics)

ICMS: Imposto sobre Circulação de Mercadorias e Serviços (Value-Added Tax on Sales and Service)

ICT: Information and Communication Technology

IEC: International Electrotechnical Commission

INATEL: Instituto Nacional de Telecomunicações (National Telecommunication Institute)

INMETRO:

Instituto

Nacional

Metrologia,

Qualidade

Tecnologia

(National Institute

Metrology, Standardization and Industrial Quality) -

ISO: International Organization for Standardization

ISO 9000: Quality System Certification

IT: Information Technology

ITU: International Telecommunication Union

Act no. 10176 dated January 01st, 2001: Computer Science Act

Act no. 11077 dated December 30th. 2004: Computer Science Act

Act no. 8248 dated October 23rd, 991: Computer Science Act

LGT: Lei Geral das Telecomunicações (General Telecommunications Act)

M2M: Machine to Machine

Mbps: Megabits per second

MCOM: Ministério das Comunicações (Ministry of Communications)

MCT: Ministério da Ciência e Tecnologia (Ministry of Science and Technology)

MDIC: Ministério do Desenvolvimento, Indústria e Comércio Exterior (Ministry of Development, Industry and Foreign Trade)

MEC: Ministério da Educação (Ministry of Education)

MHz: MegaHerts

MMDS: Multichannel Multipoint Distribution Service

ICT INDUSTRY IN BRAZIL

MPOG: Ministério do Planejamento, Orçamento e Gestão (Ministry of Planning, Budget and Management)

MVNO: Mobile Virtual Network Operator

NFC: Near Field Communication

OME: Original Equipment Manufacturer

P2P: Point to Point Solutions

PASEP: Programa de Formação do Patrimônio do Funcionário Público (Public Service Employee Savings Program)

PDA: Personal Data Assistant

PGMC: Plano Geral de Metas de Competição (Competition Goals General Plan)

PGMU: Plano de Metas de Universalização (General Plan of Universalization)

PIS: Programa de Integração Social (Employee’s Profit Sharing Program)

PNBL: Programa Nacional de Banda Larga (National Broadband Plan)

PPB: Processo Produtivo Básico (Basic Production Process)

PST: Posto de Serviço Telefônico (Telephone Service Station)

RFID: Radio-Frequency Identification

RGI: Regulamento Geral de Interconexão (General Regulations of Interconnection)

SABESP: Companhia de Saneamento Básico de São Paulo (Basic Sanitation Company of São Paulo)

SBTVD-T: Sistema Brasileiro de Televisão Digital Terrestre (Digital Terrestrial Television Brazilian System)

SIM: Subscriber Identity Module

SUFRAMA: Superintendência da Zona Franca de Manaus (Superintendence of the Manaus Free Zone)

SUS: Sistema Único de Saúde (Unified Health System)

TAP: (Public Access Terminal)

TCCA: Taxa Composta de Crescimento Anual (Compound Annual Growth Rate)

TELEBRASIL: Associação Brasileira de Telecomunicações (Brazilian Telecommunications Association)

TFF: Taxa de Fiscalização de Funcionamento (Operating Supervision Tax)

TFI: Taxa de Fiscalização de Instalação (Installation Supervision Tax)

TIC: Tecnologia da Informação e Comunicação (Information and Communication Technology)

UHF: Ultra High Frequency

VCA: Video Content Analysis

WLL: Wireless Local Loop

ICT INDUSTRY IN BRAZIL

16. Appendix 16.1. ANNEX I Frequency bands used in Brazil: The first licenses auctioned Table 1 - Band Frequency

Frequencies (MHz) Sub-band A** Sub-band B** Sub-band D Sub-band E

Extension Sub-bands

Transmission from Mobile Station 824-835 845-846.5 835-845 846.5-849 910-912.5 1710-1725 912.5-915 1740-1755 898.5-901* 907.5-910* 1725-1740 1775-1785

ERB 869-880 890-891.5 880-890 891.5-894 955-957.5 1805-1820 957.5-960 1835-1850 943.5-946* 952.5-955* 1820-1835 1870-1880

Source: Teleco (2012). Available at: http://www.teleco.com.br/Bandac.asp

Frequency bands auctioned in 2002: Note that the L band is not operating Table 2 - 3G Frequency

MHz Sub-bands F* G* H* I* J* L M Extension Sub-bands

Transmission from Mobile Station 1920-1935 1935-1945 1945-1955 1955-1965 1965-1975 1895-1900 1755-1765 1765-1770 1770-1775 1885-1890** 1890-1895**

Source: Teleco (2012). Available at: http://www.teleco.com.br/Bandac.asp

ERB 2110-2125 2125-2135 2135-2145 2145-2155 2155-2165 1975-1980 1850-1860 1860-1865 1865-1870

Frequency bands auctioned for 4G: Note that these bands are similar to European Standards for 4G. Table 3 - 4G Frequency

Sub-band (MHz) P W V1 V2 X T U

Bandwidth (MHz) 10+10 20+20 10+10 10+10 20+20 15 35

Transmission from Mobile Station 2500-2510 2510-2530 2530-2540 2540-2550 2550-2570 2570-2585* 2585-2620*

Source: Teleco. Available at: http://www.teleco.com.br/4g_freq.asp

Operator ERB 2620-2630 2630-2650 2650-2660 2660-2670 2670-2690

Claro (11 lots); TIM (6 lots); Oi (11 lots) Claro TIM Oi Vivo Sky e Sunrise (12 lots each)

16.2. ANNEX II Complete OCD List: 1) TÜV RHEINLAND BRASIL http://www.tuvbrasil.com.br/ Address: SHIS QI-13 CL Bl.A Sala 22, Brasília-DF CEP: 71635-013 Email: tuvbrasil@tuvbrasil.com.br 2) ASSOCIAÇÃO NCC CERTIFICAÇÕES DO BRASIL http://www.ncc.org.br Address: R. Conceição, 233 SALA 2510, Campinas-SP CEP: 13010-050 Email: ncc@ncc.org.br 3) FUNDAÇÃO CPqD http://www.cpqd.com.br/ Address: Rod. Campinas - Mogi-Mirim km 118,5, Campinas-SP CEP: 13088-902 Email: ocd_cpqd@cpqd.com.br 4) UCIEE - UNIÃO CERTIFICADORA http://www.uciee.org/ Address: Rua dos Comerciários, 220, Bairro Jabaquara, São Paulo-SP CEP: 04320-030 Email: uciee@uciee.org 5) FUNDAÇÃO VANZOLINI http://www.vanzolinicert.org.br/ Address: R. Camburiú, 255 - Alto da Lapa, São Paulo-SP CEP: 05058-020 Email: telecom@vanzolinicert.org.br 6) IPDE - INSTITUTO DE PESQUISA, DESENVOLVIMENTO E EDUCAÇÃO http://www.ipde.org.br/ Address: SHCN-309 Bl. B - Salas 104, 106 e 108, Brasília-DF CEP: 70755-520 Email: ipdeocd@ipde.org.br 7) OCP-TELI - ORGANIZAÇÃO CERTIFICADORA http://www.ocp-teli.org.br/ Address: Av. Afonso Pena, 3924 - Sala 608 - Bairro Cruzeiro, Belo Horizonte-MG CEP: 30130-009 Email: ocp-teli@ocp-teli.org.br 8) IBRACE - INSTITUTO BRASILEIRO DE CERTIFICAÇÃO http://www.ibrace.org.br/ Headquarters’ Address: Av. Dr. José de Souza Campos, nº 243, Sala 12, Cambuí, Campinas – SP CEP: 13025-320 Telephone (19) 3295-0012 Branch Address: SRTVS-701 - Ed. Centro Empresarial Brasília - Bl. A - Sala 701, Brasília-DF CEP: 70340-907 Email: ibrace.cps@ibrace.org.br

9) ACTA - SUPERVISÃO TÉCNICA INDEPENDENTE http://www.acta.org.br/ Av. Franklin Roosevelt, 194-Gr:405, Castelo - Rio de Janeiro – RJ CEP: 20021-120 Email: diretoria@acta.org.br 10) TECPAR - INSTITUTO DE TECNOLOGIA DO PARANÁ http://www.tecpar.br/ Address: Rua Professor Algacyr Munhoz Mader, 3775, Curitiba – PR CEP: 81350-010 Email: ffelice@tecpar.br 11) UL DO BRASIL CERTIFICAÇÕES http://www.uldobrasil.com.br/ Address: Rua Fidêncio Ramos, 195, 5º Andar, Vila Olímpia, São Paulo – SP CEP: 04551-010 Email: jose.Martins@br.ul.com 12) CTCP - CENTRO TECNOLÓGICO DE CERTIFICAÇÃO E PESQUISA http://ctcp.org.br/ Address: Rua Carlos Machado, 215 - Pólo Rio Cine Vídeo - Barra da Tijuca, Rio de Janeiro – RJ CEP: 22.775-042 Email: ctcp@ctcp.org.br 13) MASTER Associação de Avaliação de Conformidade Telecom http://www.master.org.br/ Address Roberto Teixeira dos Santos, 476 Pq. Taquaral - Campinas – São Paulo – SP CEP: 13087-330 Email: master@master.org.br

16.3. ANNEX III Table 6 - Digital Inclusion, Telebrรกs and Postal Service Market Indicators

Digital Inclusion Supported Telecentres

13,584

Telebrรกs National Network (km) 2012

21,000

Postal Service Number of agencies

11,942

Connected Schools

60,.972

Cities Covered 2012

2,018

Cities with agencies

5,548

Sources: ANATEL and CETIC Table 7 - Radio Market Indicators

RADIO FM Commercial FM Educational AM Commercial Tropical Wave and Short Wave Community Radio TOTAL

1,895 327 1,630 137 4,122 8,111

Sources: ANATEL and CETIC Table 8 - Analogue TV Indicators

ANALOGUE TV TV Providers Educational TV Providers TV Retransmitters Cities with notice of habilitation

288 124 5,303

RADCOM 2012 RADCOM 2013 FM Educational

718 658 280

Sources: ANATEL and CETIC Table 9 - Digital TV Indicators

DIGITAL TV Providers of digital TV consigned

321

Re-transmitters of digital TV consigned

1,605

Digital TV with temporary or permanent license

151

Re-transmitters of digital TV temporary or permanent license

Sources: ANATEL and CETIC

16.4. ANNEX IV 10.1.1. Computer Science Law Beneficiary Companies Companies investing in activities of research and development (R&D) of information technologies in Brazil. Companies producing scientific, automation and telecommunication goods, in compliance with the Basic Productive Process – PPB. PPB: Processo Produtivo Básico (Basic Production Process) is the minimum set of operations at manufacturing premises characterizing the effective industrialization of a given product. The PPB is set by product. Benefits IPI reduction in the commercialization of benefitted products. Preference in the acquisition of benefitted goods by organizations and entities of the direct or indirect Federal Public Administration. IPI suspension in the import and local purchase of supplies. ICMS benefits in the State of São Paulo and other States.  ICMS reduction to 7% in the operations inside the State.  ICMS suspension in the import and/or in the acquisition of supplies inside the State.  ICMS special regimen of taxation for several computer science products (credit grant).  10.1.2. IPI Reduction The IPI rate usually ranges between 10% and 15%. Table 4 – Computer Science Goods and Automation Developed in the Country.

Period

IPI Reduction

2004 to 2014

80%

2015

75%

2016 to 2019

70% Source: www.geosync.com.br

Table 5 - Computer Science Goods and Automation in General.

Period

IPI Reduction

2004 to 2014

100%

2015

90%

2016 to 2019

70% Source: www.geosync.com.br

10.1.3. Obligations for Beneficiaries of Computer Science Law Execution of the Basic Productive Process - PPB in the local production of benefitted goods. Investment of resources in R&D activities in Brazil. ISO 9000 Quality System certification. Program for Workers Sharing in the company´s profits or results. Annual Demonstrative Report presentation.

10.1.4. Destination of R&D Applications FNDCT: quarterly withdrawal in the Technological Scientific Development National Fund. Agreement with Northern, Northeastern and Central Western R&D Entities: R&D project/programs accomplished, together with research and teaching institutions with main headquarters located in the Northern, Northeastern or Central Western regions.  Official Entities: universities, colleges, teaching entities and/or centres and research institutes maintained by the Federal, State or City governments.

 Free choice: research and teaching institutions, of free choice, of public (officials) or private right. Choice of R&D entities in any region: R&D projects/programs accomplished in agreement with research and teaching institutions of choice, public or private, in any area of the country; Internal projects/programs: R&D projects/programs accomplished by companies itself or contracted with third parties

10.1.5. General Aspects of the Obligatory Applications in R&D It is not considered R&D activity to donate goods and computer science services. In the event of production by third parties, the contracting company may (???) assume all responsibilities on applying the resources in R&D activities, corresponding to the revenue due to commercialization of favoured products obtained by the contracted (Assumption Contract). It will be considered as application in R&D of the calendar year:  expenditures corresponding to the execution of R&D activities accomplished until March 31st. of the subsequent year;  deposits made in the FNDCT, until the last week-day of January subsequent to the closing calendar year; and  Eventual advance payment to third parties for execution of R&D activities, considering that its value should not go over 20% of the calendar year's correspondent obligation. The Basic Productive Processes are established for the ministries MDIC and MCT, by means of joint ordinances. The request of a company interested in the establishment of a specific PPB for a product type shall be duly appreciated, by MDIC and MCT, in a maximum period of 120 days. PPB's can be altered whenever its technical and/or economic factors may indicate it warrants doing so. The alteration of a PPB involves in its execution all manufacturing companies of the product(s). There are ordinances, which liberate some modules of local assembly, sub-sets and special components, and/or establish specific conditions for certain types of products. Activities and productive operations can be performed by third parties, however, the stages of final integration and quality management should be executed by the company itself. MCT and MDIC can promote, at any time, inspections in the companies for verification of the regular observance of PPB.

16.5. ANNEX V Table 10 - Pay TV Service Concessions per States, Technology, and Status.

Brazilian States (1) Brazil Rondônia Acre Amazonas Roraima Pará Amapá Tocantins Maranhão Piauí Ceará Rio Grande do Norte Paraíba Pernambuco Alagoas Sergipe Bahia Minas Gerais Espírito Santo Rio de Janeiro São Paulo Paraná Santa Catarina Rio Grande do Sul Mato Grosso do Sul Mato Grosso Goiás Distrito Federal

Status Operating Operating Installing Operating Installing Operating Installing Installing Installing Operating Installing Operating Installing Operating Operating Operating Installing Operating Installing Operating Operating Operating Installing Operating Operating Installing Operating Installing Operating Installing Operating Operating Installing Operating Installing Operating Operating Installing Operating Operating Installing Operating Total

MMDS

TVC

2 1 1

1 1 1

TVA

2 1 2 1 1 1

DTH 14

1 3 1 2 3 1 1 4 5 5 3 17 6 8 6 4 2 2 1 1 3 78 81

1 2 3 1 1 4 1 1 1 9 1 32 11 1 16 6 75 1 27 19 1 24 1 2 4 4 1 20 242 262

Source: ANATEL, Dados Estatísticos dos Serviços de TV por Assinatura, Capítulo I, Junho/2012Anatel

1 5 1 5 4 3

2 25 25

14 14

Total 14 3 1 2 1 3 1 2 1 3 1 1 1 6 4 3 1 7 1 2 2 14 1 42 17 1 24 6 96 1 36 27 1 32 1 6 6 2 5 4 23 359 382

16.6. ANNEX VI Table 11 - Hospital Beds in Brazil.

SURGERY GENERAL CLINIC PSYCHIATRY

Public 76307

Private 41904

Total 118211

82667

32279

114946

37669

10236

47905

PEDIATRICS

48857

11766

60623

OBSTETRICS

44507

14140

58647

OTHER Total

49986 339993

12935 123260

62921 463253

Source: SouthPartner Table 12 – Excellence-Level Hospitals in Brazil.

State SP SP SP SP

Hospital Sociedade Beneficente Israelita Brasileira - Hospital Albert Einstein Associação do Sanatório Sírio – H-Cor Sociedade Hospital Samaritano Sociedade Beneficente de Senhoras - Sírio Libanês

Hospital Alemão Oswaldo Cruz

Associação Hospitalar Moinhos de Vento

Source: Portal da saude.gov.br, http://goo.gl/m7oMx9Southpartner

16.7. ANNEX VII List 1 - GLP Distributors in Brazil.

Source: SouthPartner

16.8. ANNEX VIII List 2 - Gas Distributors in Brazil.

Source: SouthPartner

16.9. ANNEX IX Table 13 - Electricity Market in Brazil

Source: SouthPartner

16.10. ANNEX X

Importation Simulation of Microwave Antenna IMPORT ON OWN ACCOUNT THROUGH BROKER

Simulation with ICMS - ST Operating Assumptions Client Product Destination EXW (USD): NCM (Harmonized Code) : Import Tax - I.I.: Federal VAT #1 (IPI): Product Destination

A (Simulation) Sรฃo Paulo USD 130.000 8517.70.29 16,00% 10,00% Reseller

Financial Cost (CDI+0,5% ): Exchange Rate USD/R$: Exchande Rate EUR/R$: Quantity of processes Nยบ of Containers of 40' Dry: Payments Conditions Date:

1,1073% 2,2300 2,7134 1 1 60 days B/L 21/12/2012

A - Through broker

Port of Origin / Destiny Freight Inland (EUR): Freight Internacional (EUR):

STEPS DESCRIPTION

Gothenburg - Sweden / Santos, SP - Brasil EUR 556 EUR 2.726

Values in REAIS (R$) Tax Rate

Values

CIF Value Composition EXW Value

289.900

Inland Freight + Internacional

12.910

Value CFR

302.810

Insurance

0,5000%

Valor CIF

1.514 R$ 304.324

Nationalization Costs Importation Tax

16%

Base for IPI

48.903 353.227

Federal VAT #1 (IPI) Base for COFINS

Federal VAT #3 (Confins)

10%

35.323

0,9075

431.099

7,6%

32.764

Base for PIS

0,9075

431.099

Federal VAT #2 (Pis Pasep) State VAT (ICMS)

1,65%

7.113

18%

94.334

TOTAL

8558061,71%

R$ 218.436

EXPENSES Siscomex Use Tx

R$ 214,5

215

Cost for exchange closing

0,015%

Cost for Letter of Credit

0,142%

411

Deconsolidation

R$ 130

AFRMM (Freight Surchase for Brazilian Merchant Marine)

130

25%

3.557

Spawning

R$ 706

1.003

CNTR Devolution

R$ 300

426

Capatazia (THC)

R$ 928

1.318

ISPS

R$ 59

B/L Clearance

R$ 250

250

Weighing

R$ 114,78

163

Customs Storage

R$ 450

639

EADI Movement

R$ 160

227

Freight to bonded warehouse Removal

R$ 0 R$ 282

Administrative Cost

0,0%

Agent

R$ 1.500

TOTAL

0 400 0 1.500 R$ 10.365

SALES INVOICE Total Landed Cost

R$ 533.125,5

ExportHelp www.switzerland-ge.com/exporthelp exporthelp@switzerland-ge.com T 0844 811 812

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