Insight: Dreaded "Brazil cost" may dim Foxconn's iPad dreams (Reuters)

JUNDIAI, Brazil (Reuters) – The nondescript stretch of asphalt is an unlikely symbol of Brazil's attempt to lift its economy into a new high-tech era.

If officials in the industrial town of Jundiai get their way, it will soon be named Steve Jobs road -- in homage to the late Apple Inc co-founder and a nod to the expected windfall that producing iPads and iPhones here will bring.

Brazil's government has loudly proclaimed a deal it says is worth $12 billion for Taiwanese technology giant Foxconn to produce iPads and build a whole new industry based around screens used in an array of consumer electronics from smartphones to televisions.

But the infamous "Brazil cost" -- shorthand for the bureaucracy and high taxes that plague business in the country -- is already overshadowing the deal, complicating negotiations with Foxconn over the broader investment plan. The likely need for large state subsidized loans to lure Foxconn also revives concerns about the state's heavy hand in Brazil's economy.

The deal's transformative potential for Brazil is clear -- a home-grown technology industry could move the commodities giant up the value-added chain to join the likes of Taiwan and South Korea, reducing its dependence on manufactured imports from Asia.

Yet critics say Brazil's shallow labor pool and poor infrastructure make it ill-prepared to make the leap to high-end work and that it risks being stuck at the low end -- assembling components designed and made elsewhere. At first, Foxconn will have to fly in most of the key components such as semiconductors, modems and screens from China, as Brazil attempts to raise its ability to produce more of them locally.

"We are selling our market very cheaply, giving tax incentives for a company to come and produce something that is already developed in the world market," said Joao Maria de Oliveira, a researcher at the government-linked Institute for Applied Economic Research, or IPEA. "It's not something that adds much value and it won't leave much here."

The amount of value added to Apple products by Foxconn's approximately one million workers in China is a mere $10 or so per device, according to a study by researchers at the University of California, Irvine.

Brazil has cut taxes and duties on tablet production in a move that should reduce the retail price by about a third and is phasing in production requirements to foster a local components industry.

Separately, it is in talks with Foxconn on a package of incentives, including priority customs access, more tax breaks and subsidized loans from state development bank BNDES to secure the bigger investment in high-end screens.

It isn't hard to see what's in it for Foxconn, Apple and other foreign companies, including Motorola Mobility Holdings Inc and Samsung Electronics Co Ltd that have expressed interest in making tablets here.

Apple will gain better access to Brazil's voracious consumers, who have faced high prices for its products due to hefty import tariffs, and will create a jumping-off point for other rapidly growing Latin American countries.

Foxconn, the world's largest contract electronics company, with around a third of the global market, would gain a vital foothold in Latin America's largest economy and reduce the risks of having so much Apple production in China.

Producing in Brazil would also give Foxconn and Apple preferential access to Brazil's partners in the Mercosur customs union -- Argentina, Paraguay and Uruguay.

But the "Brazil cost" raises doubts over whether Apple will be able to make the iPad cheaply enough for the Brazilian market and use it as a major base to export to the United States and Latin America.

Brazil's consumer market is a huge draw for companies such as Apple, but analysts say the domestic industry will likely take years to move beyond assembly to higher-end production.

"It will take at least five, six years to create the entire ecosystem there," said Satish Lele, vice president, consulting, Asia Pacific at Frost & Sullivan in Singapore.

"I don't think they (Brazil) are ready to support huge growth as far as the electronics sector is concerned."

THE BRAZIL COST

The Foxconn factory near "Steve Jobs" road is rumored by Brazilian media to already be producing iPhones and is expected to start churning out iPad tablets by December for sale to Brazil's growing middle class. The company, whose main listed vehicle is Hon Hai Precision Industry Co Ltd, has already hired more than 1,000 people in Jundiai, a medium-sized city an hour away from Sao Paulo, to work at a new plant.

Jundiai is planning to build a technology park and nearby towns are also looking to draw more such investment.

"We're the BRICs of Brazil," said Carmelo Paoletti Neto, a spokesman for the town, comparing the region to role played the emerging powerhouses Brazil, Russia, India and China on the global stage.

But the starting monthly wage for members of the metalworkers' union in Jundiai is about 1,058 reais ($605) -- nearly double the 2,000 yuan ($315) minimum wage Foxconn paid in China as of last October.

Those wage pressures are likely to make it hard for the iPad price to fall any time soon to a range that would give it the mass-market appeal it enjoys in the United States.

Tablet sales in Brazil will jump to 450,000 this year from 105,000-110,000 last year, according to consulting firm IDC, surging to above 1 million next year. That is significant growth -- but the 60 percent of Brazilian households without a computer won't necessarily rush out to buy tablets, cautioned Jose Martim Juacida, an analyst with the company.

"The first computer purchase is usually a desktop or a laptop, because a desktop can be shared," he said.

(Additional reporting by James Pomfret in Hong Kong; Lee Chyen Yee and Clare Jim in Taiwan; editing by Kieran Murray, Martin Howell and Andre Grenon)

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Half a trillion dollars of broken Afghan dreams (Reuters)

KABUL (Reuters) – In the decade since U.S.-led troops streamed into Afghanistan, girls have gone back to school, elections have been held, clinics have been built and shops and media empires have sprung up. There is even a property boom in Kabul.

To the nations that poured money, lives and hope into rebuilding the country, after the September 11, 2001 attacks on the United States propelled it back onto the international agenda, progress like this is proof of time and money well spent.

"We just have to continue the process, and recognize again: you don't build Rome or Kabul in a day, or a decade," U.S. Ambassador Ryan Crocker said in a recent interview, discussing improvements in education and healthcare.

But corruption is rampant, violence is spreading fast even in once-peaceful areas, and every month an average of over 200 civilians die in the conflict.

Safety fears stop people traveling to hospitals, or even to schools -- so much so that some conservative Afghans still hark back to the security and values that the Taliban offered.

And looming over any development gains is the prospect, for a country that has already endured nearly 30 years of war, of a slide back into chaos once foreign troops hand over to Afghan forces -- which they have promised to do by the end of 2014.

"The most striking thing that stands out, whatever people feel about what has happened, whether it was good or bad, is they aren't sure about their future," said Martine van Bijlert, co-director of the Afghanistan Analysts' network.

"There have of course been achievements, but it doesn't balance out the sense that everything could fall apart. And there is a strong sense that the achievements are not proportionate to all the money and focus that has been given to Afghanistan."

At stake is not just Afghanistan's future, but U.S. security. A country engulfed in civil war could easily become a refuge again for groups looking to attack America.

"HERE FOR THEIR OWN BENEFIT"

The rivers of cash that have flooded through Afghanistan have left many wondering why they still live in one of the poorest countries in the world, and questioning where it went.

"The foreigners are here for their own benefit. They came here by force and they will leave here by force," said Sayed Mujtaba Mahmoddi, a Kabul university student who says the September 11 attacks have overall been bad for his country.

"Afghanistan has developed a lot during the past years, but the development does not match the money spent. So I think the international mafia, together with the Afghan government, spent all this money improperly."

For the nearly $450 billion Congress estimates the U.S. alone has spent waging war there, every Afghan man, woman and child could have been handed $15,000. That sum is 10 years' earnings for an average Afghan, according to U.N. estimates.

Life expectancy is under 45 years, and around a quarter of children don't even live to see their fifth birthday. Even for those who survive, expectations are low.

Just one in four adults can read or write and, while unemployment is hard to measure in a rural country beset by an insurgency, it is believed to run as high as 40 percent.

The West's aid and military spending, while well-intentioned, was overwhelming for Afghanistan -- with its security problems, tiny pool of educated workers, and infrastructure devastated by years of war.

"The enormous ambition to get quick results has led us to pour in more external resources than society can absorb," said one senior Western diplomat working in Kabul.

So instead of funding growth, much of it has been diverted -- into the pockets of both the elite and insurgents -- helping to fuel a culture of rampant corruption. Everything from justice to electricity supply is tangled up in demands for bribes

Graft costs Afghans $2.5 billion a year, according to U.N. estimates; Transparency International rated it the world's third most corrupt country, behind only Myanmar and Somalia.

DEATH AND HATRED

For some, the war has spelt not just uncertainty, but catastrophe. Abdullah, from eastern Nangarhar province, dreamt of being an interpreter and got good grades until U.S. soldiers arrived at night and shot his father and elder brother.

Village elders and a local member of parliament say the men were not insurgents; now Abdullah, who was also detained briefly, works in a brick kiln to support his family.

"The U.S. troops freed me and they said that your brother and your father were innocent. What they said to me did not satisfy me. If I had the power I would behead them all," he told Reuters in the courtyard of the family's mud house.

Nationwide, the toll on civilians is getting higher. The first six months of this year were the deadliest since the overthrow of the Taliban; 368 were killed in May alone.

The vast majority of the deaths were caused by insurgents, but it is the foreign killings that most often spark outrage.

"Afghans don't expect not to be killed by the Taliban, but they do expect not to be killed by international forces," said Heather Barr, of Human Rights Watch Afghanistan.

"So even if only 20 percent of the deaths are caused by foreigners, it can still be a public relations loss."

Not only does that anger sap support for the war among voters back home, it is also helping prolong the conflict.

There is a common perception that Western forces seeking quick results have been used by commanders to settle personal scores, or by given false tips by informers seeking payment.

"They have killed and detained many innocent people; they raided and searched ordinary people's houses based on wrong intelligence," said Afghan political analyst Waheed Mojda.

"As a result people...felt that sooner or later we will get killed or detained by foreign troops so they decided to get guns and fight against the foreign troops."

A decade ago, after 9/11, many welcomed those troops for helping overthrow the Taliban.

But although the West rushed into Afghanistan with money, forces and talented officials, years of relative neglect meant they lacked one critical commodity: understanding of the complexities of the country they wanted to transform.

"The huge optimism, the sense of a clean state, the idea that you could build a country and a government from zero -- that was the biggest mistake," van Bijlert said.

(Additional reporting by Mirwais Harooni)

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