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Business Management

Can Brazil's problems actually fuel tech growth?

It seems like only yesterday that Brazil was in bullish mood - a football World Cup tournament, an Olympic Games to look forward to, a popular President and an optimistic economy attracting US investment. Three years later and, well, things have definitely changed. Firstly, in 2014 the economy took a beating from which it hasn’t recovered. The World Economic Forum forecast for 2016 is continued negative growth although 2017 “is expected to improve” says the WEF. And while the national football team suffered a humiliating 7-1 defeat to eventual champions Germany in 2014, the Zika virus is threatening to derail this year’s Olympic Games. To make matters worse, President Dilma Rousseff is in court fighting impeachment on accusations of corruption, while her accusers have recently been exposed for engineering her exit. When it rains, it pours.

Although not for everyone apparently. The tech sector in Brazil has been on an upward curve for some time. In fact in 2014 the European IT Observatory claimed Brazil was the fastest growing tech country in the world, ahead of India. The recession would, in most regions take its toll on most businesses and certainly hit worker morale but not in Brazil, the land of carnival and samba, surely?

“"I think the current political and economic situation if anything has put even more life into the Brazilian tech industry,” says Gustavo Caetano, CEO at SambaTech, a Belo Horizonte-based online video platform.

While Caetano doesn’t deny that Brazil may be suffering from a brain drain in technology skills, he claims that “the younger generation see tech as the way up and the way out. Tech has become the alternative to most previously sought after careers in Brazil.”

It’s a view supported by Marcos Fugita, partner at IT Advisory Management Consulting at KPMG in Brazil.

“I do not think so,” he says when asked about a potential brain drain in Brazil if things don’t improve. Fugita talks about growth in fintech and robotics but also admits that “companies are delaying initiatives” waiting to see how the economic situation will play out.

 

Surprising consequences

Certainly the political turmoil is having an effect but not entirely as you’d expect. Sandra Sinicco, CEO of GrupoCASA in Sao Paolo believes the upheaval, at least in the short term could actually be positive for the economy and the tech sector. GrupoCASA partners with Trade Horizons, Six Degrees and The Edge, and has joined forces to create the LATAM TechLink, a bridge between LatAm and the UK with the objective of maximising good tech investment opportunities between the regions.

“The new team in charge of economic policies is the best we've ever had but for now, it is temporary,” says Sinicco. “So, in the middle of all these events the IT sector has decided to move forwards and focus on maintaining [its] businesses and investing in other creative services. The major impact we are seeing is related to the smartphone companies that lost their incentives while producing in Brazil, and felt that there's now no way to produce locally. In order to keep market share they're importing their products, even with the high tax impact.”

It’s a sign of the sort of change we saw in the Far East in the 1990s where developing IT economies had to rethink their supplier relationships, forcing many businesses to look overseas to fulfil technology demand. It could signal a significant rethink for Brazil’s tech industry, one that could see it evolve into a more services-led and entrepreneurial economy. Stats from Statista bear this out, showing growth in spending on services and software over investment in hardware.

Of course it has some way to go still. As Sinicco suggests, the industry needs patience to ride out the current climate of instability.

“Almost everybody agrees that we need to face this moment with a calm outlook and trust in a better future since the market here is huge and it can be very profitable for the ones who know how to play the game here,” she says.

“In general, the impeachment process brought a relief to the IT market that seeks for clear rules to move forward. Now it is time to wait for the next two months’ worth of decisions and start planning next year’s activities because 2016 is ‘The Lost Year’.”

The sentiment and renewed optimism is understandable. What more can you do? Certainly the feeling is that the restrictions that have generally burdened business need addressing. Caetano believes that in fact the restrictions have not imposed too much on tech as they have on other industries.

“In most cases, there are very few micro-economic barriers in the tech industry,” says Caetano. “This realization has added fuel to the fire of innovation in the country. Over the last years, things are looking up and a bit of hope has been instilled in a generation already insistent on putting matters into their own hands.”

This feeds into the idea that Brazil’s future has to be built on innovation, particularly in tech. The problem then of course is investment in the ideas. Can the country continue to attract outward investment in tech?

Pérsis Duaik, founder and CEO of Duaik Entertainment in Sao Paolo, believes it will struggle, for the moment at least, as the tech industry, “heavily dependent on R&D investment … is very exposed to risk.”

Of course, the next couple of months could change that. In August we will learn the fate of Rousseff and whether or not the Olympic Games in Rio has been a success. Certainly Brazil needs a good news story. Whether it will be enough to ignite the economy and renew investment in its tech industry remains to be seen, but that’s not denting the optimism. As the traditional rules and regulations of business in Brazil are challenged (the government has typically shielded its manufacturing industry from overseas competition) are re-written, perhaps the country can start to compete more on its own merit, with the tech sector driving the new economy? The belief is that things will change regardless.

“[The] impeachment process, in this case, represented a breath of hope for economy,” adds Duaik. “Dilma [Rousseff] was unable to cope with government debt, tax collection decrease and industrial contraction. As soon as the impeachment process began, Brazilian currency value [was] raised. Hope could be felt in the air.”

Part of that hope in tech is surely education. The country has already seen massive budgetary hits to its flagship education programmes such as the National Program for Access to Technical Education and Employment (Pronatec) (focused on low-income young Brazilians) and Science without Borders, a scholarship for Brazilian students in overseas universities. This will have a long-term effect. And there have also been cuts to its start-up development programme Start-Up Brasil - not good for a country keen to invent its way out of a crisis.

Duaik says that while the tech industry “needs better education and a well prepared workforce”, it also needs better tax legislation. He admits there is a long way to go but like others he is optimistic… sort of. But it’s an optimism tinged with concern that if the new government doesn’t get its act together soon, it could undo all the good work that has come out of the country’s tech sector in the past three years.

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Marc Ambasna-Jones

Marc Ambasna-Jones is a UK-based freelance writer and media consultant and has been writing about business and technology since 1989.

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