Articles

Dell Computer's Brazilian Dance

Thunderbird Professor Roy Nelson

By Roy Nelson, Ph.D.

Executives at Dell Computer Corporation faced a setback in January 1999. They had already chosen a site in the state of Rio Grande do Sul, Brazil, as the location for Dell’s first manufacturing plant in Latin America.

Rio Grande do Sul’s Governor, Antonio Britto (1995-99), had promised the company generous incentives to lure Dell’s $108 million investment in the plant.

Yet to the Dell executives’ chagrin, Britto lost his bid for re-election. The new governor, Olivio Dutra (1999-2003) of Brazil’s socialist Partido dos Trabalhadores (PT), or Workers’ Party, took office Jan. 1, 1999, and was vehemently opposed to granting incentives to large foreign transnational corporations (TNCs). It appeared likely that he would rescind Dell’s agreement with the prior government.

Fortunately, Dell’s executives in Brazil found a way to turn what could have been an unfortunate situation into a positive outcome for both Dell and Rio Grande do Sul.

Dell’s experience in this case offers lessons for international managers as well as for governments seeking to attract foreign direct investment (FDI) to advance their own economic development. In order to understand how both Dell and the state managed to achieve this positive outcome, some additional background is useful.

Brazil was a logical place for a Dell manufacturing plant. In the late 1990s, sales of personal computers were growing faster in Latin America than anywhere else in the world. Brazil, the largest Latin American country with a population of more than 170 million, was a very attractive market.

Moreover, Brazil was a member of Mercado Comun do Sul (Mercosul), which would allow Dell to export to other countries in the customs union — Argentina, Uruguay, Paraguay, Chile and Bolivia — at zero tariffs.

Like Dell, Ford also had negotiated a generous incentives package with the previous governor for a proposed plant in Rio Grande do Sul. After Governor Dutra took office, executives at Ford attempted to renegotiate the deal with him, but to no avail. Since Ford had not yet begun construction on the manufacturing plant, it began to consider alternative locations within Brazil.

The state of Bahia emerged quickly as a viable alternative. The state government there, determined to win Ford’s investment for this state in the impoverished northeast part of Brazil, offered incentives identical to those the Britto administration had promised.

Another plus was that Bahia was part of a federal government program that gave special incentives to automobile manufacturers locating their plants in Brazil’s poorer northeastern region.

A strong point in Bahia’s favor was that Antonio Carlos Magalhães (ACM), then president of Brazil’s Senate and one of the most influential politicians in Brazil at the time, was from the state. With his enormous clout, ACM was able to push through the Congress a modification of the legislation on incentives for manufacturing automobiles in the northeast, so that Ford could still take advantage of it, even though the deadline for additional companies to do this had passed.

The federal government also approved additional incentives in order to make up for the extra costs Ford would face by putting its plant in Bahia rather than the more conveniently located Rio Grande do Sul. Brazil’s national development bank, Banco Nacional de Desenvolvimento Económico e Social (BNDES), provided a low interest loan of over $300 million to Ford after it announced it was moving to Bahia.

This was far more than BNDES had planned to give for Ford’s investment in Rio Grande do Sul. Too late, Dutra realized that Ford was now likely to pull out of Rio Grande do Sul and go to Bahia instead.

Aware of the negative political consequences that could ensue, he attempted to negotiate with the Ford executives. But Ford had already decided to withdraw from Rio Grande do Sul. The company soon signed a contract with the Bahian state government.

Ford’s departure was a political disaster for Dutra. Residents of Guaíba, the town where the plant was to have been located, were especially upset and marched in protest, carrying signs critical of the governor. Editorials and articles in the press attacked Dutra.

Naturally, Dutra’s political opponents emphasized repeatedly the negative impact the loss of jobs would have on the state. Not wanting to lose another major TNC investment, Dutra took a different approach when Dell executives approached him to renegotiate their incentives package.

Britto had promised Dell very generous incentives in order to attract its proposed $108 million plant: a 75 percent reduction in the state value-added tax for 12 years, plus a $17 million loan, to be paid back over 10 years, with a five-year grace period. Yet now, facing the loss of these incentives, Dell considered doing what Ford had done and locate its plant elsewhere.

Other states were ready and willing to receive Dell’s investment, and on highly favorable terms. One possible state was Minas Gerais, which Dell had looked at earlier. The state met Dell’s basic selection criteria and was ready to offer an incentive package similar to what the company had received in Rio Grande do Sul.

And there didn’t seem to be the same level of partisan differences, at least in regard to attracting foreign direct investment. However, in spite of their alternative options and Ford’s failed attempts to renegotiate with Dutra, local Brazilian executives working for Dell decided to approach the governor again.

Dell’s Director of Corporate Affairs in Brazil, Fernando Loureiro, devised a facesaving strategy for the governor to let Dell keep its incentives. When Loureiro and his team met with the governor, they explained that Dell was not a typical TNC. Personal computers, the products Dell produced, were highly beneficial to society. By using PCs, people could obtain access to the Internet. The Internet provided people of all social strata with access to information.

Thus, Dell’s products would actually help to create a more egalitarian social structure.

For this reason, Dell’s goals and those of the governor from the PT were actually closely aligned. While it might make sense not to offer incentives to companies such as Ford, Loureiro explained, Dell was different.

Dutra certainly did not want to lose another major investment. He had experienced the ire of the Rio Grande do Sul population firsthand after Ford decided to locate its plant in Bahia. Thus, political calculations may have influenced his actions at this point. But whether persuaded by Loureiro’s reasoning, motivated purely by political factors, or a mixture of both, Dutra decided to let Dell keep all of the original incentives they had been offered, along with a few additional minor conditions, such as Dell donating some computers to poor areas.

Dell stayed. And in many of his public speeches thereafter, Dutra used Dell as an example of the sort of company his government would like to attract to Rio Grande do Sul.

Dell achieved a positive outcome because its local executives knew Brazil well and understood the needs and concerns of the man with whom they were negotiating. Thus, they were able to find a creative way around the problem that allowed all to benefit.

For its part, despite its new approach, the Dutra government still had difficulty luring investment to the state in the years that followed Ford’s departure. Few TNCs were willing to invest in a state whose governor seemed, at the very least, to have an ambivalent attitude toward FDI, and one that could so quickly change the rules regarding foreign investment.

This may help explain why Dutra lost even the internal primary election to run as the PT candidate for governor in 2002 and why the candidate finally selected to represent the PT in that election lost to a politician from the more moderate Partido do Movimento Democrático Brasileiro (PMDB). More important, however, Rio Grande do Sul’s experience further underscores the benefits — both political and economic — that FDI can provide, and why most governments are so eager to attract investments like Dell’s manufacturing plant.

Roy C. Nelson came to Thunderbird in 1993 as a visiting assistant professor and two years later joined the staff as an assistant professor teaching international studies. In 2000, he was named an associate professor and academic director for Thunderbird’s Executive MBA Program in Sao Paulo, Brazil. He received his Ph.D. and MA from Cornell University, another MA from Yale University and his BA from Stanford University.