With eye on taxes, Apple adds Brazil to supply chain

From a supply chain standpoint, it makes little sense to operate in Brazil, despite it being the world’s fifth most populous nation and Latin America’s biggest market. Brazil lacks cheap or abundant labor; it scores low on rankings for ease of doing business; its transportation systems are overcrowded; and its tax regime punishes importers.

But underscoring how even the last holdouts to Brazil are casting aside supply chain cares, Apple Inc. will open its first retail store next month in Latin America in Rio de Janeiro. A world leader in supply chain management, Apple has long avoided Brazil and instead sourced its laborers from China and its technicians from California while allowing third party companies to sell iPhones and Macs in Brazil.

But Brazil has two things that finally forced Apple, like many others, to open a domestic manufacturing plant and and now a retail store there: a large and growing consumer base and high import tariffs.

“The import tariffs pretty much mean you have to manufacture inside Brazil,” Dale Rogers, a professor of supply chain management at Rutgers Business School, tells Monitor Global Outlook. “Apple knows that it’s an important place to grow even though the rules of operating are difficult.”

Unlike China, which wooed foreign direct investment with promises of abundant cheap labor and reliable low-cost infrastructure, Brazil has sought to attract investment via heavy taxes.

“Brazil has refused to open up,” continues Prof. Rogers, who also consults at the Instituto de Logística e Supply Chain in Rio de Janeiro. “It forces companies like Apple to put operations inside of Brazil when otherwise they would not. You know that if you want to sell in Brazil, because of laws, you have to manufacture there.”

The Cupertino, Calif.-based tech giant is reportedly finishing construction of its retail store now, just in time to benefit from an influx of tourists for the 2014 World Cup and 2016 Olympics. Apple started setting up the supply chain logistics two years ago when it began manufacturing products with Taiwanese manufacturer Foxconn at a factory in São Paulo state.

“The Brazilian government is providing generous incentives to Apple-Foxconn to manufacture locally,” says Andres Ramirez, an associate professor of finance at Bryant University. He adds that Apple is also incentivized to reinvest abroad because of high repatriation taxes to the United States.

Considered one of the world’s most efficient operators of global supply chains, Apple has been ranked the world’s top supply chain provider for six consecutive years by research firm Gartner.

“I have worked on their supply chain at different times, and they were always open to innovation and new ideas,” says Morris Cohen, a professor of operations and information management at the University of Pennsylvania’s Wharton School, who has done consulting work for Apple. “Apple looks to produce in the most cost-effective way. They’ve always been open to advanced ideas in supply chain management.”

Analysts, though, warn against concluding that Apple is entering Brazil because the nation is finally able to add value to the supply chain.

“I don’t see Apple’s decision to open a retail store in Rio as a sign that Brazil is successfully moving up the value-added chain in manufacturing,” says Eurasia Group analyst Jefferson Finch. Rather, he says, “it probably reflects the recognition that there is sizable consumer population that consumes and uses Apple products in Brazil, and it may also be an effort to ramp up competition with Android-based phones which are widely used.”