Brazil Information Technology Report Q2 2008

Market Overview The Brazilian IT market is by far the largest in Latin America and is projected to grow at a compound annual growth rate (CAGR) of 11% over the 2007-2012 period. The total value of spending on IT products and services should pass US$21bn in 2008 and US$32bn by 2012. Despite soaring sales in the PC sector in 2007, a PC penetration rate of less than 25% indicates plenty of room for growth.

The overall economic outlook is constructive for growth in IT spending, with BMI projecting that the economy should expand by approximately 4-5% on an annual basis throughout the forecast period. This growth is lifting millions into a middle class for whom computers are no longer beyond reach. Domestic demand, rather than external factors, will play an increasingly prominent role in economic expansion. The retail PC segment should continue to register strong growth due to a greater range of financing options for consumers and more flexible terms from retailers.

Government spending is an increasingly important factor, as witnessed by recent large computer tenders in areas such as education and social security. IT is now central to the government's Growth Acceleration Plan (PAC) which calls for the percentage of GDP accounted for by IT to rise to 1.5% by 2010 from the current 0.5%. However, despite a new buoyancy about corporate spending in 2007, Brazil's company IT spending is still thought to lag behind global peers.

Industry Developments In Q108, the Brazilian government unexpectedly suspended a tender to purchase 150,000 for public schools. The reason for the cancellation, which had been provisionally awarded to local PC market leader Positivo Informatica, was rumoured to be budget concerns. Despite this however, the government is continuing to spend money on large computer orders. Recently, Brazil's social security institute INSS purchased some 1558 PCs at a reported cost of around BRL1.63mn. The contact went to Positivo.

In November 2007, President da Silva announced plans to invest as much as US$23bn in the science and technology component of the government's Growth Acceleration Plan (PAC). The vast amount of money is earmarked for innovation and technology projects and must be spent between now and 2010. A key objective of the PAC is to build more digital awareness and facilitate more citizens to access computer and internet over the next few years.

Competitive Landscape Global vendors in Brazil's booming PC market reported high double-digit growth, as the grey market share of overall sales fell in 2007. The market leader remains Brazil's Positivo Informatica, with a share of close to 15%, followed by global vendors HP and Dell. Positivo reported 54.3% revenues growth in 2007, on 66.4% growth in unit sales. HP said that its total local revenues grew 35% in 2007, while Dell reported sales growth of 52% in its fiscal year 2008.

Turning to the software segment, the larger domestic ERP companies such as Datasul and Totys contest strongly for market share with global players like Microsoft, IBM and Oracle. With Microsoft dominant in the Operating Systems segment, the US giant has around 12% of total market revenues. In 2008, Microsoft has launched a partnership with mobile operator Vivo to provide Windows Live services to mobile subscribers on a subscription basis.

In the IT services segment, Brazil has seen one of the most significant recent mergers in the IT services sector in the Latin American region, with Chilean IT services giant Sonda acquiring Brazilian company Procwork for US$118mn. Procwork will contribute to Sonda's strategic strength with its SAP expertise, with the new company trading under the name Procwork Sonda.

Computer Sales BMI is projecting that Brazil's computer and accessories market will have a CAGR of at least 8% over the 2007-2012 period. Computer sales in 2007 were put at US$6.9bn, and should pass the US$11.4bn mark by 2012. Annual computer sales are currently at around 10mn units a year, and increasing at upwards of 20% a year, putting Brazil on course to become one of the biggest computer markets in the world. The main driver of growth is the retail sector, where consumers are benefiting from a greater range of financing options and more affordability. There is a sizable grey market, although evidence suggests that this has fallen in recent quarters to below 40% of unit sales.

Software Brazil's software market is estimated to have been worth US$2.9bn in 2007, and the figure for 2008 is expected to come out at more than US$3.4mn. Software CAGR for 2007-2012 is projected at around 13%. Software is beginning to gain ground in Brazil, despite high annual software piracy losses. The software sector's current high single-digit growth is being driven partly by increasingly strong demand for ERP solutions from SMEs. Software piracy was estimated to account for 60% of software in 2006, but the fall of 4% in that year was seen as encouraging.

IT Services Brazil's IT services market is estimated to have grown around 14% in 2007 to just over US$7bn, with similar or slightly higher growth expected in 2008. For a developing market, the percentage of IT market revenues generated by services is high at around 38%, which corresponds more to developed market levels. IBM has already estimated that 54% of its country revenues come from IT services, slightly more than its global average. One driver for the market will be the government's intention to develop Brazil's capabilities in the BPO area and capture a larger global market share. Brazil has an ambitious plan to become of the world's top IT outsourcing destinations by 2010. Brazil will have to overcome a number of challenges to achieve this, however.

E-Readiness The World Economic Forum ranked Brazil 53rd in the world in its most recent survey of 'degree of preparation to participate in and benefit from information and communications technology', ranking Brazil fourth in the region behind Chile, Barbados and Mexico. According to BMI estimates, the number of Brazilian internet users reached 37.7mn in 2007, representing 20% of the population. The percentage of broadband subscribers in the general population, however, was only 3.8%.