Brazil goes nuts for iPhone as Apple, Foxconn get local

By Jonny Evans

Apple [AAPL] is set for a new Latin American growth story, starting in the insanely fast-growing smartphone market of Brazil, where manufacturing partner, Foxconn, has opened up iPhone production, with iPad production set to begin next year. Demand for Apple's iPhone in Brazil is so high that moving manufacturing there may make the country into Apple's new China. We're talking big growth potential.

Apple cracks Brazil

Brazil-based Apple-focused website, MacMagazine.br, has published images it claims depict an 8GB iPhone 4 as produced by Foxconn. It's a nice story, but even if the image is faked, it's not long until Apple does sell Brazil-made devices there.

(The back of the handset contains the words "Brazilian Industry" in Portuguese, as well as the stamp of approval from ANATEL, the country's telecommunications agency, the report claims.)

Foxconn, which manufactures iPhones, iPads, iPods and other devices for Apple, is making a major (c$12 billion) investment in Brazil plant.

There's been a rash of recent reports claiming Apple's iPad sales numbers have been less than anticipated, but these may turn out unfounded.

"According to JP Morgan analysts Mark Moskowitz and Gokul Hariharan, Apple lowered fourth-quarter iPad orders 25%, the first time there has been a production decrease. This decrease has led some to speculate that the move is more than a response to lower demand, or a wish to operate with reduced inventory," says Bloomberg.

This may not mean what it seems -- production could perhaps have shifted to Brazil. In September reports claimed the new plant was ready to produce Apple devices, with these set to start shipping in December.

Will Brazil be Apple's new China?

"At first many doubted, but it will be the first time that the [Apple] will produce iPads outside Chinese territory," said Brazil's Minister of Science and Technology Aolizio Mercadante at a hearing with the country's Commission of Economic Affairs at the time. "We are taking a big step for digital inclusion in the country."

With a population of 203.4 million, a booming service industry and a GDP of $2.172 trillion, Brazil is one of the stronger Latin American economies. There's also a smartphone revolution taking place there -- a recent Nielsen survey showed a 165 percent increase in smartphone sales year-on-year.

"As an average, 41 percent of the respondents use their phones to access the Internet. The percentage rises to 83 percent among smartphone owners. The most active users are iPhone owners; they go online more often, share more content and buy more products from e-commerce merchants." (Source: TheNextWeb)

Brazil currently puts a hefty fee on imported goods. Despite these (which reportedly can triple prices) iPhone already accounts for an estimated 10 percent of local smartphone sales.

These duties apply across all smartphones sold in the country which are not manufactured within its borders. By manufacturing iPhones there, Apple should be able to deliver iPhones at prices competitors can't match, scopping an even heftier slice of Brazil's burgeoning smartphone business. Indeed, the impact of the move could create a similar level of success to that Apple has seen in China.

Apple's growth story

"There are some countries in the world that have protectionalist type of structures where the prices of the goods are extremely high if there's not local content involved. And so we'll assess each of those and decide what's in our best interest," said Apple CEO, Tim Cook.

China has already become Apple's biggest iPhone market and seems set to become the company's biggest international market as soon as next year. Apple is the place most Chinese young professionals want to work at.

"We purposely put the bulk of our emphasis from an emerging market point of view on China to really learn, and then we're going to take that learning to other markets," said Cook last April.

And China has delivered, he said during the most recent Apple financial call: "It [China] delivered $4.5 billion of our revenue for the current quarter, and that's up almost 4x or about 270 per cent year-over-year. That brought the total revenue for the fiscal year to over $13 billion. And to further put that in context, a year ago in fiscal year '10, we were just right above $3 billion. So it is growing at a feverish pace."

Apple in conjunction with its partner, Foxconn, now intends implementing its lessons in Latin America. Is it possible it also intends using Brazil as a hub for North American device production? I can't tell, but if there's a margin improvement through reduced transportation costs, then surely any kind of price improvement should be good for Apple users.

Efficiency is the new rock 'n' roll

This isn't the only major recent investment Apple is involved in. It has also reportedly taken a major c.$1 billion slice in LCD manufacturing plants belonging to Sharp and Toshiba as it seeks to hurt its new enemy, Samsung.

It would be foolish to underestimate the importance of these emerging markets to Apple under Tim Cook. During the most recent financial call, he put the cards on the table.

"We're also placing additional focus on some other areas that have shown great promise over this fiscal year such as Brazil. Brazil was up 118% year-over-year and went over the $900 million mark. Russia is also beginning to look more and more promising. As I've mentioned on the last call, the Middle East we believe has significant opportunities. So there's several of these markets that historically Apple has not been strong and that the iPhone has really opened up..."

Investing in new futures

Expect further news. Apple has previously said it plans to spend $8 billion on capital expenditures over the next year, up 73 percent from the $4.6 billion it spend during its 2011 fiscal year. $900 million of this will be spent on retail stores, some on the company's new campus, more on iCloud and some on, "product tooling and manufacturing process equipment, and corporate facilities and infrastructure, including information systems hardware, software and enhancements."

As Cook focuses on operational efficiency and business growth and development, Apple's product development teams are already putting together the next wave of devices to further stimulate these and new markets. Next year seems set to see the iPhone 5, iPad 3HD and Apple TV, alongside an expansion in the configurations of ultramobile MacBook Air offerings.

What do you expect from Apple in 2012?

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