US embassy cable - 05SAOPAULO624

UNCLAS SECTION 01 OF 05 SAO PAULO 000624 
 
SIPDIS 
 
STATE FOR WHA/BSC AND EB/TPP/MTA/IPC 
STATE PASS TO USTR FOR SCRONIN and BPECK 
STATE PASS TO USPTO/OLIA 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/DDEVITO/DANDERSON/EOL SON 
NSC FOR KIM BREIER 
USDOC PASS TO NIST/SCARPENTER 
PANAMA FOR DCM 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EINV, ETRD, KIPR, EAGR, ENRG, SCUL, SOCI, PREL, PGOV, PINR, BR 
SUBJECT: AMBASSADOR VISIT TO RIO GRANDE DO SUL 
 
 
1. (U) Summary:  Ambassador, accompanied by officers from 
Consulate General Sao Paulo, visited Porto Alegre, capital 
of Brazil's southernmost state of Rio Grande do Sul, May 1- 
3.  During the visit, Ambassador met with the governor and 
the mayor; toured the modern General Motors and Dell 
Computers factories; met with the local American Chamber of 
Commerce and the state industrial association; gave an 
interview to the largest local media group; gave a speech on 
labor issues at the Liberty Forum; met the leadership of the 
Pontifical Catholic University and toured their impressive 
technological center, where companies like Microsoft, Dell, 
and Hewlett Packard have operations; visited the Binational 
Cultural Center and the U.S. Consular Agent; and, toured 
several of the city's museums and the harbor. The trip 
offered a wonderful opportunity to highlight the very 
substantial engagement in so many areas between the U.S. and 
Rio Grande do Sul.  End Summary. 
 
Rio Grande do Sul:  Land of the Gauchos 
--------------------------------------- 
 
2. (U) Rio Grande do Sul is Brazil's dynamic southernmost 
state, with a population of 10.4 million and an area of 
281,000 square kilometers.  The "guachos," as the state's 
residents call themselves, are largely of German and Italian 
descent and have among the highest per capita GDP  (USD 
4,046 in 2003) and literacy rates in the country.  The 
state's diversified economy, with a 2003 GDP of USD 42.5 
billion, is Brazil's fourth largest.  The state produces 
13.4 percent of national agriculture, especially rice (48 
percent), tobacco (48 percent), grapes (54 percent), and 
wheat (30 percent).  It is also the third largest soybean 
producing state, and the fifth largest in number of cattle. 
The industrial sector (second in the country in 2003) 
produces everything from shoes to electrical equipment, 
vehicles, agricultural machinery, petrochemicals, and 
computers. 
 
3. (U) A number of U.S. companies operate in Rio Grande do 
Sul, including General Motors, Dell Computers, International 
Engines (exporting to South Africa), John Deere, and Massey 
Ferguson (tractors).  Rio Grande do Sul ranked second in 
exports (USD 8 billion, 11 percent of national exports in 
2003), with 23.5 percent going to the U.S., 10 percent to 
neighboring Argentina, seven percent to China, and three 
percent each to the U.K, Germany, and Chile.  Main exports 
are shoes, computers, tobacco, machinery, meat, and 
soybeans. 
 
4. (SBU) Politically, the gauchos have a voice in the Lula 
Administration, with four cabinet ministers hailing from the 
state, though the gaucho PT has tended to be more leftist 
and less influential within the Administration than 
President Lula's more moderate PT faction (Articulacao). 
 
General Motors on a Roll 
------------------------ 
 
5. (U) The first official stop on the visit was to the 
impressive General Motors (GM) plant in Gravatai, 32 
kilometers outside Porto Alegre, part of an automotive 
assembly industrial park designed and built to produce GM's 
successful economy car, the Celta.  17 parts suppliers (some 
of them American) helped design the complex, share the joint 
expenses of operation, and operate their own factories.  The 
USD 700 million investment (USD 350 million by GM, USD 200 
million by the suppliers, and USD 150 million by the state 
government) began production in January 2000 and employs 
3,500 workers (1,600 by GM, 1900 by the suppliers).  The 
unionized workers have an average take home-pay of about USD 
400 per month and receive subsidized meals, transportation, 
and medical service. 
 
6. (U) Production costs are kept down by using just-in-time 
production techniques and limiting model options (only 120 
build combinations, versus the typical plant's 5,000-7,000 
combinations), allowing a retail price for the Celta of 
21,000-25,000 reals (USD 8,400 to 10,000).  In 2004, the 
plant produced 136,000 cars, with about ten percent of 
production exported to Argentina, Uruguay, Paraguay, and 
Central America.  GM executives said the company will invest 
USD 240 million over the next two years to expand production 
to 250,000 cars a year and boost exports to 40 percent.  The 
Celta will soon be offered in a flex-fuel mode (using either 
gasoline or ethanol).  (Comment: A similar plant planned by 
Ford in the late 1990s was held up by the then-PT state 
governor, with the resultant loss of the plant and jobs to 
Bahia state.  GM's other operations in Brazil are reportedly 
doing less well, with talk of possible future layoffs at 
other plants.  End Comment). 
 
Dell Computer's Gray Future 
--------------------------- 
 
7. (SBU)  While Rio Grande do Sul's economic outlook is 
mostly bright, a visit to Dell Computer's factory in 
Eldorado do Sul, just outside Porto Alegre, provided a 
cautionary tale of how investment can be hurt by lack of 
government action against illegality.  The rented facility, 
which opened in November 1999 and was a USD two million 
investment, produces about 400,000 personal computers (PCs, 
retailing in Brazil for USD 500-600), servers, laptops, 
projectors, and peripherals a year.  It is Dell's only 
manufacturing facility in Latin America.  About 62 percent 
of production is for the Brazilian market, with the rest 
exported to the rest of Latin America.  The plant directly 
employs 700 workers, with an additional 600 employed as 
service contractors (including a call service center in 
Portuguese). 
 
8. (SBU) Although Dell worldwide is doing quite well, Dell 
executives lamented the poor outlook for the company in 
Brazil, noting that a planned move to an expanded permanent 
facility had been scrapped.  The culprit is the expanding 
"gray market," or the assembly of computers using smuggled 
parts upon which no duties have been paid.  There are about 
ten major "gray" dealers who illegally import parts, then 
have dozens of small shops assembly them for retail sale at 
about USD 350 each, thus undercutting Dell and other legal 
producers (like IBM and Hewlett Packard). In five years, the 
percentage of the gray market for PCs in Brazil has 
skyrocketed from about 50 percent to 75 percent today, 
(Mexico, in contrast, is about 50 percent).  As a result, 
despite an overall steady growth in the demand for PCs and 
other products, the legal companies are left to fight over a 
shrinking market share of mainly corporate customers (only 
ten percent of Dell's PCs are sold to individuals who are 
willing to pay more for better service).  Dell executives 
said they are pushing a law that would require GOB agencies 
to purchase PCs only from companies that could prove all 
parts were purchased legitimately, emphasizing in their 
lobbying how much tax revenue is being lost by allowing the 
sale of gray products. 
 
FIERGS - Bullish Outlook 
------------------------ 
 
9. (U) Ambassador met with incoming Industrial Federation of 
the State of Rio Grande do Sul (FIERGS) President Paulo 
Tigre and its board of directors, and toured their 
impressive facility, which includes a large auditorium and 
exposition center.  Created in 1937, FIERGS has 34,000 
member companies in 111 industry sectors that collectively 
employ 580,000 workers. Rio Grande do Sul is usually the 
second largest exporter of all Brazilian states (after Sao 
Paulo), though due to a recent drought it is currently third 
after Minas Gerais.  FIERGS leadership expressed full 
support for the Free Trade Area of the Americas (FTAA) 
process, noting their state sends significant exports to the 
U.S. and commenting, "the future is FTAA, not Mercosul." 
 
A Young and Growing Amcham 
-------------------------- 
 
10. (U) Ambassador enjoyed a wide-ranging exchange of views 
on economic and political issues with leadership of the 
American Chamber of Commerce branch office in Porto Alegre 
at a breakfast hosted by President Carlos Biedermann (Price 
Waterhouse).  The Amcham chapter in Porto Alegre, affiliated 
with the Sao Paulo Amcham, was founded in 1998 and has 600 
members.  They believe Rio Grande do Sul is the state with 
the second largest number of American companies, after Sao 
Paulo. 
 
RBS Media Group 
--------------- 
 
11. (U) Ambassador had an off-the-record lunch with the 
editorial board of RBS Media Group, Latin America's largest 
regional communications group, operating in the states of 
Rio Grande do Sul and Santa Catarina.  RBS, which has 900 
reporters, owns newspaper "Zero Hora" (circulation 205,000) 
and five other newspapers, 18 television stations affiliated 
with TV Globo (and two independent stations), Gaucha Sat 
Network of 120 radio stations in ten states (and 25 
independent radio stations), and internet portal, and many 
supporting enterprises.  Ambassador subsequently granted on- 
the-record interviews for "Zero Hora" and the radio network. 
Pedro Parente, who was Chief of Staff (cabinet rank) for 
former President Fernando Henrique Cardoso (PSDB), is 
Executive Vice President of RBS.  (Note:  We have 
traditionally had excellent access and relations with the 
group.  End Note). 
 
12. (SBU) During the general conversation, Chairman of the 
Board Jayme Sirotsky, who is a former President of the World 
Association of Newspapers, recounted how he and other 
international members went to see Venezuela's President 
Chavez to register their concern about recent governmental 
restrictions on freedom of the press in Venezuela.  Although 
Chavez agreed to see them, he was quite rude and basically 
threw the visiting delegation out.  His appreciation of 
Chavez after meeting him up close:  "He's crazy."  The 
executives revealed that one of their recent radio polls 
found their listeners in the state about evenly split in 
their feelings toward the Venezuelan president (who was in 
Porto Alegre earlier in the year for the World Social 
Forum). 
 
The American Presence: Binational Center, Consular Agency 
--------------------------------------------- ------------ 
 
13. (U) Ambassador toured the Brazilian-American Cultural 
Center, founded in 1938, which teaches English and other 
courses to 8,000 students a year and provides library and 
other services to the community.  He also visited the co- 
located Consular Agency, headed by American Citizen Debra 
Godoy.  (Comment:  With the closure of the U.S. Consulate in 
1997, still a sore point with state residents and officials, 
our Consular Agent and Foreign Commercial Service FSN 
Roberto Muhlbach (located in a separate office) provide the 
only official USG presence in Porto Alegre; the Binational 
Center, though no longer officially linked to the USG, is a 
highly visible presence that has been the focal point of 
anti-American demonstrations in the past.  End Comment). 
 
Liberty Forum and PUCRS University 
---------------------------------- 
 
14. (U) Ambassador gave a well-received speech on the future 
of labor at the XVIII Liberty Forum, an international 
conference sponsored by a Brazilian organization that looks 
broadly at national problems.  Ambassador subsequently met 
with Rector Joaquim Clotet and a number of senior faculty 
and administrators (many U.S.-educated) of the Catholic 
Pontifical University of Rio Grande do Sul (PUCRS).  Founded 
in 1931, PUCRS has six campuses or centers throughout the 
state with 33,000 students in 26 schools, 24 masters 
programs, and 16 doctoral programs.  Clotet emphasized the 
close relationship PUCRS has with a number of U.S. 
universities in many fields. 
 
TECNOPUC's High Tech Success 
---------------------------- 
 
15. (U) A visit to the PUCRS Technological Park (TECNOPUC) 
showcased the wonderful potential of bringing business and 
higher learning together.  Opened in 2001 on land and 
buildings acquired from the Brazilian Army, TECNOPUC is 
Brazil's biggest and most advanced technological research 
park (beating out parks in Sao Paulo, Rio de Janeiro, and 
Recife), according to officials.  It has 1,800 employees, 
and companies provide scholarships and projects for 
students, many of whom are hired full-time after graduation. 
The park has had greatest success in information technology, 
with companies like Dell Computers, Hewlett Packard, 
Microsoft and a number of Brazilian and European 
counterparts working on international projects at the 
direction of their headquarters (like developing software 
and testing equipment), as well as doing work for Brazilian 
clients.  TECNOPUC will build a new 15-story building to 
house new tenants (Motorola will begin operations soon). 
 
16. (SBU) The park is also trying, so far less successfully, 
to attract companies in two other areas:  clean energy and 
health sciences.  Officials admitted that Brazil's chaotic 
electrical energy regime inhibits research in energy, while 
the inability to get effective patent protection has driven 
off interested parties in health science (Merck and SBKline 
were two pharmaceutical giants who recently abandoned 
preliminary plans to set up shop at TECNOPUC).  The only 
health research being conducted is for a tuberculosis drug 
paid for by the GOB. 
 
Meetings with Governor and Mayor 
-------------------------------- 
 
17. (U) Capping off a highly productive visit, Ambassador 
met with the region's political authorities.  After a formal 
reception, with national anthems and a military police honor 
guard and band, Ambassador met with Rio Grande do Sul 
Governor Germano Rigotto (PMDB) and his senior advisors. 
During the animated, wide-ranging discussion, the Governor 
explained his plans to bring shipbuilders and orange juice 
exporters to his state and discussed biodiesel and trade 
missions.  Ambassador separately paid a courtesy call on 
Porto Alegre Mayor Jose Alberto Fogaca (PPS), who 
surprisingly forged a coalition to end 16 years of Workers 
Party (PT) municipal rule in last October's local elections. 
 
Duddy