AMBASSADOR VISIT TO RIO GRANDE DO SUL

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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