BRAZIL'S MANAUS FREE TRADE ZONE

UNCLAS SECTION 01 OF 03 BRASILIA 001061

SIPDIS

SENSITIVE
SIPDIS

STATE PASS USTR
TREASURY FOR OASIA
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/SHUPKA
DOE FOR SLADISLAW

E.O. 12958: N/A
TAGS: ETRD EAIR EINV ECON PGOV BR
SUBJECT: BRAZIL'S MANAUS FREE TRADE ZONE


1. (SBU) Charge, Econoff and Commercial Specialist met with a number
of entities in the Manaus Free Zone May 14-16, including Whirlpool
Brazil, the Manaus Free Zone Administration (SUFRAMA),the Amazon
State Industries Federation (FIEAM) and the Center for Business
Development (CIDE),all of which recited a litany of the challenges
facing businesses operating in the midst of the Amazon. Their
largest complaint was how the Lula Administration's policies ignore
their needs and adversely affect future growth in the region,
particularly the GOB's emphasis on promoting increased South-South
trade instead of nurturing strong trade relationships with the U.S.
and Europe. Our Manaus interlocutors warned that in the future
Brazil would be disadvantaged unless the government paid greater
attention to its principal trading partners. They also highlighted
the need for continued new investment, including equipment and
training aimed to increasing human capital. All hoped that the
scheduled June 1 launch of TAM's direct flight from Manaus to Miami,
as well as the COPA flight from Manaus to Los Angeles (via Panama),
would increase Manaus' profile with international investors. The
enthusiastic welcome USG representatives received suggest there is
much to gain from greater engagement in Manaus, a thriving city of
1.8 million in the heart of Brazil's huge Amazon region. End
Summary.

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Not Business as Usual
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2. (SBU) Charge and Emboffs traveled to Manaus, capital of the State
of Amazonas and the 8th largest city in the country (population 1.8
million),to launch Mission Brazil's fifth Virtual Presence Post
(septel) May 14-16. While there, they met with government, business
and civic leaders in the area. Representatives from Whirlpool
Brazil's Manaus unit told Charge that their biggest challenge is
competition from China in the face of the appreciated Real, which
makes their air conditioners and microwaves more expensive in the
U.S. Even with the tax incentives that companies enjoy in the
Manaus Free Zone where Whirlpool and over 450 companies operate,
low-cost Chinese exports to the U.S. force Manaus (and Brazil)-based
exporters to the U.S. to become increasingly efficient. For
instance, to save on operating costs during low production seasons,
the company sends everyone in the production chain on annual leave
at the same time. Charge noted to Whirlpool representatives that if
Brazil were to reform its restrictive labor codes, such managerial
acrobatics would not be necessary.


3. (U) Members of the local AmCham told Charge that Manaus offers a
lot to the savvy business hoping to get a foothold in Latin America,
through tax incentives and relatively inexpensive labor. However,
the workforce's limited technical expertise and the fall of the
dollar have made Brazil in general less attractive. Despite recent
setbacks, most members of the AmCham continue to report increased
earnings.

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SUFRAMA Suffers
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4. (SBU) The Manaus Free Zone Administration (SUFRAMA) vociferously
expressed displeasure with the Lula administration, which it blames
for slower than expected investment growth in the region and for
preventing it from doing its job. About 450 companies currently
operate on 1.7 million hectares in the zone, which SUFRAMA plans to
expand by another 5.7 million hectares by 2010. SUFRAMA estimates
that 22 American companies are located in the free zone. As the de
facto engine of economic growth in the region and the motivating
force behind the planned ambitious expansion of the free trade zone,
and with responsibilities growing as more companies enter the zone,
the Lula administration has made the job of managing the free zone

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more challenging, SUFRAMA officials said. Despite attracting 275
new projects in 2005 (worth USD 4.68 billion) and 70 new projects
thus far in 2006 (worth USD 543 million),the zone finds itself
chiefly ignored by the current administration, losing federal
government investment dollars to Sao Paulo/Santos and even Rio. The
run-down Manaus airport handles over 51 cargo flights per week --
the third largest throughput of cargo in Brazil, behind only the two
Sao Paulo State airports of Guarulhos and Campinas -- but has had to
fight bitterly for money for upgrades. SUFRAMA has asked the
Ministry Development, Industry and Foreign Commerce (MDIC),to which
it answers directly, for more technicians in order to carry out its
expanding mandate, but has not yet received much relief, further
stretching the administrator's human resources.


5. (SBU) A strong example of the tense relationship occurred when
SUFRAMA chief economist Jose Machado interrupted his presentation to
Emboffs and become embroiled in a heated discussion with his
supervisor over the phone. He later revealed that his boss was
currently in Brasilia arguing with her immediate supervisor,
Minister of Development, Industry and Commerce Furlan, in opposition
to the rescission of R$700 million (approximately US$350 million) of
SUFRAMA funds. The loss of these funds has prompted protests from
Free Zone denizens; the prominent Free Zone firm Nokia, according to
Machado, complained bitterly to the Minister that if SUFRAMA does
not use Free Zone maintenance fees to maintain the zone's roads and
other infrastructure, then companies should not be obligated to pay
the fees.

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Wanted: Trained Workers
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6. (U) Center for Business development in the Free Zone (CIDE)
representatives said their biggest problem is overcoming the
perception that Manaus does not have the human resources to handle
increased high tech investment. Amazonas State Industrial
Federation (FIEAM) spokesmen and SUFRAMA officials stated that lack
of human resources is not just a perception but a real problem,
given the dire need for worker training on equipment that companies
use in the zone. While FIEAM administers an extensive training
program to provide Free Zone companies with trained personnel, it
acknowledges that there is continuing need for increased training on
the next generation of industrial production equipment that
companies hope to acquire.


7. (U) In addition to urging increased direct U.S. investment in the
technology sector in Manaus, FIEAM proposed that U.S. large
equipment manufacturers and technology companies develop a system
similar to that of the German company Siemens. A Siemens technician
from company headquarters is co-located at a FIEAM facility,
administering certification exams for technicians trained by FIEAM
on Siemens equipment and helping workers fulfill ongoing training
requirements. Since, according to FIEAM reps, needs are greatest for
U.S.-based computer and industrial technology, a greater American
presence is a logical solution, they said, and one which would
benefit the users of U.S. capital equipment. All interlocutors
noted a need for more software and hardware engineers and
programmers to keep up with increased automation. Even with the
free zone companies wholly sponsoring many of the technology
programs at the Federal University in Manaus, there is still a
deficit in trained hardware and software professionals. Soon,
companies would like to take a leap into micro-mechanics in the
interest increased production efficiency, but without trained
personnel, this will not be possible.

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A Coming Boom?
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8. (SBU) Despite 2005 industrial growth of almost four times the
national average (12.1% versus a Brazilian average of 3.1%),and
with a grand total of 275 new projects in 2005 worth USD 4.68
billion and 70 new projects in 2006 worth USD 543 million, Manaus
interlocutors feel the city finds itself chiefly ignored by the
current administration, losing out (in terms of federal investment
dollars) to Sao Paulo/Santos and even Rio. Representatives from
FIEAM, SUFRAMA, CIDE and the AMCHAM all argued that the Lula
Administration's strategy of concentrating its commercial promotion
efforts on South-South trade was flawed as it does not reflect the
reality that Brazil's strongest trade relationships were with the
U.S. and Europe. In the Manaus free zone alone, 34.75 percent of
exports go to the U.S. The Ministry of External Relations'
non-pragmatic, ideological foreign policy is working against the
trade zone, FIEAM representatives said. They worried that Uruguay
and Chile will soon leave Brazil behind.


9. (SBU) The one thing the current administration is getting right,
according to SUFRAMA Chief Economist Jose Machado, is its effort to
attract a semiconductor factory to Brazil. (Note: The GoB is
attempting to use its choice of a digital television standard as
negotiating leverage to obtain Japanese, Korean or European
investment in a multibillion dollar semiconductor factory.) The
states of Amazonas and Minas Gerais have large concentrations of
niobium, a primary material for the production of semiconductors --
which travel to Estonia and Asia before being re-imported into
Brazil in semi-finished form. According to SUFRAMA, Manaus currently
consumes 40 percent of the semiconductors used in Brazil and placing
a plant there would make economic sense (Comment: Based upon our
contacts in support of the ATSC digital television standard, given
the spotty investment climate in Brazil the likelihood of this
happening is low).


10. (U) Local authorities believe that the June 1 initiation of a
daily TAM flight flying directly from Manaus to Miami, along with a
new Copa Airlines flight, which allows connections through Panama to
Los Angeles, provide hope for raising Manaus' profile with potential
U.S. and Asian investors. The recently approved airport expansion
will increase cargo flight capacity by another 50 per cent,
according to authorities.

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Comment
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11. (SBU) The overwhelmingly positive response the Embassy received
from the business community in Manaus during this 3-day visit
suggests that there would be high returns for greater USG engagement
in Brazil's Amazon region, some of which lies almost as close to
Miami as it does to Sao Paulo. As the Mission looks to enhance its
coverage of the huge and under-served regions of North and
North-Eastern Brazil, we will need to build on the existing
commercial ties created by U.S. investment in Manaus in particular.
There is also fertile ground for greater public affairs engagement,
as perceptions of some of the USG policy priorities, such as trade
liberalization, can vary substantially from region to region in this
vast nation.

CHICOLA