International Business : Industry Giants Circling Brazil’s Telecommunications Market

ISSUE: For decades, telecommunications industries in Latin America have been like cozy, private clubs where a handful of privileged companies rang up enviable profits behind solid protectionist walls.

But times have changed. From Mexico City to Santiago, governments are shedding barriers and getting wired for competition.

Brazil, Latin America’s largest economy, has been slow off the block.

But government control over telecommunications has begun to relax; a constitutional revision now under consideration may end Brasilia’s longstanding monopoly in telecommunications.

The world’s telecommunication giants have been watching closely and are poised to become players in what is destined to be the region’s biggest market.

BACKGROUND: Since the 1950s, the Brazilian government has kept a tight rein on communications through the state holding company Telebras.

A handful of foreign companies known as the “four sisters”--NEC of Japan, Siemens of Germany, Ericsson of Sweden and Alcatel of France--came to Brazil early on, but under restraints. They were forced to take local partners and open local equipment plants. Telebras is their only authorized client.

The 1988 constitution affirmed the government monopoly as a keystone of Brazilian sovereignty.

But that has proved pricey: The government’s coffers are all but bare, and there is no money to invest in the upkeep of existing infrastructure, much less in expansion.

Today, the system is showing the strain. Transmission lines and microwave towers are sorely in need of repair. Yet, recession and the artificially low utility rates (held down to slow inflation) have caused Telebras revenues to plunge in recent years.

Brazil ranks a lowly 37th place worldwide in the number of phones relative to population. At 7.2 phones per 100 people, it is behind Mexico, Argentina, Costa Rica and Chile. An estimated 10 million Brazilians want a phone but cannot get one because Telebras cannot meet demand despite having a large work force.

Those who have phones aren’t much better off. Only 76 of each 100 attempted calls are completed--compared to 94 per 100 in developed countries, according to a recent study by the Brazilian Assn. of Electrical and Electronic Industries.

Telebras recently announced plans to increase investment to $3.2 billion this year, but that is only about half what Brazil needs to get its wires uncrossed.

OUTLOOK: Despite the problems, experts in and out of Brazil agree that this country of 146 million people is a communications frontier. The constitutional monopoly notwithstanding, industry observers say that privatization is inevitable.

Short of cash and new technology, Telebras is contracting for equipment and services. It recently hired a Japanese and Italian firm to begin building a fiber-optics network. The first leg of that network, the vital Rio-Sao Paulo corridor, was inaugurated in September.

The real plum is the mobile telephone market. Among the foreign and national companies that have been attracted to it are Motorola, AT&T;, Northern Telecom of the United States, Ericsson and NEC. They have been in a furious struggle over this market.

By 1995, Brazil expects to have 600,000 cellular phones in operation, 1.5 million by 2000. Late last year--in a decision still hotly contested by Ericsson and other competitors--NEC won the concession to supply cellular phones to the vast Sao Paulo market.

STRATEGY: Investors are keeping a keen eye on the Brazilian Congress as it revises the constitution.

While the outcome of the constitutional change is uncertain, analysts advise that businesses had best not dally.

The door to Brazil’s communications market is ajar, and giants of the industry are jockeying for position now; those who don’t find a foothold soon may find themselves shut out of a lucrative market.