Brazil’s R&D Savviness Moves the Country into a Whole New Category

It’s not just wide and deep technical talent that drives the Brazil growth machine. There is another piece to the Brazil story that is starting to get the …

It’s not just wide and deep technical talent that drives the Brazil growth machine.

There is another piece to the Brazil story that is starting to get the respect it deserves. Just ask GE, which sees Brazil not just for the massiveness of its internal market, but the uniquely qualified talent that will help conceive the next generation of GE products. What’s all the buzz about? The fact is many major multinationals are establishing delivery centers in the country specifically to leverage the R&D talent found there. That niche offering shows a very different picture of Brazil than the traditional IT/BPO powerhouse that we normally hear about.

We spoke to Salil Dani, Everest Group Research Director of Global Sourcing, and co-author of this report, to find out more about these R&D advantages that everyone’s after in Brazil. According to him, not only does the big B in the BRIC countries have a strong R&D value proposition, but it may even beat out rivals India and China in that sector.

 

Brazil labor pool: quantity AND quality?

 

 

The major advantage that has always differentiated Brazil from its LatAm counterparts is its scalability potential. In fact, the size of the labor pool means that Brazil is really the only country in this hemisphere that can hope to compete with India or China on employee numbers. The graduate pool for engineering or IT-related fields in cities like Sao Paulo or Rio is approximately 70-80 thousand annually.

But what about the quality of technical training of those graduates, and is it at the standard that companies require for R&D projects? That’s a pertinent question for the government to consider. “If you compare Brazil to a location like Chile for very small scale, high end niche software development or tech services, it won’t be able to compete,” says Dani. “But if you’re looking at mainframe testing, database management systems or Level 3 helpdesk support – all of these require medium to large scale operations, and it’s there that Brazil has the advantage.”

This being said, the country’s association of tech companies BRASSCOM, is actively working to raise the level of technical talent by working with universities and training centers to produce graduates with skills in line with companies’ requirements.

Cost is not an issue – A lot has been made of the wage inflation and currency appreciation that Brazil has experienced in recent years. Brazil’s cost of delivery is still 25-30% cheaper than the US, but India by comparison is 70% cheaper. So for traditional IT and BPO activities where cost arbitrage is one of the main considerations, Brazil is at a disadvantage. For R&D however, cost is not the main driver. Everest Group recently did a survey of the leading captives operating out of India. “What we found is that when they select locations for new R&D projects, the two most important things they look for are skilled talent availability, and a strong tech infrastructure” says Dani.

The same goes for Brazil’s poor record in English proficiency in the workforce, which has kept many homegrown firms from focusing outwards on the international market. Since English is an issue, most of the BPO and voice services have been focused inward on the strong domestic market. For R&D and IT infrastructure services however, that challenge is negated since language is not a big constraint. There’s much more scope for Brazilian firms to serve the US market. And for companies like Google and GE that operate in Brazil, anywhere from one-third to half of their services portfolio is purely offshore work.

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Broad R&D base – So how does Brazil differ from other LatAm locations in this sector? Very simply, it’s one of the few locations that can offer not just labor scalability, but also the skills to match a broad spectrum of R&D services. “Brazil provides R&D across multiple manufacturing sectors, IT infrastructure and petro-chemicals. Other LatAm countries have very niche services, but lack a broad base of R&D functions,” says Dani. “That being said, Brazil is unable to compete in some higher end specialized sectors.”

 

Who is driving the R&D expansion?

 

 

Because of Brazil’s strong industrial base, the main companies setting up R&D operations and expanding captive centers have been the automotive manufacturers. But the main opportunity is in IT infrastructure and R&D engineering, according to Everest Group. And firms are slowly coming – GE is one company really trying to leverage the engineering capabilities in Brazil. “We’ve heard that GE is thinking about setting up a shared services center in either Rio or Sao Paulo,” says Dani. “Companies tend not to do this, since R&D is usually more regionalized. But GE wants to establish a global R&D center in Brazil – product testing, product innovation, design, etc.”

The IT side of the R&D expansion is currently still small in Brazil, and we can’t say that it will overtake some of the traditional outsourcing sectors in Brazil. But R&D is definitely a growth area for the country, and a sector which Brazil has not yet fully tapped into.

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