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DE RUEHSO #0071/01 0301908
ZNR UUUUU ZZH
R 301908Z JAN 07 ZDK
FM AMCONSUL SAO PAULO
TO RUEHC/SECSTATE WASHDC 6329
INFO RUEHBR/AMEMBASSY BRASILIA 7420
RHEHNSC/NSC WASHDC
RUCPDOC/USDOC WASHDC 2693
RUEHMN/AMEMBASSY MONTEVIDEO 2260
RUEHBU/AMEMBASSY BUENOS AIRES 2615
RUEHSG/AMEMBASSY SANTIAGO 1969
RUEHLP/AMEMBASSY LA PAZ 3204

UNCLAS SAO PAULO 000071 
 
SIPDIS 
 
AMCONSUL RECIFE 
AMCONSUL RIO DE JANEIRO 
AMEMBASSY ASUNCION 
DEPT OF TREASURY WASHDC 
DEPT OF LABOR WASHDC 
USDOJ WASH DC 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR WHA/BSC, WHA/EPSC, AND EB/TPP/IPE 
STATE PASS TO USTR FOR SCRONIN/MSULLIVAN 
STATE PASS EXIMBANK 
STATE PASS OPIC FOR MORONESE, RIVERA, MERVENNE 
NSC FOR FEARS 
USDOC FOR 4332/ITA/MAC/OLAC 
USDOC FOR 3134/USFCS/OIO 
USDOC ALSO PASS PTO/OLIA 
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DOL FOR ILAB 
AID/W FOR LAC/AA 
 
E.O. 12958:  N/A 
TAGS: EIND EINV EWWT EAGR ELAB KIPR ETRD ECON ECIN SOCI
BR 
SUBJECT:  RIO GRANDE DO SUL: AN ECONOMIC SNAPSHOT 
 
 
SENSITIVE BUT UNCLASSIFIED; PLEASE PROTECT ACCORDINGLY 
 
Summary 
------- 
 
¶1.  (U) Summary:  Econoff and Econ Specialist traveled recently to 
Rio Grande do Sul (RGS), the southernmost state in Brazil located 
approximately 1100 km south of Sao Paulo.  The state, which borders 
both Argentina and Uruguay, has a population of 10.3 million 
inhabitants, which represents 5.1 percent of Brazil's population. 
Covering an area of 282,000 square kilometers (about the size of 
Nevada), Rio Grande do Sul generates 8.4 percent of Brazil's GDP, or 
about USD 51 billion.  The shoe industry, the largest employer in 
this region, has been affected in recent years by Chinese 
competition, resulting in job loss, transfer of technology and 
skills to China, necessary adaption to changing consumer tastes, and 
relocation of factories to the less expensive Northeast.  However, 
because of the available skilled labor force and a concerned 
government, job opportunities have been created, such as the model 
GM automobile plant, which employs 2,000 and contributes to the 
economic welfare of the region.  End Summary. 
 
Background 
---------- 
 
¶2.  (U) We met with the Federation of Industries (FIERGS); the 
Trade, Industry and Service Providers' Association of Novo Hamburgo, 
Campo Bom and Estancia Velha (ACI); the Federal University of RGS, 
the Ministry of Development and International Affairs; the State 
Committee to Combat Piracy; and the Bi-National Center. In addition, 
we took in-depth tours of the state-of-the-art General Motors plant 
and the facilities of Rio Grande, the largest regional port.  The 
visit offered a good opportunity to see firsthand the 
industriousness of this region, the challenges facing certain 
industry sectors, and the potential for continued economic growth. 
 
 
Rio Grande do Sul: Good and Bad Economies 
----------------------------------------- 
 
¶3.  (U) Rio Grande Do Sul is Brazil's 4th largest regional economy, 
representing 8 percent of the national economy.  It has a 
diversified and comprehensive industrial base, combined with good 
infrastructure and skilled human resources.  Micro and small 
companies are responsible for 46 percent of the state's workforce, 
medium companies for 15 percent, and large companies for 39 percent. 
 The production, commercialization, export and innovation networks 
are promoted by the state government and its partners, providing 
expert technical consultancy services and management training. 
During a meeting with Luis Roberto Ponte, the Head of the Department 
of Development and International Affairs, he highlighted one of the 
state's newer development programs: the "Exporters Information 
Center," a one-stop shop which offers a wealth of information, 
orientation, and technical assistance for the future international 
exporter. 
 
¶4.  (U) Accounting for nearly 20 percent of Brazil's total grain 
production, Rio Grande do Sul has suffered from a drought since 
2004, which severely damaged the soy crops, causing tremendous 
losses in the agricultural sector (estimated  at up to 70 percent). 
Fortunately, this year forecasts show much improved grain crops with 
good current sales.  The relatively appreciated level of the 
real-dollar exchange rate has also been a major factor hurting the 
competitiveness of RGS products, particularly the shoe and 
agricultural equipment industries, both export-reliant sectors.  The 
state suffered negative growth in industrial production from January 
2005 until late 2006, affecting the tobacco and shoe industries and 
the machinery sector. Also, as a result of the state's heavy 
indebtedness, there has been little recent investment in 
infrastructure, with the exception of the major port and highway 
expansion projects. 
 
Mercosul 
-------- 
 
¶5.  (U) Rio Grande do Sul, which borders both Uruguay and Argentina, 
has had good relations with its Mercosul neighbors and continues to 
maintain significant commercial activity.  Rio Grande is the major 
port linking Brazil with Mercosul, and is fast becoming known as the 
"Mercosul port" according to Rio Grande administrators.  Federal 
University of RGS Economics Professor Flavio Fligenspan believes 
that if RGS maintains the good economic and business relations with 
Mercosul countries, as well as an integrated economy, this will be 
very beneficial to the state.  He sees two immediate objectives for 
good commercial relations:  1) greater promotion of RGS products for 
export, first to the global market and secondarily to Mercosul; and 
2) encouraging stabilization of neighboring Mercosul states, which 
will result in a better regional economic environment and larger 
profits for Brazil as the largest partner.  If, in the process of 
pursuing these goals, progress could be made in the areas of 
infrastructure and logistics, this would generate jobs for the 
unemployed, which ultimately would contribute towards combating 
Mercosul's present-day instability. 
 
FIERGS:  A View from the Industrial Sector 
------------------------------------------ 
 
¶6.  (U) At the Federation of Industries for the State of Rio Grande 
do Sul (FIERGS), Kurt Ziegler, Vice President, and Alexandre 
Barbosa, Director of International Negotiations & Trade Remedies, 
provided statistical information on the many regional industries. 
FIERGS, founded in 1930; has 108 affiliated associations with more 
than 2,000 associates, representing 41,000 factories that  directly 
employ more than 600,000 workers.  Located 20 minutes from downtown 
Porto Alegre in an industrial complex, FIERGS houses an active 
Economic Department and also works closely with the Economics and 
Statistics Foundation (FEE), one of the major national economic 
research institutes.  They maintain up-to-date information and 
supplied us with their most recent publication of social and 
economic indicators.   According to FIERGS, Rio Grande do Sul is 
among the top three Brazilian states exporting to the U.S.: USD 9.8 
billion in goods in 2004, compared to USD 10 billion for Minas 
Gerais and USD 32 billion for Sao Paulo. Agricultural products 
account for 15 percent of all exports. 
 
The Shoe Industry:  Suffering from Chinese competition 
--------------------------------------------- --------- 
 
¶7. (U) The largest industry in this region is the shoe industry 
(including leather and fur), exporting mostly women's leather shoes 
to the U.S. and employing 155,000 workers in this very labor 
intensive activity.  The shoe industry is the largest employer in 
RGS (mainly women), and double the amount employed in any other 
state industry.  Most shoe companies are clustered in the Rio do 
Sinos Valley, located in the central portion of the state. 
Recently, this industry has suffered due to strong competition from 
China, with exports falling every year since 2003.  Several 
companies have already relocated their shoe manufacturing activities 
to the Northeast, where labor costs are lower.  Intriguingly, many 
skilled shoe technicians have been lured to China to train Chinese 
labor in the shoe trade.  Moreover, the Chinese shoe industry has 
begun to purchase primary leather from Brazil, which is exported to 
China and then used to make shoes that are exported to the U.S. in 
direct competition with Brazilian shoe manufacturers. 
 
¶8. (U)  In a meeting with administrators of the Trade, Industry and 
Service Providers' Association of Novo Hamburgo, Campo Bom and 
Estancia (ACI), a regional FIERGS-like organization located 45 km 
north of Porto Alegre, ACI representatives stated that approximately 
1,000 Brazilians from RGS are presently working in the shoe business 
in China, actually teaching the trade.  They further commented that 
the combination of the EU restriction on shoes from China and the 
weak labor laws in China, which allow for 29 12-14 hour workdays per 
month with minimum benefits, creates a work production pattern with 
which Brazil cannot compete.  Chinese shoe exports previously 
destined for Europe but now blocked by this restriction, are instead 
shipped to other markets, including the U.S., thus competing 
directly with Brazilian shoes.  ACI estimates that sales of 23 
million pairs of shoes were lost to China in 2003-4, and 10 million 
in 2005-6.  On the positive side, Brazil can react more quickly to 
changes in female consumer tastes and offer variety in shoe styles. 
However, the inability to maintain jobs for those presently working 
and create jobs for all those entering the job market has 
contributed to the rising unemployment rate in the shoe industry. 
 
¶9.  (U) A visit to the Zenglein Shoe Factory in Novo Hamburgo, known 
as the "shoe capital," gave a first hand view of the manufacturing 
process and its importance to the community.  This company has been 
in existence for over 40 years, and has two factories that employ 
approximately 1800 workers.  It is highly intensive manual labor, 
with each shoe passing through 20 pairs of hands in the 
manufacturing process.  Zenglein is very fortunate, as they have 
substantial contracts with WalMart, Payless, American Eagle and 
Naturalizer Shoes.  The General Manager was cautiously optimistic, 
as they have a guaranteed buyer with these contracts; however, he 
was also very concerned about the strong Chinese shoe industry, 
which produces cheaper products at a faster pace, and in many cases 
is producing cheap knockoffs of original brands at a fraction of the 
cost. 
 
Other Industries & Their Concerns 
--------------------------------- 
 
¶10.  (U) The manufacture of transport vehicles (including auto parts 
and agricultural machinery) is the second largest industry in RGS, 
supplying 60 percent of Brazil's transport needs.  Other important 
industries are:  chemical products (third nationally); agriculture 
(especially soybean); precious stones; tobacco; cutlery; chicken 
(mostly exported to the Middle East); metallurgy; arms and 
munitions, and furniture.   Some of the major companies represented 
in this region are Universal Leaf and Phillip Morris, General 
Motors, John Deere, International Motors, Gerdau (steel), and Marco 
Polo (transportation).  Major export partners in order of importance 
are the United States, Europe, and South America.  The Port of Rio 
Grande is located three hours south of the capital Porto Alegre and 
is considered the major Brazilian shipping port to the Mercosul 
countries. 
 
¶11.  (U) Both FIERGS representatives voiced three major concerns 
that affect industry in the region:  1) the 39 percent of GDP tax 
burden (federal, state, and local taxes combined), especially in 
light of the lack of services received in return; 2) the 
appreciation of the Real, which has recently pushed over 1,000 RGS 
companies out of the export market; and, 3) interest rates, "the 
highest on the planet," as Brazilians often complain.  The solutions 
are very complex, the industrialists stated, and the increased 
spending of the Lula government only adds to the difficulty in 
resolving these issues and maintaining production. 
 
Rio Grande Port:  Largest in Southern Brazil 
-------------------------------------------- 
 
¶12.  (U) The Rio Grande Port Facility is the largest port in 
southern Brazil, and the second-largest in terms of movement. 
Thirty-five percent of all exports are to the U.S., with the port 
being the second largest container exporter to the U.S. after the 
port of Santos (Latin America's largest) in Sao Paulo state.  Rio 
Grande employs 650 people in the terminal, not including the 
stevedores loading and unloading cargo.  According to Port Director 
Vidal Aureo Mendonca, it takes approximately 12 hours to receive and 
ship products out of the port by containers, provided 48 hours 
notice of the contents of the shipment is received.  Also of note is 
the high level of security with an electronic surveillance system, 
substantially reducing theft from containers.  Assisting in security 
efforts is a specially trained maritime police force, equipped with 
fast boats.  The port gave every appearance of being a clean, 
efficient, and well-run facility. 
 
¶13.  (U) In a 2004 study of 374 companies done by the Center of 
Logistical Studies at the Federal University of Rio de Janeiro 
(UFRJ), the Rio Grande Port facility was found to be the most 
efficient in Brazil.  Mendonca attributed this efficiency to the 
following factors:  1) no employee strikes, 2) good security, 3) 
efficient operation, 4) good depth of the channel, 5) great 
expansion potential, and, 6) no piracy. Currently, USD 20 million is 
being invested in improvements to the port, in order to add another 
berth that will be able to handle three ships at the same time, and 
to add two more cranes for container movement.  After 2008, other 
projects are planned for dock and equipment improvement.  This port 
is increasingly becoming the feeder port for Mercosul, and is the 
major importer of GM and Toyota cars from Argentina.  In 2004, there 
was a 15 percent rise in exports over 2003, in the amount of USD 2 
billion.  Approximately 98 percent of all exports from RGS go out 
through the Rio Grande port.  Major products exported from the port 
are:  1) shoes; 2) tobacco; 3) furniture, and 4) chicken.  The one 
problematic factor for the port is a 54 km stretch of inadequate 
highway connecting the port to the rest of the state.  However, a 
large portion of the products arrive via barge on the canal from 
Porto Alegre (1,000 containers per month) or by train (500-600 
containers per month), and there are road construction projects in 
progress to improve the bottleneck in the highway system. 
 
General Motors Facility:  A Model Complex 
----------------------------------------- 
 
¶14.  (U) The General Motors Gravatai factory is located 
approximately 45 km from Porto Alegre and is one of the most 
advanced GM operations in the world, housing 4,000 employees in the 
complex.  GM has 2,000 employees, and the 17 suppliers located on 
the complex account for the rest.  The factory builds 40 cars per 
hour, or 115 vehicles per man per year.  The Gravatai facility is 
the first in internet sales in the world for GM.  Built in 2000, 
this site was chosen for its proximity to the port, the road system 
linking it to the port, the lower construction cost, and the lower 
labor cost as compared to Sao Paulo.  According to Roberto Tinoco, 
Director of Operations, and Marco Antonio Kraemer, Director of 
Government Relations, GM has very good laborers who are well trained 
and completely understand the "lean manufacturing" philosophy of GM 
that makes this factory a model for GM.  Total GM investment since 
2000 is USD 1 billion. In addition, GM has purchased raw materials, 
goods, and services in the equivalent of USD 1.5 billion from 486 
suppliers in RGS. 
 
¶15.  (U) In October 2007, the Gravatai plant began production of the 
fuel-efficient flexcar Prisma for the national market.  Currently 
four out of 10 GM cars produced in Brazil come from the Gravatai 
plant.  GM Brazil president Ray Young, in the "Gaucho Project" 
celebration launching the Prisma, anticipates that the Gravatai 
facility will soon produce 50 percent of all GM's Brazilian 
production in the future.  With the increased production at the 
Gravatai facility, there will be increased activity in Rio Grande 
port for the shipment of cars.  In order to accommodate the 
increased transport demand, GM will expand its use of barge 
transportation from the factory to the port, and has also entered 
into negotiations with state and federal authorities to assist with 
funding to enlarge or replace the present highway.  Rio Grande port 
also plans to increase the present capacity for GM car storage, and 
will have an exclusive space for these vehicles.  The port handles 
approximately 2,000 GM cars monthly, with 10 percent exported to 
Uruguay and Panama and 90 percent imported from Australia and 
Argentina. 
 
¶16.  (U) GM has a strong corporate social responsibility commitment 
(CSR) to the region.  As part of the "Gaucho Project" (Note: 
"Gaucho" refers to residents of RGS.  End Note.), GM will strengthen 
its existing CSR programs and will further integrate GM positively 
into the life of the community.  Other CSR activities that the 
Gravatai GM facility sponsors are: 1) a Suppliers Fair, which 
prepares potential suppliers to enter the market with a realistic 
chance of succeeding; and 2) "Projeto Foco," a partnership with the 
government and the local metallurgy workers' union that trains young 
people in engineering and technological professions in the 
automotive industry.  As of May 2006, 352 students have participated 
in this program. 
 
IPR Issues in Rio Grande do Sul 
------------------------------- 
 
¶17.  (U) Rio Grande do Sul formed one of the first state committees 
to combat piracy, composed of various state offices, including the 
Attorney General's Office, the Regional Office of the Federal 
Police, the Justice Department, and the Ministry of Development and 
International Affairs.  According to Assistant District Attorney 
Mauro Henrique Renner, one of the major difficulties in combating 
piracy is making others aware that a problem actually does exist. 
He sees the need for continued education for partnerships between 
the municipalities and the private sector as well.  RGS has a 
specialized unit for combating IPR crime, but the state has limited 
funds to fully support them.  Presently, the committee is looking 
for a building located close to the airport where this unit can be 
placed and is currently searching for a private partner to assist 
with the funding, as the state government has limited funds.  Even 
though authorities have been successful in deterring some piracy, 
Renner is aware that until they have a definite physical space and 
funding to support the anti-piracy unit, there will not be a 
sustained, structured fight against piracy activities in the state. 
The port of Montevideo and Foz de Iguacu in the tri-border area are 
major points of entry for contraband goods originating in China and 
Paraguay. 
 
¶18.  (U) Renner recognized that there needs to be legislative change 
to strengthen the government's anti-piracy activities. 
Specifically, the committee is working to obtain classification of 
piracy as a more serious crime, in the same category as organized 
crime, money laundering, and possession and use of arms.  At 
present, legislation allows the counterfeiter to merely pay a fine 
and they are free without losing any of their valuable merchandise. 
For example, vehicles found carrying contraband goods in their 
storage compartments may prefer to accept the charges and pay a fine 
of USD 300, keep the merchandise, and continue on their way.  The 
potential sale value of their merchandise is much greater than the 
imposed fine, making it more profitable not to contest the charges. 
 
 
¶19.  (U) In 2003, the Trade, Industry and Service Providers' 
Association (ACI) formed a very active anti-piracy committee 
specializing in footwear.  They have approached piracy from a law 
enforcement/educational perspective, with the participation of local 
and federal authorities.  They have 14 brands represented on their 
committee and have recently been successful in the incarceration of 
nine people and the closure of seven establishments involved in 
piracy.  They are approaching piracy as a crime against the 
community, causing a loss of jobs in an employment market that is 
already suffering from increasing unemployment. As part of their 
educational message, they have prepared an information pamphlet 
addressing the effect of piracy on the labor market. 
 
Comment 
------- 
 
¶20. (U) Comment: Rio Grande do Sul is a state with tremendous 
potential.  It has Brazil's fourth largest state economy, produces a 
diversified mix of products, has strong export capability with one 
of the largest and most efficient ports, and has a hardworking, 
educated workforce poised to enter new industries.  In recent years, 
exchange rate appreciation has affected its export economy, and a 
three-year drought has severely damaged its grain crops. 
Nevertheless, the state continues to forge ahead by 1) partnering 
with private companies on infrastructure projects, such as the USD 2 
billion expansion project in Rio Grande Port; 2) investing in their 
universities to train their future workforce (Note: 98 percent of 
the state's school-age population is in school, the best ranking in 
Brazil, and RGS has one of the most comprehensive technical and 
professional training networks in Brazil, covering every region of 
the state); and 3) creating investment incentives for large 
companies such as GM, providing jobs, stimulating other businesses, 
and generating income for the community.  This state illustrates one 
direction Brazil's economy could move in; unfortunately, too few 
others are in a position to follow its example.  End comment. 
 
¶21. (U) This cable was coordinated with Embassy Brasilia. 
 
McMullen