Case - Dell’s Dilemma

in Brazil: Negotiating at
the State Level
Dr. Roy Nelson
Why Brazil?
• Size of the market
• Large (now over 200 million), growing market for
Dell computers
• High tariff barriers
• Brazil still had high tariff barriers for personal
computers
• Mercosul
• Brazil, Argentina, Uruguay, Paraguay full members
• Chile, Bolivia (and now) Peru, Colombia, Ecuador
are associate members
• Guerra Fiscal (the taxation war)
Brazilian States
Dell’s Needs: Site Selection
Criteria
• Availability of skilled labor
• Would employ about 700 people, many with
technical and/or managerial skills
• Well-developed, inexpensive telecommunications
infrastructure
• Dell took orders primarily over phone and internet
• Government incentives
• Tax incentives, government loans, and assistance
with infrastructure construction
• Government understanding of Dell’s needs
Why Rio Grande do Sul (RS)?
• RS offered the best tax incentives
• 75% reduction in ICMS tax for 12 years
• State government loan of approximately $20 million,
with 5-year grace period
• RS had an abundance of skilled workers
• RS had a number of good universities and a well-
educated population
• RS had well-developed telecommunications
infrastructure
• First state to privatize its telecom industry
• Pólo helped the state government of RS deal with
Dell in an effective way
Pros/Cons of Other States
• São Paulo
• Pros: abundance of skilled labor, principal market
for personal computers in Brazil
• Cons: No state-level (ICMS) tax incentives,
indifference of state officials
• Rio de Janeiro
• Too slow in negotiations process
• Paraná
• Relative lack of incentives, no specific focus on
high technology industries
• Minas Gerais
• incentives package almost the same, INDI very
supportive; but “rust belt industry” perception
Dell’s Options (after Dutra)
• Leave Brazil entirely
• Dell had already decided it wanted to be in Brazil,
and knew it had other options within Brazil
• Go to another state
• Minas Gerais would have been a good possibility
• Unlike Ford, Dell could not go to Bahia because the
state lacked the skilled labor pool and infrastructure
Dell needed
• Try to negotiate with Governor Dutra
• Fernando Loureiro’s idea: persuade Dutra that
Dell’s objectives were consistent with those of the
Partido dos Trabalhadores (PT)
What Happened
• Dell pursued Loureiro’s negotiating strategy
• Not wanting to lose still another investment (like Ford),
Governor Dutra allowed Dell to keep exactly the same
arrangements as before
• Dell opened its plant in Eldorado do Sul, small town near
Porto Alegre, in November 1999
• As part of its requirement to qualify for federal incentives,
Dell also opened a Software Development Center in
collaboration with Catholic University in RS in 2002
• In 2007, Dell moved its factory to São Paulo, while
keepings its headquarters and sales operations in RS
Dell’s Headquarters: Rio
Grande do Sul, Brazil
Lessons
1 Bargaining is important
• Dell received a better incentives package by playing
one state off of another

Understanding the political situation in the investment

2 location is essential
• If Dell executives had understood that Dutra could be the
next governor, they might have been better prepared to
anticipate this outcome

Understanding the needs/concerns of those with whom

3 you are negotiating can greatly improve your prospects
for success
• Dell executives were highly effective at creating a win-
win strategy tailored to the Governor’s needs