Does Brazil have what it takes to become a semiconductor powerhouse?

Semiconductors have become one of the most critical elements of the so-called technological cold war, and their importance has only grown on the back of generative AI and the need for more powerful processing capabilities.

Brazil has a large semiconductor sector, with several companies mainly focused on the encapsulation and testing part of the production chain. After a poor 2023, the sector’s revenues are growing again and set to return this year to a level of around US$1 billion.

In this interview, Rogério Nunes, president of Brazilian semiconductor association Abisemi, talks with BNamericas about the overall sector outlook, AI, nearshoring and the US Chips Act.

BNamericas: What are the expectations for the market this year?

Nunes: We have good prospects for the semiconductor sector this year in Brazil, as well as worldwide. Things have improved a lot. We had a pretty bad year in 2023.

Semiconductors include various segments and stages, as you know. Software, equipment, materials, development and manufacturing. The latter is divided into two phases. The wafer part, and encapsulation and testing, which is what we have in Brazil.

For 2023 it was predicted that the semiconductor sector, in terms of product sales, wafer and encapsulation, would exceed US$600bn globally. But the industry closed the year with US$535bn. In Brazil it was not very different.

BNamericas: Why this drop? Hasn't demand for chips just increased?

Nunes: Several factors. There are still shocks from the pandemic. The conflicts in Ukraine and the Middle East are inflationary. Inflation has increased significantly around the world. Demand for products in general has fallen sharply, particularly in the United States and Europe. The semiconductor sector reduced prices to be able to sell more.

The memory card segment, which is the flagship of the sector in Brazil, saw a significant price reduction last year. This caused losses for several large global companies that manufacture these products, unprecedented losses.

In 2024, even if the conflicts persist, a more generalized disinflationary process is taking place. We’re seeing new demand coming in. 

Additionally, global manufacturers have adjusted their production. With this adjustment, there has been an increase in prices from 2023 until now. The memory segment saw price increases of around 50%. This is still lower than 2021, in terms of average prices, but it's already higher than last year.

BNamericas: And in Brazil?

Nunes: In Brazil we expect the semiconductor sector to return to US$1bn in revenue this year. This was approximately the value of the national market in 2022. In 2023, the market contracted by 30-35%, to something close to US$700 million.

For now, the market has evolved quite positively. Of course there's still half the year to go, there are still challenges.

The illegal smartphone market, for example, has grown a lot. Of every four smartphones sold in Brazil, one is illegal. This affects local manufacturing, the production of components, semiconductors. This hurts the industry a lot.

But even so, as a result of greater memory densities, demand is stronger.

BNamericas: You mean chipsets for different AI processing functions, for example.

Nunes: That's right. Components for AI, for high-performance computing. We will have much more software and applications to deal with and take care of AI.

For all of this to run, we need hardware. A computer with AI capabilities needs three processors: MPU, GPU and NPU. Each with its function. 

Editor’s note: MPU, GPU and NPU stand for micro, graphics and neural processing units.

More memory will be needed, the amount of memory used is doubling, tripling.

Even with the problem of illegal smartphones, which is being addressed by the federal government and should be reduced in the coming months and years, a phone that previously ran on 128GB of memory now has 256GB or 512GB. This means more business for us. And I'm just referring to Abisemi, the manufacturing part.

BNamericas: What are the other positive impacts?

Nunes: Service providers. There are service providers in the country who combined sell more than 350mn reais [US$62.7mn] worth of services. These are Brazilian designers, companies with up to 15 engineers, providing chip design services abroad. We have more than 520 professionals doing this in the country. It’s a market that is growing in a quite interesting way.

BNamericas: Is Brazil well positioned to supply GPUs for servers in large datacenters? Or are these basically just imported, coming from Nvidia, for example?

Nunes: We manufacture servers in Brazil. Big companies have been manufacturing here for some time. There is a significant number of datacenters in Brazil that eventually use local memories.

But you are correct. To a large extent, the sector imports these products. We’re interested in starting to offer these technologies locally, so that we can penetrate this segment as well.

BNamericas: But would these big global cloud companies be interested in new suppliers, in local suppliers?

Nunes: There are three questions to consider. Cost, proprietary technology – and at this point these companies are often not interested in dealing with new suppliers – and technological availability.

I mean, this technology needs to be available. We’re working on these three fronts. So, yes, it’s possible, even though today this is a market with a small penetration by local companies.

BNamericas: The government included semiconductors in the PAC growth acceleration program, in the new industrial policy, and removed state-run firm Ceitec from a liquidation process. Is this supposed prioritization reflected in more business for the sector?

Nunes: We have seen very strong action from the government to support the sector. The government started to recognize that this is a truly strategic sector, of national security concern even.

We at Abisemi have been discussing new incentives for some time and now see support from the executive branch. [Bill] PL 13, approved by the lower house a few weeks ago, is currently being debated in congress.

I’m in Brasília so that we can have PL 13 approved before the parliamentary recess. This bill is being promoted by the executive, and it is a bill in which Abisemi, Abinee, P&D Brasil and other associations are directly involved, providing support on technical issues for the congressional debate.

The bill corrects areas in Padis, the previous legislation for semiconductors. The Padis name has been changed to Brasil Semicon, and it covers issues that are crucial for the success and future of our sector and for the investments we’re talking about here.

BNamericas: Which ones, for example?

Nunes: The first issue is the longevity of the program. Padis, according to current legislation, expires on December 31, 2026. Brasil Semicon will run until 2073. This provides legal certainty and is key for new investments to be made in Brazil, both by existing companies and new entrants.

The second is linked to cost. Padis, as an incentive, is product-based. So, imagine that a company in the sector has hundreds of products. For each one, it has to go to the government, make a request and wait months for approval until the investment can be made.

In the current wording of PL 13, we have what I would call a company-based Padis. Under Brasil Semicon, a company is obliged to produce semiconductors, nothing more. Once part of the program, and after government verification of compliance, it will no longer need to be certified by product. This will bring greater speed to the development of new models and technologies.

A third fundamental point is that the new law promotes R&D and reduces taxation related to R&D. It mandates investments in R&D to be 5% of a company's revenues and provides tax credits for these processes.

There are other items too. The new program will be reviewed every two years, which is great. I’m absolutely certain that the new legislation will position the country not only as a player that serves the local market, but as a global player that serves the international market.

BNamericas: In Latin America, with nearshoring and the relocation of supply chains, countries such as Mexico and Costa Rica have been identified as attractive hubs for investment in the sector. Can Brazil stand up to these markets?

Nunes: Brazil is already a very important player. When we talk about the encapsulation and testing structure, and designers, Brazil is better positioned than Mexico, and Costa Rica, which only has one company.

Intel just returned [to Costa Rica], six months ago. And it’s in the implementation process. Mexico has two companies.

Brazil has the best infrastructure in this sector in the entire southern hemisphere. PL 13 opens the doors further to exports because it reduces costs. Besides, countries like Mexico have particularities, it has agreements with the US for local production of goods destined for the US market.

Mexico, Costa Rica, Panama, Indonesia, Malaysia are countries that were included in the Chips Act program as eligible to receive investments from the US government for encapsulation and testing. Brazil is not included. And this is because Brazil doesn’t have a free trade agreement with the US.

Even without having an FTA, Brazil may not have the benefit of receiving investment from the US government. But I understand the country can be the target of investment from US companies, and from global companies to serve the US market within the concept of nearshoring and friendshoring.