Brazil-to-Portugal Cable Shapes Up as Anti-NSA Case Study

Brazil's President Dilma Rousseff and President Barack Obama
Brazil's President Dilma Rousseff talks with U.S. President Barack Obama, during the United Nations General Assembly in New York, on Tuesday, Sept. 20, 2011. Once news of Snowden’s leaks broke last year, Brazil began terminating its contracts with Redmond, Washington-based Microsoft for Outlook e-mail services. President Dilma Rousseff tweeted at the time that the change will help “prevent possible espionage.” Photographer: Allan Tannenbaum/Pool via Bloomberg

Brazil is planning a $185 million project to lay fiber-optic cable across the Atlantic Ocean, which could entail buying gear from multiple vendors. What it won’t need: U.S.-made technology.

The cable is being overseen by state-owned telecommunications company Telecomunicacoes Brasileiras SA, known as Telebras. Even though Telebras’s suppliers include U.S. companies such as Cisco Systems Inc., Telebras President Francisco Ziober Filho said in an interview that the cable project can be built without any U.S. companies.

The potential to exclude U.S. vendors illustrates the fallout that is starting to unfold from revelations last year that the U.S. National Security Agency spied on international leaders like Brazil’s Dilma Rousseff and Germany’s Angela Merkel to gather intelligence on terror suspects worldwide.

“The issue of data integrity and vulnerability is always a concern for any telecom company,” Ziober said. The NSA leaks last year from contractor Edward Snowden prompted Telebras to step up audits of all foreign-made equipment to check for security vulnerabilities and accelerated the country’s move toward technological self-reliance, he said.

Nigel Glennie, a spokesman for San Jose, California-based Cisco, declined to comment. Last November, Cisco Chief Executive Officer John Chambers said uncertainties related to NSA spying were causing international customers to “hesitate” in buying U.S. technologies.

Vanee Vines, a spokeswoman for the NSA, didn’t return a call for comment.

Damage Control

The Telebras-planned cable, which will run 3,500 miles from the Brazilian city of Fortaleza to Portugal, shows how losses to U.S. technology companies from the NSA disclosures are now crystallizing. While much of the handwringing over damage to U.S. firms has focused on existing technology contracts, the pain may come more from projects that are just getting off the ground. In many cases, it’s too costly and complex to remove existing computing infrastructure, no matter the rhetoric coming from government leaders.

New projects are a different matter. With modern data networks being built worldwide -- especially in emerging markets where information-technology spending is estimated to rise 9 percent this year to more than $670 billion, according to market researcher IDC -- that’s where there’s opportunity to look increasingly to non-U.S. technology providers.

$35 Billion

U.S. companies could forgo as much as $35 billion in revenue through 2016 because of doubts about the security of their systems, according to the Washington-based Information Technology & Innovation Foundation, a policy research group.

Brazil’s new cable is the “perfect project to go non-U.S.,” said Bill Choi, an analyst at Janney Montgomery Scott, given that laying cables is a labor-intensive process dominated by non-U.S. companies such as French firm Alcatel-Lucent and Swiss-based TE Connectivity Ltd.

Some of the anti-U.S. technology company talk may just be negotiating ploys to gain lower product prices. While Microsoft Corp. and Verizon Communications Inc. have lost some contracts in Brazil and Germany, and Cisco has reported declining orders from emerging markets, the finances of most U.S. technology companies have held up so far. Gross margins for the companies in the Standard & Poor’s 500 Information Technology Sector Index are at their highest levels since 1990, according to data compiled by Bloomberg.

Yet there’s more risk for U.S. companies of being excluded from new projects, said Lee Doyle of consultancy Doyle Research. In Brazil, Russia, India and China, “the anti-NSA sentiment is real and significant,” he said.

Doyle added that only a minority of IT projects can realistically be implemented without any U.S. technology, yet “that doesn’t make it any less painful for U.S. tech companies looking to grow.”

Brazil’s Actions

Brazil is a key geography where the pain for U.S. technology firms is rising. The world’s seventh-biggest economy has long prioritized buying from its own companies. A 1991 law gave preference for state-sponsored projects to use locally made technology, and importers face steep tariffs.

Once news of Snowden’s leaks broke last year, Brazil began terminating its contracts with Redmond, Washington-based Microsoft for Outlook e-mail services. Brazil President Rousseff tweeted at the time that the change will help “prevent possible espionage.”

Controlling Expresso

Brazil is focusing instead on an e-mail system called Expresso, developed by state-owned Servico Federal de Processamento de Dados, known as Serpro. Expresso is currently used by 13 of the country’s 39 ministries.

“Expresso is 100 percent under our control,” said Marcos Melo, Serpro’s corporate solutions coordinator.

Jack Evans, a spokesman for Microsoft, said the company continues to hear from customers that “where their content is stored and how it is used and secured matters.” He said Microsoft is committed to “increasing choice and transparency about how we store our customers’ content.”

Last November, Rousseff also signed a decree requiring government ministries and agencies to use only technology services provided by public or partially state-owned companies, without competing for contracts in auctions.

The transition “for the preservation of national security” should be monitored by the ministries of defense, communications and planning and budget, the decree said.

Fortaleza Cable

The Fortaleza-to-Portugal cable, proposed in 2012 before the spying allegations, would further the country’s efforts to encourage local companies. The cable will bypass Brazil’s existing Internet traffic routes to Europe, which currently go through the U.S.

International submarine cables are prime targets for espionage, Rousseff said at a press conference in Sao Paulo on Oct. 20 as she campaigned for re-election. She said after the cables to Europe, Brazil will study building direct connections to Africa and Asia.

“It’s a very important strategy for the country, this question of submarine cables, because it’s good to remember that submarine cables are among the main mechanisms of spying today,” she said. Rousseff was re-elected on Oct. 26, in a result that had the tightest margin of victory since at least 1945.

Winning Vendors

So far, Telebras has said it will only partner with European, Asian and local vendors. In January, Ziober said at a press conference that Telebras will work with Madrid-based Islalink Submarine Cables SL and an as-yet-undetermined Brazilian associate to construct the technology pipe.

Ziober added that a project this complex could have multiple vendors, to be chosen from proposals presented after the third associate is finalized. Construction is slated to start in the first half of 2015, with the cable to be operational 18 months later, he said at an Oct. 15 event.

Among the beneficiaries is likely to be Padtec SA, a 400-person network-equipment maker based in Sao Paulo state. Padtec CEO Jorge Salomao Pereira said his company will submit an offer when the bidding process is opened to build and operate all of the submarine cable.

Closely held Padtec has 262.4 million reais of contracts with Telebras in Brazil’s national broadband network, including a 98 million-real agreement for maintaining fiber optic cables. State-owned development bank BNDES identified Padtec as a leader in the networking industry and last year helped the company raise 167 million reais for new products, acquisitions and international expansion.

The anti-NSA sentiment provides “a window of opportunity for other smaller companies to enter the market with this technology and become global players,” Salomao said.

Cisco’s Experience

Telebras’s Ziober said in the interview that the competition for the cable project is also likely to include Asian and European suppliers Huawei Technologies Co., Alcatel-Lucent and Ericsson AB.

Huawei spokesman Bill Plummer declined to comment. Ericsson isn’t part of the cable project, said spokeswoman Elisabeth Manzi. Alcatel-Lucent representatives didn’t return messages for comment.

The Brazilian chill is already being felt by Cisco. The country, once one of Cisco’s most promising markets, is now among its poorest performing ones. Orders in Brazil fell 13 percent in the latest quarter ended July 26, continuing a series of double-digit declines there. Cisco doesn’t disclose underlying sales numbers for the country.

That’s a far cry from what Cisco had been working toward in Brazil. In 2012, the company said it would invest $1 billion in the country over four years. It opened an innovation center in Rio de Janeiro last year, eight days before Brazil’s most-viewed news magazine, Fantastico, revealed the NSA spying and disclosed that Brazilian leaders had been monitored.

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