It is no secret that Brazil’s economy is booming. Along with other major Latin American countries, the region's largest country weathered the 2008 global economic slump rather well. While there have been some worries that a slowing in demand for some of Brazil’s commodities in China – one of its biggest customers – may be slowing growth , companies that do business in Brazil’s data center market could not be more optimistic about it.

Take Eaton Corp., for example. The now-Ireland-based vendor of electrical equipment grew its service organization in Brazil by a quarter of its former size in 2012. And that was when the country’s economic growth had reportedly slowed. Darrick Finan, Eaton’s VP of sales for the Americas, says, “I’ve added 25% to my service organization last year in Brazil. I added people to go service all the equipment that’s being sold.” Data centers are not Eaton's only sector, but it is a crucial one.

One of the most distinctive features of Brazil’s economy is past decade's emergence of a robust middle class. Now that more people do not have to work more than one job to survive, they have more leisure time, Finan says. And that means they are buying more electronics and spending more time logged into social networks and consuming digital media. This, of course, means skyrocketing demand for data center capacity. This is why Equinix bought Brazilian provider Alog, with its three data centers, in 2011, and this is why Verizon Terremark has just added 30,000 sq ft of space at its NAP do Brasil building in São Paulo and ready to add more.

Steve Rivera, VP for Latin America and Caribbean at Terremark, says the additional space came online in January, and five customers signed up the same month. Until the expansion went live, the data center was about 95% full, he says. Other providers in the city are in a similar space-constrained situation, according to him.

São Paulo obviously is not the only major metro in Brazil. There are also Rio de Janeiro, with its heavy presence of energy companies, Porto Alegre and Belo Horizonte. These metros, along with São Paulo, are where the majority of Brazilian commerce takes place, Rivera says.

A comfortable market for Eaton

Brazil is the biggest market in Latin America for Eaton. The company has had operations there for decades, Finan says, and today employs about 10,000 people in the country. Brazil is where Eaton’s largest factory is located, one of the plants manufacturing products for the automotive industry, including Fiat and other automobile manufacturers. “Eaton is very comfortable in Brazil,” he says.

Its customer base there consists of both local companies and multinationals. The former comprise the majority today, but sales to the latter are growing at an accelerated pace. “The multinationals that are moving in, I’ve just seen it starting to take place over the last 18 months,” Finan says. Most of them enter the market through buying local companies, but some are expanding and building there from scratch.

Some of the most recent notable data center deals for Eaton have been one with Banco Itaú and one with IBM. The Brazilian banking giant is building a 20MW data center just outside of São Paulo, and Eaton is supplying uninterruptible power supplies (UPS), power distribution units (PDUs), remote power panels and Stulz air-conditioning equipment for the project. It is also doing a lot of project-management, service and integration work, Finan explains. IBM has been expanding its data center outsourcing capacity there to cater to small and medium businesses, expanding Eaton’s revenue in the process.

Provider competition toughens

There is a wide variety of data center end users in the country. “We’re seeing a lot of ecommerce, web hosting, financial services and healthcare,” Terremark’s Rivera says about the company’s business in São Paulo. Companies in “each of those verticals are increasing outsourcing of their data centers.” There is a fairly equal split between local and foreign customers, he says, and most of them are using the company’s colocation services. “Right now, colocation is by far the largest of our services that are being taken advantage of,” he says. Second largest is Cloud, whose adoption in Latin America as a whole has been gaining acceptance over the past three-to-six months, according to Rivera’s observations.

Economic growth is spurring more competition in the data center provider market. “That’s why we’re rolling out more services to try to differentiate ourselves,” Rivera says. Terremark is doing this to counteract the attempt by some other players to compete on price alone. “Our competition is trying to commoditize data center services,” he says. The company’s biggest competitors in São Paulo include Alog (an Equinix subsidiary), HP, UOL Diveo and Tivit, competing with its colocation business for the same customer base, Rivera says.

A new link

Larry Schwartz, CEO of Seaborn Networks, is observing Brazil’s economic growth from his own unique vantage point: traffic growth on a submarine-cable route between Brazil and the US. “Capacity growth on our route historically has been anywhere between 45% and 100% percent a year and shows no signs of declining,” he says. Seaborn is building a new cable along the route to take advantage of pent-up demand.

There are currently five cables on the Brazil-US route, Schwartz says, and, according to him, Seaborn’s will be the only cable running directly between São Paulo and the US. Others have landing points on the way. As he explains, the existing cables used prior-generation design that did not allow a direct link between US and Brazil without interim landings. The technology has improved, which means it is now possible to create a direct link. Three of Seaborn’s four fiber pairs will connect São Paulo and New York metro directly, with the fourth one landing in Fortaleza, a coastal town in Brazil’s northeast that is “something of a hub for cable landing stations,” Schwartz says.

Brazil’s challenges

There is a fairly steep learning curve facing multinationals that want to enter the Brazilian market. There are cultural intricacies, Rivera says, that anyone doing business in the country has to understand. “Brazil is unlike any other country in Latin America,” he says, which is why Terremark hires Brazilian staff to work for its São Paulo business.

A report published last year by Cushman and Wakefield and hurleypalmerflatt ranked countries according to how risky it is to build and operate data centers in them, placing Brazil at the top of the list as the riskiest. The report only compared places that were already active data center markets. Brazil's risk factors were high energy prices, high corporate tax rates, scarcity of educated workforce, low GDP per capita, high inflation and political instability.

Finan, of Eaton, says high energy rates are a manageable reality, and Brazil is not unique in that respect. For Eaton, they're actually beneficial, since energy efficiency and energy savings are a huge part of its products’ value proposition.

Keeping up with frequent regulatory changes in Brazil is a larger challenge. For example, the government recently raised import duties for uninterruptible power supplies (UPS) coming from anywhere but Mercosur countries from 16% to 20% over the course of a weekend, Finan says. Mercosur (called “southern common market” in English) is a free-trade agreement among Brazil, Argentina, Venezuela, Bolivia, Paraguay and Uruguay. “Somebody building inside Brazil has a 6% advantage now that I have to overcome and be able to make up for.” Eaton manufactures a lot of its UPS in China. Now, it is now considering whether it is worth doing some of that manufacturing work in Brazil.

Despite Brazil’s challenges, the market is growing much faster than major markets in the US and Europe, and both local and multinational companies find working through the challenges worth their while. Yes, tax rates may be higher there than in many other places, Finan says, but “I don’t think it’s going to drive anybody out. People are moving into Brazil because of the opportunity.”