Rafaella Brites and Felipe Andreoli look at an Apple iPad in Sao Paulo, Brazil,… (Paulo Fridman, Bloomberg )
SAO PAULO, Brazil — On a recent vacation to Orlando, Fla., from his home in Brazil, Tulio Avellar made sure to stop by such world famous tourist destinations as Walt Disney World and Universal Studios.
But he also visited one of the most popular spots for anyone traveling from Brazil: the Apple store.
The 23-year-old bought an unlocked iPhone 4S for $570 — about half its cost back home. Brazilians planning to visit the U.S. are often besieged by requests from friends and family to procure Apple products for them.
"Buying an iPhone just isn't worth it in Brazil," Avellar said.
Avellar's case illustrates how far Apple Inc. has to go before it can compete in Brazil.
Thanks to hefty import taxes, Apple phones are priced well beyond the reach of most Brazilian consumers. Its efforts to build iPhones in Brazil to avoid those tariffs have hit a number of snags.
And although the country is one of the world's fastest-growing smartphone markets and a rising economic power, Apple has yet to have a single retail store in Brazil.
The upshot is that Apple commands less than 10% of the market in Brazil. The story is much the same in other developing nations, including China, India and Russia, where rival Samsung Electronics Co. is fast becoming the brand of choice.
That has analysts worried. With Apple's revenue growth slowing in the U.S. and Europe, the company's fortunes depend on winning consumers in the developing world.
If Brazil is any indication, Apple has a lot to learn.
"I don't know what Apple's strategy is here," said Jose Roberto de Souza Pinto, a telecom analyst in Sao Paulo. "But they'll have to change it radically if they want to take advantage of the Brazilian market."
Brazil is one of the world's largest economies, with a population of 193.9 million. In the last decade, more than 40 million of those people have risen out of poverty into a new hard-working, big-spending middle class that now makes up more than half the population.
As a result, smartphone sales in Brazil are starting to soar. According to research firm IDC, Brazil is the world's fifth-largest smartphone market, with an estimated 23.9 million units expected to be sold this year. IDC projects that by 2017, Brazil will jump to fourth, behind China, the U.S. and India.
On an earnings call in early 2012, Apple Chief Executive Tim Cook said Brazil ranked only behind China in terms of importance in emerging markets.
"I think there's a huge opportunity for us there, and we've more than begun to go deeper into Brazil," Cook said.
Apple has made some moves in Brazil, such as opening a Brazilian iTunes store, hiring a Brazilian to oversee its Latin American operations, and more recently, cutting the prices on the iPhone 4 and 4S by 25% and 15%, respectively.
Still, Apple remains far behind.
According to research firm Gartner, Samsung sold 42.4% of the smartphones in Brazil last year, followed by LG with 13.3% and Apple with 9.1%, just barely ahead of Nokia and Motorola.
Cook has repeatedly said that Apple doesn't care about market share, that it just cares about making great products.
But he's also acknowledged that the company needs to find ways to make its products more appealing in emerging markets.
"There are a lot of markets where we don't sell anything," Cook said at the company's annual shareholder meeting this year. "I look at it as the glass half full. We have a lot of work to do there."
Brazil should be a good place for Apple to start.
This is a country that loves its gadgets. Walk the streets of the poorest of Rio de Janeiro's favelas, or urban slums, or visit its shiniest shopping malls, and it's a common sight to see people on their smartphones.
But so far, the Apple brand has been almost invisible here. The biggest reason is price.
When Avellar was deciding on a smartphone in February, the unlocked iPhone 4S with 16 gigabytes of memory that he bought for $570 would have cost $950 in Brazil, while a Samsung Galaxy S3 was $650.
While Apple products tend to be more expensive than those of rivals in the U.S., Brazilian taxes add as much as 60% to 70% to the cost of an imported smartphone, by some estimates.
In the U.S., Apple and other smartphone makers get help from carriers such as AT&T Inc. and Verizon Wireless, which heavily subsidize the cost of phones for customers who sign two-year contracts, a system known in the industry as "post-paid."
But Apple can't count on that help in Brazil. About 80% of mobile phone users select prepaid plans, where they pay a set amount in advance. Since consumers don't have to sign a contract, Apple can't count on carriers to subsidize their phones.
Analysts believe Apple needs to take a couple of big steps to be more competitive in Brazil.
The first is to make a cheaper iPhone that is perhaps smaller or contains less-expensive components that will be attractive to people on prepaid plans.