One of the more intriguing oddities in the world of video games is Sega's continued presence in Brazil. And not just in a purely nostalgic way, like the recent release of Sega Genesis Flashback and other such devices in North America and Europe. Sega remains a potent, viable contender with decades old consoles, selling tens of thousands per year and thrashing Nintendo, while even posting comparable numbers to Sony's PlayStation 4.
Why is this? What happened in Brazil to make Sega live on forever, when it folded into becoming not much more than a third party software developer in the early 2000s in the rest of the world?
The answer lies with a Brazilian toy company, and...well, taxes.
Tectoy is a Brazilian electronics and toys company that was founded in the city of São Paulo by former Sharp Electronics executive Daniel Dazcal in 1987. Brazil was in the midst of strong economic growth in the 1980s, and was beginning to have its own emerging tech industry. However, Dazcal noticed that toy companies had no interest in moving into home electronics, and felt that a Brazilian company could mimic the success of electronic toy markets in North America, Europe, and particularly Japan, where he had the most connections.
Tectoy set up its manufacturing base in the city of Manaus, the capital of the state of Amazonas, and a Free Economic Zone that gave Tectoy huge tax incentives, and exemptions from some of Brazil's harsher manufacturing taxes.
From here, Dazcal immediately sought to break into the world of video games, and he first approached one of his former clients at Sharp: Sega.
The Sega Master System
In the mid 1980s, Sega's fortunes in the home console market were fairly grim. Every single release had failed to chip away at Nintendo's Famicom in Japan: the SG-1000, the Mark II, and the Mark III. While Sega was a successful and respected developer of arcade games, their consoles simply weren't selling in Japan. So they turned their eyes internationally.
The Mark III, rechristened the Master System for its 1986 North American release, proved to be a moderate but disappointing seller in the US and Sega struggled dealing with American toy company Tonka to distribute the system. Again, it just couldn't touch the NES: its smaller library of games and higher price made it a difficult sell. The Master System would eventually find success in Europe thanks to a lucrative deal with Virgin Electronics and enjoy a long and healthy life there, but not before a 1988 incident where toy company Mastertronic failed to get Master Systems on shelves in time for Christmas, causing tons of orders to be cancelled and Mastertronic going under, being bought out by Virgin. Things were not looking good for Sega.
Tectoy would be Sega's saviour in Brazil, though, and Dazcal approached Sega to sign a licensing deal for the Master System in the country. Sega was initially hesitant because of their poor experience with Tonka, but Dazcal's savvy and Tectoy's successes in selling Sega peripherals convinced Sega to give them a chance: Tectoy signed a licensing deal to manufacture and market Master Systems in Brazil.
The manufacturing aspect here is critical. Brazil has some of the harshest import taxes in the world, as a protectionist measure. This means that unless foreign companies open factories and manufacture in Brazil, or have a Brazilian company manufacture the products for them, they will be hit with huge, huge taxes making their products considerably more expensive. This is what had happened to Nintendo -- unwilling to manufacture their machines in Brazil, the NES was a prohibitively expensive luxury item in the country.
Tectoy launched the Master System in 1989, and it was an instant smash. By 1990, Tectoy had sold roughly 280,000 units in Brazil, outselling the NES by a comical number. Coupled with finally breaking into Europe with Virgin's help, Sega finally had a successful console.
In part two, we'll see how Tectoy and Sega kept on flying high in Brazil where other competitors failed.