By Alan Wheatley and Daniel Alvarenga
TORRES VEDRAS, Portugal (Reuters) - For Portugal to succeed in ambitions to reindustrialize its shrinking, debt-laden economy, it will not be down to the revival of mass manufacturing but to the sprouting of high-tech start-ups such as UAVision.
As the name Unmanned Aerial Vehicles suggests, drones mounted with cameras are a mainstay for the small engineering firm. Clients include big farmers who want to monitor conditions in their fields. One drone has been adapted to film camel racing in Dubai.
Nuno Simoes, one of UAVision's partners, is as excited as a schoolboy as a small battery-driven drones lifts off outside his workshops some 55 km (35 miles) north of Lisbon.
He says Portugal needs to play to its strengths in design and engineering rather than making eyes at footloose multinationals.
"Don't think big. We are a small country with small companies," Simoes said. "They think they can turn Portugal into a new European China. They can't. China can produce at a fraction of our cost."
Ground down by deep public spending cuts and shrinking domestic demand under an austerity program imposed by international lenders, the Portuguese economy contracted 3.2 percent in 2012 and is expected to shrink by a further 2.3 percent this year.
It grates with Economy Minister Alvaro Pereira that Portugal has lost too many jobs and industries to the likes of China and eastern Europe.
Manufacturing accounts for about 13.5 percent of national output. That is more than in Britain and the Netherlands, but Pereira would like to get the share back to 20 percent, where it stood in 1989, by 2020.
"One of the problems that we've had in Europe in the last few years was to think that investing in industry was not sexy," Pereira said in London recently. "We don't need to bring back all our industry, but we definitely need to have a stronger industrial base in Europe."
He rejects old-style industrial policies and focuses instead on improving conditions for manufacturing, such as by expanding vocational training.
The odds are against Pereira. Too many older workers lack skills, which weighs on competitiveness. Businessmen complain that the government ties them up in red tape. And credit is hard to come by.
"The banks give you an umbrella when the sun's shining and take it away when it's raining," grumbles Joao Carlos Costa, general manager of Arpial, a small metal-working firm in Lisbon.
But Joachim Fels, chief international economist with Morgan Stanley in London, said there are signs that production is returning to countries such as Portugal as labor costs in emerging markets rise.
"The interesting thing is that globalization is not a one-way street," he said.
An illustration of that phenomenon is Brazilian plane maker Embraer, which has built a components factory in the walled Roman town of Evora to tap Portugal's underused aeronautical engineering skills.
Successful collaboration with Embraer not only will demonstrate that Portugal is capable of high-tech innovation but also will help change the nation's mindset, said Jacinto Moniz de Bettencourt, chairman of EEA, a group of 35 suppliers to the Brazilian company.
"We are capable now of making some products that 10 or 20 years ago we wouldn't have believed we could do," he said.
Just one example: the trunks worn at the London Olympics by Michael Phelps and other star swimmers were designed and made in Portugal.
The textile industry is not the only traditional sector striving to reinvent itself. Renova, Portugal's leading producer of paper goods, makes a black lavatory tissue that is much coveted. Portuguese shoe makers insist their wares are now as prized as Italy's.
"Portugal has to rebuild its image. If you go to Germany and try to sell a product or a service and say it's from Portugal, it's associated with low technology and low quality," said Antonio de Melo Pires, the head of Volkswagen AutoEuropa, the country's second-biggest exporter.
Pires, too, sees no comparative advantage in trying to lure mass manufacturing. Instead, Portugal should boost its shipping and logistics industries to capitalize on its relative proximity to Africa and the Americas, he said.
A cut in the 25 percent corporate tax rate would also encourage more firms to set up shop in Portugal, Pires added.
"We have to attract middle-sized companies because they are more flexible, they require less investment and so they distort the regional economy less," he said.
Of course, competition for foreign direct investment is stiff.
Steiff, the German maker of expensive teddy bears, recently closed a factory in the central town of Oleiros with the loss of 100 jobs. It shifted production to Sidi Bouzid, Tunisia, the birthplace of the Arab Spring uprising in late 2010.
"Salaries in Tunisia are less than half those in Portugal, so that was the key problem," Jose Marques, the mayor of Oleiros said. "This was pure greed. I see no other reason."
Sara Ladeira, a seamstress for 12 years at the Oleiros plant, earned Portugal's minimum wage of 485 euros ($620) a month. Ladeira, 33, with two children, worries how she and her husband will pay the mortgage now that she is out of a job.
"It was a surprise to us all, because we had a lot of work to do at the factory," she said.
Armenio Carlos, the head of the CGTP union, Portugal's largest, says the ambition to revive industry is realistic. But he is critical of the government for acting too late, lacking a strategic vision and failing to finance its plans.
"One of the big problems we have is that after we joined the EU we allowed industry to crumble. We were relegated almost completely to being a country of services," Carlos, a former electrician, said in an interview.
One of the entrepreneurs trying to reverse that trend echoes the union leader. "We cannot just live off sun and olive oil," said Antonio Reis, technical director with Optimal Structural Solutions, a design and engineering start-up.
"Is our economy sustainable only on tourism? I don't think it is, so we have to grow industrially."
($1 = 0.7788 euros)
(editing by Jane Baird)