The Automotive Industry in Brazil:
Innovating the Small Car
Jennifer Catton, Daniel J DiAngelo, & Thiago Lazarini,
Cleveland State University
Dr. Andrew Gross
May 5, 2004
With its estimated 177 million inhabitants,
Brazil has the largest population
Large industry is concentrated in the south and southeast. The northeast is the poorest part of Brazil, but it is beginning to attract new investment. The economy was under critical stress in 2002 with election uncertainties, the 35% depreciation of the real, and less foreign direct investment (dropping to $16.6 billion, $6 billion less than the previous year's total). Public debt is 63% of GDP, 11% above the 2001 year-end level. Brazil was helped by the IMF, which stepped in with a record $30 billion program. President Lula's incoming government slashed spending and increased its primary budget surplus target from 3.75% to 4.25% of GDP, going beyond the letter of the IMF agreement. (Global Edge)
Market opening and economic stabilization have significantly enhanced Brazil's growth prospects. Brazil's exports and imports have nearly doubled in the last decade. President Lula and the PT (Left Party) have become co-chairs of the FTAA with the United States since November 2002. The United States and Brazil have worked constructively together to achieve common goals such as global elimination of export subsidies and reduction in domestic agricultural support can enhance this partnership. Brazil has much to gain through free trade as to economic growth and realizing its trade potential. (Watson)
According to the Country Commercial Guide, Brazil has one of the most advanced industrial sectors in Latin America. Accounting for nearly one-third of GDP, Brazil's diverse industries range from automobiles and parts, other machinery and equipment, steel, textiles, shoes, cement, lumber, iron ore, tin, and petrochemicals, to computers, aircraft, and consumer durables. Automakers look to test new production methods in Brazil, since the industry is more flexible than the more mature industries in Europe. As Brazil's domestic economy has grown and diversified, the country has become increasingly involved in international economic and trade policy discussions. The United States, Western Europe, and Japan are primary markets for Brazilian exports and sources of foreign lending and investment.
The automotive industry was established in Brazil in 1957, following governmental plans for national industrialization. Assembling and sales companies, however, had been present in the country since the 1920s. The industry was initially established in Sao Paulo state and expanded through the 1980s into Rio Grande do Sul, Paraná and Minas Gerais. In 1996, a new expansion phase began with the adoption of the Brazilian automotive regime, aiming at making Brazil one of the top car manufacturers worldwide, whether by modernizing existing facilities or by building new plants and creating new hubs. These new units, fitting in the industrial decentralization process, were built in Săo Paulo, Paraná, Minas Gerais, Rio de Janeiro and Rio Grande do Sul. (Appendix 3; Map)
Brazil has been used as an experimental zone by several major automakers in recent years, specifically with regard to the development of small-car manufacturing techniques. General Motors (GM), Ford, Volkswagen (VW), and Fiat Auto have all established notable small-car production facilities in Brazil and all four hold promising prospects for the future, despite the country's economic difficulties. The efficiency of the plants in terms of manufacturing looks to boost the market share of the four automakers within Brazil, while at the same time giving Brazil the opportunity to expand its export markets. This, in the long term, should make Brazil a specialist in small-car production with Brazilian demand tending towards the small, economy passenger car. (Test Bed)
In Brazil, popular car status requires a 1.0 liter engine and entails a preferential tax structure that promotes its affordability. The popular cars are only offered with standard transmission and have the simplest features in the car market. Since the rate of auto tax that consumers pay depends on the size of the car, vehicle makers such as Ford, Fiat, VW, and GM have better prospects at the smaller end of the market. The average tax paid for small cars is 10% of the total price compared to luxury cars, which is 25% tax on its total price. The Brazilian vehicle demand does focus heavily on small and compact cars because of the lifestyles and the traffic congestion in the major cities. For example, Sao Paulo is characterized by heavy traffic jams and narrow streets. Therefore, small cars become the most convenient source to save time, reduce gas expenses, and fight congestions. A major issue in Brazil, as well as in other third world countries, is the danger of driving a sophisticated car. Many Brazilians utilize the “popular” car to drive to work, take the children to school, and to do grocery shopping. The simplicity of popular cars, enable individuals to drive to work feeling safe; because driving a more appealing/attractive car, for instance a Honda Civic, BMW, or a Toyota Corolla, increase the chances of being surprised by a robber with a gun. (Lazarini)
The Brazilian automotive industry depends heavily on the small car market. The major automakers are outperforming competition by adopting cost leadership strategies. Many companies, like GM, have built innovative manufacturing facilities to respond to competition and to the demand for low cost cars. By consolidating and engaging suppliers in the car production, automakers are able to cut prices and meet demand expectations.
Recently the Brazilian government and President Lula raised the minimum wage by almost 9%. While a raise in minimum wage would apparently satisfy the populace, this 9% increase enraged the workers and laborers, who were lobbying for a more than 30% increase. This rising discontent with the current administration may signal a change in the government at the next election due in 2006. If one of the 16 political parties in Brazil promises to raise minimum wage, that party may win the election and cause nightmares for the automotive industry with a massive increase to the cost of labor. (Brazil Economy)
Political uncertainty creates some concern for manufacturers, but there are some good things on the horizon also. Brazil is a member of the Mercosur, a free trading organization of South America. Mercosur has recently begun negotiations on the Free Trade Agreement of the Americas (FTAA) which Brazil is co-chairing with the United States. This trading union would represent an unprecedented alliance between some of the largest markets in the world. The FTAA would progressively lower export / import duties and promote free trade between most of the Western Hemisphere. Brazil would benefit from this agreement with new market openings for its extremely efficient small car production.
Companies doing business in Brazil must worry about other factors, such as inflation, in addition to the adoption of the FTAA. Fluctuating inflation rates are a threat to foreign investment. During the late 1980’s and early 1990’s Brazil saw inflation bouncing as much as 85% per month. In 1996, however, the Real plan helped Brazil stabilize its inflation and since then inflation has steadily declined. (Minella)
Another major concern for carmakers is the corruption throughout Brazil. As recently as 1994, GM realized the corruptive possibilities of Brazilian auto dealers. With the release of the Corsa, GM had to deal with dealerships raising the price of the car 30-50% over list price because of the unprecedented popularity of the car. The problem escalated to the point where GM Brazil’s president went onto prime time television to ask the public to stop buying their car. In order too meet demand, GM backordered 130,000 vehicles, almost an entire year’s production. (Shapiro)
Brazil’s Small Car Industry: Competitive Assessment Using Porter’s Five Forces Back to table of contents
There are many barriers to entry in the automobile industry. The first is the extremely large start up costs for a small company, which is in the $3 billion range. The small car market is very mature and is dominated by General Motors, Ford, Volkswagen and Fiat. Industry trends suggest that within the next few decades, there will be less than 20, maybe even fewer than 10 automobile companies worldwide. Mergers and acquisitions are an everyday occurrence in the automobile industry; it is almost hard to keep track of who owns whom anymore. Foreign direct investment is very risky for companies because of the unstable Brazilian economy, high inflation, unpredictable labor costs and unionization problems. (Catton)
Buyers always demand the latest technology for the lowest price. In today’s car industry, the supply is far greater than the demand, creating the illusion that buyers have power over the manufactures. Because of the low income in Brazil, manufactures must produce cars that the population can afford.
Average disposable income in Brazil is very low. The minimum wage in Brazil in 2003 was $240 Reais, or about $80 US dollars per month. While $80 dollars seems unlivable by US standards, the lifestyle and prices in Brazil are much lower. Although prices are lower all around, there are other factors to the difference in prices that need to be considered.
Geographical differences affect pricing strategies. Extreme regionalism in Brazil creates higher prices in the south and lower prices in the north. In the more developed southern states, like Sao Paulo, the education levels are higher, which leads to more productivity and higher salaries allowing companies to offer more sophisticated cars.
Due to the size of many automobile companies, suppliers do not have much chance to negotiate price. The auto parts industry is extremely fragmented and since the automobile companies are so large and there are so many suppliers to choose from, the competition among suppliers is severe. A lot of suppliers have run into hard times due to the incredibly low prices automobile companies demand.
The automobile manufacturers in Brazil are working to reduce the number of suppliers and modernize their production technologies. They require auto parts manufacturers to have a heavier involvement in the automobile project and final assembly. Suppliers must therefore have the financial resources and technological capabilities for meet the manufactures demand.
Drastic cost-cutting campaigns from car manufacturers, who face difficulties themselves, have decreased margins among suppliers who now have to produce higher quality components in order to compete in the global market. The global source model adopted by automobile manufacturers and the increased competition among auto parts companies are leading the auto parts manufacturers to modernize their managing and production methods, to obtain international quality certificates and move towards just-in-time production systems. While this requires new investments, increased costs are not included in the sales price because of extremely narrow margins allowed by automobile producers. As a result, a significant number of auto parts manufacturers are beginning to merge with their competitors in order to achieve economies of scale.
Fiat, Volkswagen, General Motors and Ford dominate the automobile industry in Brazil. These four companies represented 86% of all car sales in Brazil in 2002. Some of the other manufacturers that have a presence in Brazil include Honda, Toyota, Daimler-Chrysler, Renault, and Peugeot.
Competition is very intense and all companies are looking for new ways to reduce costs. Many companies are starting to implement a global platform, which is a common structural base or assembly that can be used to construct multiple models and makes of vehicles. Volkswagen, for example, has three one-million-unit global platforms. The largest of these is the A4, which produces over 1.8 million vehicles including the Golf, Jetta/Bora, Beetle, Seat Toledo, Skoda Octavia, Audi A3 and Tr. (Sorge)
There are a large number of substitutes in Brazil, but their power is declining. Cars have become more of a necessity item rather than a luxury item. In Brazil the ratio of cars to people is 1:9, which means that many Brazilians have to use other modes of transportation. The main form of transportation varies with geographic location. In the north, where income is low and the infrastructure is poor, the main forms of transportation are bicycles or walking. In the more developed southern cities, like Sao Paulo and Rio de Janeiro, the majority of people use buses or trolley cars as their transportation. There is a subway system in Sao Paulo, but it is very limited. For a number of years, cars were the substitute product while buses were the primary method of transportation. Today, automobiles are becoming the primary means of transportation throughout Brazil slowly replacing the bus as the main form of transportation. (Lazarini)
GM's Gravatai plant in Porto Alegre, Rio Grande do Sul, has changed the relationship between vehicle makers and components suppliers, since the role of the supplier has been wholly integrated into the design of the car plant itself. The model currently produced at Gravatai is the Celta (Appendix 1 Figure 1), produced since September 2000, where suppliers and GM developed a new, low-cost manufacturing model that reaches unprecedented levels of efficiency and 85% of its components are manufactured on-site. In most assembly plants, only 40% of components (in terms of value) are sourced from within the factory. This gives GM greater flexibility, enabling it to adapt certain features of the Celta according to customer preference. Celta is a sub economy car targeted to a segment that represents more than 65% of the Brazilian automotive market. Continuing this same spirit of innovation, GM of Brazil and its dealers announced that they plan to sell the Celta on showroom floors and through a completely new internet sales channel. The new internet sales channel is based on four key strategies: (1) e-commerce, (2) one price, (3) direct invoicing and (4) fast delivery to the customer. GMB's cyber customer can purchase a Celta simply by accessing the website (www.celta.com.br) which offers the vehicle at one price including tax and delivery to anywhere in the country. In its first year of offering, GMB sold 65% of its Celtas through the internet sales channel. (General Motors)
Another major car produced by GM is the Corsa (Appendix 1; Figure 4). The Corsa was initially designed for Europe and Brazil. GMB was the first region to receive Corsa outside of Europe. The region removed all of the European required safety content in order to lower cost. GMB added the 1.0L engine to take advantage of the “popular car” tax break in Brazil for vehicles with engines 1.0L or less. Corsa is one of the most successful models in GMB history since it was introduced in 1993. In addition to receiving over twenty international design awards, Corsa has held sales leadership positions in Germany, Great Britain, the Netherlands, and Portugal. Corsa’s success is due to the consistency of its style with an international flavor to its design. GMB addressed common customer needs by focusing its efforts in two areas: packaging and styling. In packaging, GMB added power windows, power steering, and air conditioning to step up from the basic popular car. (Sieradski)
The Celta is priced from $18,750 to $20,390 Reais while the Corsa is priced in the market from $22,990 to 33,990 Reais, approximately $7,000 to $13,000 US dollars. The difference in prices between the Celta and the Corsa are primarily due to the manufacturing technology GM employs in the Celta production, which is at the GMB’s advanced Gravatai plant. Further, GM reduces holding costs by covering all shipping directly to the buyer in Brazil bypassing the car lot. Such innovative approaches allow GM to offer the Celta considerably lower than the Corsa. (General Motors)
Ford's new assembly plant, Complexo Amazon, began the production of its Amazon line of cars in April 2002. Based in Camacari, in the northeastern state of Bahia, the new plant, which was inaugurated in October 2001, has the capacity to produce 250,000 passenger cars per year. The Amazon line will be made up of small, compact cars, based on Ford's new Fiesta platform. The cars are to consist of 90% Brazilian content, with 13 of the 23 major components suppliers working within Ford's assembly plant itself, and the remaining 10 based in the adjoining supplier park. (Test Bed) This includes not only making the auto parts, but also participating in the installation and final tests of the vehicle. It will generate the most modern cars in the market, as well as create more jobs, and be a major player in the economic development of the whole country. High technology and high levels of automation are the key characteristics of the innovative facility. The plant currently produces Ford’s most popular car, Fiesta (Appendix 1; Figure 5.) which is geared for both domestic and foreign markets. It was also an answer for the growing “supermini” segment which had been spearheaded by other competitors like VW. The fiesta prices range from $19,015 to $23,125 Reais and the Fiesta has been the major player for Ford’s total Brazilian sales. (CarSales.com) The advertising for Ford Fiesta makes the vehicle a virtue of necessity by emphasizing Fiestas’ Brazilian heritage.
Volkswagen has been in Brazil for over fifty years. Volkswagen of Brazil is one of the primary markets in the Volkswagen Group, representing 9.5% of its total sales. The Gol (Appendix 1; Figure 3) is VW’s popular car with its stylish and younger look. The Gol is geared to the younger generation and is perceived to be the best small car in the market. The prices range from $18,500 to $25,300 and the main competitive advantage comes from the brand image VW has in Brazil. The Gol has been the top selling car in Brazil for the past sixteen years. Volkswagen Brazil is currently working on the introduction of a newer model to replace the aging Gol market. The Fox, VW’s newer model, will feature a dual fuel option allowing the car to be powered by alcohol or gasoline fuel. (Volkswagen) Sales of the Gol have been declining for the past several years forcing VW to restructure its Brazilian operations and shift it to the production of the Fox to stabilize the company’s shrinking market share. GM and Fiat have been stealing VW’s market share with offerings such as the Celta and the Palio.
Volkswagen Brazil has found a rather unique use for Palm handhelds within their business, being the first company in Brazil’s auto manufacturing sector to utilize handhelds on the vehicle assembly line. By using Palm III handhelds to enforce strict quality standards, VW Brazil has reduced assembly line errors at its plants by 14%. VW team members involved in the development of the project were eager to explore the extent on the palm handhelds capabilities. Today, workers use 120 handhelds in a relay system managing quality control for painting and assembly. (Niles)
Fiat Automóveis is the youngest of the four big Brazilian manufacturers and Fiat Auto's biggest automotive unit outside Italy. Fiat has been manufacturing vehicles in Brazil since 1972 and began manufacturing the Palio (Appendix 1; Figure 2) in 1996, when the company redeveloped its existing factory in Betim. The plant's programming and logistics computer is central to the way in which the facility is controlled, enabling the plant to employ a just-in-time delivery method. Recently, Fiat achieved an important landmark when it became the biggest manufacturer in the country (33% of national production) and leader in car sales within the Southern Cone Common Market, Mercosul selling more than 357,000 vehicles. (Auto Intelligence) Fiat achieved this result with its ability to innovate engineering, safety and customer service. The choice of Brazil as a base for the launch of the Palio world car also brought Brazil into the wider scenario of the world motor industry. The creativity and automotive know-how that made the Fiat Palio an unprecedented success on the Brazilian market immediately established itself as a benchmark in its segment for safety, performance, style and quality. The Palio is priced from $22,350 to $30,089 Reais. Palio marketed as the most cost efficient car on the market, boasting the best liter / kilometer ratio. (Fiat)
In addition to the Palio, Fiat offers the Uno (Appendix 1; Figure 6). The Uno was released in January 1983, and in the same year won the ‘Car of the Year’ award. It received much praise for its interior space and low fuel consumption (due to its low weight and low drag factor). During its life numerous special edition cars were produced, including the Suite with full leather upholstery and air conditioner.
Although the Uno is the cheapest small car in the market, its prices range from $15,850 to $21,905; it is known for being the weakest and the least reliable small car due to its poor engine power and instability on highways.
Brazil has been used as an experimental zone by several major automakers in recent years. Despite economic instability and social differences, the main reasons for choosing Brazil as the pioneer for manufacturing innovation are low labor costs, access to high quality natural resources, and vast amount of land enabling automakers to build giant manufacturing facilities within 5 miles from their main suppliers.
Ford's experimental Amazon project and GM's Gravatai complex have led major manufacturers to look to Brazil with interest. Projects such as these have demonstrated how components suppliers can play a far greater role in the vehicle manufacturing process than they do in traditional assembly arrangements.
As a result of the close integration between manufacturers and components suppliers and the proximity of major suppliers to the assembly lines, these plants are highly efficient and have the potential to reduce the cost of manufacturing small cars significantly. This enables the cars produced to be competitively priced on the domestic market, giving the automakers the opportunity to boost domestic market share.
Meanwhile, Fiat's Betim plant, although built some 23 years before the others, has captured the world's attention in recent years, for the way in which the automaker used Brazil as a test-bed to produce its Palio models in 1996. At each of these plants, the focus is on the cost-effective production of small, entry-level passenger cars. On the other hand, GM of Brazil (GMB) claims that the GM Celta is approximately US$500-US$1,000 cheaper than many other small cars sold on the Brazilian market. Since GM itself covers all freight costs within Brazil with regard to the Celta model, the car can be sold for the same price throughout the country, boosting sales in the north-east, for example, far from the industrial centre of Sao Paulo.
With Brazil's interest rates being characteristically high, it is expensive for automakers based there to obtain credit and this subsequently pushes up the price charged to the consumer for the finished vehicle. If automakers are able to cut production costs, as they are able to do at these new, innovative plants, their ability to price the cars competitively increases.
Auto Intelligence; http://www.autointell-news.com/news-2000-2/September-05-00-p1.htm
Brazil Economy; “Brazil boosts minimum wage 8.3%”; April 30, 2004; http://www.brazileconomy.com
Country Commercial Guide; www.statusa.gov
Minella, Andres; “Monetary policy and inflation in Brazil (1975 – 2000)”; www.epge.fgv.br/portal/arquivo/1492.pdf
Niles, Steve; “Brazilian business realizes the versatility of Palm computing”; Palm Power; May 2001; http://www.palmpowerenterprise.com/issuesprint/issue200110/brazil.html
Sieradski, Lisa; “Opel Corsa, the Accidental World Car”; http://globaledge.msu.edu/KnowledgeRoom/FeaturedInsights/0027.pdf
Shapiro, Helen; “The mechanics of Brazil’s automotive industry”; Jan 1996 http://www.hartford-hwp.com/archives/42/037.html
Sorge, Marjorie; “VW, GM Lead Global Platform Race”; May 1999; Automotive Industries
Watson, Alexander; “The Americas in the 21st century”; http://dosfan.lib.uic.edu/ERC/bureaus/lat/1994/941122WatsonCommerce.html
World Atlas.com; www.worldatlas.com
Zellner, Mike; “Burning Rubber Latin Trade”; Oct 2002; http://www.findarticles.com/cf_dls/m0BEK/10_10/93230213/p1/article.jhtml
Figure 1 GM Celta (General Motors)
Figure 2 Fiat Palio (Fiat)
Figure 3 GM Corsa (General Motors)
Figure 4 VW Gol (Volkswagen)
Figure 5 Ford Fiesta (Ford)
Figure 6 Fiat Uno (Fiat)
Table 4 Market share by vehicle (Zellner)
Appendix 3 Map of Brazil
Figure 7 Map of Brazil (WorldAtlas.com)