Plowing New Fields
A Dodge Dakota pickup truck will roll down Chrysler’s assembly line near here Tuesday, inaugurating a $315-million plant and launching a new industrial age in this once-pastoral south Brazilian region.
It is the first of three car factories going online here in coming months and is a milestone in the remarkably rapid economic development of a part of Brazil better known for coffee, soybeans and bureaucrats.
By offering an array of incentives and leveraging Brazil’s newfound economic appeal to foreign manufacturers, the state of Parana has attracted some $12 billion in investment since 1995 from auto makers such as Chrysler, Renault and Volkswagen/Audi, as well as other industries such as dairy, carpet and wood products.
It’s part of an ambitious plan spearheaded by Gov. Jaime Lerner to transform Parana’s agrarian landscape into a more diversified, technology-based economy, lessening a reliance on agriculture that made it a perennial hostage to bad harvests and mercurial commodity markets.
Its measure of success also illustrates Brazil’s fever for investment as it tries to join the top tier of global powers. Second only to China in direct foreign investment last year, Brazil is pointing the way for all of Latin America in shaping broader-based economies.
To get there, Brazil is trying to exploit the globalization pressures on the world’s major auto companies, which increasingly feel the need to leave mature U.S. and European markets to pursue sales in foreign lands where growth rates are high and car ownership is low.
The auto industry has been a force in Brazil since 1919, when Ford Motor became the first manufacturer to launch operations, assembling the Model T here. Most of the world’s giants, including General Motors, soon followed. In fact, Volkswagen and Fiat, which each have huge Sao Paulo factories, are now the leading suppliers, with 25%-plus market shares, followed by GM with 21% and Ford with 14.5%
After two decades of inflation and instability that made its market unattractive, Brazil is now at the top of any globalizing car company’s expansion list: With 19% annual unit sales growth since 1992, it is one of the most dynamic car markets on Earth.
But the nuts and bolts of economic development depend on local leaders such as Lerner, an architect and planning innovator who was once Curitiba’s mayor. In the bitter competition with other Brazilian states, he’s offered free land, tax breaks and vocational training, even equity dollars, to attract jobs and establish an industrial base in his state.
What better way to achieve an economic breakthrough than to create a mini-Detroit in your own backyard, an instant auto industry? That’s what is happening. In addition to the three auto powerhouses, Curitiba and environs are getting dozens of auto suppliers--giant firms such as Dana Corp. and Detroit Diesel Corp.
All told, the area will have about 12,000 auto workers by 2001. Though the bulk of Brazil’s auto industry remains focused in Sao Paulo, this region could be churning out 20% of all new Brazilian cars, trucks and buses within three years.
“I’m not saying we’re a model, but we’re a good reference point,” Lerner said.
Curitiba isn’t the only city attracting auto factories. Porto Alegre to the south in Rio Grande do Sul state is getting major new GM and Ford plants costing more than half a billion dollars each.
But Lerner’s state has had more than its share of success, selling the auto companies on the state’s favorable geography, large work force and quality of life. He’s framed it as a vantage point from which they can attack not only Brazil’s booming car market but also the entire southern half of the continent.
The sheer speed with which Chrysler, Renault and Volkswagen/Audi are establishing operations here recalls the similar rush by Japanese auto makers such as Honda, Nissan and Toyota in erecting factories across the Midwestern United States during the 1980s.
Local critics complain that Lerner’s program has been too successful, as evidenced by the increased traffic that is clogging highways and by a rising cost of living--especially rapidly escalating housing prices--that plague the citizenry.
Chrysler’s plant, which will employ 400, and the Renault and VW/Audi facilities, which will each employ 2,000 or more, are on the outskirts or in the suburbs of Curitiba, a city of 1.5 million, a clean and orderly urban center surrounded by mainly farm communities.
“It will be a bit crowded with the other manufacturers here, but a great opportunity for us,” said Pierre Poupel, Brazilian head of Renault of France, which was the first auto manufacturer to commit to Curitiba.
Continental Tire, Sweden-based food processor Tetra Laval and Belgian carpet maker Baulieu are also building major factories in Ponta Grossa about 70 miles from here, investing a combined $200 million.
Cognizant of the risk of undermining its quality of life, the state has begun diverting new industrial arrivals away from the Curitiba metropolitan area, said Clemente Simiao, a Parana state economic development official.
The Brazilian government also has taken steps to address another fear: that the country could be used as no more than an industrial way station or source of cheap labor to assemble imported components. It requires all manufacturers to meet 60% local content levels by the third year of operation or face onerous tariffs.
That law, which means 60% of any product made and sold here must be Brazilian-made, is why auto suppliers are locating in and around Curitiba. Lear Seating of Southfield, Mich., chassis builder Dana of Toledo, Ohio, paint supplier PPG Industries Inc. of Pittsburgh and engine maker Detroit Diesel are just a few of the dozen or more Chrysler suppliers here.
Opposing politicians also express the fear that the state is giving away too much to lure the auto factories. One of the most controversial carrots: a four-year deferral of the 17% state taxes typically levied on manufactured products.
That incentive comes on top of a major break the federal government has given the car industry by cutting the sales tax paid by consumers who buy low-end subcompacts called “popular cars” that typically list for about $10,000. Those cars account for 60% of all unit sales in Brazil.
The measure, part of President Fernando Henrique Cardoso’s economic recovery plan dating from 1994, is credited with helping kick-start Brazilian car sales after the country’s long, hyper-inflationary dark spell.
The auto industry is worth accommodating because it produces such a lengthy chain of favorable economic impacts beyond the direct jobs it creates, said economist Paulo Levy of the Institute of Applied Economic Research in Rio de Janeiro.
“The car industry has strong backward and forward linkages--backward in the production of auto parts . . . and forward in the sales, service and repair sectors. That makes autos very important as employment creators,” Levy said.
All told, Brazil’s auto industry represents 12.3% of total industrial output, reflecting the industry’s unusual importance here, said Mauro Schneider, an economist with ING Barings investment bankers in Sao Paulo.
In a country where rail and ocean transport are surprisingly underdeveloped, trucks, buses and cars have had to pick up the slack in moving goods and people around the country, Schneider said.
Auto-based industrial networks have long been recognized as one of the most intensive technology producers a local economy can have, because producers must operate efficiently on a large scale in order to gain access to different markets. That benefits the host economy because, to achieve that efficiency, car companies must employ leading-edge technology, which in turn leads to higher productivity and real wages.
In addition to the lure of the financial incentives, Chrysler sees the city of Curitiba, with its young and inexperienced work force, as a perfect laboratory for new cost-saving manufacturing processes involving just-in-time deliveries of modular components.
Chrysler’s plant, which will produce 40,000 Dakota pickups initially, will be the first in history to receive “rolling chassis” from supplier Dana. They consist of frames with axles, wheels, gas tanks and other components already built in, saving Chrysler the time and cost of assembling them.
Much as the Japanese did in the United States, Chrysler has purposely hired young workers--average age 23--with no manufacturing experience so it could train them in the team methods that give line workers more authority, plant manager David Elliott said.
“The traditional Brazilian work force is very hierarchy-driven, in which workers do only what they are told. It’s an ‘I’m not supposed to think’ type of mentality,” Elliott said. “Our philosophy is different.”
Of course, Brazil isn’t the only car market attracting big dollars. So are countries such as Mexico, China, Argentina, Turkey and India, which, combined with Brazil, will penetrate 47% of the world’s vehicle sales growth through 2010, according to Mark J. Rowen, an auto analyst with Salomon Smith Barney who recently completed a study of the global auto market.
But because of its exploding consumer economy, Brazil--despite the current slump produced by October’s currency crisis and ensuing recession--is seen as the best near-term opportunity, said Nicholas Colas, Credit Suisse First Boston’s auto analyst.
“Brazil is an emerged market, as opposed to an emerging one like China’s, which, while potentially huge, is still an agrarian-based economy with low incomes,” Colas said.
Maryanne Keller, an auto analyst with Furman Selz investment bankers in New York, said Brazil represented GM’s most profitable market in the early 1990s, although there is no guarantee that Brazil or any other foreign operation will always wear that mantle.
“Global exposure has brought greater balance and so, hopefully, the opportunity to capitalize on markets that are expanding while others are contracting, to create vehicles that can be sold in many countries and therefore create economies of scale in product development,” Keller said.
Meanwhile, the thirst for export dollars is great, and Cardoso’s tax incentives for auto manufacturers to export seems to be working. Twenty-five percent of the 2 million vehicles made in Brazil in 1997 were shipped overseas last year, mainly to Europe and Argentina. And the export tide is rising; the dollar value of auto exports over the first four months of 1998 totaling $623 million was 2 1/2 times the export value for the same four months last year.
So far, Brazil has not been a significant source of vehicles for the U.S. market, unlike Mexico, where GM, Ford and Chrysler are accused by labor groups of exporting U.S. jobs. And GM and others insist their main objective in building or expanding Brazilian plants is to serve the Brazilian market.
Which can only get bigger. Even after several years of booming sales, per-capita car ownership is still low in Brazil, fewer than 10 cars per 100 citizens, or 10% penetration, compared with more than 100% U.S. penetration, according to the Sao Paulo office of the A.T. Kearney market research firm.
“Brazil is still behind,” said Kearney’s Rogerio Aun.
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The world’s leading auto producers, in estimated 1997 total units, including cars and light trucks.
Rank, Country, Estimated 1997 total units, in millions
1. United States: 12.0
2. Japan: 10.8
3. Germany: 4.4
4. France: 2.7
5. Canada: 2.5
(tie) Spain: 2.5
6. Brazil: 2.0
7. Britain: 1.9
8. Italy: 1.8
9. Mexico: 1.2
(tie) China: 1.2
Source: Salomon Smith Barney GYRUS