Summary
After some 10 years of painfully slow growth and inflation, Brazil is seeing an unexpected revival. Is this growth sustainable? What about the complete supply chain? Will Tier2s and 3s be able to cope with this increased demand?
Analysis
Reaction of the market to this ever increasing and all so positive demand is somehow surprising. Especially Brazil with its large structural issues is not new to cyclical extremes.
Back in the 90’s the complete automotive industry saw Brazil as the market to be. Large OEMs and Tier1s invested heavily in state of the art facilities, utilizing the best available production methods. Result was some 3.2 million vehicles per year by 1997.
1999 however, the dream came to an abrupt ending. Volumes went back 30% compared to peak production.
After the boom of the 90’s everyone has been waiting for a revival of the Brazilian economy.
But the market has never gone completely dead. Back in 2005, signs of optimism were obvious to those following the development of the countries automotive industry.
Economic growth was moderate, inflation rates more or less under control, and what was more important, export rates were continuously increasing, moving car/truck production to an incredible 2.6 million vehicles/year.
From 2000 to 2004, devaluated Real (local currency) and governmental incentives fomented exports.
Everyone was happy to sign for export agreements.
OEMs and Tier1s, who had invested heavily, successfully opened new markets in emerging countries as well as in mature markets like the US and Europe.
Vehicles made in Brazil can be now purchased almost everywhere in the world.
Now the Real is back on track. Currency is somewhat stable and vehicle prices are back to where they where back in the 90’s. The effects of the agreed export volumes in a country that is no longer an LCC transcript directly into low profitability.
What can be done to maintain production and productivity in Brazil.
Everyone knew it would take time to see changes in the Brazilian/Mercosur economy. And everyone did what was necessary to cope with this slow process.
Reducing capacities, becoming leaner, enforcing cost cuts all the way down the supply chain.
The effect of such measures is known at OEM and Tier1 level.
We all have certainly heard about GM do Brazil’s or Volkswagen’s struggle to cope. We all know how difficult it has been for JCI, ThyssenKrupp, Bosch or Denso, but have anyone heard of the situation of Metagal, Bratec or any of the countless small companies supplying struts, mounts, welded parts, machined wire, stampings, etc, etc…
All these companies are in tremendous distress. Their financial outlook is more than grim.
To make sure that current production levels are sustained for the next 5 years, the sector must ensure pressure release on its distressed supply chain and develop a competitive cost model for the region.
In Brazil, as almost anywhere in the world, Tier2s and 3s are the weakest links in the supply chain. There are 1000s of small companies, mostly family owned, providing all sorts of services and products into most Tier1s.
Most of these companies do not posses the necessary capital or know-how to cope with the changes. They did not restructure, or invested in new technologies. Most of these companies suffer today of high cost, lowest profitability, old production processes and antiquated equipment.
While in the past most OEMs and large Tier1s have managed to juggle with the problems and somehow ignore the situation, it can and will eventually backfire. The results could not be more devastating.
Brazil is in a dilemma. Decisions to strengthen their supply chain were not taken when needed, back in 2005, when the first signs of recuperation were obvious.
Now no one can afford to lose sight of the problems. Not OEMs, not Tier1s, not Brazilian authorities. If a radical change is not tackled urgently, this revival will turn to be another production peak, and the next downturn will be at the door.
Who knows how long recuperation will take this time.
