BRAZIL: More competitive Mexico wins VW Golf supply race
Volkswagen has just announced it will build the seventh generation Golf alongside the Jetta and import it into Brazil from late this year or early in 2014.
This is one more hint that Brazilian production is not competitive as the Golf made here remains the fourth generation model.
Mexico, which has a free trade agreement with Brazil, has several advantages.
Its currency is weaker versus the US dollar and it has lower labour and manufacturing costs. It is also in the North America Free Trade Zone (NAFTA) which allows parts to be sourced at significantly lower prices.
Mexico has trade accords with the European Union and Japan as well as Brazil/Mercosur. It is not by chance that Audi earlier confirmed a Mexican plant for 2016 which will allow it to export duty-free to three large economic blocs.
The new Golf is the second MQB model on new architecture. VW Group will develop at least 40 products on it, from compacts to SUVs, to be sold under five different brands.
Brazil is likely to see MQB products which are flexible enough to be adapted for regular assembly lines, according to Ulrich Hackenberg, group vice-president for product development. He would not say when or what models but admitted that, if the Brazilian market keeps growing and costs become more competitive, the new Golf might eventually also be made here.
A window is open, however, for producing low-cost compacts, a segment in which Brazil is still reasonably competitive.
Until not long ago, automotive groups made quite narrow profit margins on cars of this category and, therefore, there was little interest in developing them. But Renault started to change this scenario by introducing the Dacia Logan from its Romanian subsidiary in 2004.
Currently there are six derivatives using old and already amortised architecture from Renault that allows the automaker to offer roomy cars at low retail prices. It turned out to be a true alternative for shoppers who previously bought only used cars.
It did not take long for the brand to expand. Nearly 1m units were sold in 2012 in 36 countries, two thirds with the Renault badge. Profit is circa 9% per unit as estimated by Morgan Stanley, well above the skinny margins of the weakened matured markets, especially Europe’s. Inevitably, other automakers have their eyes on it.
Renault's alliance partner Nissan is now eyeing low cost through the rebirth of Datsun brand on Lada platforms. Plans are for a car priced at EUR3,000/US$4,000 only, taxes excluded, for markets such as India, Russia and Indonesia and still profitable.
Volkswagen and Fiat have recently announced almost at same time plans for similar lines, either with new brands or sub-brands. Both are considering suitable architectures and countries where production would be feasible.
China looks likely to benefit. It is still too soon to weigh the chances Brazil has, for up to now basic cars don't attract buyers here. Yet export opportunities could arise and make production feasible.