Brazil's recent history has been a little chequered. Economic problems in Brazil and the region have adversely impacted the market and manufacturers have found themselves with considerable overcapacity. Rogério Louro interviews, exclusively for just-auto, Brazil's National Association of Vehicle Manufacturers' (Anfavea) recently elected president, Rogelio Golfarb.

At the beginning of the 1990s the vigorous growth of the Brazilian automotive market attracted the attention of all car makers and many decided to establish themselves in the biggest Latin American country, which then had only 11.1 inhabitants per vehicle.

As a result, since 1996 some fourteen new car or truck plants have been opened in Brazil, with twelve new brands started to produce vehicles in the country.

Audi, Chrysler, Citroën, Honda, International Trucks, Iveco, Mercedes (cars), Mitsubishi, Nissan, Peugeot, Renault and Toyota (cars) invested in Brazil to compete with established firm that already made vehicles locally: Volkswagen, Ford, GM, Fiat, Volvo trucks, Mercedes trucks and Toyota (jeeps). In 1997 the Brazilian automotive market hit a plateau with production of 2 06 million vehicles and home market sales of 1.94 million units.

But after that the Brazilian economy went into reverse gear and started to fall dramatically. The Asian and Russian financial crises pushed Brazil into recession and the automotive market plunged into a deep hole - in 1999 production declined to 1.35 million units and sales to 1.25 million.

From 2000, the economic situation and the automotive market started to get better, but slowly and without consistency. This situation condemned the carmakers to a losses of hundred of millions of dollars as a consequence of production overcapacity. As a consequence, Chrysler and International trucks closed their young plants.

For the vehicle makers this difficult situation needs to change in the next few years if the Brazilian automotive market is not to stay in recession. To guide the automotive sector through the coming hard and crucial years Brazilian's National Association of Vehicle Manufacturers (Anfavea) has elected engineer Rogelio Golfarb president until 2007. He is 46 years old and the director of corporate affairs and communication at Ford do Brasil.

just-auto spoke to Golfarb at a ceremony held in São Paulo to mark his appointment and he explained the current Brazilian automotive market situation and what he expects in the future.

Can you give us an overview of the Brazilian automotive market situation today?

Automakers have total capacity to produce 3.2 million vehicles in Brazil per year, but last year we made 1.8 million units. The sector employs about 1.3 million in direct and indirect jobs. This is a result of an investment of $US27 billion in the last 10 years by the carmakers and parts makers.

Because of the present situation the industry has production overcapacity and financial losses that also limit exports.

Are the social problems in Brazil also affecting the industry?

Yes, really. Consumer incomes have deteriorated over the last few years and unemployment is high. Another problem is high interest rates which make it difficult for consumers to access credit. Because of this and neutral economic growth, Brazilian consumers lack confidence. Huge taxes also affect the vehicle market.

 

[Taxes on Brazilian-made vehicles include: industrial products tax (IPI), tax on services and circulation of goods (ICMS), government program of social integration (PIS), contribution for social security financing (Cofins).]

Rogelio Golfarb - Anfavea president to 2007

What's the result of this current situation in terms of the Brazilian market and industry?

The consequence is a fall in competitiveness. We don't have a suitable return on our investment and the sector's future is threatened. We are going through a difficult patch in terms of making a return. When we don't have a return on our past investments the first thing to happen is a huge restriction on new investiment.

Vehicles manufacturers are using only 57% of their installed capacity in Brazil. In relation to a 100% production capacity: 41% supplies the local market, 16% is for exports and 43% is halted. That's the equation our head office is seeing every day.

Because of the overcapacity our production costs are enormous and this affects our local and foreign sales.

But the Brazilian automakers have put in a great export performance in the last few years?

Yes. We tried to compensate for the fall in the local market with exports and we obtained fantastic results with foreign sales. Last year automotive industry exports were worth $US5.5 billion and we expect to increase this result 20% in 2004. But we can't stop to celebrate this performance. We need continuous new investment to increase our competitiveness in the global market.

But now we compete for investment with China, India, South Korea and the Central European countries. The new members of the European Union are important competitors for Brazil. They have markets keen to consume, well-educated manual labour and low labour costs. If we don't provide good returns to the automotive companies already in Brazil we will lose future investment to other countries.

Do you expect to make another agreement with the government to help the industry, such as the last one that reduced IPI tax between August last year and February 2004?

The automotive sector accounts for 4.5% of Brazil's Gross Domestic Product (GDP) and is responsible for 14% of all exports by value. We need to remain working to help the country.

Anfavea is working a project to boost the automotive market and will submit this to the government. But I'd like to go to the government to negotiate a long-term agreement and not an emergency agreement like the last one that reduced IPI tax by 3% for some months.

To help us the government also needs to resolve some economic problems. After a home, a car is the most important purchase for a person; because of this the decision to buy a vehicle is linked with a consumer's economic confidence. If he doesn't have confidence his job will be stable he doesn't buy a car. Falling unemployment rates and more jobs provide consumers with the required income growth to maintain their spending growth.

Now we have another problem, the prices of some commodities have been rising a lot. In two years the price of steel increased 71% in Brazil and more prices rises are expected this month. The steel industry has high production capacity and is being boosted by Chinese demand. Another problem is rubber which has risen 55%.

This situation affects our costs but we can't pass all rises on to consumer, because they don't have the money to pay more to buy a vehicle. The automotive industry is concerned about this. Again the solution is to increase production volume to dilute the costs.

And what is the way to encourage exports?

A stable economical situation is one way. But we need help from the government to expand our international free trade agreements. As an example, Mexico has more than 10 trade agreements and we have only four (with Mexico, Mercosur countries, Chile and Andean countries).

Now we are negotiating with India, South Africa, China, the European Union and the FTAA (Free Trade Agreement of the Americas). It's necessary to accelerate these negotiations.

In the past the Mercosur agreement aided the growth of the Brazilian automotive industry. Has it lost its importance?

No. After a huge economic crisis the Mercosur trade showed its capacity to survive. It's an important deal for Brazil, Argentina, Uruguay and Paraguay and is a pillar of Brazilian development.

Now the region started to grow again. As an example, Argentina has a better rate of increase than Brazil. In 2003 their market took about 120,000 vehicles and this year they expect to hit 240,000 units.

Despite the obstacles, what are your objectives for the Brazilian market?

My objective by the end of my term is to reach home market sales of two million vehicles per year using 80% of installed production capacity. For exports we plan a continuous increase. With this we will have a consistent market that gives a return on our investments.

What do you need to reach your objectives?

We need a continuous increase of 3% or 3.5% of Brazil's GDP, stable exchange rates for the real [Brazil's currency unit], a controlled rate of inflation, low interest rates and easier access to credit by consumers. All this is necessary to keep the economy improving and bolster consumer spending.

Brazil can soon have this scenario, we are confident. But we are still concerned with the speed of the recovery. We need to start to make gains.

Some problems in the automotive sector also need to be solved. The taxes are so high. However reducing the taxes is not the only solution. It's essential to find new ways to finance sales, open new lines of credit and encourage exports.

If the sector does not start to rise what do you foresee?

I believe in a market increase. In 2004 we expect a production increase of 7% and growth of 8% in home market sales compared with last year.

But we know that this is not enough and the sector is stopped at the red light. If we don't increase our production volume in three years we will start to see problems. The Brazilian market is likely to lose a generation of new cars*.

We will work to develop our market. After all, Brazil has some of the most modern plants in the world. We have revolutionary production concepts and a great relation between the carmakers and parts makers. Our engineering is sophisticated and oriented to cost reduction that makes it competitive in all parts of the world.

However the technology cannot run in fits and starts, it needs consistency. And the way to support that modernisation is to increase production.

* Some carmakers have already decided not to replace certain models currently built in Brazil. Local plants will not make the new versions of the Audi A3, General Motors Astra and Volkswagen Golf already being built and sold in Europe.

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