Brazil’s tougher new rules for automakers could cause supply problems, especially for producers that are building or plan to build their first factories in the country, purchasing managers from the industry have said.
To slow vehicle imports and boost the local industry, Brazil last year raised taxes on cars made with less than 65% locally sourced content, and, for at least the next four years, will continue to impose higher taxes on cars without a specified level of local content.
Many of the established auto makers already produce a significant ratio of their parts locally, and expect that they should be able to meet the new local content requirements without significant bottlenecks, purchasing managers for the South American units of Fiat, Ford, General Motors and Volkswagen said at an event in Sao Paulo covered by Dow Jones Newswires.
Asian car makers “will bring their production partners with them and what doesn’t make logistic sense to bring here they will seek to buy in Brazil,” said Renato Abel Crespo, purchasing manager for the region for Volkswagen. Because of that sudden increase in demand, “some parts of the supply chain could suffer disruption.”
The purchasing managers said that the bottleneck won’t be a question of volume but of increasing capacity while maintaining their products’ competitiveness.
“From the point of view of volume, we always find a way to resolve those problems,” said Orland Cicerone, purchasing manager for GM. “The bottleneck has more to do with professional capacity, automation, technology, [and] innovations in the manufacturing process.”
Brazil’s auto-parts industry is working far below capacity, according to Paulo Butori, president of industry association Sindipecas. There is surplus capacity of close to 40%, which has increased in recent years due to a strong Brazilian currency.
A cut in payroll taxes should help to boost competitiveness in the short term but Butori said he sees a “big shake-up” – such as slashing taxes – as necessary to revive the industry. In the meantime, Brazil’s auto-parts trade deficit will likely climb to US$5.6bn this year from $4.5bn in 2011, Sindipecas has estimated. With the new government measures, however, Butori said this deficit should start to narrow by 2017.
For Butori, 2012 will be a critical year as Brazil makes the transition to the new rules, adding that “for those companies that manage to survive, 2013 will be a good year.”
According to the purchasing managers, the biggest risk to the supply chain comes at the tier 2 level of production which often lacks capacity to expand production to meet demand.
A lack of professional preparation, as well as a bureaucratic financing process, means that many parts suppliers may not adapt and fail to carry out the necessary heavy investment in time to meet the new demands, and lose their competitiveness, the purchasing managers said, according to Dow Jones.
“We need to invest in the professionalisation of tier 2, because that is the weakest link in the chain,” said Osias Galantine, Fiat’s purchasing director.