The Multinational Monitor

JANUARY/FEBRUARY 1990 - VOLUME 11 - NUMBERS 1 AND 2


A U T O   I N D U S T R Y

Brazil's Auto Industry:
No Miracles Here

by Bill Hinchberger

In December 1989, two weeks before Brazil nearly elected a former auto worker as its president, the Brazilian automotive industry took advantage of its year-end gathering to proudly announce that Brazil had become the world's tenth auto manufacturing country (and the first from the Third World) to produce 20 million vehicles. At the same time, the president of the Brazilian auto manufacturers association, ANFAVEA, was calling the 1980s a "lost decade."

These recent events symbolize both the coming of age and the stagnation of the Brazilian auto industry, hailed in 1986 by the Wall Street Journal as an emerging "world-class auto exporter."

In a country where soccer metaphors abound, the auto industry is the "Pele" of the capitalist world's eighth largest economy. It accounts for 11 percent of Brazil's gross national product and employs 140,000 workers. Yet the five leading firms, which rank among the country's 17 largest corporations, sport such non- Brazilian names as Volkswagen, General Motors, Ford, Mercedez- Benz and Fiat. Together these companies control over 90 percent of the Brazilian vehicle manufacturing industry.

Like an aging star athlete, the industry's income remains high but its performance is slacking off. Production figures for 1988, the third highest in history, were released without fanfare, since the 1.1 million vehicles fell far short of the 1.5 million projected for the year at the beginning of the decade. Yet 1988 sales figures set a record in dollar terms, ringing in at $3.16 billion, and the nine leading manufacturers enjoyed profit margins ranging from 1.8 to 9 percent. Observers expect 1989 to be another profitable year--despite an estimated 5 percent drop in sales.

Yet the lack of growth has suppressed the euphoria which permeated the sector in the late 1970s. A mid-1980s rush to export--considered the industry's road to salvation in reaction to domestic price controls--has dissipated. Current profits stem not from growth but from progressively falling real wages.

From miracle to sorcery: the domestic market

The Brazilian auto industry began in the 1950s on the outskirts of Sao Paulo, the country's largest city. It was an integral element of President Juscelino Kubitschek's plan for "50 years of development in five," characterized by import substitution policies, and its birth coincided with an ambitious road-building program.

The rise of the auto industry paralleled the growth of the middle class during the so-called "economic miracle" of the 1960s and early 1970s. Auto manufacturers initially emphasized production for the domestic market, particularly moderately priced models like the VW Beetle. According to the Inter-Union Department of Statistics and Socio-Economic Studies (DIEESE), the research arm of the Brazilian labor movement, this marked the beginning of a period of expansion and concentration that lasted until 1984.

In 1984, the government instituted price controls for domestically-sold vehicles as an anti-inflation measure. Ever since, industry officials have groused that the home market is unprofitable because sticker prices fail to keep pace either with inflation (projected at an annual rate of 1,500 percent for 1989) or with their production costs.

The price controversy "is a game of hardball between the automobile manufacturers and the government," states economist Helio Nogueira da Cruz of the University of Sao Paulo. "The Brazilian tradition of price controls has generated a tendency among firms to hide their real costs in order to have some leeway in setting prices."

Whether due to price policy or not, production for the domestic market has never surpassed levels attained in the late 1970s, when it inched over the one million mark. Domestic sales plummeted during the recession-ridden early 1980s, and only in 1986 did production for the Brazilian market rebound to one million, where it has since levelled off.

Domestically, the battle is over shares in a stagnated market--a relatively secure one due to protective trade policies. Da Cruz considers the market competitive despite the predominance of a small number of large firms. The recent jostling for position during a shortage of supply parts was indicative of this competition: GM and Fiat took advantage of Volkswagen and Ford's hardline negotiating stance toward suppliers to move up in the sales rankings.Another example is the proliferation in the number of makes in the country: in 1975, 27 different types of cars were produced; by 1988, that number had increased to 50.

The so-called standard models have gone out of fashion, however. Symbolizing the shift, the ever Beetle was discontinued in 1985. Brazil's hottest car between 1961 and 1981, it was largely responsible for putting VW on the top of the carmakers' heap, a position it has yet to relinquish. In 1979, 40 percent of the 6.1 million cars on the Brazilian roads were "bugs." But the Beetle was the car most affected by the recession in the early 1980s. Even though it was still hovering between third and fourth overall in domestic sales, VW halted production to concentrate on higher-priced models that cater to the needs of upper-middle- and upper-class drivers.

Struggling to fill this void is Gurgel. Traditionally known for its jeeps, Gurgel is the only nationally based firm to register significant sales in 1988, when it captured 0.2 percent of the market. Its new emphasis is on economy cars; company President Joao Augusto Gurgel recently announced plans to invest $150 million to build four plants by 1996. His goal is to gain more than 6 percent of Brazilian production, taking advantage of the niche that the multinationals have ignored. "We prefer to avoid direct confrontation," he admits.

The rise and fall of the export drive

The segment of the market that multinationals most dearly want to occupy is exports. But since an export surge in the mid-1980s, things are beginning to look bleak.

The Brazilian automobile industry's first move toward the international market occurred in 1972, when Ford convinced the government to let it import parts and production equipment if it would export three times the dollar amount it imported. Other major car makers, enticed by a government export incentive program, soon followed suit.

Exports as a percentage of production grew constantly through 1987, when 37.6 percent of the industry's output--or 345,555 vehicles--left Brazilian ports. This trend coincided with the emergence of the "world car" concept. GM's Monza (the Cavalier in the United States), Ford's Escort and Fiat's Uno use components that can be exchanged among plants throughout the world, allowing producers to reduce manufacturing costs. Ford's first "world truck," the Cargo, soon followed the world cars off of Brazilian assembly lines.

One of the most striking steps in this direction was the 1986 creation of Autolatina, a holding company for the Brazilian subsidiaries of Volkswagen and Ford. The two companies have already begun to export a Ford car with a Volkeswagen engine, and now each is about to release essentially identical models in the domestic market: Ford will call its the Verona; VW will use the name Apolo. But da Cruz stresses that the real reason for the joint venture was production for export.

The Brazilian auto industry has been increasingly orienting itself to exports. The industry received a sharp blow, however, in September, 1989, when Ford's U.S. headquarters, citing problems with both prices and delivery, decided to stop importing the Cargo.

That move is indicative of an international shift away from Brazil as an export center in the overall strategies of auto manufacturers. In 1980, Brazilian auto exports stood at 157,085. Peaking at 345,555 in 1987, they dropped to 320,476 in 1988, and another 20 percent decrease is expected when the final 1989 figures are in. ANFAVEA's Mendonca laments, "The Brazilian export market is condemned to death."

As economist da Cruz puts it, "International conditions--and those in Brazil, where inflation is measured monthly--make things difficult. In global terms, this is not a period that offers very good prospects."

Industry representatives prefer to place the blame on domestic public policy. According to Mendonca, four factors are responsible for the fall in exports: Brazil's artificially low currency exchange rate, high production costs, restrictions on technology imports (especially for computer-related items) and the phasing out of government incentives for auto exports.

As a result of these conditions, maintains the ANFAVEA president, Brazilian exports are no longer competitive. He cites the example of Volkswagen's Fox. In the mid-1980s, the Fox was one of the cheapest cars in its class in the United States, with a price tag of $5,900. By September 1989, the cost of a Brazilian-made Fox had risen to $7,000, making it the second highest priced car in its category, according to Mendonca. Thus, in 1987 Autolatina exported 75,000 Foxes, 68,000 in 1988 and only 53,000 in 1989.

A stagnant future

Historically, the government has firmly supported the automakers with export incentives, subsidized inputs and police action to quell strikes. But today its priorities seem to have changed. Computer manufacturers, for example, have received assistance at the expense of the auto industry. The strong barriers erected to protect Brazil's computer industry prevent auto manufacturers from using imported technology even if there is no available domestic equivalent. Also, until mid-1988, state-owned steel manufacturers sold their product at a below-market price; today they are charging international market rates.

Executives in the auto industry have reacted in predictable fashion. At the end of 1989, most of the major vehicle manufacturers announced short-term investment plans which da Cruz calls "nothing ambitious." For in-stance, Autolatina intends to invest $1.5 billion over the next five years, and truck manufacturer Saab-Scania will spend $100 million over the coming four years. General Motors says it will invest $150 million in Brazil in 1990, half of which will go to updating its Opala and Monza.

All indications are that these investments will do nothing to increase productive capacity, which ANFAVEA's Mendonca admits had been stagnant in recent years. The development of new models is a constant in the auto industry and requires a certain level of new expenditures. Other investments, predicts da Cruz, will continue to be made in the area of "production reforms, modernization and in changing over to the Japanese mode of production."

GM is the only company in recent years to have seriously considered investments which would increase production. But in October 1989 it announced that it had decided not to invest $500 million to produce a minivan for export but instead to produce the vehicle in either South Korea, Mexico or Portugal.

Laboring to maintain jobs and wages

These boardroom decisions have had real repercussions on the shop floor. DIEESE has called attention to the Brazilian industry's shift toward modern inter-national methods of production and labor organization. Among the changes are in-creased automation and the introduction of robots.

Industry officials state their desire to implement more such changes to reduce labor costs, which they consider exorbitant. While they admit that Brazilian workers earn less than those in the United States or Europe, they say that they need to employ more workers to attain the same level of production. Low productivity, they argue, leads overall Brazilian labor costs to be higher.

When pressed, industry officials are unable to pro-duce studies to support this claim. In contrast, an independent study by political scientist Ruy Mauro Marini of the University of Brasilia, based on 1982 figures, shows that relative labor costs (hourly wages in relation to productivity) in Brazil were 24 percent of those in the United States. That is, Brazilian workers earned one-quarter of what their U.S. counterparts did for the same output. In addition, DIESSE figures show that production per worker hit a record high in 1988.

Real wages have not risen with worker productivity and have actually fallen considerably since 1982. DIEESE demonstrates the issue graphically by calculating the number of monthly salaries an average auto worker would have to spend to purchase a VW van. Until 1980, salary gains outdistanced increases in the price of the van, when the average worker would have had to spend 12 monthly salaries for that vehicle. Since then, salaries gradually lost ground,with the biggest bite coming since 1986. By March 1989, the average auto worker would have to pay 50 monthly salaries to purchase a van.

In more formal economic terms, DIEESE calculates that in March 1986, 6.5 percent of the domestic sticker price of a VW van went to labor costs and 10.5 percent went to profits. By October 1989, labor's portion had dropped to 2.9 percent of the sale price, with profits eating up 22.8 percent. "The drop in real wages has guaranteed high profits," confirms economist da Cruz.

This drop in real wages occurred despite the efforts of the labor unions in the auto sector, one of the country's best organized industries. Under Brazilian labor law, local unions hold periodic elections that, in practice, end up as contests between the two leading national confederations: the United Labor Confederation (CUT), a combative union linked to the leftist Workers Party (PT), and the General Confederation of Labor (CGT), a self-proclaimed "union of results." The CGT supported right-wing populist Fernando Collor de Mello in his 1989 presidential race against former auto worker and labor leader Luis Inacio "Lula" da Silva. Currently, each union confederation controls a number of autoworkers' locals.

Autoworker strikes in the late 1970s were an instrumental part of the political and social transformations that led to the end of the military dictatorship in 1985.

Strikes remain a salient element of Brazilian industrial relations as evidenced by a tumultuous work stoppage in April and May 1989.Y et, at the bargaining table, labor-management relations have become more cordial, says Heiguiberto ("Guiba") Della Bella Navarro, vice president of the Sao Bernardo and Diadema Autoworkers Union (affiliated with CUT).

But Guiba charges that management still uses widespread dismissals as a tool against strikers, and organizers are often singled out and fired. For example, he says, only six of the 24 members of his union's executive board are still employed inside the factories.

Still, from the workers' perspective, the multinational companies are better employers than the national auto manufacturers. Lula, during his presidential campaign on the PT ticket, acknowledged this in an interview with a Brazilian newsmagazine: "If you ask a worker if he would rather work for Volkswagen or for a national firm, he will tell you that he prefers to work for Volkswagen. The working conditions are better there." DIEESE admits that salaries are higher in multinational firms than in national companies.

Nevertheless, the strategy of heavy reliance on multi-national corporations, especially in the auto industry, no longer seems to hold much prospect for stimulating the economy. The expectation that Brazil would develop into a world-class auto producer, widely held a few years ago, has been largely abandoned. With stagnant production levels and increasing automation, the multinational companies are likely to provide fewer jobs and continue to pay progressively lower real wages to the workers they do employ. If Brazilians want an economic miracle for the 1990s, they are going to have to look beyond the auto industry.

Largest Brazilian Companies, 1988

Company                          Industrial Sector                   
1. VolkswagenAutos
2. ShellPetroleum Distributor
3. General MotorsAutos
4. Andrade GuiterrezConstruction
5. Souza CruzAlcohol and Tobacco
6. FordAutos
7. OdebrechtConstruction
8. Mercedes-BenzAutos
9. Pao de AcucarSupermarket Chain
10. EssoPetroleum Distributor
11. CopersucarFoodstuffs
12. TexacoPetroleum Distributor
13. VarigAirlines
14. AtlanticPetroleum Distributor
15. CarrefourSupermarket Chain
16. NextleFoodstuffs
17. FiatAutos

Source: Veja (newsmagazine), August 23, 1989.


Brazilian Vehicle Cost Factors

March
1986
October
1987
October
1988
October
1989
Manufacturers' Labor 6.5% 4.0% 3.4% 2.9%
Manufacturers' Raw Materials 34.6% 28.1% 25.0% 26.1%
Manufacturers' Profits 10.5% 6.1% 18.8% 22.8%
Dealers' Costs 10.0% 8.2% 7.1% 7.3%
Dealers' Profits 2.5% 1.5% 4.6% 5.6%
Dealers' Taxes 35.9% 52.1% 41.1% 35.3%


Bill Hinchberger is the editor of Third World magazine, published in Rio de Janeiro, Brazil.


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