Friday, 23 September 2011

Macro Level Trends - Brazil – 360 degree Planning to Self-Generate a Very Different 21st Century

The mixture of slowed and contracting global passenger car markets, set against what was a previously strong rebound in global production capacity expansion, has set global mainstream manufacturers the task of re-balancing procurement ordering, manufacturing schedules and inventory levels.

Signs of a 2011 global slowdown were already noted by Q3 2010, yet the combination of the 'Fukushima Effect' in March disrupting global trade (esp in autos), the slow growth of the US and the ongoing EU debt crisis has made H2 2011 a pointedly concerning period for investors, industrialists, economists and national policy-makers; the latter now faced with IMF calls for policy alteration which endangers undoing 'fiscal consolidation' progress made to date.

In the automotive realm corporate seniors are seeking-out preferred geographic battle-grounds from which they might assert advantage so help to maintain the earnings traction of the last few years.

Today, although a partially and recently slowed market, Brazil is viewed as a firm favourite by VMs, given the seemingly never-ending negativity elsewhere. The following very briefly depict the regional pictures which have led to the tactical re-focus on Brazil – though of course the country has been viewed as 'highly strategic' for the last 20 years.

Previously, the North American auto-market re-buoyed thanks to a mix of massive QE programme injections boosting the stock market and the highly important re-stocking of corporate inventories from previous historic lows. Tentative economic confidence was undoubtedly generated but its life-span – so closely tied to QE – was questionable, even during the process. However, it along with radical corporate restructuring gave GM and Chrysler the salvation of boosted sales to surpass newly assigned break-even points.

That in turn gave them what could be termed an unfair advantage over Detroit peer Ford, and importantly the group of non-US global VMs - specifically mainstream producers of VW, Toyota, Nissan Honda, Mazda, Mitsubishi and Hyundai-Kia - which whilst trying to conquer the US have also had to combat a number of headwinds. These being primarily: domestic manufacturer's QE enabled credit tailwinds, their expansive N.A. dealership networks, and the re-emergence of the 'Made in America' conscienciousness amongst US car buyers. Whilst useful to the restructured, vehicle focused FIAT SpA by way of new product, production and distribution synergies with Chrysler, all other VMs have well recognised the up-hill struggle of selling within the USA and Canada, even if they operate transplant factories in the country. Since here and now even that previous advantage - under a level playing field - has been diminished. As seems the US stereotype, freer flowing credit is the prime car-buying determinate, as seen by 2005's record sales TIV of 17.4m, 2006's 17m, 2007's 16.4m, viewed against 2008's 13.5m, 2009's 10.6m, 2010's 11.8m and the 2011 SAAR of 12.1m.

A less uneven playing field existed in Europe, yet far from truly even given France's major bail-outs of its 2 prime VMs versus smaller assistance packages in Germany and 'fiscal spread' efforts in the UK. Though not a resuscitation on the US scale, such direct and indirect assistance together with varying levels of operational down-sizing helped re-energise the market and draw mainstream VMs earnings power into the black once more. Yet the return to the low earnings / no earnings 'European norm' only served to demonstrate the futility of the battle for some, themselves forced into ongoing ever more drastic operational change.

Whilst boosted in 2009 & 2010, in 2011 northern EU markets have experienced general 5% declines or so, whilst southern Europe has seen sales slides of 18-30% over consecutive monthly periods. In contrast the re-afforded 'homeland footholds' US manufacturers were given by government, most European operators have had to re-shape with greater adeptness to capitalism's prime principles. Europe's historically more constrained automotive TIV (compared to the US), and the absence of government incentives, means that sales are being largely driven by product quality those vehicles that maintain good residual values promote replacement purchase, whilst dealers are trying to manage 'pre-loved' inventory to both maintain used car values and critically support new car price floors. The broad credit environment has demonstrably shrunk, its contraction low-end mass market VMs which previously relied upon 'flexible terms' to obtain sales for customers. Instead however, internally 'captive' credit arms are being rebuilt whilst trying to balance volume vs risk exposure profiles of its credit-enabled buyers. As such (enlarged) EU car sales rose, collapsed and re-rose as seen by the following years: 2005: 15.25m, 2006 15.82m, 2007: 16m, 2008: 14.3m, 2009: 14.1m 2010: 11.8m, with 2011 expected at 12.1m

In Japan, the consequences of Fukushima and the nations ever-ongoing de-leveraging process have subdued sales, with a new focus on lower cost 'kei' small vehicles. Vying for ownership of this important Japanese and later European small product market the seeming sore-point in the previously announced Suzuki & VW joint venture. Yet as seen by sales figures, the economic shrinkage has been ongoing; 2008 with 4.2m passenger cars sold, 2009 offering 3.2m sales.

[NB this itself could well have been politically induced given Japan's probable desire to re-unite JV amongst its own players; as was the case in the 1950s-60s in Japan's first homeland kei-car phenomenon. But mindset and probable industrial consolidation leaves little opportunity for non-Japanese mainstream players across the islands' prefectures].

China's automotive market has slowed markedly, and though still world-leading in size and growth (having posted 13.5m in 2009), it seems that the PRC leadership wishes to use the contraction period as one of homeland rejuvenation as part of its own industrial planning schedule. Thus again a mix of homeland backed producers, credit squeezes and less 'exploratory' consumers indicates tougher times for all but the wholly entrusted. VW will maintain its standing, but even GM and its apparently historically entrenched Buick brand will probably suffer more so compared to the deified German producer as a natural consequence of overt brand familiarity. Not a question of familiarity breeding contempt - far from it - but the reality that the marketplace is a very different animal to 5 or 10 years ago. China of course has seen monumental growth thus far: 2008 car sales of 5.7m units, 2009 sales of 8.4m units (+47%). That jump necessitating governmental interaction to slow vehicle expansion patterns for infrastructure capacity and economic stability reasons.

The boom and bust of Russia, created by commodities demand surges and arguably directed by politico-entrepreneurial forces, makes it hard for product and industrial planning for the global VMs. Hence the desire to become engrained via indigenous producers, such as Renault with Avtovaz, to reduce the overall 'corporate regional risk profile' - the 'hit or miss' effect. Thus a case of 'slow and steady' for most VMs ranging from Ford to GM to Toyota to Chinese players like Great Wall and Chery. Russian volatility was seen over 2008-9 with the quickly risen car market plunging from 2.9m units to 1.46m units (-49%).

VMs operating in India, whilst less obviously so politico-entrepreneurially controlled, must balance product offerings in primary tier-1 and tier-2 cities within an economic growth environment that also fosters high inflation. Furthermore, though one country, the strength of its largely self-governing regions (spanning capitalist, mixed market and socialist mindsets) means that India cannot be viewed as a singular entity, Historically then, those VMs seeking step-by-step tentative entrances into India to build-up presence have been thwarted by a mix of national-level issues such as high import duties, aswell as region-related issues spanning from poor logistics to the 'greasing of (officials) palms'. Additionally for foreign VMs, Indian mass manufacturer itself has in the past been thwarted by the need for high % local-parts content policies – all to the theoretical good – but the quality levels of which have typically undermined the foreign VM's own product quality, a problem when a foreign badge carries a quality expectation from the consumer. And the aforementioned inflation volatility only adds to procurement-cost and sales-pricing schisms of arguably inferior quality components.

Whilst JVs have indeed been created, only Suzuki has truly undergone the operating pains of becoming entrenched via Maruti; that FDI relationship in turn providing the incremental improvement lessons for the domestic producers themselves, thus gaining a greater grasp over their country with the right industrial and commercial business models. Nonetheless, the 17% sales TIV growth in cars between 2008-9, from 1.54m units to 1.81m units (+14.2%) highlights a voracious country demand when conditions allow.

The annual new vehicle sales decline and growth figures which 'book-end' either side of the last decade (2001 vs 2010) tell the critical story.

USA: 17.5m vs 11.8m units
Japan: 5.9m vs 5.0m units
Germany: 3.6m vs 3.2m units
France: 2.8m vs 2.7m
UK: 2.8 vs 2.3m units
Italy: 2.7m vs 2.2m units
Spain: 1.7m vs 1.1m units
Canada: 1.6m vs 1.6m
S. Korea: 1.5m vs 1.5m

China: 2.4m vs 18m units
Brazil: 1.6m vs 3.5m units*
India: 0.9m vs 3.0m units
S. Africa: 0.37 vs 0.49m units
Poland: 0.35m vs 0.39m units
Argentina: 0.17m vs 0.7m units
Turkey: 0.12 vs 0.8m units

This seemingly slow but powerful global seismic shift was exacerbated in 2008-9, whence worldwide TIV capacity shrank from 64m units to 60.5m units, showing a 5.5% overall decline. This demonstrated that new EM/Eastern demand had yet to offset Triad/Western fall-off; even though China's new car demand proved demonstrably greater than that of the US.

Given this historic shift in demand patterns, multi-national VMs' prime attention has been devoted to their commercial positioning in BRIC+ nations. China obviously the primary catchment focus; but those expansionary ambitions accompanied by the PRC's intrinsically self-regarding political & commercial acumen. This then represented and still represents 'high hurdles' for the majority of VMs that had not devoted previous consecutive years toward building an 'entente cordial' (consisting primarily of technology transfer).

In this global opportunity context, a smaller but seemingly far more realistic and reachable proposition is Latin America / MERCOSUR, with of course 'The Federative Republic of Brazil' the central target..

Over the 2008-9 period of sharp global 5.5% shrinkage, Brazilian TIV rose by 11.4%. This is indeed impressive, but at first glance doesn't hope to match the 'kinetic growth' of the PRC or 'potential growth' of India. The prime difference however - well noted by observers including capital markets and IMF – is that Brazil had reached a certain plateau of ongoing economic and social stability.

Brazil's socio-political history has been both fragile and volatile, but the military regime that effectively ruled between 1964 & 1989, was superseded by the 'Nuvo Republica', and whilst chronologically a short time-line, the country today exhibits ever smaller reflections of autocratic control that had been present for hundreds of years under different names. The industrial and political elite still of course have influence, but the once deeply divisive social idealisms generated by the communist ideology has been replaced by a progressive mixed-market mentality, one equally apparent in neighbouring Argentina, Chile, Venezuela etc with ever evolving presence and influence across the less advanced nations of Latin America.

To this end Brazil has become 'the' progressive socio-economic role-model throughout MERCOSUR and many worldwide EM regions, and the high visibility of new car ownership, itself propelling used car ownership, perhaps the greatest advertisement for the country. The following depicts Brazil's year on year vehicle sales over the last decade:

2001: 1.6m
2002: 1.48m
2003: 1.43m
2004: 1.58m
2005: 1.71m
2006: 1.93m
2007: 2.46m
2008: 2.82m
2009: 3.14m
2010: 3.51m

The driving force was of course the combination of Brazil's commodities export boom and increasing socio-economic liberalisation, shifting yesteryear mindsets toward the free-marketeering of industry and commerce. This displayed by the dynamic growth of the BOVESPA stock exchange* (view postscript).

[NB the term 'commodities boom' could be read as a short-hand reference to overall swelling economic growth activity, though undeniably set in motion by the exportation of natural resource wealth spanning: oil / petroleum / ethanol; iron ore for steel-making; semi-precious metals for industry; agricultural foodstuffs, bio-fuels and fertiliser; general timber logging (inc. rare hardwoods), aswell as low to mid-value consumer and industrial goods able to previously deploy low cost labour and cost-amortised old generation capital equipment].

The vehicle market's 220% expansion over the decade was of course built upon fundamentally sound economic success, enabling a secure framework of growth for both private commerce and state-service employment, thus able to massively energise consumer demand.

Yet the part of that expansion in both business and consumer circles was also 'supercharged' by the increasing availability of credit – seemingly intrinsic to the second half of the modern economic cycle - available from both auto-maker's captive credit houses aswell as the plethora of external sources.

The majority of Brazilian car buyers are naturally very price sensitive, a consequence of decades of instability and austerity. However car-makers also noted an increased elasticity in the Brazilian market created by the proliferation of buyer types, from the small band of newly wealthy, to the re-emergence of a sizeable middle-class wishing to 'publicise' their status to the creation of broad working class now with increased disposable income levels. As a consequence a greater number of vehicle types were demanded (as seen by import trends) influencing product planning choices in order to expand brand product portfolios – at model and variant levels – so stretching the pricing ladder upward and so improve unit margins and corporate profitability.

This then, typical of a swelling consumer culture, was well understood and exploited by the established incumbents: VW, FIAT, GM & Ford. The size and shape of the 'pie' also convincing previously exited players such as Renault & PSA to re-instigate, marginal players such as the Japanese VMs to expand vehicle portfolios, and attracted newcomers such as S.Korea's Hyundai-Kia in cars and India's Mahindra within the light truck sector.

The 2011 picture is as follows:

FIAT – 22.3% market share from 23.2% (loosing ground)
[3 plants / 530 dealers / 16,000 employees}

VW – 23.3% market share from 22.5% (gaining ground)
[4 plants / 418 dealers / 25,400 employees]

GM – 19.4% from 20.5% (loosing ground)
[4 plants / 377 dealers / 23,000 employees]

FORD – 9.2% from 10.1% (loosing ground)
[4 plants / 449 dealers / 10,600 employees]

[3 plants / 244 dealers / 5226 employees]

[2 plants / 136 dealers / 3500 employees]

[1 plant / 123 dealers / 3,425 employees]

[1 plant / 159 dealers / 1740 employees]

[1 plant / 25 dealers / N-A]

Thus in a relatively short period, although the market-size has expanded year on year, so too has the competitive climate. The temperature has increased yet further with entry of Chinese corporations such as Chery Auto Co and JAC Auto Co importing vehicles to target the dominant A & B-segments (approx cars of 1.0-1.3L class). Chinese market share in Brazil is approximately 3.3%, a speedy climb from 0% over the last 18 moths. It is a trend seemingly enabled by what has been the increasing availability of credit to even low income earners with stable re-payment histories. Good news for China seeking its own hi-potential export markets, but of growing concern to the established auto-makers, amongst which VW, GM & FIAT have been decade long economic stalwarts.

Critically of note is the fact that Chinese producers have had to overcome an import tax of up to 35% per unit, which whilst more easily absorbed a decade ago when China's input cost were far lower, adds what may very probably be an intolerable cost-weight on importers shoulders. Thus the cars offered today may in fact be strategically offered 'loss-leaders' so as to gain market foot-hold.

The government then has had to balance the lobbying of its pseudo-indigenous producers that are concerned about the seeming Chinese-import advantage, against the significant FDI promises made by various Chinese VMs and OEMs.

To partially cool the short-term temperature of the competitive climate, the it was recently announced that those vehicles which were not domestically manufactured would attract a two-tier tariff system: 7% if 'MERCOSUR made' (ie with 65% or more local content) and, 37% for imported vehicles. This then on-top of the present import-duty system.

Thus whilst seeming to stave-off immediate foreign competition, the government also recognises that Chinese manufacturers will now need to fulfil their pledges of producing inside Brazil, thus aiding mid and long-term FDI, employment and general national economic contribution.

After what has been a boom period, we now witness see a cooling of the Brazilian economy - due to the Chinese & Asian slow-down – yet it is an economy that still simmers briskly with comparative gusto. Even though turned 'off the boil', the 3.1% GDP growth in Q2 2011 sits against previous levels of 4.1% in Q1 2011, and 5% in Q4 2010. Though this appears a world away from the 9% or so for Q2 and Q1 2010, as with the physical universe, all in the economic universe is relative That 3.1% compares well to the 20 year average rate of 3.26%. that rate achieved even with very turbulent periods of 1992 and 2009. It appears then that the country's Finance Ministry and Central Bank has become adept at reading and reacting to the macro-environment and any consequential shock-waves..

A natural consequence of the recent 'cooling' has been the partial timely removal of the previous broad credit availability to lower income earners and those businesses & individuals with higher credit risk profiles. This action stems from the inevitable increase in the cost of wholesale borrowing as capital markets contract and from the reaction to an increase in loan defaults.

This in turn should play to the advantage of the 'indigenous VMs' – the bigger the more so - with balance sheet strength, capacity utilisation efficiencies and pan-national dealer networks: providing greater defensive resolve. However, what cannot be discounted is the size of 'homeland' backing each auto-maker can muster. The question of wholesale-available finance may be a determining factor above and beyond the usual criteria of model-mix contribution, efficiency cost savings etc.

The fact that the USA is embarking upon another round of liquidity easing (by another method) indicates that GM (presently far below its IPO price) will be an expected beneficiary, as will Chrysler an Ford. FIAT with arecent credit downgrade invariably sits in a different place, and though no doubt possibly frustrated by the increasingly illiquid and costly Italian capital markets may through Chrysler wish to access lower-cost liquidity from the USA thanks to the Federal Reserve. Thus in this cooled period GM & FIAT could theoretically play hard-ball against VW, the Japanese and S.Koreans by effectively buying market share through vehicle discounting etc. VW however will probably choose to maintain unit margins through manufacturing and inventory management and worry less about the threat to market share. It probably recognises (as history indicates) that it should not enter into pricing wars which only serve to diminish brand respect and residual values, creating the value-destruction spiral of low margins and higher production costs (pushed by volume) seen with the previous demise of GM and Chrysler' s North American operations.

As has been historic choice and necessity, VW, the Japanese and now S.Koreans will endeavour to build their Latin American presence through quality, not price; really the only option also available to PSA. Whilst it appears that GM, FIAT-Chrysler, Renault, the Chinese and possibly Indians (excluding TATA's JLR), will battle in Brazil and beyond using business models reliant upon wholesale financing models as much as product models, wholesale models reliant upon long term devaluation of the US$ for 're-generative funding', and long-term currency FX strength of the Yuan and Rupee.

Tomorrow then is a very different ball-game to that of yesterday, let alone yesteryear.

'Yesteryear' was a frustrating period when incumbent VMs such as VW, FIAT, GM and Ford who were effectively forced to 'lay-low' for the previous fiscally constrained decades – often forming JVs to 'sit-tight' in marketplace until better days appeared.

'Yesterday' - the late 1990s and 2000s - allowed for a disentanglement of previously formed co-dependencies, perhaps best exemplified by Ford's 'piggy-backing' of Renault platforms and VW powertrains. In turn it provided for major over-hauls of their Brazilian organisations, across: design, development, manufacturing and sales, so as to eradicate older product lines (which had served well) and introduce new products that were far more globally aligned and modern yet critically intrinsically engineered to Brazilian roads and Brazilian buyers' not so deep pockets. .

'Today' we see an emerged confident country with its own 'Nuvo-Americana Couture' represented by indigenous products like FIAT's Nuvo-Uno, the expected spiritual successor to the VW Gol and other national vehicles, but the dynamics of the industry mean that although such 'Brazilian Couture' is displayed, look below the hemline and it is also accompanied by what true internationalists consider the feet-dragging of a 'Flip-Flop' tariff policy.

And that is something which investment-auto-motives expects to see periodically emerge as and when Latin America seeks to temporarily protect itself over the coming years, mimicking Brazil's movements.

The Brazilian success story has meant an ongoing appreciation of the Real, that constant upward re-valuation bow viewed by Brazilian politicians as out of kilter with the general trend of an unstated but nevertheless unambiguous global currency depreciation war. The cooling of the Chinese economy - along with those neighbouring SE Asian countries which are intrinsically linked – has recently muted demand for Brazilian exports. Thus Brazil has been hit by both FX induced and basic export demand induced headwinds; a story it shares with it primary trade partner China.

Moreover, that FX differential has undermined its standing as low cost producer of basic consumer items, with perhaps the most apparent examples being the influx of Indian, Chinese and CIS made beach-clothing. Thus culturally, a case of even Brazilian 'national dress' of flip-flops, vests, shorts and swim-wear being lost from the grasp of domestic producers.

As noted, this concern has recently expanded to include the nation's car industry.

Brazil's ascendancy, its relative economic peaking amongst its EM peers and the disadvantages consequences have become increasingly noted amongst politicians, Hence recent calls for global regulatory bodies to effectively 'name and shame' those whose actions reflect subtle policy-ploys for currency manipulation.

But beyond the political lambasting, Brazil today finds itself in a similar position to China a couple of years ago. The diminishing of export markets and a rising currency base means that Brazil must now become more inwardly focused, developing greater internal economic activity and so B2B and B2C demand, to off-set lost export earnings. 2011+ economic traction must be generated.

The most visible example of this policy re-orientation is the hosting of the 2016 Olympic Games which inevitably serves as a medium-term fiscal catalyst. But Brazil must look beyond the Games' usual raft of stadiums and the creation of 'legacy infrastructure' projects so as to maintain and indeed broaden a philosophy of multi-aspect led growth. Not to do so repeats the experiences of Abu Dhabi and UEA countries, where the ostensibly private-sector construction boom provided what became a flawed second economic pillar alongside oil.

The real-estate asset base is of course of undeniable importance, and of use in economic policy formation, but as all now recognise, must be counter-balanced by tangible value-adding across the economic board.

Such lessons of the distant and near past however appear to have been absorbed in Brazil, indeed its own mid-20th century history offering a powerful successful case study. Thus, even before winning the Olympics Bid, projects were seemingly well under way to try and mimic the economic miracle seen in the 1950s & 1960s industrial.

To this end, coastal areas and inland plains far beyond the major cities of Rio de Janeiro and Sao Paulo were identified as new economic development regions. Effectively viewed as 3rd tier new towns – behind 2nd tiers such as Salvador, Brasilia, Fortaleza & Belo Horizonte – which could provide both national access to the globalised world (and vice versa) through large-dock ports and new and improved internal highways improving logistics. Both then serving as vehicles for additional national economic activity founded upon new regional activity which itself would stem domestic migration toward the two 1st tier cities, which themselves have become 'choked' by overpopulation physically and economically.

To promote this new economic age, new ports along the full seaboard have been identified and are in the process of being built, created in tandem with co-aligned industrial and commercial centres. One planned port that will be able to provide easier access for shipping is near the historic port of Vitoria in the state of Espirito Santo; an old harbour with logistical disadvantages. But it is the 'super port' near Sao Joao da Barra, called “Superporto do Acuto” to the NE of Rio de Janeiro, that represents the countries export and import future. One designed to house the largest ships in the world so as to reduce transportation costs and thus improve the profit margin for shipping owners and their corporate customers alike.

Such green-field port development allows for well considered and properly designed infrastructure, attracting both heavy industry reliant on exports and lighter mass-assembly industries (such a s vehicles) which both procure inward-bound components from a plethora of foreign lands, and are able to sent their products outward-bound with pricing, quality and time-line assurances.

Sao Joao da Barra is due to officially open in 2012, and the complimentary industrial parks that surround the port will typically reflect Brazilian industrial activity that has undergone both sector consolidation via M&A and efficiency seeking via updated methods.

Thus Brazil's renewed industrial agenda will focus upon the efficient processing, semi-finishing and distribution of higher-value steel products and plastics, as opposed to simply the shipping of raw and graded iron ore and oil & ethanol; which underpinned much of the export-led success story recently. Besides serving other industrial sectors such as construction with rolled-steel and coiled-steel. this then also importantly provides the processed materials of sheet-steel, flat-aluminium, structural platform for expansion of vehicle-making facilities.

However, the very question of Brazilian asset ownership is one that has become rather fraught in recent years, even with the intermediary ownership mechanism of the BOVESPA. This perhaps especially amongst the olde worlde industrial players of Europe and the USA relative to Chinese interest.

Once Brazil was seen as a natural extension of their global power-base, an attitude very well illustrated by Henry Ford's own Fordlandia project based inside the Amazon forest and seeking value-chain advantage through timber, rubber and soy access (for plastics). But China's recent but prolific arrival on the world stage has immeasurably shifted the geo-economic 'power-base', one which has offered new negotiating alternative for those in prime positions such as Brazil; itself seeking not only China's hefty FDI packages but access to China's massive and progressive business and consumer markets.

Expectantly so, the various sub-segments of Brazil's broad vehicle industry is seen as a key mutual economic enabler. The complexity of the vehicle manufacturing sector, with depth and breadth of supply chain and retail links, offers a myriad of commercial opportunity. And the resultant 'unit output' of the vehicle itself enables the daily transportation of the masses, the haulage of goods, raw materials, part-finished goods & completed goods, the mobilisation of the commercial salesperson, service technician and repair technician and the very turning of the soil and reaping of the crop that will serve both Brazilian and Chinese life-improvement ambitions.

This policy of 'new order industrialisation' then supports the GDP input-mix, which in 2010 consisted of 5.6% agriculture, 28.6% industry & 67.4 services, and which provided a notional per capita GDP of US$10,500 – though realistically with deep earnings divides. It also steers an alternative balanced path compared to other EM countries which have chosen to bypass 'smokestack' industrialisation straight into service-based growth; this either forced by lack of natural resources, or the ambition to leap-frog into 'advanced country' status.

Importantly though the 'nuvo-industrialisation' of Brazil looks set to go much further than the size and scale seen in its mid-20th century modernisation plan; a plan in which Brasilia became the showcase. A scheme which could infact makes the Brasilia Plan look modest and antiquated, and has a far greater effect on the auto-sector.

The four central tenants behind the 1957 'Brasilia Plan' were to:

- create an administrative centre with high-brow ideals & ethnic melting-pot
- reach into the hinterland so as to aid exploitation of natural resources
- to create a modern, planned city of discreet areas
- to create a motorised city

Hence, its administrators came from the various 'rainbow' of ethnic cultures, the city map was/is that of an aeroplane silhouette illustrating its distant location deep in the heartland, its commercial, industrial and retail activity-sectors were set according to the prevailing modernist outlook, and its scale was not 'humanist' but 'motorist' in the North American manner of the period, hence dispersed sections and grand boulevards. Brasilia helped set Brazil into the global consciousness and was thus deemed a Brazilian success to this day.

Sixty-Five years later from that grandiose statement, investment-auto-motives believes that Brazilian seniors seek to undertake Brasilia 2.0.

The premis of a recent UK television programme was to research into what were described as sizeable 'lost populations of the Amazon', people and large townships reported by Amerigo Vespucci in the very early 1500s. Though of questionable credibility given his probable desire to upstage Christopher Columbus and seek political advantage with the King of Portugal, Vespucci claimed that the River and Forest supported a mass civilization. The programme's thesis was that this discovery undoes contemporary opinion of the Amazon as 'virgin' forest; with an assertion that the whole area was shaped by man for agricultural, residential and commercial purposes in previous ages.

This, investment-auto-motives suspects, could be the very beginning of an argument presented by the Brazilian government. One to re-utilise the nominally protected Amazon through a an eco-initiative of (an initially) sparse populace settlement plan.

Importantly it recognises that although upon its own sovereign province, Brazil must credibly convince the world at large of its intentions and outcomes of its new settlers. It will probably cite that accessing the country's interior will massively improve living standards for its future populace, especially so for those who presently live in semi-squalid and crime-ridden slums of the 'Favellas'; squeezed onto inner-city hillsides. Those in marginalised housing would be re-settled in the outer reaches of sovereign territory; whilst also ensuring protection over its natural resources (which like Greenland's oil reserves have become of such interest to other nations) using forest management techniques that have long been in use in Europe.

Thus Brasilia may seek to convince its social appropriation of its own forest area by positing the theory that certain academics have arrived at: that previously populated small localised sites were inter-connected by a network of tracks through and across the forest floor, creating a low-impact, highly sustainable progressive society. Instead of broad concrete boulevards, individual sectors, monumental buildings and broad vistas, Brasilia 2.0 could be the very opposite.

This may appear remote conjecture, something of little consequence to the Brazilian auto sector, but its latter-day ramifications could be huge. Such an outcome, if properly orchestrated, then has massive long-term potential for Brazil's 'pseudo-indigenous' auto-manufacturers, allowing them to fast-forward both their Brazilian R&D and that within the US, Germany, Italy, Japan, S.Korea, India and China.

At first, the idea of possibly millions of vehicles running through the Amazon forest appears absurd and ethically monstrous, but if those cars, trucks and buses were garnered through 'low CO2' technology mixes (small cc ICE, hybrid, plug-in hybrid and EV), the CO2 absorbing forestlands could in fact be vehicle's natural home. Arguably far far better than the open skies and smog-bands of Los Angeles or Beijing, and part of the reason why green-cities like London and Paris have not suffered as much, indeed with their own plans for wide scale tree re-planting.

[NB expert opinion views the typical broad-leaf mature tree as absorbing 1 tonne of CO2 over its lifetime of about 100 years].

Depending upon progress and pressures, such a radically re-orientated Brazilian future could be perhaps only 20-30 years away, and thus must be something seniors in the Brazilian auto-sector alongside its national association – ANFAVEA – should seriously contemplate.

From a 'here and now' investment perspective, the ongoing expansion and increasingly complexity of the Brazilian auto-sector, even in its conventional vein and supported by a very well balanced economic base, should offer an ever broadening horizon of investment opportunities.

Some of its smaller Latin neighbours may enjoy comparatively faster growth rates over the mid-term via their own commodity booms, but many of those will come with their own as of yet unresolved political and social tensions. Brazil may be relatively conservative for fast reacting 'risk-on risk-off' players, but for the automotive-sector investor it has reached a level of credibility and opportunity that leaves many other advanced and EM counterparts standing in the shade.

The present 'cool breeze' should be welcomed as a time to reflect and properly assess.

Post Script

The BOVESPA grew from a near zero-rated flat-line between 1989 and January 1994, grew on a steadily trend path until March 2004 reaching approx 23,000 on its index, the dramatically climbing to a record of 73,516 in May 2008, rapidly fell to approx 30,000 (as a new floor) by late 2008 as a result of the Wall St collapse, rose sharply with constant hover peaks at approx 72,000 before now settling at about 56,000 in Sept 2011.

investment-auto-motives suspects there will be a gradual new “correction” to about 50,000 as the news regards a systemic slowdown of the global economy takes effect and short and mid-term investors 'take profits'.

This should however provide a positive effect by re-stabalising the national stock market at a new foundational floor offering improved p/e ratios whilst Brazilian corporations re-assess their operational efficiencies and new companies are publicly listed, so as to provide future investor value-creation simultaneous to a latter-day upturn of the global economic cycle.