Friday, 2 September 2016

Micro Level Trends – Brazil's Automotive Sector – “Brazil 66”...Sixty Six Years of Economic Power Lifting (Part 3)

As many worldwide await the Paralympic Games, Brazil continues to be humanity's geographic focal point.

Pertinent is the fact that many Paralympians experience the world itself “upon wheels”, doing so  with astounding ability. Whilst great swathes of Latin America hope to escape their own socio-economic confines via eventual car ownership and so their own set of wheels.

Here in Europe the standard issue of summertime 'Eurotrash' songs have been superceded by Brazilian signature tunes: feel-good and party inspiration provided by the musical descendants of Sergio Mendes and 'Brasil 66', with Latin themed girl trios of 'Nossa' and 'Bellini', whilst the men of 'Mojito' provide modern rendition of the Mariachi.

Interestingly in the spirit of CSR (corporate social responsibility) the organisation 'OI Brazil' provides what might be described as updated Brazilian traditionalism, targeting the cash rich realm of corporate events so as to provide economic trickle-down to those far less secure in the Fevellas.

The United Nations may have recognised a plethora of distinct national and regional musical genres, but for the rest of the world beyond Latin American borders the music represents pure summer escapism.

A snapshot of the Brazilian national ambition toward betterment for all can be heard in lyrics of The Black Eyed Peas' version of “Mas Que Nada” when raps:

“Try hard, hard, be my daily operation,
Got to put in work in this crazy occupation,
Got ta keep it movin' (that's the motivation)
Got to ride the waves and keep a tight relation...
With my team, keep it movin' and doing it right
I bring it loud everyday 'till daylight,
Just to make things move in this monkey business,
(We took an old samba song and remixed it).

Back in 2006 it was used for a Nike TV advert featuring the Brazilian football team, and almost became the de facto national team theme tune for a while.

As will be shown, those words could equally describe Brazil's attitude and efforts toward its own auto-industry, seeking continual progress over the decades since 1950 and through a myriad of constraints and opportunities.

The necessary economic 're-mixing' of industrial policy-setting and industrial dynamics within the sector continues, but within this obvious commercial planning must be allied with a new sense of culturally inspired 'visioneering' for the future.

For the present, the following provides a general description of “Brazil 66” : the sixty-six years of auto-sector economic power-lifting.

Achievements that have done so much for people spanning all social spheres.

A Brief History of Brazil's Auto Industry -

In the Beginning...

The globalisation effect of European colonisation over centuries, together with the combine of European and American industry and high finance, meant that Brazil's “open door” policy under-pinning trade of primary goods (agricultural and extracted commodities) was by the beginning of the 20th century enjoying its own export super-cycle.

Brazil's scale and diverse terrain meant that inland infrastructure and associated transportation methods and links had always been a major issue. Where feasible rail routes allowed for deep inland penetration, but the load limitations of equine hauled carts and wagons meant that there was a fundamental disjuncture between the capacities and logistics flow of 'mule-trains' versus steam-trains.

The appearance of the internal combustion engine in heavy load trucks solved that dichotomy and so revolutionised and continued to powerfully propel Brazil's own economic engine.

By the 1920s and 1930s Ford, GM, and Chrysler trucks, buses and cars became the transportation staple, mostly directly imported but also part assembled to appear “all Brazilian”.

So good were the trade relations (underpinned by the need for advanced American military equipment) that Henry Ford invested millions of dollars into 'Fordlandia' deep in the Amazonian river basin, to obtain, process and ship raw materials back to his Baton Rouge plant in the USA.

However, claims of “American Imperialism” and industrial slavery led to social unrest within 'Fordlandia', this anger spreading elsewhere, toward the “foreign imperialists” and Brazilian (ie European rooted) elite. America's capitalists and their “national co-conspirators” were viewed as reaping profits at the cost of the health, happiness and dignity of ordinary Brazilians.

To help counter this, new trade links grew with Germany in the mid 1930s. As a neutral country Brazil (along with other similar Latin American countries) was able throughout WW2 to trade exported raw materials in direct exchange for imported German finished goods; all done on a barter-system basis for use across the social spectrum.

However, the legacy effect of previously imported items and the innate technological strength of American capital goods and consumer goods meant that it would have been very foolish to have severed such trade ties, so they were retained.

The Mid-Century Modernisation Drive...

The American connections to Ford, GM and Chrysler made in the 1920s were logically retained , but as as ostensibly non-partisan throughout WW2 until the very end, Brazil could begin to maximise its retained relations with Germany, Italy and Japan.

That impetus came in the early 1950s, in reaction to the UN's ECLA recommendation regards necessary domestic industrial expansion, so beyond narrow focus and reliance upon the 'primary industries' (agriculture, forestry, mining), and toward greater economic self-development of 'higher-value' secondary and tertiary industries (steel, automotive, engineering design etc).

So as to diversify the national economic base, modernise quickly (“50 years progress in 5 years”), raise livings standards, gain international respect, and critically extract itself from near total the reliance upon the vageries of the worldwide commodities market - which experiences sharp downturns and slow upturns. Vitally so as to create a worthy export base of higher value manufactured goods across and broad spectrum to both its South American neighbours and worldwide.

The ECLA recommendations for future economic prosperity highlighted that much of Brazil's own 20th century modernisation agenda would need to be supported by the pragmatic creation of an indigenous automotive industry.

The start point to that ambition would of course the attraction of additional foreign parties beyond Detroit's Big Three.

Initial steps were made after 1953 with the imposition of a vehicle import ban so as to kick-start homeland efforts.

Four small scale ventures were agreed. Firstly the CKD based production license of the 3-wheeled Iso-Isetta to a domestic machine tool manufacturer, renamed the Romi-Isetta. Second, the comparitively large CKD of Willys-Overland vehicles, notably the iconic Jeep. Thirdly, CKD assembly of the first Toyota LandCruiser. Thereafter the initial tentative CKD start of the Volkswagen Type 1 “Fusca”.

Interestingly, though the government promised to financially support the Romi-Isetta venture as the first step in its national plan, in fact it failed to do so.

Instead, 1957 saw the creation of ANFAVEA, set up as the country's central auto-sector association with initially very close ties to government and important role in sector development.

So whilst the first notionally Brazilian car was of Italian origin, it was Germany through VW that became the first foreign vehicle producer to invest heavily and build a full capacity semi-automated plant in 1957. Initially for the Type 2 Kombi van in 1959 for industry and commercial buyers, with two years later the Type 1 “Beetle” or “Fusca” for scaled-up private mobility. Even a 'long back' estate version of the Fusca was created as a prototype to improve interior space, but did not warrant the cost of production for additional small internal space gain.

VW's own factory investment prompted a wave of additional FDI in the 1960s from Ford and GM. Much of the Brazilian population, the youth especially, altering its previous Anti-US stance given the outcome of WW2, the size of the American market for export goods, and the promise of economic expansion; with which new life-improving American-made household goods could be bought, such as GM's Frigidaire refrigerators.

Since Brazilian cars would obviously be in the small, light and efficient European mould, with their own cars effectively defunct, the American firms instead utilised low labour rates to produce engines, heavy trucks and pick-ups for burgeoning haulage and general commercial demand. As will be seen later, most interesting was the Brazilian-unique Ford F-100 pick-up.

Recognising the advancement made by the Americans and Germans, and as part of their own  internationalist agendas, France and Italy were enticed in during the 1960s.

Renault created an alliance with Willys-Overland for sale of their Dauphin small car.FIAT providing greater commitment with the building of a new plant in Betim (Belo Horizonte) in Minas Geras.

Thus for over a decade the government pledged support to foreign vehicle makers, even if such assistance was spasmodic to its own entrepreneurs. Volkswagen, Ford, GM, Willy's and FIAT all received cheap land, grants and loans equivalent to typically 50% of the start-up costs, with additional key provision of the required infrastructure of roads, sewerage and electricity.

After start-up the instigated of a low taxation regime, controlled-labour legislation to surpress overhead costs and allowance for foreign investor firms to repatriate profits back to the home country.

Thus it was largely Ford, GM, VW and FIAT, who provided the cornerstones for Brazilian national ambition, through both democratic and autocratic forms of rule.

This provided the ability to create pseudo-indigenous vehicles often through adaptive hybridisation of adopted foreign vehicles to allow for Brazil's own self-build products.

Critically, beyond the tailored Brazilian packaging and aesthetic of the vehicles produced, was the necessary ability to retain and utilise relatively basic power-train technologies. VW's small air-cooled boxer-4 engine simple to run and maintain across very varied geographies, altitudes, climates and temperatures where professional assistance could be hundreds of miles away. Ford's big lazy, low compression V8s able to breath deeply and so provide torque at mid and even high altitudes. Both the 'boxer' and 'big V' able to run on poor low-octane fuel, or indeed old stale fuel often found in remote locations.

Thus, little surprise that such basic engine technologies were so long entrenched in such a highly variable transport conditions from the mid 1950s through to the mid 1980s and beyond.

Another critical cause being the economic stagnation of the country, and lost decade and a half from the mid 1970s through to the late 1980s, caused by initial social unrest and reactionary monolithic political rule for that period.

The 1990s / 2000s Boom...

Over the last twenty years or so Brazil has demonstrate itself as an increasingly competent and highly vertically integrated champion of the global auto industry.

The 're-opening' of the country to international investment and a vital world mindset in the early 1990s prompted a fresh (and long awaited) injection of FDI and vitally foreign commercial belief in both domestic and export potential.

The resource rich land proffered much by way of raw materials and lower cost input costs, as did likewise somewhat policy tempered energy costs regards running heavy industry. But critically business and government leaders recognised the to encourage and nurture expanded and new sector competences to improve of those critical core functional capabilities that underpin substantive vehicle design, production and distribution.

Much of this learning was inevitably 'imported in' from the personnel and processes of those long established Multi-National Companies already present, but vitally a renewed complimentary effort was made within academia and smaller indigenous auto firms.


As of 2015, even whilst in the midst of a severe domestic recession and global fragility, it is reported that Brazil had still risen to become the 9th largest producer of vehicles. Countries such as China, USA, Japan and Germany may have been well ahead in terms of production volumes, but tellingly Brazil was far in advance of France, UK and Italy.

Today Brazil produces a myriad of vehicle types is destined for a range of distinctly targeted markets. These span cars, trucks, bus and coach, general utility, military (light green) and agricultural vehicles.

Within (the prime focus of) passenger cars an increasingly diverse range is being produced, from increasingly affordable city cars thanks to a previous credit expansion for the less wealthy (tho' generating concerns about accordant fail rates of sub-prime loans within this recessionary period) to the more recent introduction of premium marque executive sedans.

In the former category the likes of the compact but voluminous FIAT Novo Uno distinctly designed for Brazilian and LatAm demands, to the smaller VW Fox city-car destined for both homeland and European and Japanese export, production units specified with varying levels of technology content befitting target market to suit a wide range of income levels and tastes.

The expansionist mindset now includes the legendary VW Gol (the Brazilian archetype after the Brasilia), long since matured beyond its 'grass roots' technical origins and licensed to Iran Khodro company for 'satellite' plant production in the Middle East, this business model set to be replicated elsewhere .

Renault-Nissan has set out its EM strategy likewise, after the massive success of Dacia in Eastern Europe and far beyond (Western Europe, MENA, India etc), it seeks to replicate that achievement with new models. Once such is the Nissan Kicks, a compact SUV initially produced in Mexico, to be manufactured in Brazil imminently and supposedly set for 80 local manufacture and export destinations.

Whilst, in a nicely paradoxical and serendipitous manner that illustrates the end of one important era and the new beginnings of another for Brazil, the last of the locally produced iconic Type2 vans (with water cooled modern engines) were themselves exported as 'fashionista' products to various export locales (eg Danbury in the UK) to satiate the post-modern demand for 'authentic retro' by cash-flush middle aged hipsters keen to differentiate themselves from the neo-retro mainstream crowd.

In the Global Manufacturing Sweet-Spot...

Brazil today then is a much advanced auto-player, with the advantage of enjoying near world class production standards thanks to the quality measures of global manufactures, yet still offering a relatively lower cost of labour.

Thus foreign and domestic manufacturing firms are able to adroitly 'mix and match' the levels of (fixed overhead) capital spend on plant, tooling and associated equipment, against the requisite (variable) spend on labour; whether on a project by project basis, or indeed for complete long term business cases.

Brazil then could be said to have at last reached its production zenith, its regions able to offer keenly sought business model flexibility.

Little wonder that since the mid 1990s all the major global auto-players have re-invested heavily (FIAT, VW, GM, Ford, Renault, Toyota) or undertaken varying degrees of new millennium investment as either sole production owners (PSA, Nissan, Daimler, BMW, Mahindra, TATA Jaguar Land-Rover) or via joint venture importers (Coao-Hyundai-Suburu).

For very good reason, sixty-six years after the dream of a substantive and convincing indigenous automotive industry, Brazil has begun a phase which positions it very favourably “front and centre” of the world's automotive stage.

Into the Future -

Given the economic contraction and fiscal budget woes of today that induces austerity led policy-making, together with the headlines of political corruption, when the present socio-economic mire is contrasted with the (albeit erratic) leaps and bounds of the past sixty-six years, many of Brazil's reputable leaders within the political and business elite will be frustrated by the late impact of the global recession; a recession which various economic theorists thought would pass-by given Brazil's strong all-round economic platform.

Indeed, compared to the devastating impact upon North America, Europe and elsewhere Brazil's 'real-world' recession beyond statistical data-sets and hard-leftist generated demonstrations has indeed been comparatively shallow. The continued broad export success of the auto-sector, and maintained strength of sub-prime loan repayments just two interconnected illustrations of the reality for many in “Main Street” Rio de Janeiro or Sao Paulo.

The fact is that unlike the truly poor in the West facing high existence costs (food, winter heating, etc) various lower-level ('D' category) urban Brazilians with a comparative higher disposable income (given low existence costs) are able to enjoy relatively high priced brand-named FMCG and consumer electronics goods (for status-seeking) whilst bemoaning the raised cost of public transport.

[NB this is not to overlook the many who are simply  existing at a subsistence level].

Nonetheless, Brazil's economic stewards - typically drawn from the elite and with a sense of national responsibility – well recognise the need to continue to build upon the achievements made to date.

Today industry and services account for a greater proportion of national GDP than the primary sectors of mining and agriculture, even if Brazil is externally seen by narrow minded foreign investors as a “commodities play” awaiting a return.

As seen and recognised by senior national planners - who themselves directly experienced the transformative effect of VW Fuscas, Brasilias and little FIATs - the ever broadening automotive industry is core to future betterment. However, what they may not (but must) appreciate is the extend to which 'Brazi Autos LTDA' presently sits in a remarkably unique position relative to the rest of the world.

The 'Social Headwind' and the 'Industrial Tailwind' must now be coalesced to provide ongoing national metamorphosis.

The time then is right to re-undertake a brave new era of national economic planning and thus regional re-planning. Planning in which the automotive sector can continue to act as a socio-economic transformer.

New Visions for Rio de Janiero and Sao Paulo as cyber inter-connected 21st century cities have been seen to provide fundamental advantage within pre-existing organically generated central urban spaces.

But a much bigger planning mindset is now required relative to the life-limiting constraints of the favelas both in city centres and in sprawling suburbs versus the newer and very understandable trend for middle-class life to be kept within the safe-zones of remote gated communities, upscale shopping malls, business districts and leisure areas.

Europe and North America went through broadly the same archetypical development pattern in the late 19th and 20th centuries, and it was a combination of garden cities (with planned industries), the aspirational suburbs (with good transport links) and vitally the car itself that allowed a powerful new phase in societal evolution.

When an increasing numbers of new cars are parked in the narrow streets of poorer districts and yet basic infrastructure services may still not be available, it illustrates much about a fundamental disjuncture between social planning and social consumption.

Like the planning and execution of Brasilia, the massive achievement that is the completed Trans-Oceanic Highway linking Atlantic and Pacific coastlines highlights Brazil's ability to complete monumental infrastructure projects.

Just as this provides the raison d'etre and suitable logistical context for trucks and road-trains, so the lower stratas of society, themselves obviously and naturally intent upon car ownership, must be provided with the appropriate physical environment.

Since the state presently has its hands financially tied, it should look to all kinds of public-private partnerships models, far beyond the 'IPP's' conventional goals for SOE privatisation, and toward more novel schemes within this new age of global corporate social responsibility.

Brasilia itself created the transformative conditions for the indigenous auto sector, time now to do the same in terms of regional re-planning commercially, industrially and residentially; for an ever-more inter-connected populace whose own world presently is, or soon hopes to be, on wheels.

To Follow -

1. Detailed account of the transformative phases within Brazil's auto-industry to date.
2. Broad account regards the “cultural visioneering” of Brazilian autos.
3. Broad account of the necessary socio-economic vision required by Brasilia of the “intra-global template” (serendipitously following in the footsteps of the Brazilian-made 'World Car' ideology).