Friday, 16 September 2016

Micro Level Trends – Brazil's Automotive Sector – “Brazil 66”...Sixty Six Years of Economic Power Lifting (Part 4.1)

Previously a (hopefully sensitive and deft) allusion was made to the freedom that new 'wheels' provide to those who are all too typically socially marginalised: those with varying degrees of reduced physical autonomy (the term 'disabled' now almost as insulting as 'handicapped') , and the many at the bottom of the income scale, predominantly in EM regions, invariably financially confined to immediate surroundings.

'Wheels' – in chair and vehicular forms – of course the common denominator to much improving the quality of such lives.

And since technological cross-fertilisation has created the intermediate 'electrified urban' realm (eg pavement buggies, gyroscopic platform devices and road buggies) the role of 'autos' in its broadest sense has multiplied. Today an economic multiplier in its own right as previously confined people have become more socially integrated and subsequently more important economic agents.

As shown, add that mobility idealism to the spectrum of cyber-linked possibilities, from impulsive 'pop-up' consumer experiences to the re-planning of whole regions (cities to new towns) and the world of digital mobility / 'cyber-auto', if well planned and presented and allowing diverse business models, promises much to nearly all of humanity.

Some years ago investment-auto-motives highlighted the need for industry to better utilise the inherent knowledge and nurture the technical skills of those with 'disabilities', after all who better to innovate and adapt than the end user. Aligned to real-world initiatives and commercially led, the idea that (the Formula One supremo) Frank Williams become a leading figure of such a campaign.

Also, the world has now (at last) come to learn of the ex Formula One driver and Paralympian Alex Zanardi, from race-car track to athletics track. Surely a natural ambassador for promoting this new milieu of overlapping mobility solutions for all people. Whilst the mix of 'disabled' and able-bodied technicians behind the scenes of the Paralympics, repairing all kinds of mobility devices, fuel the 'Dyson-like' spirit and professional ambitions of tomorrow's (bio-electro-mechanical) design-engineers.

At a time when the broad-base of socio-economic integrity and inclusion is seen to be failing, with the advent of 'my kind' tribalism, renewed xenophobic nationalism and new signs of subtle trade protectionism, a strong counterpoint by way of a new highly progressive mentality is required. Hi-tech personal mobility for all engenders such a focus.

Quite frankly, although devout competitors, the humility, mutual respect, drive and unity between Paralympians put the broader, supposedly more capable, 'able' world to shame. Before the Games close, the innate optimism of Rio and the traits of the sports-people and their own supporting cast – the very embodiment of the Torch - ought to be the “new light” for the world.

In this regard, Brazil has made a mark upon the world at large, and so should continue in this thread and consider how it may continue to play a major part in leading and transforming the world through progressive long-term visions, toward the realm of digital mobility and all that is 'cyber-auto'.

That path requires exacting construction, from the legacies of yesteryear to the competitive advantages of today.

For now investment-auto-motives delves deeper into the country's automotive past to better appreciate exactly how the present industrial 'sweet-spot' (encompassing a wealth of expertise, ambition and potential) was reached.

For easier literary digestion, this relatively detailed history of important brands, models and technologies will be split over successive weeks.

It starts with:

1. 'Foreign Adoption for Indigenous Adaption'
2. 'State-Led Licensed Technology Transfer'

And is followed by

3. Indigenous Development – Corporate (Mass)
4. Indigenous Development – Independent (Niche)
5. Indigenous Development – Technologies
6. Multi-National Companies, Regionalisation and Globalisation
7. Indigenous Development - Strategic and Value-Added
8. Indigenous Sector Promotion
9. Indigenous Technological Research

Thereafter examining the question as to 'where next' for Brazilian Autos as it balances the question of present ongoing VM led global integration and the need for future local differentiation to ensure the continued future vitality of this critically important, highly inter-disciplinary, domestic industry.

The Steps to Sector Transformation -

A very distinct set of domestic and broader Latin American challenges means that the development of national vehicle production has undergone distinct phases.

As seen, these have been primarily led by the political will of the an ear, Brazil seemingly historically reactionary between trade liberalism and protectionism, though pragmatically (to different degrees) always in dialogue with strong foreign firms from whom Brazil can imbibe, learn and self-develop, typically in a hybridised manner between foreign technologies and homeland resources and capabilities.

Obviously when previously 'closed' far more self-reliance upon relatively basic “national technology strategies” regards engines, fuel and accordant experimentation in lightweight body construction methods; with the added design problems of very variable operating environments regards road types, altitude and micro-climates.

And obviously when “open”, the ability to enjoy foreign modern advancements and so the provision of world class product quality, the ability for this itself to be re-engineered as needed to tackle the harsh demands of the Brazilian, Latin American and broader EM vehicle environs, and the end user able to enjoy the fruits of vibrant free-market capitalism through economies of scale, reduced comparative pricing, greater model and variant choice and so vitally improved overall consumer experience.

The road to reaching that present level of diversity, across both high volumes for global reach and low volumes for specific target impact has been long and somewhat tortuous, but ultimately very beneficial for the span and depth of the Brazilian auto industry.

[NB The accompanying graphic illustrating time-line examples of the vehicle types described hereafter].

1. Foreign Adoption for Indigenous Adaption :

As previously explained, the first vehicles that were notionally produced as 'Brazilian Made' were the end assembly and 'finishing' of American trucks and cars by Ford and General Motors, whilst Chrysler (Dodge) continued to ship ex-factory US made vehicles.

Given the importance, indeed reliance upon that initial US shipping, and the need for stable electricity supply, the only rational sites for such operations were in the Sao Paulo region.

As production line capabilities and efficiency grew so a higher number of 'modules' and individual parts were assembled, variously made in the USA or Brazil.

However, the purchasing and shipment problems caused by WW2 prompted Brazil to become more adept at the self-manufacture of an increasingly complex array of individual components.

By the 1950s with the Vargas 'Estada Novo' (New State) era and the 'ISI' (Import Substitution Industry) policy under-way and Kubitschek's “50 years in 5” vision the next step, it was time to firmly set the foundations of the notionally indigeneous auto-industry proper.

The in-situ American companies were encouraged to expand plant investment and production and new additional foreign inward investment sought. To this end, Ford expanded its operation at Sao Bernado do Campo in 1957, whilst in 1958 GM added a second site at Sao Jose dos Campos (the first established in 1930 at Sao Caetano do Sul, having rented premises since 1925 in Ipiranga). To support the national growth ambitions, with infrastructure a key pillar of that agenda, Ford and GM would focus upon the production of (the then) large and standard sizes of 2WD and 4WD large heavy duty trucks and pick-up trucks.

In addition for more general demands a smaller and cheaper type of 4WD utility vehicle was required in various bodystyles, as was a lighter and yet cheaper 2WD adaptable van type vehicle. Thus Japan's Toyota and Germany's Volkswagen were both approached with the prospect of initially small volumes of the original LandCruiser and Type 2 via CKD hand assembly from an imported kit of parts.
Thus the fundamentally required vehicle types which would transport the good and people that would literally build the country were in place by the early1950s, and moreover gave new foundations to the auto sector.

However of all the models it was perhaps the Ford F-series that was most prosaic and pertinent.

The Ford F-100 :

Original 1957 production was that of the standard 'US issue' model, but so as to build basic internal engineering competency it was deemed that the standard model be altered to produce a Brazil-only vehicle. This saw greater emphasis on the passenger cabin, and so a unique “extended cab” was designed and so too was a 'double cab' version comprising of two ''clap-hand' side doors with thin B-pillar.

[NB This was innovative since historically double cabs typically use two front hinged doors and a strong central B-pillar to retain structural body strength].

However, this arrangement was used to add a more upmarket car-like appearance and functionality (as seen by the contemporary Lancia Aurelia and Lincoln Continental). This was deemed appropriate because these vehicles would indeed have triple roles: a) functional hauler, b) business transport (for clients etc) and c) weekend family leisure transport. Beyond the unique door arrangement they often had 'upmarket' two-colour paint schemes and greater use of chrome, again to seem car-like, and to be serious 'all-rounder'. Not for another 45 years would similar hi-style pick-ups be created by Detroit's Big Three with 'luxury pick-ups', but these critically without the seriousness of intent behind those Brazilian originals.

As more types of cheaper locally made cars and luxury imported cars became available so the unique double-cab was discontinued. However, instead the 'extended cab' pick-up variant took on a uniquely Brazilian flavour. This done again to maintain and build local engineering capabilities.

As the F-series went through its own generational aesthetic changes the Brazilian variant saw the rear side window grow in size to become a unique feature. The loss of the rear door for passenger convenience had been essentially substituted by a large vertical 'panoramic' rear quarter-light window, taken deep into the vehicle's 'belt-line', so as to provide a unique experience for the rear passengers. This type of window had become fashionable on after-market built custom leisure vans in the USA, so was seen to be fashionable. Heavier than sheet steel, the glass added weight but the product USP allowed Ford to maintain Brazilian national loyalty.

The Volkswagen Fusca :

The VW Fusca (Beetle) was the vehicle that gave mass mobility, initially with the middle classes of the 1950s and 60s. In its own right it was an admirable vehicle, robust and capable on both tarmac and unpaved roads in very variable conditions. But its overall 'packaging' with rear mounted engine and limited front luggage space presented load carrying challenges.

In an attempt to at least be seen to try and overcome this, a seemingly unique prototype of the Fuscia Wagon was created by the Volkswagen do Brasil. The vehicle's wheelbase was extended slightly to provide additional length and a new rear end was made in harmony with the rear of the Type 2 micro-bus to retain a family appearance. Though promoted to the Brasilian government as a domestically generated car for the Brazilian masses, infact the bones of the project had been actually initiated back in Wolfsburg. The German Post Office had sought a capable delivery vehicle that was smaller that the Type 2 van, and so VW created a limited run of Beetle panel vans to fulfil the new opportunity. During the vehicle's redesign phase the obvious question at headquarters about applicability elsewhere prompted the idea of the Brazilian Fuscia Wagon.

However, whilst the rear-engined Wagon variant was indeed very applicable for a single postman with often a single driver's seat, the concept was unable to serve the true functional needs of Brazilian small business or families, and so was rightly not taken beyond the drawing boarrd. Ultimately, and critically knowingly, it was more of an opportunistic PR tool for the government in new Brasilia, which would set the tone for a legendary and very successful spiritual successor - the VW Brasilia (to follow).

Whilst the more space efficient Brasilia (itself still rear engined) would replace the Fusca in the early 1970s, it was not until 1980 that the right formula of packaging, space efficiency, fuel efficiency and affordability would emerge, doing so as n archetype hybridised ideal.

The Mk1 Volkswagen Gol :

The first generation VW Gol was born in Brazil, for Brazilian needs, from a corporate 'parts-bin' philosophy to ensure low cost and durability. The Gol's body structure was taken from the Audi division which had already been partly amortised from previous sales in Europe as Audi 80. Thus much of the tooling was 'lifted and shifted' from Germany to Brasil, itself bought cheaply by one cos-centre from another. However to aid manufacturing costs, contain product sales price and to provide rationality to the end user, and ensure in service durability, the air-cooled engine from the Fusca/Beetle was used and was for the first time mounted in the front.

The first VW Gol then was conceived in the true hybrid manner, and so could be said to have been even more spiritually accordant to the country's spirit of 'mix and match' than even the legendary seemingly home-developed VW Brasilia. The Mk1 Gol was the crystallisation of 'Adopt and Adapt'.

Though less unique, the 1983 VW Parati followed in a similar vein. This 3-door wagon/estate used a VW family water-cooled engine, but was importantly able to offer utility, comfort and affordability thanks to VW's strategic deployment of low cost transfer pricing between Germany and Brazil.

The Chevrolet Celta Mk1 :

The Celta was introduced in 2000 and was a very pragmatic solution for General Motors regards the more aspirant, more demanding and quickly expanding Brazilian car market.

The Celta utilised the body structure of the very successful European derived Opel/Vauxhall Corsa B (1993-2000). The Corsa had already been well established in Brazil, Argentina and other countries in Latin America so was very well known, and indeed was so popular that it took on a pick-up variant and was exported in CKD form to South Africa.

However, to maximise use of the much amortised Corsa B platform so as to maximise per unit profits, the Car was face-lifted and provided with more features to match the contemporary Astra and Vectra in higher C and D segment classes.

Thus, not sold elsewhere, and to differentiate itself from a burgeoning B-class crowd, the Chevrolet Celta became perhaps Brazil's first aspirational B segment, able to maintain its pricing power – and vitally profitability - in the competitive city-car climate.

Summary :

Given its initial early commitment to Brazil, VW was the first to establish a true EM Technical Strategy from the 1959 outset, able to plan and deliver adopted and adapted vehicles using the cost efficiency levers of scale, design and production engineering flexibility, amortisation, and phase-introductions between AM and EM geographical markets.

This would be replicated by most other global automakers, FIAT the next proponent with Brazilian-centric focus and thereafter GM, with Renault's Dacia the most recently EM prolific elsewhere.

However, with the advent of true globalisation and so necessary AM-EM 'product harmonisation' by the mid 2000s the corporate use of 'market trickle-down' of products and technologies in a stepped or phased manner has now been superceded by proper global platforms and associated products.

As will be seen late, today more than ever there is core product 'equality' in body styles and basic drive-trains, the 'advanced' versus 'emerging' difference

Yet it had been Ford and the unique F-100 variants at the very beginning of the mass motorisation process that allowed Brazil to develop its own industry competencies; first in body structures and the necessary close tolerances of 'closures' (the hand-clap doors) and thereafter regards engine production and power-train modification.

Those early lessons with Ford and Volkswagen would were the first step for a new auto-sector. The next obvious step up the economic value creation ladder was to learn more via creation of a broad-spanned national automotive organisation.

2. State Led Licensed Technology Transfer
(eg FNM – Fabrica Nacional de Motores)

As part of the mid-century ambition that was “50 Years Progress in Five Years” the government recognised a need to deploy modern technologies, especially so in the showcase auto-industry.

This idea to replicate the advanced 'state of the art' was in stark contrast to other developing nations, such as the newly independent India whose own truck and car brands would be for decades to come simply the 'recycled' in-market use of advanced foreign vehicle platforms and powertrains.

Moreover unlike India which relied upon entrenched business families / conglomerates, any new Brazilian national champion would be a SOE (state-owned enterprise), seen to be owned by the people and so as to provide enough political, financial strength and independence to start the industrial ball rolling and maintain its momentum over some time.

Such a new national champion would critically also need to be seen to philosophically and aesthetically mirror with the newly build and futuristic showcase that was the capital city of Brasilia. To have anything less than contemporary and modern technology and appearance would be to undermine the central goal of joining the ranks of the world's leading nations. The formation of this auto-champion would be underpinned by other major state investments in a second steel company and hydro-electric power generation. What was seen as the “golden trinity”.

Inevitably then the strategy would have to be that of licensing such foreign technology, and after a delegation was sent out to assess German, British, Italian. French and Soviet possibilities, the general recommendation was for that of Italian vehicles, undoubtedly also swayed by endemic Latin cultural links.

The Brazilian government named the new national champion 'Fabrica Nacional de Motores', abbreviated to “FNM”, and it was to be effectively a backward integration into an SOE firm started in 1942 by two military officers which produced amunition, aircraft parts, engines, wheel components and refrigerators.

The automotive firm was established in 1949 and initially undertook a heavy truck licensing agreement with renowned Italian firm Isotta Fraschini, recognised for its ideal match of advanced engineering and increasingly fragile financial circumstances. However Isotta Fraschini itself fell into bankruptcy by 1951 and so a replacement partner was sought to fill the capacity of the 3.3 million square metre FNM facility in the state of Rio de Janeiro.

The new partner as of 1952 was Italy's Alfa Romeo, the decision outcome of Brazilian and Italian state-led policy-making. It was an obvious candidate given its mix of trucks and cars that populated Southern Europe, its trucks outselling its cars at the time by a ratio of 3:1.

Alfa Romeo had previously been rescued by the Italian government in the 1930s and was likewise an SOE at the time. Thus the two were viewed as naturally synergistic across separate geographies. Critically it offered world-class engineering and a diverse stable of vehicles. Though Alfa's roots had been solely in sports, GT and luxury sectors, as a result of Italy's post-WW2 reconstruction programme it had diversified into small cars, vans and trucks; prompted by cheap expansion loans and (initially) guaranteed customers.

However the inescapable might of its then private homeland competitor FIAT (and the increasing strength of other large European automakers) undermined the expansive, arguably over-stretched, vehicle portfolio and costly business model.

Thus overseas expansion was sought, FNM seen as an ideal alliance. This eagerness seen by the creation of a new FNM logo designed to obviously mimic (with a cultural slant) that of Alfa Romeo. That badge was a crystallisation of the long-term mutual intent.

Given the infrastructure building needs of Brazil, primary focus was on heavy trucks, the chassis of which (known as chassis-cabs) would allow for the construction of independently made bodies by start-up Brazilian enterprises, so providing employment and industrial learning, with over 15,000 mixed units produced.

With heavy trucks accomplished – providing a degree of Brazilian independence from America (GM and Ford) and the mainstream passenger car plan underway with Volkswagen and other supporting firms, a private firm named FABRAL was created to investigate and produce an executive/luxury model.

'Fabrica Brasileira de Automoveis Alfa' (“the Brazilian Alfa Auto Factory”) was born from a private Brazilian interest, seeking to create a partnership with Alfa Romeo and so gain a new market entry and supply for one of Alfa's large cars. After investigation the privateers ultimately viewed the prospective venture as too risk-laden and so stopped progress on the matter. However to President Kubitschek the idea of a high-class Brazilian car was alluring; no doubt to ferry the seniors of new Brasilian about, and the de facto car for Brasilian business people. Thus the project was handed to FNM – itself part-owned by Alfa Romeo – and from 1960 the FNM 2000 was produced: a FIAT 2000 Berlina with FNM badge, and nicknamed the 'JK' after the President. Hardly a successfully profitable project, effectively subsidised by government procurement throughout its life, it was also supported by Alfa Romeo given its own strategic intent for overseas expansion.

In 1966 FNM, with much Alfa input, heavily adapted that base platform to create the sporty 'Onca' ('Jaguar') coupe; seen as a personal luxury car for wealthy Brazilians. This was intentionally styled by “Rino” Malzoni (designer of the Malzoni GT/ Puma) to replicate the Ford Mustang but with an Alfa 'face' presumably so as to mimic the sales success seen by Ford in the USA. This was presumably done with the intention of also seeking to attract Ford's attention to create a new technical and contract manufacture arrangement with Detroit. Its name had obvious associations with Britain's Jaguar Cars, the successful sports-car and race-car producer. Thus the project was itself strategically a wholly manufactured venture, created for major impact but in which ultimately less than ten examples were actually built; illustrating the misreading of the market or mistiming of the project by FNM seniors.

Thus the apparent FNM strategy - at least by the Brazilian members of the Board - was the intention to create a network of international VM partners, drawing on foreign expertise and the lower-cost advantage of semi-amortised vehicles and platforms. That multi-firm interest would then allow the government to eventually recoup its FNM spending through the effective auction sale of the company to a major foreign vehicle producer.

This implicit intent created a fracture between the Brazilian and Italian representatives on FNM's Board, leading to Alfa Romeo taking a controlling stake in 1968 for $36m, so as to fend-off any other foreign interests and retain the goodwill of the Brazilian government.

The 'Berlina 2000' (sedan) was steadily improved in powertrain and features, and remained the bread and butter of car production as the 2150 and 'old' 2300; though FNM capacity was still heavily biased to trucks.

The most striking outcome of Alfa's new ownership was the (effectively stillborn) “all Brazilian” Furia GT coupe f 1971 . It used the Berlina-Onca platform but offered the trend for simple, angular European “wedge inspired” sportcar styling; but only a few prototypes and initial builds produced. It is assumed that Alfa undertook this project within Brazil with a “skunkworks” mindset away from Milan to deploy a low-cost development project for South American sales and possible Brazilian export into the USA, Italy and across Europe, itself as a mid-priced 4-seater 'exec coupe' to enter a market position between the lower 2-seat Duetto/Spyder and higher 2+2 Montreal GT However, this did not come to pass for various reasons (primarily macro-economic and technical competitiveness).

Either way for a time the Furia programme bolstered the formative learning of Brazilian engineers regards niche build platform spin-offs and the engineering demands of more sporting vehicles; both these elements coming more greatly into play in Brazil's small but burgeoning independent sportcar realm..

The beginning of FNM's decline came with the Alfa Romeo's divestment of the trucks division to FIAT 1973, replicating its previous similar divestment in Italy some years earlier, with focus now on the cars division. That meant that the central core of FNM had gone.

Car production was maintained, albeit in relatively low numbers, and the originally based updated 2300 'JK' model replacement by the 'new' 2300 in 1974. However, the financial squeeze on the Cars division was self-evident in the technical choice for the 'new' big sedan / saloon.

Whilst its aesthetic was similar to the all-new Italian Alfetta, it was infact a comparatively larger car based upon old mechanicals from the previous 1900 (itself from 1950). Thus it can be seen that Alfa well recognised the need to create its seemingly new 'all-Brazilian' car on a low-cost proven base, using 'lift and shift' tooling from Italy so as to improve per unit (and so the project's overall) margins.

The 1974 new 2300 was then in the prime spirit of the sector's early-phase of indigenous industrial 'Adoption and Adaption', and infact because of import bans, lasted until 1985 as the de facto exec and large car.

Thus the lifespan of the state established, majority state owned and partially state funded, FNM automotive company lasted from 1949 until 1974. It's central remit was to both to allow government planners a central role in steering the direction and shape of a major indigenous producer and to also critically to provide a third leg under the stool that was foreign inward investment (USA vs Germany vs Italy) so as to better balance Brazil's reliance on external foreign firms and their own fortunes.

As such, whilst the effective subsidisation of the 'JK' model was against the grain of any true free-market attitude, and many of the truck sales went to state-owned, or state-linked enterprises, FNM could at least be said to have been a successful venture within what was actually an archetype mixed-market economy of the period; this stance necessary to economically propel Brazil through the 1950s, 1960s and early 1970s.

Summary -

EM countries have long recognised the importance of an indigenous automotive sector, yet many have failed to provide the right strategy to both compel and new industry into being with the right balance of short-term and long-term viability.

(As illustrated with Malaysia), the temptation for speedy market progress and technical sophistication is to typically taking sole responsibility and produce a monolothic, monopolistic national champion, from a single foreign source (Mitsubishi) itself followed by likewise domestically sponsored apparent competitor again using another foreign source (Diahatsu). All the while retaining heavy import protectionism to provide a guaranteed homeland market for its champion.

Brazil however rightly chose to invite a mixture of foreign interests with attractive inward investment policies to industrialise the regions, so creating a long-term strategic template whilst also ensuring short-medium term tactical support by creating a national champion which itself was closely aligned, indeed heavily interwoven, with the infrastructure based national growth agenda.

Crucially the Brazilian government knew exactly when to dis-invest itself from its created champion and to allow the dynamic of free-enterprise, and so continued FDI to prevail.

Having shown great lucidity in the 1950s and 1960s, for the long-term future, Brasilia should also consider possible future paths which would avoid the failings of past western governments having to handle the 'flip-side' of economic decline (eg the UK's inevitably poor BMC/BL consolidation, and the USA's Chapter 11 'bail-out' of General Motors after the financial crisis).