Sunday, 27 November 2016

Micro Level Trends – Brazil's Automotive Sector – “Brazil 66”...Sixty Six Years of Economic Power Lifting (Part 4.5)

(Prior to this weblog's continuation, a message of condolence to all affected by the recent air-crash reported in Colombia, that took the lives of Brazilian football players, staff, journalists and crew).

The previous section highlighted how the apparent ideal of nurturing a truly indigenous auto sector would provide an avenue toward notional national independence.

However, it was also recognised from the late 19th century onwards that Brazil would not fulfil its broad economic potential if their was sole reliance upon Brazilian assets and its generally inferior domestic technical capabilities.

As with elsewhere previously, steam-power, rail-roads, the internal combustion engine and electrical generation massively progressed the commodities based economic miracle in the period, with similar advancements simultaneously transforming Japan (which like Brazil gained much from German, and American, cross-fertilization.

But it would be the speed and leap-frog economic gains of German, Italian and Japanese post-WW2 reconstruction, assisted by capitalism, more efficient methods and new technologies that would serve as the continued development template.

And although Brazil had not been decimated – indeed it partially thrived in comparison – those revolutionary changes to the broad economies elsewhere in commerce and the populace's much improved quality of life, could not be ignored.

Yet likewise, to avoid absolute dependence, there had to be a cultivation of indigenous assets and capabilities, those resources that were physical, technological and intellectual.

Thus, although Brazil quite understandably sought to delineate a degree of self-independence, as exemplified by hydro-electric power and ethanol fuels (their low eco-impact and cost-savings indisputable compared to the immense gains) the fact remains that beside such engrained knowledge of such disciplines, up until the beginning of the 21st century Brazil's own internal capabilities had lagged behind, specifically in both:

1. advanced technology creation (Autos to IT to Aero)
2. the mass-manufacture of mid-value and high-value, complex products and services

The astounding advancement of the USA, Europe, Japan and South Korea across the respective breadth of the 20th century, promoted by technical research backed by capitalism, meant that up until the 1990s the so called BRICs had become even greater laggards to the Old West and New East. (Indeed the commercial confluence of both 'supercharged' that development).

Thus whilst always promoting nationalism, all the past and present governments of Brazil have recognised the advantage of international relationships, and obviously sought to broaden its capture of the add-value ladder, from base mineral and agricultural commodities (mined and farmed with greater scale efficiencies using foreign equipment or IP) through to self-eduction into the realms of such disciplines as low construction cost cars in the 1960s, and fifty years on, 'digitally intelligent cities' today.

Most pertinently, whilst the geography and spirit of of Rio de Janeiro, Brazilia and The Amazon are the merged face of Brazil to outsiders, undoubtedly it was the automobile that enabled and altered life so much that it became central to the developmental spirit and so true persona of Brazil.

Undoubtedly it was the snowball and avalanche impact of GM's and Ford's trucks, VW's Fusca / Micro-bus / Brasilia / Gol and FIAT's 147 / Uno / Palio that instigated the developmental ambition; spanning much from B2B research and development through to B2C modernised retail models and much expanded consumer financing through to C2C brand-centric tribal affiliations.

Thus whilst vehicles like the Brasilia Gol or Palio may appear identifiably Brazilian, it was globalisation that enabled such nationalistic creations.

6. Multi-National Companies and Globalisation

As now well recognised, the economic boom of the 1990s founded upon the commodities super-cycle, led to MNC's and domestic producers considerably expand consumer choice, from FMCG to 'big-ticket' items.

Aspirational everyday brands, the uptake of widespread auto-ownership and the later gradual but prolific impact of internet have together altered the commercial and social landscape of Brazil; the country had at last once again “has come into its own” by the turn of the millennium.

However, the foundations of such economic success had, in part, been formed by the industrial rationalisation effect of the far more austere 1980s. It was in that era that VW and Ford recognised the need to combat FIAT's growing success, creating 'AutoLatina' to do so.

AutoLatina -

This was in essence a four-part Joint Venture between the seperate operating companies of VW and Ford in Brazil and Argentina - 51% was held by VW and 49% by Ford.

Obviously created to effectively minimize costs across the board whilst maintaining a feasible Brazilian and Argentinian market presence in cars and trucks during what were problematic times.

Mutually beneficial product substitution was the prime focus via a necessary strategy of cross-companies 'badge engineering'. To this end in the cars realm we saw:

1. the European derived 'B2' Passat introduced in 1984 was given an extended life as the first JV vehicle in 1991, badged as VW Passat and Ford Verseilles/Royale (sedan/estate); with facelifts in 1994 and 1998. It was discontinued in 2002, thus giving 18 years service.

2. the European Ford Orion used as the platform basis for vehicles named the Ford Verona and VW Apollo, sold between 1989 and 1993.

3. the newer Escort (Mk V) used between 1993 and 1996 for the new Ford Escort and VW Pointer and 2-door VW Logus

It must also be recognised that 'AutoLatina' was established with not just the Brazilian and Argentinian markets in mind, but as the hub for broader cost-controlled exposure to the rest of Latin America. It was understood that these mainstream vehicles could remake the names of VW and Ford in the Southern and Central Americas; offering good quality (though not cheap) cars with pricing constraint helped by high volumes, even if the individual markets themselves at the time were relatively small.

The creation of 'AutoLatina' allowed the Wolfsburg and Detroit partners to appreciably drive down costs through either the much longer length of a product's lifespan, as with the near two decades of the 'B2' Passat/Verseilles', or by utilising the 'Global Car' ideal and so international economies of scale, as with both Passat and Escort.

[NB the 'B2' Passat gained enormous scale economies, and so worldwide pricing flexibility, precisely because of its voluminous manufacture in China, where it became the de facto trusted vehicle by taxi drivers, government and wealthier families of the period].

This expansive and pervasive approach to 'baton down the hatches' during recessionary times allowed for the latter-day enlarged revenues of the 1990s to be immediately injected into operational and strategic re-expansion projects aswell as the 'bottom line'. So providing for: availability of more product types, the part-corporate financing of new franchise dealerships, much improved press and TV marketing, growth in cross-departmental headcount and critically decent reward for shareholders at both the local level and the parental firms.

Lasting until 1994, the JV's 'concentration of contraction' provided the basis for the impressive corporate rebounds as strong and continually strengthening de-merged independent entities between the boom decades between 1994 to 2014.

In turn this generated a large multiplier effect for local, regional national and pan-LatAm economies, the greater advantage going to Brazil itself.

The next developmental revolution, that of 21st century Information Technology, would also in great part be spawned by the globally connected local auto-sector.

The Introduction of IT Enabled Global Planning -
(ITC and CAE: CAD-CAM) -

As early adopters and advocates of IT, the automotive MNC's (Multi-National Corporations) operating in Brazil were ostensibly the initiators, vanguard and 'preachers' of IT based productivity enhancements.

Though adopted noticeably later in Brazil as a consequence of market dynamics and thus delayed need, the requirement to act quickly to respond to PESTEL change meant that in the late 1980s and early 1990s the new world of Information Technologies could be deployed to appreciably assist both the need to quench new consumer automotive needs and to (in of itself) create new value-added services which appeared higher up the value chain.

That embraced electronic age allowed Brazil to leap into a new era of product research, design, development, manufacture, distribution and retail. It was as if internal development capabilities of the sector – and thereafter other sectors - had suddenly shifted from that of the 1960s into the seeming 2000s; the transformation was so dramatic.

So whilst the Brasilia, Mk1 Gol and 147 Panorama are recognised by as the Brazilian 'originals', the de facto 'originators' of the highly integrated process that is modern industrial Brazilian design and build, were the Mk2 VW Gol, the localised FIAT Uno and the Palio.

It was these vehicle programmes that properly captured the advantages of the then new digital age, as the new and burgeoning research and development centres used new age communuications equipment – from the fax machine to the super-computer and a myriad of international satellite servers and terminals – to revolutionise the design-development process of Brazilian made cars.

The result was that Computerised Aided Design, Computer Aided Engineering and Computer Aided Manufacturing was absorbed far quicker in Brazil than previously seen elsewhere, where it had had to be learned 'first hand' and as the IT disciplines themselves slowly emerged.

Instead after the year 2000 the combination of both social trends and corporate competitiveness rapidly changed the country's industrial landscape. The conjuncture between a younger tech-savvy workforce able to learn quickly and proficiently (so themselves technologically accomplished) and the need for EM located corporate divisions to better technologically align themselves with typically more advanced IT capabilities at their HeadQuarters, meant that the pace of change was unprecedented.

[NB it must be recognised herein that those tech-aware youngsters were usually the fortunate sons and daughters of the old (ie bureaucrat) middle classes. And that the majority of such IT learning – in Engineering and Design at least - was not from colleges / universities (themselves with only basic IT ) but whilst within the corporations themselves].

The foreign auto-producers themselves recognised (and still recognise) that then, as now, and into the near future, it is they who must take on the role as primary educator.

Nevertheless, as seen, such enthusiastic young people were able to quickly learn those digitally based processes and methods that had themselves been created in the USA, France and Germany; from the pan-departmental use of Microsoft's Office (in American English and Portugese) to Engineering's use of Dassault System's CATIA and AUTODESK to NX CAM from Siemans.

[NB the larger global providers such as Dassault and Siemans long since expanding their integration into corporate methods by offering much expanded Product Lifecycle Management IT beyond design, engineering and manufacturing, to span the full value chain from raw material to recycling or disposal].

For the Brazilian divisions of both the major volume vehicle producers and their locally based domestic and international supply-chain, by the mid 1990s Product Development process itself had transformed. From that of previously being ostensibly 'serial' (ie the secondary re-engineering of a European platform, as with Uno) to the truly 'parallel' (ie the simultaneous engineering of a complimentary EM platform, as with Palio).

Globally reaching IT had enabled the decades-long ambition of creating congruent yet necessarily altered product offerings from a component set with high degree of commonality in as quick a time as possible.

That allowed for greater correlation to the ideal of more accurate Product Planning which in turn allowed for better Manufacturing Planning, whereby the higher scale of manufacturing volumes could be used to drive down Procurement costs, whilst speedier Engineering Development (itself increasingly computerised with 'digital mules' etc) also ensured greater internal cost efficiencies, from manpower to capital expenditures.

However, this IT advantage was initially approached differently from within the respective VW and FIAT empires.

The VW Gol Mk2 of 1994 was an update version of the previous BX platform, with much change in a lengthened wheelbase and more curvaceous exterior. Thus VW's ideological approach to digital technology investment was effectively about altering and honing much of the given 'carry-over' sub- structure to further amortise the costs of in-place tooling and equipment.

This lesser demand of its digital processes meant that it could 'up-skill' the back-end of its Brazilian engineering workforce, to ensure a more seamless transition between the Product Engineering and Manufacturing Engineering functions, especially regards the increasingly important issue of cosmetic appearance, 'fit and finish' etc. Thus instead of re-inventing the fundamental 'wheel' (the complete platform itself) instead better to improve the customer's perception of a quality vehicle. This then points to a high degree of 'answerable autonomy' in the period by Volkswagen do Brasil.

In contrast on the new Palio of 1996, FIAT Automoveis was required to wholly harmonise with the Global Product Planning, Design and New Programme functions in Turin, Italy. To maximise the competitive gains super-computing could bring, in time / speed / quality, it was believed that the EM dedicated Palio must be created with as broad a geographic input as possible to ensure the vehicle's capability and thus brand credibility. Furthermore it would allow the programme to be run
in sync with its AM segment siblings so as to contrast and compare engineering solutions for relative performance and cost. The programme was named the “Project 178” and would essentially be “all new” itself subtly mechanically altered for specific variants (hatchbacks, sedan, estate/wagon and 'ute') which would cater for a myriad of different customer types and respective needs.

The enormous co-opted and mutual learning from HQ in Italy on Palio was a vital stepping stone toward the successful time-cost-quality execution for the later “all-Brazilian” Novo Uno introduced in 2010. As the replacement for the old (and near legendary) Uno it was expected be an “Uno +” and the 'novo' (new) model was indeed so. It had to be bigger and stronger to meet the needs of volume-hungry users (for loads and feeling of spaciousness) and to still be able to tackle the outer and upper geographical reaches of Brazil, broad LatAm and the Rest of the World.

As such its regional research regards use and marketing was the most comprehensive ever, as was the prototype and 'first-off' test regime. Thus where as previously Brazilian NPD familiarity had been regards structural and aesthetic quality, and the match to manufacturing, the Novo Uno project would see greater engineering research (from normative competitor tear-down to far more 'in the field' user demands), so melding greater marriage of Marketing Research, Design Research and Engineering Research.

The other local MNC's of Ford and GM similarly sought to deploy IT and more relative to their specific strategic market and product lifecycle requirements, with a likewise snow-balling of Reasearch and Development capabilities as ambitions grew greater over time to meet a much expanding market, competitive threats and consumer expectations.

Thus GM do Brasil introduced it in the VW manner when re-skinning Corsa as the upgraded Celta, concentrating upon the 'back-end' of the project to create an improved quality vehicle with considerations of shut-lines, 'A' surfaces, interior and exterior plastics etc.

Expanding the local Engineering team at the turn of the century allowed GM do Brasil to create a joint development project for a small MPV with GM-Opel in Germany. The result was the Meriva Mk1 of 2003, which whilst luke-warmly received in Europe provided the Brazilian young family with the near-perfect motoring solution. This project was the big IT and Quality learning curve for GM Brasil.

However, the toward the end of Meriva's lifecycle GM do Brasil recognised the need to create a true EM orientated product, better suited to other less developed countries than Meriva, and enlarged to enable 7 seats and create a “Zafira for the EM-world”. Again its Engineering capabilities grow significantly as it sought to self develop the new Spin, launched in 2012 in Brazil and simultaneously produced in Indonesia as of 2014.

Ford do Brasil's first efforts at a self developed vehicle was the modification of the European Ka (Mk1) launched locally in 2003. This the primary 'localisation' effort was the alteration of the rear hatch and lamp housings, so allowing the then relatively small engineering staff to undertake small acclimatisation design projects across the span of: sheet metal (inner and outer), plastics and glass. This also allowed for improved local supplier input and relationships, and was key to establishing the next far more locally important Ka (Mk2).

The new Ka of 2008 was effectively a Brazilian designed model so requiring a large 'ramp-up' in engineering talent for its development. This model fundamentally altered over its predecessor in size, engine capacity and additional seating, so as to move up a segment from the A-segment into the B-segment. In design and engineering terms this was Ford do Brasil's 'Independence Day' leading to its becoming 'on-par' (in terms of functions if not scale) with the Development centres in the USA, Europe and Australia by 2010 or so. (Indeed the European division had undertaken a JV with FIAT using the 500 base for its small Ka replacement in 2009).

In 2014 the new Brazilian Ka (Mk3) was launched, appreciably bigger that its European-designed cousin it was derived from the old generation Fiesta, and with a broader span of engine capacities and fuel types, this model demonstrates the world-class skills of the Brazilian design and engineering teams. Reckoned to be a good-value proposition for Europe aswell it has recently arrived as 'Ka+', to expand the entry level offering.

Thus as we see, though still closely connected to their respective HQ's, the Brazilian arms of FIAT, VW, GM and Ford have adroitly illustrated themselves as the curent deep-knowledge centres of EM attuned global 'converged product' engineering.

Paving the Way into Global Automakers -

Brazil's entrepreneurial realists recognise the fact that in an ever more trade connected world with ever greater consumer information about product quality (born from costly research and development), and critically the increasingly inter-connected web of capital markets, that trying to beat the world's entrenched, massive and powerful major auto-makers is a “fool's errand”.

Failed attempts with the likes of Malaysia's Proton and Perodua and the limited local regional success of Iran Khodro illustrate that trying to create a world-beating EM originated vehicle producer is nigh on impossible. Whilst massively supported initially, both Proton and Perodua have each stumbled to grow beyond their national boundaries in any meaningful manner, whilst, as seen, Khodro's maintains its more pragmatic method of 'badge-engineering' other's vehicles with Gol the latest incarnation of that tried and tested (if indeed overtly local) approach.

To this end, the acutely aware local entrepreneur with internationalist outlook, will instead seek to create a national brand and product(s) which will eventually be easily absorbed into a major player's vehicle portfolio.

Herein, indigenous and Regional ventures of such an ilk have come into fruiting and been promoted in the Brazilian media through news stories, dedicated 'roadshows' and advertising.

The indigenous company Troller was established in the early 1990s, with its Jeep-like T-series (now refreshed and very visually appealing in its 4th generation) has seen success and is being heavily marketed. But its generic mid-size truck [eg Ford Ranger] the Pantanal appears to have been discontinued. Tellingly, now as a Ford unit, it is Ford Credit that is underpinning many of the Troller's sales.

Troller then depicts how indigenous companies who originate as local niche or specialists can and should be developed to, when brought under the wing of, or in association with, MNC's can provide suitably aligned targeted product to the world.

Toward the Bigger 'Value-Pyramid' of Tomorrow -

As is well known, many products sit within a broad 'pricing-pyramid'; one which encompasses a mass market price-sensitive base, a sizeable middle which balances quality and price and a top which provides premium qualities.

Half a century on from its truly tractable beginnings, Brazil has successively moved through the lowest and middling phases, with the 2000s seeing a meaningful growth in imported premium vehicles from Germany, Japan, UK and Italy.

Thus the upmost echelon (the peak) of the pricing-pyramid has also become normative for a fortunate thin slice of Brazil's entrepreneurial talent.

However, as seen with much from IT to Retail, given that globalisation has untapped much thus far, and that there remains still much future potential as a leader of the EM world and intersect with the AM world, the fact is that Brazil's complete auto-sector pyramid is set to grow larger and larger.

At its base new entrants such as exemplified by Effa Motors. Based in Uraguay it imports and rebadges a range Chinese manufactured vehicles (from differing brands) for 'finished assembly' and regional market into various Latin American countries. Recent soft-protectionist actions to deter such imports will undoubtedly succeed in the near-term to keep poor quality and copy-cat products at bay; but it seems probable that 15 years or so into the future, with improved quality and non-copies, Brazilian-Chinese and Brazilian-Indian joint ventures will be manufacturing vehicles for those people who require more affordable, low-end, mobility.

In the mid-ground, as seen from foreign interest levels, more of the European firms, Japanese and S.Korean firms will seek local production for their own 'glocal' vehicles. Albeit small, Renault's own Brazilian design team helped co-conceptualise the radical cross-over coupe 'Kwid' as an offering to a multitude of EM nations. Developed with creative input from Renault's satellite design centre in India, and first shown at the 2014 Delhi Auto Show, the well finished concept vehicle itself was obviously a PR exercise for the brand 'glocally'; and vitally a segue for the recently launched 'Kick' X-over. Others have since shown such interest to make their similar marks across EM countries. Thus the mid-ground will inevitably attract more diverse brands and products as the middle-classes re-expand in the future.

And with any such economic expansion, the first to enjoy such fruits tend to be the more wealthy, at the forefront of business themselves. This expansionary trend thus propelling the interest of premium and luxury car-makers. So at the peak of the price-pyramid many a premium manufacturer has highlighted intent to enter Brazil for 'glocal' production purposes, able to enjoy expanding national and export markets, whilst gaining from a typical lower cost of labour; especially necessary for so called 'crafts-people tasks'. Jaguar-Land Rover seeks to massively expand its presence (as illustrated by its PR efforts of in-car celebrity coverage at Interlagos and around Sao Paulo). Its mix of luxury/status, AWD and security obviously seen to prime attributes the wealthy seek.

And likewise VW has seen great success with its expansion of Audi and Porsche into Brazil and LatAm, similarly Mercedes-Benz and BMW, with FIAT seeking Maserati, Ferrari and Alfa-Romeo's expansion in the markets. (These buoyed by the existence of Argentina's Pur Sang Cars which makes exact replicas of yesteryear marque icons such as the A-R 8C). As wealth grows so will the consumer base for luxury goods companies (including the now embraced “things automotive”). Under this idiom, if deemed suitable and profitable, Aston-Martin could indeed set-up yet another new assembly plant (for CKD kits) from Wales to Brazil.

To Conclude -

To end, the point is that even though the Brazilian government is seemingly becoming more protectionist so as to re-direct the possible outward flow of investment monies back into the country – and especially toward higher-value activities – the fact remains that historically Brasilia has well recognised the importance of the connected globalised economy.

So as to provide very necessary commercial diversity that can further strengthen its already broad interests from base raw materials right through to scientific instruments and services. And moreover, foreign automotive input has always played a leading role, whether policy was notionally written as 'closed-door' or 'open-door'.

An analogy is that of F1 driver Felipe Massa's recent (and abrupt but very gracious) retirement.

Just as one door apparently closes so another (closely connected) opens. Thus it would be good to see Senhor Massa become an Ambassador for Brazil's future technological aspirations and efforts.

Aspirations that should be married to the technical ambitions of both domestic and foreign 'Technologists' (such as Williams', and McLaren's hi-tech divisions) and those of the bigger MNC's, so that Brazil can continue to wave its flag with grand ideals internationally.