Group Blog: The Automobile Industry in Latin America

Florianopolis Travel Blog

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Written by: Rachel Benkeser, Phil Gadomski, and John Winn

 

Like Argentina and Brazil, the countries of South Korea and Japan industrialized well after the nations of Western Europe and the United States.  Yet, unlike Argentina and Brazil, South Korea and Japan closed their borders to foreign automobile companies, using regulations and import limitations in order to give their respective infant auto industries a chance to blossom.  As a result, the domestic auto industries in these Asian countries developed, and Korea (with Hyundai) and Japan (with Toyota, Honda, etc.) now enjoy economic success in domestic and international markets (“The Mechanics of Brazil’s Auto Industry”, Helen Shapiro).  But due the economic policies and conditions of ISI, Brazil and Argentina, two countries with significantly larger populations and markets, never developed any domestic car companies of their own.

 

Historically, Argentina and Brazil have depended on agriculture as a source of economic strength and stability. The dependence on agriculture began during their colonial days and has continued throughout the years. While many other countries such as the United States began to move away from the dominant dependence on agriculture and shift toward industrialization, Argentina and Brazil remained focused on their agricultural goods (http://www.ers.usda.gov/publications/wrs013/wrs013d.pdf).  Industrialization in these countries did not begin until the mid-twentieth century. By this time, they were too far behind in the automotive industry to create their own domestic car. Instead, both countries decided to allow foreign companies to invest in both Argentina and Brazil. European and US companies primarily set up assembly plants in these countries (History of Argentina, Luis Alberto Romero, pg 141). The decision to allow such companies to enter their markets was based on a need for investment to cut down the debt both countries were fighting as well as to promote industrialization and job growth under ISI programs. In addition, Argentina and Brazil lacked the ability to compete with the quality, service, and efficiency of foreign automotive manufacturers.

 

It is important to note that countries such as Japan and Korea were also dependent upon agriculture until the mid 1900s, and each of these countries were able to produce their own domestic automobile companies. However, they did so by closing the borders and protecting the growth of these industries which allowed for such a late success in industrialization (http://www.britannica.com/eb/article-225684). Argentina and Brazil, however, were experiencing economic turmoil and had no feasible way of closing their borders without going into severe debt and eventual economic collapse. Instead, they needed investment of foreign companies. The initial investment that took place in the early 1950s was largely supported by the ISI programs.

 

Another significant hindering factor were the circumstances surrounding ISI, an economic policy adopted by both Brazil and Argentina.  ISI, short for import substitution industrialization, was adopted by most Latin American contries, due to the perceived failure of liberalism in the late 1920’s and early 1930’s, as well as the declining terms of trade for the raw and simple good and resources the countries had economically depended on for so long.  Instead of trading for finished goods from Europe and the U.S., Argentina and Brazil hoped ISI would foster growth of domestic infant industries and manufacturing because of the government subsidies, kickbacks, and tariffs that accompanied the policy.  Specifically, the countries favored to foster industries that would create backward linkages, like the auto industry, which in turn would stimulate steel, glass, and other industries (“Import Substitution Industrialization”, Patrice Franko, pgs 54-56 & 69).

 

However, one of ISI’s major downsides was that with all the government subsidies, competition was basically eliminated, and thus, there was little to no incentive for innovation (“Import Substitution Industrialization”, Patrice Franko, pgs 66-67).  This coupled with the fact that foreign car companies had long established various plants in Argentina and Brazil (the 1st Ford assembly plant in Argentina was opened in 1916) meant there was no reason to create a domestic car company (History of Argentina, Luis Alberto Romero).  As these plants and factories became nationalized, there was no sense in trying to start from scratch; rather, the countries decided to build off of and further develop what was already there.  And once ISI ended in the 70’s and 80’s for these two Latin American countries, the heavy focus on industrialization ended, thus again leaving no incentives and no point in pursing a national car company.

 

Furthermore, even if these two countries wanted to have created a domestic car company, as oppose to simply developing further the production of foreign cars, it would have been nearly impossible.  The automobile is a very sophisticated product, required advanced technology and a good deal of raw materials.  Brazil and Argentina did not have access to technology and didn’t necessarily have adequate resources to have the capacity to create a national car brand.  Argentina specifically, at the beginning of its ISI years (late 1940’s/early 1950’s), had exhausted its financial reserves, due to Peron’s welfare-like policies, and was experiencing a significant economic crisis as elevated grain and meat prices returned to normal (History of Argentina, Luis Alberto Romero). 

 

In order to avoid the major debt and financial burden of a domestic auto, the two countries looked towards foreign investment for help, which meant more foreign car companies entering Argentine/Brazilian market.  These transnational automobile corporations were some of the largest and most successful internationally, and were essential sources of technology and information necessary for making car production a possibility.  South Korea and Japan had access to such licensed technology, but Brazil and Argentina would have had to develop such equipment and tools, which was out of the question since these countries planned on exporting.  Inferior and outdated products would never be internationally competitive.  An example of the presence of foreign investment can be seen in GM do Brasil (“a joint venture between Brazilian capital and General Motors”), in addition to Argentina’s jump in foreign investment from $20 million in 1957 to $248 million in 1959 (History of Argentina, Luis Alberto Romero, pg 141).  The only possible scenario that could have allowed for the creation of domestic car companies is if all foreign car companies withdrew from or showed no interest in these countries.  Yet, many transnational companies went along with the requirements and regulations of the governments, fully committed to staying and establishing in these countries (“Import Substitution Industrialization”, Patrice Franko, pgs 63 & 68-70).

 

Specifically looking at Brazil, industrialization in Brazil began to develop in the 1930s and 40s. However, this movement was based on an emphasis for defensive purposes. It was not until the 1950s that the shift form solely agricultural focus to industrial defense to the modernization of the economy and stimulation of industrial growth began to take place (“Urban Renewal Municipal Revitalization”, Hugh Schwartz, pg 1). The shift originated with the onset of ISI programs which in the case of Argentina and Brazil attracted foreign investments. “A wide range of foreign trade exchange rate mechanisms were used to attract these investments and aimed at substituting for imports and automobiles at first.” (“Urban Renewal Municipal Revitalization”, Hugh Schwartz, pg 1). These incentives were successful in beginning the production of foreign owned automotive assembly plants.

 

As these foreign investments were proving to be a great success, Brazil decided to take these ISI incentives and policies and shift them toward more industrial advancements. In 1962, the policies sought to help expedite the transfer of resources from abroad and to promote the manufacturing of these exports. This time period is when Brazil began to produce parts as well as assemble the automobiles (http://h-net.org/~business/bhcweb/publications/BEHprint/v018/p0026-p0032.pdf). As stated before, the Brazilian government decided to stick with the infrastructure and production that was already in place, while foreign companies were benefiting and making their own technological advances. Such a decision greatly benefited the economy as Brazil began its transition into the industrialized world by accepting foreign investment and giving incentives for companies to invest. “Short term incentives led to long term stay and benefit.” (www.unep.org/PCFV/events/LAC-Workshop.html). In other words, the special programs to install foreign investment in the 1950s changed the Brazilian economy and economic policy through the 1970s.

Argentina’s and Brazil’s automotive industries have continued to be financial successes for both the countries as well as the foreign automotive companies. During the 1980s, both countries experienced economic instability. However, foreign companies continue to remain in this regions automotive industry. In fact, companies such as Ford and Volkswagen entered partnerships during the unstable times so that they would not lose their investments. Many policies promoted this industry throughout the 1990s. These policies attracted more automotive investments from abroad. “From 1995 to 2000, automobile manufacturers poured in approximately $23 billion into new automobile factories.” (“Import Substitution Industrialization”, Patrice Franko, pg 71). The quality of these plants greatly increased as well. In 1996, Volkswagen’s new Brazil plant was considered to be the most advanced technologically in the world. (“Import Substitution Industrialization”, Patrice Franko, pg 71). As the advancement and quality increased, both Argentina and Brazil benefited more and more. However, in 2002 Argentina’s economy collapsed. The foreign automotive companies experienced some loss, but Argentina as well as Brazil are doing everything they can to open the door to more foreign investors, particularly in the auto-industry. As foreign investments continue to rise in Brazil and Argentina, the automotive industry is continuing to boom in today’s market. Therefore, it is highly unlikely that Brazil or Argentina will ever try to attempt to produce its own domestic automotive company.
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