Group Blog #2
Florianopolis Travel Blog› entry 4 of 5 › view all entries
Group members: Mary Beth Strawn, Dillon Parker, Brent Brannen
II) Political economy course. Japan has developed an impressive local automobile industry (Toyota, Subaru, etc.). South Korea, has one particularly large manufacturer as well (Hyundai). India is also trying to do so the same (Tata). Most of the industrialized countries created their national car firms (France, Italy, USA, Britain, Sweden, Germany, Russia). Brazil and Argentina developed a huge automobile industry but through the investment of the foreign companies. Discuss why Brazil and Argentina didn’t create their own local automobile brands.
The answer to the question of why Brazil and Argentina do not have their own automobile industries goes back to the beginning of the 20th century. To begin to understand the depth of the automotive industry, it is essential to know some background material regarding Brazil and Argentina. From 1918 until the mid-1940’s, the Latin American automobile industry was completely dominated by U.S. companies. At the time it was easier for the United States to invest in Latin American markets. This was because these markets could extend the production runs of part and components made in the United States. The European markets of this period were very protected and wouldn’t allow this. Between 1925 and 1929, Argentina, behind Canada, was the largest foreign market for the United States.
In the 1950’s and 1960’s, the decades following the second world war, the United States and European Union wanted to boost their exports. This was a lucky time, because in Latin America, many governments were encouraging industrial development through import substitution policies. These governments wanted foreign manufacturers to produce their vehicles locally. To encourage this local manufacturing they began to impose very high import duties on finished automobiles. They also increased local content requirements for vehicles locally manufactured. Eventually, policies were accompanied by out-right prohibition of imported vehicles.
During this time in Brazil, the Kubitschek administration came to see the auto industry as the quickest, most effective way of promoting Brazil's industrialization. Kubitschek’s motto: “fifty years (of development) in five” fit this industrialization method perfectly. It was the plan's approach was to restrict imports and force transnational automotive companies to choose between abandoning the Brazilian market or producing vehicles with 90-95% Brazilian-made content within five years. By issuing a credible threat that the Brazilian market would be closed to imports, the government was able to pressure the transnational companies to engage in full-scale local production. The government also offered extensive subsidies that significantly reduced the cost of capital investment and guaranteed a return even if profits did not materialize.
As was stated earlier, Import Substituting Industrialization (ISI) began to take over in the Latin American region. The firms were then forced into undertaking direct investment as part of the program, which began in 1956. This combined foreign exchange and tax subsidies with the unfortunate ban of access to imports. Thus, the rules allowed 100% foreign ownership and as a result, attracted substantial investments from eleven companies including GM, Ford, and Volkswagen, six of which were wholly owned subsidiaries.
The 1970’s in Brazil included a time of military government. They promoted the development of cars for export by launching the Special Fiscal Benefits for Exports (BEFIEX) program in 1972. Through this approach the government granted generous incentives, including tax exemptions on imported machinery, equipment, and other parts, and waived federal and state value-added taxes on exports. In exchange for the benefits, firms had to commit to long-term export contracts and comply with minimum domestic-content requirements (85% for vehicles sold in Brazil). Firms were also allowed to import a certain number of parts and components that had previously been banned because they were produced domestically. Over the course of the 1970s, Brazil's total automotive exports had increased from virtually zero to US$1 billion.
The 1980’s were more or less an economic slump for Latin American countries. In the 1990’s, the automobile industry took off. Then in 1990, when the BEFIEX program was phased out, Brazil's car exports reached US$8.2 billion. Exports began to substitute for, rather than complement, domestic sales. In the mid-1990’s, Brazil’s president, Franco, dropped import tariffs on cars to 20% as a part of the stabilization program’s inflation targeting policy, where import competition was expected to help control domestic prices. Then, the ensuing flood of imports, would further reflect poorly on the competitiveness of Brazilian-made cars. This should have been expected given pent-up demand, low tariffs, low inflation, overvalued currency, and macro-economic stabilization. Competition from imports was meant to jump-start the stagnating domestic auto industry by forcing firms to invest in new technologies and update locally produced models. Franco raised the tariff back up even higher to try to fix the damage. After him, the Collor administration reduced domestic-content requirements from 90% to about 70% and loosened other regulations protecting domestic suppliers in an effort to give firms more flexibility with respect to sourcing and reduce the time required to introduce new models. The firms must still satisfy high domestic-content requirements. Likewise, tariffs remain higher than in other industries and are being reduced only gradually. Brazil continues to actively manage trade through industry-specific trade accords such as Mercosur.
When speaking of Mercosur, they have a big grasp of the automobile industry in Latin America. Mercosur allows automobiles to be traded between Argentina and Brazil duty-free. They must comply with certain rule-of-origin requirements. As for imported automobiles, there is a 35% CET on all passenger cars. Argentina has to export ½ of domestically made cars. The Argentinean Automotive Regime includes these requirements: assemblers that do not have plants in Argentina are limited by a quota of 10% of all the local production, and they have to pay a 22% tariff; local content requirement of 60% in local plants. Brazil’s regime includes: generic 63% tariff on all vehicles; auto manufacturers with manufacturing plants in brazil qualifying under the Brazilian Automotive Program are able to import vehicles at 31.5% tariff; quota of 35,000 vehicles from Japan, Korea, and Europe with a 35% tariff; the average import duty on auto components is 16%; assemblers established in Brazil have to source 60% locally and new assemblers must have 50% local content upon opening and 60% after three years (all Mercosur is considered local); government special financing line for investment in parts production; additional tax benefits in some regions of Brazil. Though these guidelines seem fair and productive, tensions still remain between Argentina and Brazil over the current price advantage enjoyed by Brazilian firms despite this agreement in Mercosur.
Looking back to Collor’s administration in the 1990’s, perhaps the most important policy initiative designed to promote the auto industry's recovery was the creation of sectoral chambers that bring together the state, the auto firms, and labor unions. The chambers were started by the Collor administration. Those chambers, which started as an emergency measure to save the auto industry from collapse, evolved into an ongoing forum in which the state, business, and labor attempted to negotiate realistic policies that all three sides could agree to. In 1993, the sectoral chamber expanded to include a plan to develop “popular cars,” so named because of their small size (engines less than 1000 cc) and low price (around $7,200). They wanted to design a car that was affordable to Brazil's middle class. Itamar Franco's government (1992-1995) agreed to tax reductions for these small cars in exchange for commitments from firms to invest and from labor to moderate its demands. Unfortunately, not only has employment not increased, as the sectoral chamber promised, but wage increases haven't risen either.
After this insight into their respective history, it’s easier to understand why Argentina and Brazil have a large foreign auto industry. They began with outside companies making “specialized” cars for them. With all of the invited and highly encouraged foreign investment, there was no way a local company could compete with these big names. Both had better equipment, experience, expertise, knowledge, technology, and labor methods. With the investment of United States and European companies so heavily in the region so quickly, any local company had no chance.
It is good that the automobile industry for Brazil and Argentina is so large and important for their country. I think that it’s sad that a domestic company can’t compete with the huge North American and European companies. Somehow, the world always works itself out. If Latin America already had a strong domestic market, the United States and European companies would have never gone global, or at least not to the extent that they did. In the end, it seems to work out for everyone.
Clark, Joel P.; Henry, Chris; Roth, Richard; Veloso, Fransisco; Global Strategies for the Development of the Portuguese Autoparts Industry. Global Autoparts.
Doctor, Mahrukh. The Interplay of States and Markets: The Role of Business-State Relations in Attracting Investment to the Automotive Industry in Brazil. University of Oxford Centre for Brazilian Studies. Working Paper Series. 2003.
Mathiason, Nick. Brazil Leads Field in Alternative Fuel Race. The Observer. May 21, 2006.
O’Keefe, Thomas A., Haar, Jerry. The Impact of Mercosur on the Automobile Industry. The North-South Agenda. September 2001.
Romine, Traci. Investment Rising in Brazil’s Automotive Sector. Inside Brazil. April 20, 1997. Edition No. 36.
Shapiro, Helen. The Mechanics of Brazil’s Auto Industry. Report on the Americas. NACLA. Jan/Feb 1996.
The Mercosur Automotive Industry: Feeling the Pressure. Mercosur Economic Summit 2000. August 5, 2000.