In 1957, then-Brazilian President Juscelino Kubistchek promoted a plan to manufacture cars in Brazil for the first time. More than 60 years later, however, the auto industry in Brazil is still struggling and has had problems adapting to global trends. As a result, carmakers continue to rely on government subsidies, which, with Brazil’s sluggish economy, have become less and less reliable.

Last month, the Ford Motor Company announced it was shutting down its plant in São Bernardo do Campo—an industrial region on the outskirts of São Paulo. While 3,000 people are employed in Ford’s factory, its closure would threaten the jobs of some 24,000 workers, considering the production chain as a whole.

</span></p> <p><span style="font-weight: 400;">To make matters worse, General Motors was </span><a href="https://g1.globo.com/carros/noticia/2019/01/19/em-comunicado-gm-alerta-funcionarios-no-brasil-sobre-prejuizos-e-plano-de-restruturacao-rigoroso.ghtml"><span style="font-weight: 400;">reportedly</span></a><span style="font-weight: 400;"> considering a similar move and could abandon its factories in São Paulo state. In January, GM&#8217;s top executive for Brazil and Argentina, Carlos Zarlenga, said the operation has reached “a critical moment that will require sacrifices from everyone.” One week before, Chief Executive Mary Barra said GM would not &#8220;keep deploying capital to lose money.&#8221;</span></p> <p><span style="font-weight: 400;">Ford&#8217;s decision to leave Brazil follows the country&#8217;s worst recession on record, during which car production halved after peaking in 2013 when 3.8 million units were made. Though the auto industry has managed to recover some of the ground lost in the last two years, idle capacity remains at roughly 40 percent.</span></p> <hr /> <p><img class="alignnone size-large wp-image-15191" src="https://brazilian.report/wp-content/uploads/2019/03/export-KPBpj-1024x683.png" alt="Will Brazil’s auto industry ever stand on its own feet?" width="1024" height="683" srcset="https://brazilian.report/wp-content/uploads/2019/03/export-KPBpj-1024x683.png 1024w, https://brazilian.report/wp-content/uploads/2019/03/export-KPBpj-300x200.png 300w, https://brazilian.report/wp-content/uploads/2019/03/export-KPBpj-768x512.png 768w, https://brazilian.report/wp-content/uploads/2019/03/export-KPBpj-610x407.png 610w, https://brazilian.report/wp-content/uploads/2019/03/export-KPBpj.png 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></p> <hr /> <p><span style="font-weight: 400;">To avoid the loss of 15,000 direct jobs, the government of São Paulo has stepped in, </span><a href="http://www.saopaulo.sp.gov.br/spnoticias/ultimas-noticias/governo-de-sp-mantem-gm-no-estado-e-montadora-anuncia-investimentos/"><span style="font-weight: 400;">announcing</span></a><span style="font-weight: 400;"> cuts of up to 25 percent in state taxes for automakers that invest at least BRL 1bn in his state and create at least 400 jobs. While the financial aid package seems to have been taken from the Dilma Rousseff playbook on economics—handing hefty subsidies to a specific sector which has a strong lobby—there are a few differences. Governor João Doria&#8217;s program imposes clear counterparts, according to Antonio Jorge Martins, a professor at think tank Fundação Getulio Vargas and coordinator of an MBA course in automotive sector management.</span></p> <p><span style="font-weight: 400;">“The trend nowadays is to only hand out tax breaks if companies give something in return—such as investments. That’s what the state government is doing,” said Mr. Martins. “As the government faces fiscal issues, it will be very difficult to sustain the same level of incentives adopted in the past.&#8221;</span></p> <p><span style="font-weight: 400;">Economy Minister Paulo Guedes has promised to put &#8220;an end to the era of tax subsidies.&#8221; But the question is: will the auto industry be able to stand up on its own?</span></p> <h2>Brazil&#8217;s auto industry: a long history of government dependence</h2> <p><span style="font-weight: 400;">During the six decades of Brazil&#8217;s auto industry, it has benefited from at least six major </span><a href="https://www1.folha.uol.com.br/mercado/2018/07/brasil-teve-ao-menos-outros-cinco-grandes-programas-automotivos-antes-do-rota-2030.shtml"><span style="font-weight: 400;">stimulus packages</span></a><span style="font-weight: 400;">. According to a study by researchers Wagner Pralon Mancuso, Maetê Pedroso Gonçalves and Fabrizio Mencarini, between 1988 and 2006 alone, 46 legal provisions gave fiscal benefits to businesses, 56 percent of them to specific sectors—including packages that were considered illegal by the World Trade Organization.</span></p> <p><span style="font-weight: 400;">The current program destined to aid the auto industry is </span><i><span style="font-weight: 400;">Rota 2030</span></i><span style="font-weight: 400;">. For the next 15 years, it will allow tax breaks of up to 2 percent for vehicles produced in accordance with energy and safety goals. Companies also get a tax cut of up to 15.3 percent for investments in research and development. Even with this benefit, </span><a href="http://www.virapagina.com.br/anfavea2019/51/#zoom=z"><span style="font-weight: 400;">taxes</span></a><span style="font-weight: 400;"> amount to 30.4 percent of a car’s rental price in Brazil, against 16 percent in Germany and 9.9 percent in Japan, according to automakers association Anfavea.</span></p> <hr class="" /> <p><img class="alignnone size-large wp-image-15192" src="https://brazilian.report/wp-content/uploads/2019/03/export-ioLzf-1024x683.png" alt="Will Brazil’s auto industry ever stand on its own feet?" width="1024" height="683" srcset="https://brazilian.report/wp-content/uploads/2019/03/export-ioLzf-1024x683.png 1024w, https://brazilian.report/wp-content/uploads/2019/03/export-ioLzf-300x200.png 300w, https://brazilian.report/wp-content/uploads/2019/03/export-ioLzf-768x512.png 768w, https://brazilian.report/wp-content/uploads/2019/03/export-ioLzf-610x407.png 610w, https://brazilian.report/wp-content/uploads/2019/03/export-ioLzf.png 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></p> <p>&nbsp;</p> <hr /> <p><span style="font-weight: 400;">The auto industry defends its </span><a href="http://agenciabrasil.ebc.com.br/politica/noticia/2018-11/anfavea-diz-que-setor-automotivo-esta-otimista-com-novo-governo"><span style="font-weight: 400;">role</span></a><span style="font-weight: 400;"> in the Brazilian economy to justify the incentives. The sector is responsible for 130,000 direct jobs and accounts for 4 percent of the country&#8217;s GDP. According to André Rebelo, an economic advisor at the Federation of Industries of São Paulo (FIESP), tax breaks helped Brazil during the 2008 global financial crisis, bringing the government revenue that would not otherwise be available.</span></p> <p><span style="font-weight: 400;">Critics, however, reckon that the government&#8217;s insistence on this kind of policy is among the top reasons for Brazil&#8217;s recent recession. &#8220;While the rest of the world progressively withdrew subsidies after the worst part of the crisis had passed, Brazil persisted with the same procedure—which proved to be a huge mistake,&#8221; </span><a href="https://economia.uol.com.br/noticias/estadao-conteudo/2018/09/09/durante-crise-de-98-modelo-brasil-ignorou-resto-do-mundo.htm"><span style="font-weight: 400;">wrote</span></a><span style="font-weight: 400;"> economist Samuel Pêssoa.</span></p> <h2>ABCD becoming a rust belt</h2> <p><span style="font-weight: 400;">No other part of Brazil has felt the impacts on the auto industry as deeply as the “ABCD” industrial area of São Paulo, a region made up of four neighboring cities to the south of the state capital. Being halfway between São Paulo and the port of Santos, ABCD was an ideal location for an incipient industry that needed both access to materials and to be close to its consumers. As the auto industry blossomed, so did ABCD. São Caetano do Sul, one of the four cities of the region and where the General Motors plant is located, boasts Brazil’s highest human development index and one of the highest per capita GDPs in the country.</span></p> <p><span style="font-weight: 400;">But industrial struggles are bringing decay to the region. Recent </span><a href="http://www.uscs.edu.br/sites/conjuscs/cartas-de-conjuntura-.html"><span style="font-weight: 400;">research</span></a><span style="font-weight: 400;"> by the City University of São Caetano do Sul shows the region&#8217;s GDP has backslid to 2003 levels. Looking only at industrial GDP, between 2013 and 2016 ABCD’s has fallen 39 percent after inflation, three times the loss nationwide.</span></p> <p><span style="font-weight: 400;">Politicians blame not only the economic crisis but also the so-called “tax wars” between Brazilian states and municipalities—which lower local taxes to attract businesses. Several companies have left the ABCD in search of lower taxes. Ford, for instance, </span><a href="https://exame.abril.com.br/negocios/por-dentro-da-fabrica-da-ford-em-camacari-na-bahia/https://exame.abril.com.br/negocios/por-dentro-da-fabrica-da-ford-em-camacari-na-bahia/"><span style="font-weight: 400;">has a huge plant in Bahia</span></a><span style="font-weight: 400;">.</span></p> <h2>A Brazilian problem?</h2> <p><span style="font-weight: 400;">Across the globe, the auto industry is changing. Trends such as car sharing, ride-hailing apps, and even electric vehicles have disrupted manufacturers&#8217; business models. Ford and GM, for example, are not only struggling in Brazil.  The former has missed its </span><a href="https://www.cnbc.com/2019/01/23/ford-q4-2018-earnings.html"><span style="font-weight: 400;">earnings estimates</span></a><span style="font-weight: 400;"> for the fourth quarter and lost market share in every major South American country except Peru. GM, which is a bit ahead on its restructuring plan, </span><a href="https://www.cnbc.com/2019/02/06/general-motors-q4-2018-earnings.html"><span style="font-weight: 400;">has bested Wall Street’s estimates</span></a><span style="font-weight: 400;">, but its adjusted earnings were 13.3 percent down on a year-on-year basis.</span></p> <p><span style="font-weight: 400;">Experts and researchers seem to agree on one point: Brazil’s ultimate challenge lies in doing its own homework. </span><a href="http://www.ipea.gov.br/portal/images/stories/PDFs/conjuntura/190328_cc_42_atividade_economica.pdf"><span style="font-weight: 400;">As Ipea highlights</span></a><span style="font-weight: 400;">, “Brazil’s industry keeps facing several structural issues, associated with low productivity, margins under pressure and high work unitary costs.”</span></p> <p><span style="font-weight: 400;">Undoubtedly, companies do have to adapt to changing markets, but in a scenario with less money available for fiscal incentives, structural changes have to be made to foster growth again.</span></p> <p><span style="font-weight: 400;">For the industry, that would necessarily include tax reform and </span><a href="https://brazilian.report/money/2019/02/15/legaltech-brazil-bureaucracy/"><span style="font-weight: 400;">less bureaucracy</span></a><span style="font-weight: 400;">.</span></p> <p><span style="font-weight: 400;">“Brazil’s automobile industry has a demand problem and even the best incentive program in the world could not increase it. But, unlike more mature markets, there’s a bunch of people who would like to have cars, they just lack the conditions. As long as credit is more available and the economy grows again, the demand shall improve”, says Mr. Rebelo.

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BY Natália Tomé Scalzaretto

Natália Scalzaretto has worked for companies such as Santander Brasil and Reuters, where she covered news ranging from commodities to technology. Most recently, worked as an Editor for Trading News, the information division from TradersClub investor community.