As Brazil’s auto industry struggles, Ford shuts up shop

. Jan 12, 2021
auto industry brazil Ford's Camaçari plant is set for immediate closure. Photo: Joa Souza/Shutterstock

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Today, Ford pulls out of Brazil in a move affecting thousands of workers in the auto industry. Brazil’s stock market volume rivaling GDP for the first time. Official 2020 inflation figures to be announced today.

Ford exit highlights Brazil’s auto industry woes

The Ford Motor Company announced the closure of its three plants in Brazil this year, after the pandemic “amplified a persistent idle capacity and underperforming sales, resulting in years of significant losses.”

Factories in the states of Bahia and São Paulo will be immediately shut down, with a third in Ceará following suit by Q4 2021. </p> <p><strong>Behind the decision. </strong>Car sales dropped 26 percent in Brazil last year and are not set to return to pre-pandemic levels for another two years. In the state of Bahia, Ford paid roughly BRL 200 million (USD 36.4 million) in taxes back in 2019 —&nbsp;an amount that was halved in 2020.</p> <ul><li>The writing was on the wall after Ford had closed another São Paulo-based plant early in 2019. Moreover, <a href="">it had not launched a new investments program</a> for the country since 2015, when the last plan expired.</li><li>The move affects 5,000 workers and will disrupt a production chain that employs another 7,000 people.</li></ul> <p><strong>Why it matters. </strong>Production costs in Brazil and its byzantine tax code make local operations only worthwhile if sales are constantly soaring and there is currency stability. That has not been the case in Brazil for a number of years.</p> <div class="flourish-embed flourish-chart" data-src="visualisation/4938169"><script src=""></script></div> <p><strong>Widespread auto industry problem.</strong> As finance reporter Natália Scalzaretto <a href="">wrote last year on <strong>The Brazilian Report</strong></a>: &#8220;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.&#8221;</p> <ul><li>Unafisco, a federal union of tax auditors, states that the auto industry gets BRL 6.6 billion in tax exemptions. Brazil&#8217;s federal revenue authorities estimate that Ford alone received around BRL 20 billion in tax breaks since 1999.</li><li>State administrations in São Paulo and Bahia are trying to launch an emergency task force to attract potential buyers for the Ford plants —&nbsp;which could include further tax benefits.</li></ul> <p><strong>Reactions.</strong> Governors have slammed the federal government for not enacting structural reforms that would improve Brazil&#8217;s business environment. However, some of these changes are opposed by governors themselves, such as parts of a proposal to overhaul the country&#8217;s tax system.</p> <hr class="wp-block-separator"/> <h2>Brazilian trading volume rivals GDP for the first time</h2> <p>The trading volume of the São Paulo stock exchange <a href="">reached BRL 6.45 trillion</a> (USD 1.1 trillion) in 2020. That was a 71-percent increase from the previous year and is more than three times levels recorded in 2017. Moreover, the stock market trading volume is now equivalent to 93 percent of the Brazilian GDP, up from 52 percent in 2019.</p> <ul><li>In the U.S., the stock market trades the equivalent of four times that country&#8217;s GDP.</li></ul> <p><strong>What drove this push.</strong> Despite a generational crisis caused by the pandemic, the number of Main Street investors soared as people looked to take advantage of multiple stock crashes earlier in 2020. On March 23 of last year, Ibovespa reached its lowest point in recent times (63,569 points) — only to rally to an all-time high of 125,075 points on Monday.&nbsp;</p> <div class="flourish-embed flourish-chart" data-src="visualisation/4938079"><script src=""></script></div> <p><strong>Why it matters.</strong> Anyone looking for evidence that the stock market and the real economy are <em>not</em> the same thing should look no further. As retail investing thrives, the Brazilian economy continues to sputter.</p> <p><strong>Cream of the crop.</strong> Per consultancy firm Economatica, transactions involving the top 12 stocks on the Brazilian market added up to over BRL 100 billion in 2020.&nbsp;</p> <ul><li>What is noteworthy is that despite the recent attention toward ESG (environment, social, governance) principles among investors, Brazil&#8217;s leading listed companies are Vale — the mining company involved in the two worst environmental disasters in Brazilian history —&nbsp;and Petrobras, the state-owned oil giant which has resisted investing in a transition to cleaner energy sources.</li></ul> <hr class="wp-block-separator"/> <h2>Official inflation to meet target, but consumers will feel the pinch</h2> <p>The Brazilian Institute of Geography and Statistics will publish the official inflation rate for Brazil in 2020 later today. Analysts surveyed by the Central Bank expect the rate to stay at 4.3 percent, slightly higher than the 4-percent target. Still, consumers&#8217; perception indicates a much more challenging scenario, especially after food prices soared in the second half of the year.</p> <ul><li>The IPCA price index is a nationwide indicator which aggregates multiple variables&nbsp;— thus masking specific realities in different segments of society. A study by the Institute for Applied Economic Research (Ipea) shows how inflation hits different income brackets in distinct forms: in November, inflation hit 2.69 percent for high-income households, against 5.8 percent for very low-income families.</li></ul> <p><strong>Perception.</strong> An <a href="">end-of-the-year poll</a> shows that 72 percent of Brazilians expect prices to continue rising. They are probably right, as we wrote in <strong>The Brazilian Report</strong> on Monday: &#8220;services are set to see significant price increases in 2021, meaning that <a href="">Brazilians could be on the cusp of a “second wave” of Covid-19-related inflation</a>.&#8221;</p> <p><strong>Why it matters. </strong>The main sectors to be affected by rising prices are likely to be healthcare plans and private education —&nbsp;which could hit the Brazilian middle class hard and fuel disgruntlement against the government.</p> <div class="flourish-embed flourish-scatter" data-src="visualisation/4938013"><script src=""></script></div> <hr class="wp-block-separator"/> <h2>What else you need to know today</h2> <ul><li><strong>Banking.</strong> In a <a href="">securities filing</a>, state-controlled bank Banco do Brasil announced a reorganization plan that includes closing 361 branches and reducing its staff by at least 5,000 employees. The company plans to save BRL 535 million in 2021 and BRL 2.7 billion by 2025. Numbers of branches and staff members have gone down by 19 and 8 percent, respectively, since 2015.</li><li><strong>Education 1. </strong>On January 17 and 24, almost 5.8 million students will take the National University Entrance Exam (Enem). It is Brazil’s <a href="">leading college acceptance exam</a>, used by most of the country’s federal universities. Experts have advised against the in-person tests being held, as they will require students to remain inside classrooms for hours and could further the spread of the coronavirus. On Monday, Brazil&#8217;s Basic Education Director Carlos Souza — who is responsible for overseeing the Enem — <a href="">died of Covid-19</a>.</li><li><strong>Education 2. </strong>The 2021 Enem will serve to reveal the impacts of the pandemic in <a href="">widening the gap between rich and poor students</a>. Twenty-two percent of students did not have access to the internet at home during the health crisis, with 44 percent not owning a personal computer. Inequality was already staggering, with the 2016 School Census showing that 97 of the 100 pupils with the highest Enem marks were <a href="">private school students</a>. </li><li><strong>Election. </strong>The Superior Electoral Court published the findings of third-party audits into the country&#8217;s electronic voting system. Private companies were unable to find any evidence suggesting that the <a href="">system is vulnerable to fraud</a>, as President Jair Bolsonaro insists. One former ally in Congress has asked the Supreme Court to force Mr. Bolsonaro to present evidence backing up his claims or face prosecution.</li><li><strong>Vaccine.</strong> Health Minister Eduardo Pazuello said Brazil could try to administer a first dose of coronavirus vaccine to as many people as possible before making a second available. He claims the AstraZeneca vaccine &#8220;offers 71-percent protection after the first dose,&#8221; elevated to &#8220;90 percent after the second one.&#8221; Meanwhile, the government gave up on anti-parasitic medication nitazoxanide, once touted as a <a href="">drug that would &#8220;save lives.&#8221;</a></li><li><strong>Virus.</strong> Japanese authorities found a new variant of the coronavirus in four travelers who had recently been in Brazil. Samples show a <a href="">strain with 12 mutations</a>, one of which had been identified earlier in the United Kingdom and South Africa. &#8220;There is no evidence that [the mutation] impacts the efficacy of vaccines or PCR tests,&#8221; said Brazilian authorities. A new survey on mental health has shown the emotional toll the pandemic has taken on <a href="">over 200,000 health workers</a>. Their stress levels have peaked due to fears of transmitting Covid-19 to friends and family — especially those in at-risk groups.

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