RIO DE JANEIRO, BRAZIL – On Monday, January 11th, the Brazilian automotive industry suffered a major blow: Ford announced the closure of its three plants in the country, shutting down its domestic production of vehicles such as the EcoSport, Ka and Troller T4.
Also in 2021, operations in Camaçari (BA), Taubaté (SP) and the Troller plant in Horizonte (CE) will be closed. The decision directly impacts 5.300 workers in these plants. Ford said it will maintain its plants in Argentina and Uruguay.
Local governments have already reacted: Camaçari is now negotiating its plant with Chinese companies. Meanwhile, the federal government declared that Ford’s departure is contrary to the industry’s moment in the country. “The automaker’s decision is out of step with the strong rebound observed in most industrial sectors in the country, many of which are already recording better results than in the pre-crisis period,” said the Ministry of Economy in a statement.
The question remains: what led Ford to leave Brazil? InfoMoney spoke with economists and specialists in the sector to understand the reasons that led the American manufacturer to abandon Brazil.
Ford’s history was dismal: the brand experienced some bitter years in Brazil. It registered billion-dollar losses, lost market share and had already shut down other operations before this week’s announcement, such as the closure of the truck plant in São Bernardo do Campo (SP) in 2019. The profit and market share situation was further complicated by the novel coronavirus pandemic. So, Ford focused on the essentials: more productive plants and cars with higher added value.
But experts also pointed out that the Brazilian business environment contributed to the country losing ground to Argentina. The slowdown of the Brazilian economy, which reduced vehicle sales in the market, coupled with a background of legal instabilities and high bureaucracy, were major factors in the decision, according to economists.
“Legal insecurity in Brazil is often higher than in Argentina. Companies here have to deal not only with potential tax rises, but also with a change of rules midway through the season. Taxes are increased overnight and everyone is taken by surprise; no business plan can adjust that quickly,” says Raphael Galante, an economist who has worked in the automotive sector for 14 years and is a consultant at Oikonomia Consultoria.
Brazil: difficult years for Ford
Ford stops producing cars in a country where it has been suffering losses for years. “Between 2013 and 2020, Ford’s South American operation accumulated losses of US$5.7 billion,” Galante said in his InfoMoney column, based on Ford’s results.
“If we expand the brand’s 2006 results analysis to 2020, there is a US$112 million profit. We had a good period between 2006 and 2012 with a positive result of US$5.8 billion, against a loss of US$5.7 billion in the period between 2013 and 2020 (the 2020 last quarter result should leave the operation at zero for these 15 years of operation)”, he adds in his text.
The automotive market closed 2020 with the highest slump in five years, according to the National Association of Vehicle Manufacturers (ANFAVEA). Among passenger cars, light SUVs, trucks and buses, the total number of new registered vehicles last year reached 2.06 million units, 26.2% lower than in 2019. This is a decline unseen since 2015, when the collapse in the sector, amid the Brazilian recession, reached 26.6%.
According to Tendências consulting projections, the rebound in the Brazilian automotive market should occur gradually, reverting to 2019 levels only in late 2022 or early 2023. “The pandemic may be an additional factor for Ford’s departure. The automotive industry has been heavily impacted by the pandemic in general. Although we saw a rebound throughout the second half of the year, driven by domestic sales, which showed a positive recovery, the impact was still severe for production in the year-to-date,” said Isabela Tavares, economist at Tendências.
According to the National Federation of Motor Vehicle Dealers (FENABRAVE), Ford had a 7.14% market share in 2020, below General Motors, Fiat, Volkswagen and Hyundai. In 2006, Ford had 11.34% of the market.
“This loss of ground occurred mainly due to lack of innovation. Ford failed to expand, innovate and update its portfolio at the same pace as its competitors. Despite the surprise of the news at first, it was just a matter of time before the automaker was forced to stop production. After all, the indicators show that it has lost competitiveness,” explained Galante.
However, according to Tavares, Ford was not the only automaker to lose market share. “Almost the entire market saw this trend, given the rise in competition in recent years – particularly with the entry of Asian automakers.”
Milad Kalume Neto, new business director of Jato Dynamics automotive consultancy, points out that Ford’s departure from Brazil was not negative for the brand. “Insofar as the company’s stocks climbed in the United States,” he says. By the end of Monday, January 11th, Ford stocks closed the trading session up 3.3%, at US$9.30. That same day, the S&P 500 index, which includes the 500 main companies listed on stock exchanges in the USA, saw a 0.66% drop. On Tuesday, January 12th, at 4:45 PM (Brasília time) the stocks were up 4.52%.
Another major point for Ford’s departure was the idle capacity of Brazilian plants, too large for the demand for Ford vehicles. Motor vehicle and metal products manufacturers recorded an average idleness rate of over 30% in the past four months, according to data from the Getúlio Vargas Foundation (Ibre/FGV).
Domestic production has a yearly capacity for between four and five million vehicles, estimates Kalume Neto. But sales projections for this year were only 2.4 million new vehicles. “Drops in Ford sales in a market like the Brazilian one causes significant losses, because the fixed costs remain high,” says the specialist, adding that Ford plants were not operating at full capacity and idleness produces high costs for industries.
Why Argentina?
Antônio Jorge Martins, FGV’s financial director and automotive course coordinator, says looking at Ford’s decision without comparing the macroeconomic situations of the two countries is necessary.
“There are factors that led Ford to sustain its operations in Argentina, but it’s not because the country is a paradise, with a better economy than Brazil’s, or a more attractive exchange rate. It’s not that. Brazil was not replaced by Argentina. Ford chose to paralyze the production of the EcoSport and Ka here, but did not reallocate them to another plant in a neighboring country. These products will no longer be manufactured. This shows that the automaker is undergoing a kind of downsizing of its operations,” he explains.
According to Martins, the restructuring process used as an argument for closing plants in Brazil is not very different from the association and merger processes that other automakers have announced recently. “The merger of FCA (Fiat-Chrysler Automobiles) and PSA (Peugeot Société Anonyme, which owns Citroën, Opel and Vauxhall brands) is an instance, as well as the Renault-Nissan-Mitsubishi partnership. This restructuring is a worldwide trend, one way or another,” he says.
Nevertheless, Ford specifically chose the Argentine market for a number of reasons:
Productivity and agreements with Brazil
First, moving to the neighboring country may solve Ford’s idle capacity dilemma. “Moving production to a country with a smaller structure may have been the right choice. Now, Ford is occupying virtually fully productive plants. It was a purely financial decision,” says Kalume Neto.
Also according to Jato Dynamics director, the Argentine domestic market for new vehicles is a third of the Brazilian market. The Uruguayan market is even smaller. “Ford can export its vehicles to Brazil, leveraging on existing bilateral agreements. Argentine vehicles on Brazilian roads are not a novelty.”
In 2019, Argentina and Brazil signed an automotive free trade agreement. The agreement provides for the free trade of automotive goods, as of July 1st, 2029, free of any restrictions. Until free trade is finally achieved, the pact provides for gradual increases, with immediate effect, in traded volumes with no tariffs levied.
Argentine expertise, with an eye on the future
Yet, in the neighboring country Ford’s timing is different. Ford Argentina closed last year with the announcement of a US$580 million investment to manufacture the new generation Ford Ranger, scheduled to begin in 2023. The pick-up’s current model is manufactured in General Pacheco, province of Buenos Aires.
“Our dedicated team has made significant progress in changing our operations, including discontinuing unprofitable products and moving out of the heavy truck business,” said Lyle Watters, Ford’s president for South America at the time. The information is from the Argentinean newspaper Clarín.
In 2019, Ford had already announced the closure of its plant in São Bernardo do Campo (São Paulo). At the time, Ford claimed it had suspended production to stop the truck segment in South America. “The move in São Bernardo was difficult, yet necessary to restructure the company’s business,” the company said in a statement.
In a statement on the closure of the three plants in Brazil, Ford stressed this need to offer vehicles with a higher added value. The company mentioned in the note that it will serve consumers with an “exciting portfolio of connected vehicles, and increasingly electrified”. Ford mentions models such as the Ranger, Transit, Bronco and Mustang Mach 1.
Although the Argentine market is smaller, Galante says it holds a very specific expertise. “They have developed expertise in the production of SUVs and pick-ups, like the Ranger [which was already imported to Brazil]. They have knowledge in this segment, which has a tremendous potential and is expensive in Brazil,” he says.
Therefore, Ford’s strategy is clear, according to Galante: focus on bigger cars, which will yield higher profitability. “The automaker chose to focus on niches with a higher added value, such as SUVs and pickups, and to maintain a small and targeted portfolio. It removed the Ka and the Ka sedan from its portfolio, as they are cheaper cars, with low profitability and with a volume very much directed to car rental companies. It also removed the EcoSport, which was the first SUV in Brazil, but its segment is very competitive.”
‘Brazil Cost’ as backdrop
“Clearly, Brazil is losing the trade war. The fifth largest automaker in terms of sales is abandoning its activities in the country, and this is not normal. It is a reflection of the economic and political instabilities that prevail in our country for some years,” analyzes Kalume Neto. “A fiscal policy with no artificial stimulus measures would render the country more suitable for investments in all areas. We need to create jobs and income in a sustainable way. But the government has done little in the fiscal aspect.”
The Ministry of Economy stated that “it is working intensively to reduce the ‘Custo Brasil’ using initiatives that have already achieved important progress. This [Ford’s decision] reinforces the need for a quick implementation of measures to improve the business environment and to move forward in structural reforms,” reads the note. ‘Custo Brasil’ [Brazil Cost] is an expression used to bring together the set of difficulties that impede business growth in the country – such as legal, logistical and tax complexities.
Organizations have also stressed the need for reforms in the country. ANFAVEA, which represents automakers in Brazil, credited Ford’s departure to the lack of measures designed to reduce production costs in Brazil. “ANFAVEA will not comment on the subject. This is a global strategic decision of one of our associates. We respect it and lament it. But this confirms what the organization has been alerting for over a year about the idleness of the industry (local and global) and the lack of measures to reduce the Brazil Cost,” says the organization in its full note.
In a statement, the São Paulo State Industries Federation (FIESP) has also demanded the need to reduce the Brazil Cost. “We urgently need to make structural reforms, lower taxes and improve our economic competitiveness to attract investments and create the jobs that Brazil so much needs”, pointed out the organization. “The cost of each automobile produced here, for instance, doubles only because of taxes.”
The president of the Chamber of Deputies, Rodrigo Maia, said on Monday, January 11th, that the closure of Ford plants in Brazil evidences the absence of clear rules, legal security and a rational tax system. An advocate of the proposed tax reform authored by the candidate he endorsed for his succession in the leadership of the Chamber, Baleia Rossi, the current president of Brazil’s Lower House pointed out that the tax system has become a “madhouse” in recent years, with direct impact on companies’ productivity.
Did Ford lack subsidies?
On Tuesday, January 12th, President Jair Bolsonaro said he laments the loss of jobs caused by Ford’s decision, but said the company is not telling the “truth” and that it wanted subsidies to remain in the country. “I lament the five thousand jobs lost. But what does Ford want? Ford failed to tell the truth. They want subsidies. Do you want us to keep giving them R$20 billion, as they did in recent years? Your money, your tax money,” he told supporters outside the Alvorada Palace.
Data from the Ministry of Economy compiled by O Estado de São Paulo newspaper show that tax incentives for automobile manufacturers reached R$43.7 billion between 2010 and 2020. In addition to benefits in federal taxes, the companies rely on state and municipal tax benefits, which have not been included in the Ministry of Economy’s accounts.
However, FGV’s Martins does not believe that the lack of subsidies was a reason for Ford to leave the country. “Brazil has traditionally had aggressive subsidy policies and incentives for the automotive sector in general. In the past, the sector had a high level of employability, which decreased due to machine automation and the development of technology. Nevertheless, it is a very important sector for Brazil”, he explains. “But Ford is not abandoning Brazil for lack of subsidies. It’s a strategic decision, the first indication of which had already been seen with the closure of the truck plant in São Bernardo do Campo, in 2019.”
Martins emphasized that Ford has been granted subsidies, and each assembler benefits from this kind of opportunity as it sees fit. “It’s hard to determine who uses which subsidy or incentive. Rota 2030 [tax incentive program that replaced the similar Inovar Auto] became known and should foster technological development, investments and some manufacturers are adopting measures in this direction, but they will be granted tax incentives if they reach certain targets for energy efficiency and investments in new cars, for instance. Tax incentives such as the ICMS (a state VAT Tax on Goods and Services), import tax and IPI (Tax on Industrialized Products) are irregular and the federal and state governments use these devices at certain times. It wasn’t the absence of these mechanisms that made Ford leave,” he says.
So, Ford never again?
In practice, Ford stopped producing cars in Brazil, but continues to operate here. The notice stated that the Product Development Center in Bahia, the Testing Ground in Tatuí (SP), and its regional headquarters in São Paulo continue to operate, as well as consumer assistance services for sales operations, spare parts and warranty for customers in Brazil.
Moreover, Galante understands that the prices of Ford cars that will be commercialized here will not suffer great impacts. “Ford vehicles that consumers will have access to will be imported, as is currently the case with the Ranger, with the Mustang. They won’t become more expensive just because Brazil doesn’t have a production line any longer. Consumers will find the cars of the assembler’s portfolio in the dealerships networks – which will be radically reduced, given the low volume we will have henceforth, but will continue to be there,” he explains.
Source: InfoMoney