Creating a sustainable automotive market in Brazil.After the boom and bust In economics, the term boom and bust refers to the movement of an economy through economic cycles. The Boom-Bust economic cycle According to most economists, an economic boom is typically characterized by an increased level of economic output (GDP), a corresponding of the 1990s, the Brazilian market is growing again. But structural issues are threatening the future of OEMs and urgent action is needed. Brazil's automotive market is no stranger to cyclical cyclical Of or relating to a variable, such as housing starts, car sales, or the price of a certain stock, that is subject to regular or irregular up-and-down movements. extremes. During the 1990s, all major OEMs and suppliers from around the world invested heavily there, and the country's production capacity jumped to more than 3 million units per year. OEMs, using several state-of-the-art plants and new manufacturing concepts, churned out vehicles at an unprecedented rate. But the automotive sector almost came to a standstill standstill /stand·still/ (stand´stil?) cessation of activity, as of the heart (cardiac s.) or chest (respiratory s.) . stand·still n. Complete cessation of activity or progress. when production volume collapsed in 1999, down 35% compared with its peak in 1997. The outlook for Brazil's automotive sector was bleak, but over the past few years a moderate recovery has been unfolding. Record high production volumes of 2.5 million passenger cars and light commercial vehicles were reached in 2005. A boom in export flows and years of steady growth in the domestic market is behind this favorable situation. Brazilian OEMs and suppliers, well equipped with modern plants, manufacturing processes and technology, have been tapping into new export markets. In 2005, 840,000 passenger and light commercial vehicles were exported from Brazil, up from 261,000 in 1999. "Made in Brazil" vehicles and components are being shipped both to emerging as well as developed markets. Taking steps to avoid a fall The industry must take steps to ensure that the current level of production develops into a sustainable platform for the future. If it fails to take the measures now, the current high will become just another peak. Two main issues need to be addressed to ensure the sustainability of the industry for the next five years: (1) How to improve the distressed supply chain; (2) How to develop a competitive cost base. Problems with the supply chain not only threaten the global competitiveness of the industry, but also the sustainability of the domestic business. In Brazil's automotive sector, Tier 2 suppliers are the weakest link in the automotive supply chain. In response to globalization globalization Process by which the experience of everyday life, marked by the diffusion of commodities and ideas, is becoming standardized around the world. Factors that have contributed to globalization include increasingly sophisticated communications and transportation , Tier 1 suppliers restructured their businesses. Tier 2 suppliers did not restructure, so they suffer from low profitability, high costs, meager mea·ger also mea·gre adj. 1. Deficient in quantity, fullness, or extent; scanty. 2. Deficient in richness, fertility, or vigor; feeble: the meager soil of an eroded plain. 3. investments, old processes, and poor quality. These difficulties could cripple crip·ple n. One that is partially disabled or unable to use a limb or limbs. v. To cause to lose the use of a limb or limbs. the sector. OEMs can no longer afford to turn a blind eye to them. Brazil is no longer a low-cost country. Car prices, measured in U.S. dollars, are back to the 1998 levels, but local costs are up by over 30%. Years of currency devaluation Currency devaluation A deliberate downward adjustment in the official exchange rates established, or pegged, by a government against a specified standard, such as another currency or gold. hid the region's structural gaps and encouraged the "export campaigns" taken by OEMs and suppliers in the early 2000s. Now that the exchange rate has recovered, the sector's weakness is becoming more visible. Almost all players are stuck with their export commitments, characterized by high volumes and low margins. Once again aggressive measures are required if Brazil's automotive market is to regain its competitiveness. If these measures are not taken, then the danger looms large and another economic bubble An economic bubble (sometimes referred to as a "speculative bubble", a "market bubble", a "price bubble", a "financial bubble", or a "speculative mania") is “trade in high volumes at prices that are considerably at variance from intrinsic values”. can be created. Claiming import duty protection then will only be a measure of how many important decisions were not taken in 2005. By Corrado Capellano, Principal, Roland Berger Strategy Consultants Roland Berger Strategy Consultants is a strategy consultancy firm based in Europe and founded in 1967 in Munich. In 2005, their sales were approximately EUR 550 million. With 33 offices in 23 countries, the independent partnership is solely owned by its more than 130 partners. , Sao Paulo--Corrado_Capellano@br.rolandberger.com |
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