The pandemic accelerates the structural change of industry

With Ford, a traditionally important group is pulling out of Brazil. This is due to the structural change in the industry worldwide, but also to the weak growth prospects in the region. Companies that want to remain competitive in South America will have to invest heavily. Some companies do not want to risk this in view of the unclear scenario.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

 

It was not a good start to the year for Brazil’s economy. After 113 years of presence in Brazil, Ford announced it would close its three factories in Brazil. Around 5,000 employees will be affected. The announcement generated a strong response: after all, Ford is not just any carmaker in Brazil. The manufacturer was one of the first foreign groups to produce modern cars in Brazil, the consumer dreams of several generations. For years, Ford sold the most vehicles, along with GM, Volkswagen and later Fiat. Brazil was always strategically important for the manufacturer from Detroit: Henry Ford even wanted to produce the rubber for the tires in the Amazon in Fordlândia in 1920 – and failed.

But now Ford is giving up a market in which it was still successful with its compact models: Around seven percent market share in the world’s sixth-largest car market – you wouldn’t think a global manufacturer would give that up voluntarily. Why is Ford doing this?

On the one hand, Ford wants to focus primarily on electric vehicles worldwide and light commercial vehicles. This also explains why Ford is expanding the plant for the Ranger pickup in Argentina but closing its plants in Brazil. The model series for compact vehicles is to be phased out, they do not bring enough profit.

Ford would have had to invest massively in Brazil to implement its global strategy there. After all, the industry is in the midst of one of the biggest transformation processes since the invention of the internal combustion engine. It’s about the electrification and digitization of vehicles, the use of Big Data, autonomous driving. Ford has decided that it is not worth driving this change in Brazil.

Because at the same time, the market has been shrinking for seven years and it doesn’t look like things are going to improve any time soon. The lack of reforms has caused the industry’s hopes of an imminent improvement in the investment climate to evaporate.

In addition, the purchasing power of Brazilians has shrunk since 2013. Exporting is difficult. Brazil is not a cheap location; production costs are high. In addition, the market is closed, both in the region and worldwide. It is therefore not possible to create economies of scale in conjunction with other production sites.

This loss of importance of South America as a location is currently being experienced most strongly by the automotive industry. In Brazil, Mercedes has already announced the closure of its plants. Audi has stopped production. In Argentina, suppliers such as BASF, Saint-Gobain Sekurit and Honda have stopped production.

Nevertheless, the impression should not be given that the automotive industry as a whole is pulling out of South America. Volkswagen, Toyota, GM, Renault and above all FiatChrysler (soon to join forces with PSA Peugeot Citroën) are investing heavily in new models and plants there.

Commercial vehicle manufacturers such as Scania, VW, Mercedes and Volvo are currently demonstrating that state-of-the-art factories in South America also pay off: they have all invested in new models and production lines in the midst of the severe crisis and export their vehicles worldwide.

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