SAO PAULO, BRAZIL – Delegates at the Automotive Logistics South America conference on May 19-20 in Sao Paulo warned that a fast acceleration in Brazil’s vehicles sales could slam into a logistics blackout as the country’s lagging infrastructure struggles to cope. OEMs, Tier Ones and LSPs warned that Brazil’s inadequate infrastructure could stall the automotive sector’s growth once the global recession recedes.
Brazil, the world’s fifth largest auto market, faced plummeting sales at the end of last year, but has since witnessed a recovery in 2009. According to Johnny Saldanha, VP Global Purchasing & Supply Latin America, Africa and Middle East for General Motors, Brazil managed to keep sales steady this year despite the global recession. “On May 15th last year Brazil had sold around one million vehicles and by May 15th this year the figure was the same,” he told delegates at the conference. “Looking [at other countries] around the globe this is good news,” he added.
In Saldanha’s opinion, Brazil’s government has managed to buoy sales with temporary reduction of the IPI industrial production tax until June. As a result, General Motors estimates that Brazil is likely to sell up to 2.7m new cars if the tax reduction continues or 2.1m cars if the reduction is removed after June.
Ford’s Edson Molina, Materials Planning and Logistics Director in South America, added if the IPI tax reduction disappears sales will fall. But overall Ford sees the Brazilian auto market as stable. The US carmaker is continuing to invest in capacity and infrastructure to guarantee deliveries and to support sales and marketing, Molina said on the sidelines of the conference.
Davi Lunardi, Supply Chain Director at truck and busmaker Iveco Latin America, warned that the IPI tax reduction is unlikely to continue after June. This will have less impact on trucks sales as buyers usually prioritise issues such as the quality of service, he said. As a result, Brazil’s domestic truck sales should remain robust at around 100,000 vehicles this year. But Lunardi warned that exports may drop to 10,000-20,000 vehicles this year because of the economic slowdown with neighbours such as Argentina, as well as the Venezuelan government cutting imports to virtually zero, he told delegates.
Still, Lunardi sees opportunities to spur trucks sales. Brazil’s truck fleet is on average eight-years old and new sales should really start in 2010, he predicts. The restrictions on lorries more than 3.5 metric tonnes in Sao Paulo is forcing many companies to switch to smaller delivery trucks, he said.
Brazil’s looming logistics blackout
The global economic slowdown may have had a silver lining for Brazilian logistics. Fuelled by Brazil’s rising middle class and consumer credit, car sales surged. But while Brazil’s economy grew and people bought more cars, the infrastructure failed to keep pace. The economic downturn and has provided some respite, delegates said.
Delegates from OEMs, Tier Ones and LSPs complained that in the sprawling metropolis of Sao Paulo and the southeast of Brazil cars and lorries are jammed bumper-to-bumper. Vehicles and parts move at a snail’s pace through crowded ports and bureaucratic paperwork adds to delays. Strikes regularly also hamper the flow of materials, they complain.
Stephan Gruener, Managing Director of LSP BMS, recalled that in the remote north of Brazil, muddy roads with deep cavernous potholes are some of the hurdles that local and international automotive logistics experts need to navigate. BMS trucks risk being stuck in deep ditched and clogged with mud, while barges are needed in the remote Amazon juggle region to reach dealers, he said.
According to Mauricelio Gomes Faria, Fiat’s Logistics Manager in Latin America, everyone suffers from the infrastructure problems, but there seems to be no concern from the government. Faria remembers that two years ago Brazil’s creaking infrastructure almost reached breaking point.
Moreover, Faria explained that if vehicle sales really gather pace the inadequate infrastructure could lead to a logistics blackout in two years. “This can mean delays of a day or a few hours, but without investment in infrastructure the costs will certainly mount up,” he said.
In a poll of some 120 delegates at the conference, 86% agreed infrastructure was the biggest challenge to undertake logistics in Brazil. While in another poll, 38% said that changes to the port system are most essential; 27% prioritise changes to roads, and 25% to the rail system.
Katia Bednikovs, South America Logistics and Indirect Material Purchasing Manager at Lear Brazil, said security is also becoming more of a concern. Bednikovs warned that an increase in stolen cargo has also occurred this year. Some 1,849 cases of stolen shipments occurred between January and March 2009 versus 1,560 cases in the same period of 2008 and 1,520 cases in 2007, according to Sao Paulo’s union of transport companies or Cetcesp.
Jose Ricardo Chiarello, Volkswagen do Brasil’s Head of Logistics, explained that the inefficiency of the infrastructure leads to higher transport and fuel costs as well as maintenance. This can add 20% on costs, he estimated. As an example, the only highway from Sao Paulo to Curitiba city can be easily blocked by accidents. As a result, Volkswagen needs to hold a minimum of three days parts in-house – more than in other countries in Europe or the US, he says.
The inadequate port infrastructure even led Ford to establish its own private port terminal – Terminal Portuario Miguel de Oliveira – in the northeast of Brazil. The nearby Salvador’s port wasn’t big enough, so the carmaker decided to build their own 6,000-hectare terminal.
PAC lacks a punch
Delegates also believed that current government initiatives were too slow to avoid the pending blackout. For example, Brazil’s government infrastructure programme, Programa de Aceleracao do Crescimento Brasileiro, known as PAC is unlikely to bring quick solutions. Gruener recalled that the government earmarked BRL29.9 billion ($15.4 billion) for PAC between 2007-2010. Of the total, BRL17 billion is for highways; BRL5 billion for ports and BRL4 billion for rail. “We don’t expect many projects to be finished by 2010,” Gruener said.
To overcome the threat of a logistics blackout, OEMs, tier ones and LSPs from the conference stressed that the government needs to be take action. But delegates appeared unsure of how to move ahead and of the best way to lobby the government.
Jansen Esteves, Delphi South America Foreign Trade & Logistics Manager, proposed tapping the combined strength of associations such as the Brazilian Association of Autoparts Manufacturers (Sindipecas) and the Federation of Sao Paulo Industries (Fiesp) rather than individual actions. The private sector really needs to work with the government and ports to improve the infrastructure, Esteves said.
Roberto Avelli, Supply Chain Executive Manager & Active Director, Renault Mercosur, recalled that Renault cooperated with a range of companies in the food and maritime segments to push through reforms to ease congestion at the southern Paranagua port. “Rather than associations, perhaps cross-sector groups can push things forward,” Avelli said.
While Karin Schoener, Director of Marketing and Sales at Panalpina, said private companies in the pharmaceutical industry successfully lobbied the government to resolve logistics safety issues. And a delegate from BMW said delegates should establish priorities and initially select one issue. It is easier to fix a single issue than tackle all of the infrastructure problems, she said.
OEM, LSP Opportunities
The LSPs and carmakers also proposed other initiatives to propel the sector. For example, Lear’s Bednikovs proposed partnerships and consortiums to help the industry reduce costs. These can be among players in the automotive sector or even with other sectors. Bednikovs proposed that Lear, for example, could place high volume items such as metal or plastic components in containers alongside heavy cargo such as parts of a motor or heavy clutches. With a maximum weight of 25 metric tonnes in certain containers, this would mean more space can be filled, she said.
Iveco’s Lunardi said opportunities exist for LSPs in the economic downturn. They should position themselves to offer technological solutions to add value and improve the flow of materials from the production line through to customers and to reduce inventories.
While Volkswagen’s Chiarello said that most employees have worked in the auto plants for many years and therefore the LSPs can help OEMs fill the knowledge gap by bringing new logistics experience from outside. This is especially important in strategic planning for materials handling and inventory levels, he said.
Moreover, Chiarello highlighted the life blood nature of the automotive industry is smooth logistics. People often only think of logistics when there’s a problem such as a delay of parts, he told delegates. “But they forget, the business is only alive because of logistics,” he said.