Brazil’s supply chain could hold back growth
SAO PAULO 14 SEPTEMBER 2011: Rising logistics costs, poor infrastructure and an appreciating currency are causing challenges in Brazil’s automotive supply chain, even as the market is expected to reach 6m unit sales by 2020. Without improved logistics efficiency and improved planning, carmakers could suffer
The Automotive Logistics South America Summit, held this week in Sao Paulo, revealed a Brazilian market that is forecast to grow solidly in vehicle sales and production over the next decade, with carmakers and tier suppliers continuing to invest in manufacturing in the region.
However, OEMs and tier suppliers face numerous headwinds. They include an uncompetitive cost base for labour, taxation and raw material costs, an appreciating currency hurting exports, and poor, underfunded infrastructure that has led to high logistics costs.
Among the many inefficiencies in the supply chain is a complete lack of multimodal transport options.
Towards 6m units in annual sales
Without serious focus on improving supply chain planning and logistics operations, experts and executives from carmakers warn that Brazil’s established manufacturing base is going to lose out to foreign imports. On the other hand, the overall growth of the market and the rising value of the real, along with the ongoing development of global car platforms and supply chains, also bring considerable opportunities for global logistics service providers to work more closely with carmakers and tier 1’s in the country.
Following credit restrictions in the first part of 2012, growth has moderated this year with passenger car sales up around 5% in the first eight months compared to 2010, according to Alexandre Bernardes, vice president of Anfavea, the national carmakers’ association in Brazil. Light commercial vehicle sales have done better, rising more than 16% in the January-August period, while heavy commercial vehicles and buses are up more than 16% and 19% respectively. Bernardes said that the government’s recent lowering of interest rates should lift sales in the last quarter of the year and into 2012.
Thereafter, vehicle sales are expected to grow substantially in the medium term, and Bernardes predicted sales to reach 6m units by 2020. Carmakers continue to invest in their operations here, with Renault reportedly considering an expansion of operations in the southern state of Parana, while Volkswagen is said to be considering expanding capacity or building a new plant (its global CEO Martin Winterkorn has just announced that he expects to build eight new factories across the world in the next seven years).
Market-leader Fiat has already announced plans to build its second plant in Brazil, to be located in the smaller but faster growing northeast of the country in Pernambuco, and will expand capacity at its existing factory in Betim. Meanwhile a spate of Chinese carmakers, including Chery, Jiefang and Great Wall have also recently announced plans to build factories in Brazil to serve the Latin American region.
Not a low cost country
But while these investments demonstrate the potential that global carmakers see in Brazil and its neighbours, they have a different backdrop to the expansion being seen in the regions of Asia. Bernardes pointed out that Brazil is not a low-cost location when competing for global production. According to Anfavea, it is around 60% more expensive on total costs than China, 55% more expensive than India and 40% more expensive than Mexico (a country with which Brazil has a free trade agreement allowing duty-free imports of vehicles). Brazilian-based manufacturers are also facing tough competition from South Korea, both because Hyundai-Kia are making deeper inroads into the market and also because General Motors uses the country as a major manufacturing hub for Chevrolet vehicles and CKD kits.
“The main differences in costs for Brazil are logistics, labour and taxes, as well as a high cost of capital and some of the most expensive steel prices in the world,” said Bernardes, reeling off a long list. “Brazil also has a very high cost of energy.”
Those cost issues were picked up on by many speakers, including Marie-Christine Lombard, chief executive for TNT Express. She pointed out that Brazil has one of the highest levels of taxation and regulation in the world, including (the not unique situation of) difficult and expensive customs.
Not enough infrastructure investment
Almost all speakers pointed to infrastructure inefficiency as a major problem. Katia Bednikovs, South America logistics and indirect material purchasing manager at Lear, noted the chronic underinvestment in infrastructure by the government in roads, rail, ports and airports. The state’s rate of investment compared to other countries in the region is ahead only of Columbia and Argentina. This is in a market in which Marcius Braga, director of transportation for DHL Supply Chain, explained that 99% of his service parts parts are moved by road (the small balance is by air).
And those roads, he added, were often in very poor condition. Of Brazil’s near 2m kilometres of roads, only around 10% are paved. And only a small proportion of those are of motorway standard.
Daniela Gabriel, logistics purchasing manager for South America at General Motors, gave the example of bottlenecks in ports during the harvest seasons.
She showed fellow delegates pictures of massive inventory held up not only in ports, where ships full of grain and sugar cause long waiting times, but also at airports in Brazil, as well as from countries were parts are being flown to Brazil, notably India, China and South Korea.
The impacts for the supply chain are very negative, she observed.
Currency fears are getting real
Hammering home the same criticisms, Edson Molina, director of material, planning and logistics for Ford in South America, pointed to the near-complete lack of rail, short sea and river transport options which has left the industry at a major disadvantage.
“This affects the level of outsourcing that we can give to logistics service providers. Whereas in other markets providers come up with multiple options for moving our material, in Brazil we can only move from A to B, usually by one route, leaving less room for providers to offer value and control our supply chain,” he said.
Molina said that Ford had done studies to see if it could use rail to move cars from its factory in Bahia, in the northeast, to the main markets of the Sao Paulo region. But the service was unreliable and it took more than seven days, compared to two day by road. Fiat’s Faria said that in Brazil “rail suffers from a complete and total lack of credibility” among carmakers and other shippers.
An added worry for the local Brazilian industry is the appreciation of the real, which is now at a record level against the US dollar and other South American currencies. Its elevated value has already contributed to a drop in 2011 exports of nearly 30% versus last year, compared to a 35% jump in imports, including a 43% rise of imports of passenger cars.
While the growth in imports might be encouraging to shipping lines, Bernardes told delegates of his concern that the growing trade balance disparity will widen. Indeed, in the first eight months of the year sales of locally manufactured passenger cars dropped 1.5% compared to 2010. Sales of locally-manufactured light and heavy commercial vehicles faired better, rising around 15% each, but they did not match the dramatic, nearly 50% rise in imports for these vehicles.
Bernardes said plainly that the sector would suffer if it couldn’t become more efficient and competitive, including in the supply chain. “Our sector is at risk if we don’t change our ways,” he said. “The market has a lot to grow on its way to 6m units, and we have to make sure that it is not absorbed by imported products.”
Fiat’s director of logistics for Latin America, Mauricelio Gomes Faria, had a similar message, particularly with the increasing push into South America by Chinese carmakers. “If we don’t become more competitive, than the Chinese will do it,” he warned.
While Brazil’s infrastructure and bureaucratic woes are not new, speakers revealed some more recent positive developments as well. Lear’s Bednikovs pointed to the government’s infrastructure initiative – dubbed PAC – which is set to improve road, rail and ports investment, and includes the largest port drainage project in the world.
By 2020, the number of motorway-level roads is slated to increase from 29,000km to 42,000km, while the government has set an objective of shifting around 30% of freight to the railways and another 30% to waterways.
The government has also shown some signs of improving bureaucratic and tax burdens, including addressing the issue of double taxation on certain items.
“Currently we see duties to import material to Brazil, and then taxes again to export it to Argentina, for example, ” she explained. “Removing this burden would have a very positive impact for the automotive industry.”
But while she and others acknowledged these moves, she said they are not nearly enough to progress towards the government’s multimodal objectives. Ford’s Molina added that, even with PAC, Brazil’s investment is far too low, particularly in comparison to other BRIC markets like China.
Finally, Orlando Moral, head of logistics in Brazil for Volkswagen, pointed to major infrastructure and system constraints for rail that will also require considerable investment, including addressing the different rail gauge widths in Brazil’s network. Moral had more hope for the eventual shift of more materials and finished vehicles to sea transport, espcially considering Brazil’s long coastline and extensive river network. But so far there has been little progress for domestic waterway transport, he said.
Better supply chain planning is a must
While the infrastructure issues persist, speakers at the conference were also keen to point out that they would have to improve their supply chain planning, IT and communication to overcome the logistical challenges in Brazil. Several also pointed to the need for logistics service providers to increase their capacity and service levels in Brazil to meet carmakers’ needs.
André Perez, director of supply chain Americas for Renault, said that building an integrated planning system, improving logistics operations and developing closer ties with suppliers were all part of Renault’s current objectives as it aims to grow substantially in Brazil over the next five years.
Perez pointed out that the company had already been growing above its own expectations – by 36% in sales in 2010 and another 18% so far in 2011 – and to cope has had to substantially increase its supply chain flexibility and logistics capacity.
He noted, in particular, the importance of integrating IT systems, sharing forecasts with suppliers and providers, developing more tactical planning, and being able to understand risk scenarios.
“We need to be able to plan and execute under every ‘what if’ scenario,” he warned. “As a result we are working carefully to create risk scenarios, some of which have begun to become reality now when we were anticipating them to come in December. We are at the limit of our capacity.”
Perez said that Renault is now implementing more sophisticated milk run and consolidation networks to help mitigate high logistics costs and constraints. GM’s Gabriel, who is responsible for milk-run engineering, also spoke about improving such services in the supply chain. “We are making a lot of efforts to improve and better link together the supply chain, including better communication with providers and stronger forecasts,” she said.
Lear’s Bednikovs and Carlos Panitz, material planning and logistics manager at the engine manufacturer MWM International, also discussed the importance of building and adapting the right milk-run services.
They called for logistics service providers, both global and local, to improve their services and increase capacity in Brazil and South America. While GM’s Gabriel praised the general ability of logistics providers in Brazil, she said that GM was making more of an effort to improve performance, such as developing supplier scorecards and allowing a more fluid communication, including a specific feedback loop for providers to tell the carmaker about their issues and challenges.
At least one logistics provider seemed prepared to answer the call for more sophisticated services. Lombard, from TNT Express, a company that has a large asset-based network in South America for spare parts and express deliveries following the acquisition of two major Brazilian providers, spoke about investing in better forecasting tools and in track and trace IT. “We also have a warehouse in the Sao Paulo region that is fully automated and state of the art,” she said.
Buying global parts for Brazil
Another way of making Brazil’s local supply chain more competitive appears to lie in better integrating its international supply chain. While the value of the real has hurt exports of cars and components, it has also made purchasing international material more competitive. While executives such as Renault’s Perez rightfully point out the risk and the careful calculations that need to be done to ensure that logistics and supply chain costs don’t outweigh potential saving, many at the conference spoke about the importance of managing these international supply chains.
“We cannot be competitive in Brazil without mainstreaming low cost countries,” said MWM’s Panitz. “There is no going back on this despite the complexities it causes in the supply chain.”
Panitz revealed the extent of his company’s supply chain. It could see components from 30 countries and four continents, in part because of ownership legacies (MWM, today a division of Navistar in the US, is a combination of a British and Brazilian supplier merger), and in part due to competitive sourcing in other markets. MWM has developed its supply chain with such sourcing in mind, including the development of logistics centres outside each of its plants to deconsolidate and process the material that comes through ports.
Renault’s Perez had a similar perspective, pointing out that Renault takes advantage of its 44 plants around the world, as well as global platforms and sharing with alliance-partner Nissan to find the most competitive sources. The result has been considerable cross-shipping, whether raw materials from Eastern Europe, wheels from India, diesel technology from France or a large sourcing base in Argentina. In Brazil, Perez said, Renault sources around 20% of its material globally, and he expects this share to persist even despite the difficult logistics from places such as India or Thailand.
GM is also balancing a very complex supply chain. The company sources a significant amount of material from Korea, which is a major technology centre for Chevrolet, the only GM brand currently sold in Brazil. And while GM continues to focus on localisation, Gabriel said that the company expects its international content to continue if not increase.
While these increases in material and component imports are a worry to the domestic car makers association, Anfavea, such global supply chains connecting Brazil to other continents represent significant opportunities for global logistics providers to manage and move these flows. Both GM’s Gabriel and MWM’s Panitz, for example, acknowledged that premium and airfreight had been rising, and would continue to do so. “But the calculation of total cost is what is so important for global sourcing. We make sure that we calculate the total costs – including premium freight – in making our sourcing decisions,” said Gabriel.
GM’s director of logistics for South America, Fred Roldan, also pointed to more scope for logistics providers to work within his company’s organisation. “Our final customers are demanding more from us, from aftermarket service to cost pressure, and we as carmakers are going to need to change how we do business in the supply chain.
“I rely a lot on my logistics providers already,” he said, “and I’m going to rely even more on them going forward.”
So while Brazil’s sales and production potential remains considerable, without changes in policy and infrastructure investment from the government, as well as logistics strategy among manufacturers and investment by service providers, the automotive industry here will suffer.
How to avoid collapse
Renault’s Perez went so far as to say that, without change, the industry would “collapse” as it approached the 6m sales mark.
Overall, and taking stock of the revealing presentations and intense discussions over the two evenings and one day of the Automotive Logistics South America Summit for 2011, there was assembled a group ready to make the changes that they can, at least within their own organisations.
Perhaps the final note is to return to the global context. While Bernardes said that logistics is one of Anfavea’s top concerns, executives from carmakers acknowledged that their upper management has some way to go.
VW’s Moral, for example, said that while VW has a transport budget of around $1 billion a year, he still felt that the company didn’t always have the focus and resources on logistics that it should. GM’s Roldan confessed that his company had only recently come to give logistics more importance, particularly after more accurate calculations revealed that the costs and implications of logistics were higher than originally thought.
The momentum and prospects of the Brazilian market continue to bring excitement and investment to its automotive sector. But the drive towards providing infrastructure capacity, and making its supply chain more efficient and competitive, needs to be accelerated if growth and service are actually to be delivered.
About the conference
Automotive Logistics South America 2011 Summit provided an all-in package for a single delegate fee containing:
1) Networking Opportunities
Careful scheduling allows interaction between customers and suppliers at:
- introductory cocktails
- coffee breaks
- networking lunches
- informal meetings within the conference area
- the mid-conference business dinner
A unique and high-level gathering of senior executives and analysts provides:
- formal speaker presentations
- Q&A discussion sessions
- break-out workshops
- soft copies of the speaker presentations after the conference.
3) Business and Social environment
We recognise the all-important personal dimension to any business relationship, so the event provides a relaxed environment for the conference Gala dinner and the pre-conference cocktail reception.
This year’s Gala dinner was held at the renowned Fogo de Chao.
New to our events? Watch a 4-minute overview of the Automotive Logistics Europe 2011 conference to get a flavour