Automotive growth at risk in Brazil if logistics cannot be improved

OEMs continue to invest despite the backdrop of bureacracy, trade wars and strikes which are stunting growth

SAO PAULO  5 SEPTEMBER 2012:  After a slow start to the year, the Brazilian automotive industry is once again enjoying growth in new passenger car sales, including a record 400,000 units in August spurred in part by tax incentives and interest rate cuts. Even in the midst of slower GDP growth and economic worry over the financial crisis in Europe, major carmakers including Fiat, Volkswagen, Renault Nissan and General Motors are building new plants or adding production capacity in South America’s largest economy.

But as delegates heard again at the 4th Automotive Logistics South America Summit, held this week at the Renaissance Hotel in Sao Paulo, the supply chain in Brazil continues to be dogged with delays as a result of constraints in ports, congested roads as well as a near-complete lack of multimodal transport.

Manufacturers also pointed to a Kafkaesque labyrinth of bureaucracy, regulation and increasing protectionism. As well as ripping up the playbook for import duties and free trade agreements with several other countries in the past year, including vehicle quotas with Mexico and, in the words of one Fiat executive, an “absurd trade war” with Argentina, there have been a series of strikes across numerous union, municipal and federal organisations from customs officials to truck drivers.

Indeed, concurrent to the conference, there were rolling strikes at ports, customs and the Federal Police, some of which began more than three months ago. As a result of the disturbances, there is currently a backlog of ships carrying material and finished vehicles moored outside ports such as Santos and Paranaguá.

“We have strikes everywhere – in customs, in the federal police. All you can do is scream sometimes,” said a frustrated Mauricelio Faria, head of logistics in Latin America for Brazil’s largest carmaker, Fiat.

Logistics blackout still looming

Fred Roldan, General Motors

For as many years at the conference has been held, speakers have discussed the possibility of a ‘logistics blackout’ in Brazil, where industry and growth would grind to a halt as a result of failing supply chains. While manufacturers and logistics providers have continued to cope with Brazil’s perennial problems and managed to avoid stopping their production lines for the most part, logistical problems this year appear to be perilously close to holding back if not lowering growth. And it could threaten the forecast, still supported by Anfavea, of production expanding from 3.5m to 6m units annually by 2020.

Fred Roldan, General Motors’ South America logistics director, said that Brazil’s industry was suffering badly, even if the worst had so far been avoided. With five major new launches in the last year, GM has increased the movement of sea containers to Brazil by 300%. Meanwhile, there has also been a sharp increase in the number of truck routes; one plant in the Sao Paulo region has seen daily truck deliveries rise from 600 to 850. GM has also needed to setup new external warehouses in Brazil, Argentina and Venezuela.

While GM has been able to sustain the growth, Roldan expressed concern that Brazil’s ports and road carriers were struggling to sustain the increase, and that further growth and regulatory issues could make it worse.  

“Even if we didn’t have a genuine logistics ‘outage’ so far, there have been serious impacts and consequences,” he said.

Christine Krathwohl, GM’s director of global logistics and containers, commented that the lack of short sea shipping as well as securing quality warehousing capacity were “serious issues”.

“GM has used cabotage [domestic short sea shipping] in Thailand, which is such a small country compared to Brazil. In the US, GM moves 75% of vehicles by rail, and yet nothing here,” said Krathwohl. “How competitive can we be in future? I don’t think port infrastructure can cope.” 

Andre Perez, director of supply chain for the Americas at Renault

Andre Perez, director of supply chain for the Americas at Renault, also suggested that the worst was yet to come and that Brazil’s supply chains have only been spared more disruptions following a drop off in GDP growth. “The ‘blackout’ didn’t happen in part because of the [eurozone] crisis and slow growth,” he said. “Brazil is tracking at [an annualised rate of] 1.7% GDP growth this year and we have all of these problems. Paranaguá port has 35 ships waiting 30 hours each to dock, so imagine what it would be like at 4%. Non-growth has mitigated this.”

Carmakers warned of serious damage to the country’s competitiveness for production in relation to places such as Mexico, China, South Korea and India, all of which, despite their own logistics problems, are considerably cheaper places to manufacture vehicles. Many of Brazil’s leading carmakers, such as GM, Ford and VW, have factories in these locations that compete with South American plants, while Chinese vehicle brands such as Chery and JAC have made inroads in the Brazilian market in recent years.

“We have serious difficulties with ports, roadways, railways and waterways, which add cost to our operations,” said Alexandre Bernardes, a Fiat executive who is also vice-president of Anfavea, the Brazilian automotive manufacturers association. “If you take Fiat Uno manufacturing in Brazil compared with China, China’s production is 60% lower.”

As context, delegates were reminded how far there is to go. Russia is ranked a dismal 97th in the latest World Bank index of countries’ logistics performance. To give the BRIC comparison, Brazil and India are at 45 and 46 respectively, while China is up in 26th place

A love-hate relationship with government

The situation in Brazil appears to be partly complicated by a kind of ‘love-hate’ relationship between the industry and the government. On the one hand, the government has taken considerable measures to stimulate vehicle sales, including extending a tax break on vehicles, helping to ease credit flows to consumers as well as lowering interest rates in an effort to depreciate the Brazilian real (which has dropped more than 20% relative to the dollar since last year).

Anfavea has supported these measures, with Bernardes suggesting that the tax revenue lost on the vehicle sales was being made up for in increased volume and job growth. “The government’s interaction was correct on lowering taxes,” said Bernardes, although he said that Anfavea did not support a permanent elimination of these taxes.

He added that the government should follow a similar path in the truck market, which has been hit hard in Brazil by the decline in GDP growth, higher fuel costs and new emissions guidelines. Sales are down around 40%, but up to 60% in some truck and bus segments. “If the government were to lower taxes on trucks, it would push growth,” said Bernardes.

But while the industry favours the government’s efforts to stoke demand, speakers expressed frustration with a regulatory environment that often clashes with the needs of the industry. The government currently has plans to introduce stricter regulations that would limit the amount that truck drivers can operate, for example, which is likely to compound an already increasing driver shortage. And even as the government acknowledges the need for greater investment in port and transport infrastructure, regulatory hurdles often make local and even private investment difficult.

“The municipal states and federal government are not aligned,” said Edson Molina, director of material planning and logistics for South America at Ford Motor Company. “The government does not know what we go through for operations on a day-to-day level.”

Likewise, there is a general agreement that the government has not done nearly enough to invest in Brazil’s infrastructure, which sees just 6% of roads across the country paved. The government has recently announced plans for major investment in roads and rail as part of a wider economic stimulus package. While carmakers have welcomed the news, reactions ranged from benign optimism to outright scepticism that such investments would be realised.

Fiat’s Faria complained that the government was making it harder for companies to invest in necessary improvements. “If the government cannot be the facilitator, then it shouldn’t make it harder for enterprises to expand,” he said. “Making investment in ports is difficult for a million reasons.

He also said that Fiat had struggled to get the right permission to improve road access to its plant in Betim, which builds more than 3,000 cars per day. “We have one road to access the Betim plant. If it closes, that’s it, we have no way to deliver just in time. We looked at building a ring road, but it is a bureaucratic nightmare.

“The railway and roadway plan by the government is a relief for us. But these have been discussed for 20 years – it is no great novelty,” said Renault’s Perez.

“Brazil needs to recover 15 years of stagnation in infrastructure investment. We’re always told investment will be 3-4% of GDP, but every year it falls to 1%,” said Faria. 

Protectionist trends

Another controversial aspect related to government intervention in Brazil has been protectionism, which has become an increasingly significant part of the industrial policies of several South American countries. This tendency is already evident in many developing markets, such as import taxes higher than 100% on for some imported vehicles to India, or Russia’s production and localisation targets. In South America, Brazil isn’t as restrictive as Venezuela or arguably even Argentina, which has set rules that force companies to export in an equal value to imports (a situation that led Porsche to export wine from the country).

Alexandre Bernardes, Vice President Anfavea

Nevertheless, over the past year the Brazilian government has changed import duties several times, often at short notice, including those for vehicles built in the Mercosur trade bloc (although the current tax break applies to imports as well). There have also been a series of tit-for-tat trade retaliations between Argentina and Brazil that have made moving vehicles and components between the two countries – important trade flows for both – much more difficult. Recently, there have been recent discussions about raising import taxes on commercial machines, equipment and tyres.

Anfavea has generally supported policy that offers a measure of protection to Brazilian manufacturers. Bernardes said that the ratio of imported vehicles and components was still high in Brazil and should be corrected. But he also recognised that some components and equipment could not be produced in Brazil on a large scale and for which trade should be made easier. 

“The concern is that the Brazilian industry should thrive but depend less on imports,” he said. “We advocate the investment in capital goods and tools and we know that, for the time being, there are some components and tools that cannot be produced in Brazil. To that end there are some measures to reduce rates that should be discussed throughout various parts of the industry.”

On the trade war with Argentina and other neighbours, however, Bernardes was unequivocal. “There is no winning side in this dispute – it’s lose, lose. We should not have trade restrictions within Mercosur. That is fundamental.”

Despite the higher duties, the ratio of imported vehicles in the Brazilian market this year has remained stable at around 22-23% (aided also by the tax break for car purchases). However, the duty changes, along with the drop in real, have hit consumers with higher prices and are likely to have prevented sales growth in some segments.

But while speakers were generally muted in their views on the protectionist policies, offline there were several expressing worries that such policies could hold Brazil back from investing in the models and technology to compete on exports. Despite the depreciation of the real this year, Brazil’s exports are down around 16% in the first seven months of the year. Over the medium term, Brazilian exports have declined 25% since reaching a high of 724,000 units in 2005.  

The shifting policy landscape also risks unnerving investors, as manufacturers and providers struggle to predict what direction duties and volumes could go. Fiat’s Faria pointed out that plans to produce more cars together with Chrysler in Mexico now had to be reviewed given the quota limits in imports from Mexico. 

Limited port capacity for vehicle logistics

The challenges for finished vehicle logistics are extensions of the issues faced across the Brazilian automotive industry, including bureaucratic headaches, labour unrest, limited capacity constraints in ports and minimal multimodal transport possibilities. Furthermore, all vehicles are moved within Brazil by truck.

Port capacity is a significant issue for carmakers and importers. Brazil currently has nine terminals dedicated to automotive, with two in Santos (near Sao Paulo), and others in Suape, Aratu, Vitoria, Rio de Janeiro, Sao Sebastiao, Paranaguá and Rio Grande. The largest volume is concentrated in Santos, where the TEV terminal alone saw growth of 25% in 2011 to handle 205,603 (representing about half of the volume in the port). Despite being hampered by significant delays following customs strikes, the terminal is on pace to handle a similar number of vehicles in 2012. Imports currently make up around 45% of volume, with the balance exports, according to Francisco Costa, commercial manager of TEV at the port of Santos.

Costa acknowledged the relatively small size of the terminals across Brazil – Vitoria has the largest area at 250,000 square metres, while Santos TEV is 164,000 square metres and Santos Deicmar is 74,000 square metres. Suape is just 56,700 square metres.

Costa said that in Santos, the TEV terminal tries to make up some productivity by working 24 hours a day. Fiat’s Faria called for more investment at the ports from both the public and private sector, particularly in expanding terminal space to store vehicles. “The president of Brazil has put together a large package of money to invest in roads and ports but as of now we’ve yet to see how it will work,” he said. “Rio de Janeiro, for example, needs a high building to stack cars, but hasn’t built it yet. I think Santos will also need more verticalisation [parking buildings].”

Costa agreed, but pointed out that building such parking facilities could not be done quickly. He also referred to the import delays, strikes and regulatory bottlenecks that the port faces, the solutions for which “do not depend on our investments”.

Operations at Santos and other Brazilian ports are under significant strain following the on-going strikes. “We’ve been affected since May by disturbances that we didn’t expect, leading imported vehicles to be held up the port for 60-90 days,” said Costa. “With these delays, any pre-programming or planning that we or our customers do is usually lost.”

Costa added that the excess inventory is a cost burden rather than a revenue generator for the terminal. “In our lease agreement we have to reach a quota of vehicle movements in each month, and if we don’t reach this number we pay a fine.”

Faria also stressed that the bureaucratic delays represent a pure loss in productivity. “We need to emphasise to the government that the country does not earn money when the cars are stopped – neither the OEM, nor the port” he said. “It’s money thrown out the window.”

Changing import flows

As a result of the constraints, carmakers have tried to adapt their outbound supply chains with the use of different or additional ports. General Motors, which imports about 85,000 vehicles a year into Brazil, uses the ports of Rio Grande in the south, Santos and now also Suape in the northeast, according to Luis Pedressani, logistics supervisor for GM South America.

GM uses Suape for imports from Argentina, many of which also move by road to its plant in Gravatai, where they can be consolidated with domestic production and imports from Rio Grande port. Pedressani expects GM volumes at Suape to increase this year to 18,000 (compared to 12,000 in 2011). He also suggests that Mexican imports could move through Suape. “GM’s intention is to increase the use of Suape, however there are many infrastructure problems,” said Pedressani. “We have only one mode of transport, and there is only space to store 1,800 vehicles. Suape needs investment.”

Jaguar Land Rover is a relatively small importer of vehicles to Brazil, selling around 9,000 vehicles in 2011, and expecting a similar number this year following the current tax breaks, according to Ricardo Rosini, head of sales planning and logistics. “It is actually very complex to import 9,000 cars to Brazil each year, including a whole range of bureaucratic work and difficulties with duties.”

Rosini revealed that the Tata-owned carmaker faced a series of disputes and disagreements with ports over the past several years, switching from Salvador to Santos and then Vitoria all in the same of a year between 2009 and 2010. “We had low volume and a lot of difficulties related to labour and high port costs,” said Rosini.

Following the news that the loss of a regional tax break had caused JLR to shelve previous plans to assemble vehicles in Brazil using CKD, the carmaker appears likely to import finished vehicles from the UK for the foreseeable future. Rosini therefore hopes that the Brazilian government and port authorities will make considerations for small and more specialised importers as well as the larger players. “We want the government not just to encourage automotive supply chain systems for the large companies but also for the small,” he said.

Fiat has also been changing its import flows into Brazil. The carmaker has traditionally used Santos and Rio de Janeiro, but because of inventory build up at ports it has had to change routes to other ports at times. “With the government measures taken in response to this absurd war between Brazil and Argentina, we’ve had to reconfigure routes, and I think it will get even worse,” he said. “Santos already needs more space. The government will tighten up this Argentine issue and then the cost will really go off the wall.”

The impact of new regulations

The difficulties around regulation came up again and again. Faria took issue with the limits on driving hours and other tighter monitoring measures proposed by the government, saying that it could cost the industry a great deal of productivity. He pointed to an example where drivers moving through the Sao Paulo traffic might be forced to stop to rest, and then lose eligibility to drive the following day. “The impact on the industry will be huge,” he said. “The government is generating a problem and worrying about how to solve it later.”

GM’s Pedressani also pointed to impracticalities in the regulations. One requirement will be a monitoring of advanced pickup and destination points. However, Pedressani points out that vehicles often move through consolidation centres before they are assigned dealer destinations. “It would mean that I will need to send correction letters on a continual basis,” he said. “The government gives us a challenge but not the infrastructure to deal with it.”

The word is adaptability

Eduardo Barnez, senior manager of central logistics at truckmaker Mercedes-Benz

“Legislative changes, market fluctuations and change are now part of the routine for us,” said Eduardo Barnez, senior manager of central logistics at truckmaker Mercedes-Benz Brazil. “The word now is adaptability and we have to adapt to what we face everyday.”

Mercedes-Benz, for example, has recently gone through a major transformation. After reaching full capacity at its factory in Sao Bernando do Campo, in Sao Paulo, the company decided to convert a passenger car factory at Juiz de For a, north of Rio, into a truck plant. In the conversion, which was completed in January 2012, Mercedes-Benz brought in advanced logistics concepts both from Germany and those adapted to the Brazilian market.

For example, the company developed an industrial park, called the ‘I-park concept’, adjacent to the factory to base suppliers to perform subassembly of components and modules that are delivered to the line just in time. There is also no warehouse on site, except for CKD material, with both imported and domestically sourced components held in an external warehouse.

For all of the problems facing automotive supply chain management in Brazil, the industry is still advanced in its level of logistics services. Indeed, the infrastructure and regulatory conditions in the country have forced manufactures to adapt quickly.

“Legislative changes, market fluctuations and change are now part of the routine for us,” said Eduardo Barnez, senior manager of central logistics at truckmaker Mercedes-Benz Brazil. “The word now is adaptability and we have to adapt to what we face everyday.”

Mercedes-Benz, for example, has recently gone through a major transformation. After reaching full capacity at its factory in Sao Bernando do Campo, in Sao Paulo, the company decided to convert a passenger car factory at Juiz de For a, north of Rio, into a truck plant. In the conversion, which was completed in January 2012, Mercedes-Benz brought in advanced logistics concepts both from Germany and those adapted to the Brazilian market.

For example, the company developed an industrial park, called the ‘I-park concept’, adjacent to the factory to base suppliers to perform subassembly of components and modules that are delivered to the line just in time. There is also no warehouse on site, except for CKD material, with both imported and domestically sourced components held in an external warehouse.

Material for production is also consolidated in what Mercedes-Benz calls an Auspackungszentrum, which tracks, collects and redistributes returnable packaging.

Mercedes-Benz has also been able to make a rare use of multimodal transport for the CKD kits of the Actros. Material arrives at the port of Rio de Janeiro, from which point it is moved by rail to Juiz de Fora, where it clears customs and then moves to an internal warehouse at the plant. From there, the material is moved by internal milkruns to the assembly line.

An interesting point for this plant is that all of the warehousing and line feeding are done by a third party logistics provider, which also owns the material handling equipment within the plant. This outsourcing is in contrast to the plant in Sao Bernando, where the union presence is stronger. There, a 3PL is responsible for transport, returnable packaging and an external warehouse, however Mercedes-Benz employees, according to Barnez, carry out the rest of the activities.

Advancing an advanced market

The Mercedes-Benz example demonstrates to some degree the relatively advanced market for logistics services in Brazil. Many of the major, global logistics providers have a fairly strong presence in the market, and unlike in China, logistics services are rarely handled by in-house providers.

Adilson Dezoto, board member director at MAN Latin America

According to Adilson Dezoto, board member director at MAN Latin America, the truckmaker has already outsourced nearly every possible logistics activity to providers, including parts ordering, operations, procurement, inventory, knockdown kit consolidation and export and warehousing. “We carry out extensive audits and monitor everything,” he said. “But partnership in logistics is very present for MAN.” 

 

 

In the last 20 years Brazil’s logistics providers have been moving more towards service integration and operational excellence, rather than transaction-based transport moves.

Dezoto said that the next stage should entail an integration of the supply chain, including a move towards more value added services and reducing the order-to-delivery cycle. For example, rather than offering different activities based on individual cost, such as transport, material checking, receiving, overflow, storage, sequencing and line feeding, providers should move towards offering services as aggregated by value. Whereas the previous offering might involve seven different transaction, a value-added approach might reduce this to three (i.e., transport, checking, line feeding), with IT capabilities to provide complete visibility to customers without their needing to oversee and contract every individual leg of the supply chain.

“In this way the logistics provider can focus on value added activities and the elimination of waste in the value chain,” he said.

Gustavo Bonini, logistics manager at Scania Latin America

Gustavo Bonini, logistics manager at Scania Latin America, complemented Dezoto’s vision for logistics, calling for providers to make the transition from catalogue suppliers to integrated suppliers, where partnership is carried out on a more ‘open’ cost model. He also believed that the next stage for logistics in Brazil would be the full outsourcing of ‘logistics projects’ that would include more strategic decision making and engineering by providers in developing supply chain.

“Most companies start now by creating their own flows, and then outsourcing them,” he said. “What will improve in the years to come should be a more open development of the service together with providers, so that we can bring our problems to providers and they can coordinate the services start to finish.”

Bonini hoped that such a development would lead to services based more on service than purely price, but he admitted that such an open relationships with providers was still under development.

Ana-Paula Annibaldi, import, export and logistics manager for Visteon Brazil, said that the tier supplier currently was letting its logistics provider to take more strategic decisions about its logistics. “Some of our providers have been working with us for 20 years and so we can trust them to see more of our plans and essential issues to design strategic measures that will make a difference.”

OEMs and providers urged these developments further, stressing that the industry would need to work together to better train staff and drive performance higher. MAN’s Dezoto admitted there was a long way to go, but he said the industry was continuing to move towards a higher level of professionalization. “I believe that the challenge in the forthcoming years is going to be to have the right professionals with the necessary skills to handle the increasing complexity in the supply chain,” he said. “With all of the new plants coming to Brazil, we risk a labour shortage in logistics and supply chain.”

A need to work together

Ultimately, it was this sense of mutual purpose that brought many speakers together. While there were many complaints about the government and regulations, Brazil’s automotive supply chain experts agreed that the industry could not have a purely “paternalistic” relationship with the government when it came to fixing logistics issues, to use the words of GM’s Roldan. Progress and competitiveness in production and distribution would only be maintained by building stronger links between manufacturers and providers, as well as by creating more visibility in the supply chain.

“We need more communication, more accountability and commitment,” said Roldan. “We need relationships that are more long term and less transactional.”

Toby Grey, president of TNT Brazil, said that his company had been focusing on increasing visibility and systematic communication in the supply chain in efforts to overcome infrastructure limitations.

Ultimately, it was this sense of mutual purpose that brought many speakers together. While there were many complaints about the government and regulations, Brazil’s automotive supply chain experts agreed that the industry could not have a purely “paternalistic” relationship with the government when it came to fixing logistics issues, to use the words of GM’s Roldan. Progress and competitiveness in production and distribution would only be maintained by building stronger links between manufacturers and providers, as well as by creating more visibility in the supply chain.

“We need more communication, more accountability and commitment,” said Roldan. “We need relationships that are more long term and less transactional.”

Toby Grey, president of TNT Brazil

Toby Grey, president of TNT Brazil, said that his company had been focusing on increasing visibility and systematic communication in the supply chain in efforts to overcome infrastructure limitations.

“With infrastructure, we’re right in the middle of the storm. We will work with anyone to try to improve infrastructure and operations as soon as possible,” he said.

The carmakers and OEMs at the event also promised to work more closely together to lobby associations such as Anfavea to take logistics competitiveness into greater consideration for future legislative and investment plans. It was agreed that Brazil needs to improve its supply chain efficiency both at home and in relation to the global sector if it was going to avoid falling behind other markets a base for global platforms and research and development.

“Competition is fierce, and we have a large number of new entrants to meet the needs of excellence demanded by consumers,” said Roldan. “A part of this is better connecting the supply chain.”

Fiat’s Faria maintained that Brazil could not only look inward, either, be it through protectionism or an inefficient supply chain. “If we don’t have the competitiveness to export, then we won’t be competitive internally in the future,” he said. “Associations have a responsibility in this together with all industry players. There won’t be any way to survive as we are right now.”

The conference is part of the worldwide Automotive Logistics series, which in 2012 includes:

  • Europe (in Bonn, Germany 28Feb-1Mar);
  • China (Beijing 18-20Apr);
  • Russia  (Moscow, June)
  • North America (held as Automotive Logistics Global, Detroit, 25-27Sep);
  • India (Pune 5-7Dec) 

Value for each delegate

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

2) Learning
A unique and high-level gathering of senior executives and analysts provides: 

  • formal speaker presentations
  • a discussion sessions
  • break-out workshops
  • soft copies of the speaker presentations after the conference

3) Business and Social environment
We recognize the all-important personal dimension to any business relationship, so the event provides a relaxed environment for the mid-conference Gala dinner and the pre-conference cocktail reception.     

In summary, delegates at Automotive Logistics South America 2012:

  • Heard great presentations from OEMs, tier 1 suppliers and LSPs
  • Asked questions in person, joined discussions
  • Networked with the senior executives across the industry
  • Made new contacts, gained new introductions and developed new business opportunities
  • Benefitted from the interaction at social occasions, including the main conference dinner and  introductory cocktail reception (all included in the delegate fee)
  • Receive soft copies of the speaker presentations to download and circulate within their organisations

Conference calendar