Brazil: Life in the narrow margins25 July 2016 | Tony Danby
Brazil’s economy is facing crippling political and economic challenges, with the general outlook poor and vehicle sales crumbling. The country’s carmakers and supply base are currently in the painful process of adjusting to lower demand, including shutting down plants and redesigning trucking and logistics flows.
Brazil’s GDP is expected to sink around 4% this year while inflation, despite easing slightly, is still around 7%. The benchmark interest rate remains in double digits and most tax incentives have been axed. Unemployment has climbed sharply to 10% and banks have been tightening their credit lines.
As if all that weren’t enough, the Brazilian Senate voted on May 12th to suspend the president, Dilma Rousseff of the Workers’ Party, for up to 180 days while it assesses whether or not she will be impeached for allegedly violating fiscal laws on accounting practices.
Widespread protests for and against Rousseff have regularly been leaving major cities at a standstill. In the meantime, Michel Temer, the former vice-president and member of the Brazilian Democratic Movement Party, has become the interim president; if two-thirds of the Senate vote for impeachment, he might remain in the post until the end of 2018.
Even that might not settle things politically, as both parties are mired in corruption scandals and the ongoing Operação Lava Jato – ‘Operation Car Wash’, a money laundering investigation at the state oil giant Petrobras.
This malaise has led to difficulties across most sectors, with the automotive industry one of the hardest hit. Plants have suspended production and thousands of workers have been put on lay-off.
Last year, Brazilian vehicle sales fell around 27% year-on-year – the worst drop in nearly three decades – to 2.57m light vehicles, lorries and buses, according to Anfavea, the association of vehicle manufacturers. Production was hit just as hard, falling to 2.43m, including 2.33m light vehicles – the lowest total for nearly a decade. This year looks even worse; in the first five months of 2016, total vehicle production fell by another 24% year-on-year to 834,000 units.
The decline has occurred just as several carmakers are bringing new or expanded production plants on stream. These include a large Jeep factory that Fiat Chrysler opened last year in Pernambuco state, as well as recent or forthcoming facilities from Audi, BMW and Jaguar Land Rover.
Honda, however, has postponed a plant in Itirapina, in São Paulo state, while China’s JAC has scaled down a 1 billion reais ($292m) investment to 200m reais and delayed its plant’s inauguration in Camaçari until 2017 (and is also at risk of losing government benefits). China’s Chery, which opened a plant in Jacareí, in São Paulo state in 2014, has scaled back plans and, according to sources, mothballed the project almost entirely.
However, life marches on for other OEMs. Neuton Karassawa, logistics director for South America at General Motors – which sold the second most vehicles in Brazil last year after FCA – says that many carmakers have been pushing ahead with expansion plans.
“Despite the [economic] crisis, if we take advantage and use creativity, then, when the market recovers, we’ll be prepared to grow,” he says. “You need to do your homework.”
But plants in Brazil are struggling. Han Roest, global sector head automotive at DHL Global Forwarding, says there is up to 50% overcapacity across Brazilian plants, which he warns is unlikely to improve significantly until the political environment stabilises.
Paulo Sarti, managing director of South America for third party provider Penske Logistics, suggests that those investing in Brazil have had to change their timelines. “Conditions have changed and current volumes make it hard to meet the expected return on investment,” he says, noting that many of these plants will still bring rewards in the long term.
Most observers do not expect recovery anytime soon. “Many customers expect the automotive market to only reach 2013’s high [3.76m units] again in 2020,” says Sarti, though some growth some recovery may begin next year.
Logistics providers, especially smaller carriers, are struggling. Penske uses a number of subcontractors for trucking and Sarti sees many facing razor-thin freight rates made even thinner by high inflation. Penske works actively with its carriers to find loads, he adds.
Han Roest also sees logistics challenges far beyond the economy. Brazil’s infrastructure is difficult with limited air and ocean gateways, few rail options along with complex customs, tax and import barriers. These all contribute to a “prohibitive environment” for just-in-time logistics, he suggests.
Adjusting to reality
GM’s Karassawa says it is vital for OEMs and providers to identify more efficiency and reallocate resources. “Companies shouldn’t just react to the economic crisis or falling sales; they need to predict and establish projects that optimise processes,” he says. With the market falling by around 25% again this year, logistics services need to adjust quickly to the same level.
Despite all the challenges, opportunities still exist.Independent research indicates that around 14-15% of costs in automotive products are related to logistics, he says. Even in a crisis, when revenues are faltering, the best way to move ahead is by becoming more productive, stresses Karassawa.
In this light, GM is adjusting its portfolio and its logistics teams are revising inbound and outbound operations based on lower demand, while renegotiating contracts with suppliers.
In Brazil, GM uses a mix of in-house expertise and the likes of Ceva, Penske, JSL, a variety of ocean carriers, as well as local terminal operators such as Santos Brasil. The OEM, which typically completes some 8,000 inbound trips a month in Brazil, has been stripping out waste by redesigning its networks and routes. “We adjust idle capacity for all plants everywhere, paying less for the same service,” says Karassawa.
As another part of this cost-cutting, last year GM opened a 30,000 sq.m facility at its industrial complex in São Caetano do Sul, in São Paulo state, for the sequenced delivery of parts to its nearby assembly plant. It pumped 100m reais into the centre, which will process around 1.4m parts a day for delivery to the Chevrolet plant. Karassawa says the centre allows GM to supply the production line more easily thanks to its close location, while reducing supply costs.
Penske’s Sarti sees signs of OEMs willing to share facilities more to reduce costs. While warehouses used to be dedicated, for instance, companies are now more willing to share such assets to maximise utilisation, he reports.
In Brazil, out of its 12 storage facilities, Penske currently runs two multi-client warehouses totalling 340,000 sq.m. In one, a carmaker shares space with an electronics company, so there are no competition issues between them and no adverse risks such as chemical spillages, Sarti says.
The same type of asset sharing is coming to the fore in road transport. Where trucks typically used to be 80% full, many companies are now willing to share loads to maximise utilisation, with routes cut and the number of trucks reduced.
DHL’s recession strategy has been to expand its customer base and service offerings, but the German global forwarder, which operates 14 offices in Brazil, sees a need for cost savings. It is currently analysing its customers’ supply chains with a particular emphasis on transport mode optimisation, taking account of warehousing, inventory and transport costs, says Han Roest. One specific example is the increased use of domestic ocean transport along the Brazilian coast to complement or replace road transport.
Lights in the dark
There are silver linings to the current storm in Brazil, both for the export supply chain, as well as for those logistics providers who are able to reduce costs for OEMs.
With the real weak against the dollar and other currencies, OEMs are boosting exports to compensate for low sales. In the first five months of 2016, Brazilian light vehicle exports were up 23.6% year-on-year to 172,700 units, according to Anfavea, driven primarily by trade with Mexico and neighbouring Argentina.
Helio Lopes, executive for logistics at Scania Latin America, says since implementation of the Swedish truckmaker’s global production system in the early 1990s, it has been easier to direct more of its production to exports. Today, 70% of production from São Bernardo in São Paulo state is destined for export to Latin America, Asia and the Middle East.
Penske is somewhat insulated from the current economic crisis, according to Sarti, as 90% of its revenues in Brazil are related to aftermarket activities. “During an economic downturn, people need to hold on to their cars and do more maintenance and repairs,” he explains. “Penske is not so heavily impacted as it manages warehouses and delivers parts to customers.”
DHL’s Roest also notes that fuel prices have remained stable, which has helped to reduce some of the volatility experienced in previous years.
Adriano Thiele, executive director of operations at local logistics company JSL, says his firm is keeping customers’ costs down by using the latest logistics optimisation software to boost utilisation rates and determine the best routes and vehicles for each load. After eight months of testing, JSL is now adopting an Israeli fuel-management technology that tracks fuel and manages consumption in real time. The firm has also invested recently in truck telematics to help it manage its drivers and fleet, helping to cut fuel usage and maintenance costs while improving operational safety.
Penske, meanwhile, has high hopes for its lead logistics provider (LLP) activities, which began in Brazil two years ago. Its LLP team searches for ways to save on costs across the supply chain; for example, using route and package size data, Penske can boost truck capacity by 20% across routes, suggests Sarti. Penske expects to grow revenues by around 10% in 2016 primarily because of demand for this service, and it has invested 30% more this year in IT systems to support it.
Despite the economic downturn, Helio Lopes says Scania’s overall logistics operation has not undergone any major changes. “External storage remains the same – the factories saw a natural adjustment in shifts versus volumes versus the number of employees,” he says. Scania only pays for external storage by the amount actually occupied and the fleet used is adjusting to the new volumes, he reveals.
Going for gold… later on
Brazil’s economy is expected to receive a boost this summer from the Olympic games in August. Han Roest says the impact of this, however, will be concentrated in Rio de Janeiro, where few carmakers and tier suppliers have manufacturing or administrative offices. However, DHL has prepared a contingency plan to ensure that higher passenger and material flows before and during the Olympics will not adversely affect logistics activities for its customers.
Penske’s Sarti agrees that the Rio Olympics is unlikely to boost companies much beyond the city, although some OEMs are involved in marketing activities that may have some effect.
Looking further ahead, Helio Lopes predicts it will take some time before customers regain the confidence to invest. “Perhaps we won’t come back to the same levels we had in the recent years, but the industry will adjust to the real demand for transportation,” he suggests.
Han Roest believes the government’s Inovar-Auto stimulus programme, which has given incentives for local production, may help keep the sector’s investments in Brazil moving forward. “Significant investments have been announced through 2018 related to the Inovar-Auto programme that was implemented earlier this decade. The programme encourages OEMs to invest in vehicle efficiency, domestic manufacturing, R&D and technology,” he explains.
However, in a sign of how difficult it may be for some companies to keep their spending commitments, the government revealed in June that JAC’s licence for Inovar had been suspended as it has not kept up with the schedule of financial and physical requirements. The Chinese OEM said that it was in talks with Brazil to maintain the programme.
What happens in the next five years, however, will depend on the outcome of the current political unrest in Brazil, adds Roest. If specific measures are taken that increase the ease of doing business in Brazil, there is no doubt that the country can return to sustainable long-term growth – but everyone hopes that ‘if’ it happens, it comes sooner rather than later.