The relatively new trend of Chinese OEMs building vehicles outside China began in the mid-2000s, and is now a global reality. The first Chinese vehicle manufacturers began exporting cars to Brazil in 2007: Chery, Effa and Geely were the pioneers that selected Brazil as a potential market. It turned out to be a risky, but successful strategy.
Some years later, in 2010, during the 26th Sao Paulo International Automobile Trade Show, the Asian industry was represented by the greatest number of vehicle manufacturers to date. Some brands were already well-known to Brazilian car buyers, like Hyundai, Kia, Toyota, Honda and Nissan. But the stars of the show were China’s Jac Motors, Haima and Chery, all of which announced new models to be commercialised in Brazil.
The strategy appeared successful, and since the economic crisis in 2009, the Brazilian government has announced several measures to encourage both the purchasing of automotive products and vehicles, and the establishment of foreign vehicle manufacturers in the country, in order to improve the country’s global competiveness.
Jac representative, Sergio Habib, stated that no plant anywhere in the world could ever reach 65% of local content on its cars in the first year.
The Chinese car industry got the message and, thanks to the Brazilian market’s positive response, the construction of three plants was announced: Jac Motors confirmed plans to invest almost Real 1bn (approx US$530m); Lifan announced a Real 160m investment (US$85m); and Changan (Chana) announced an investment of Real 300m. In addition, five other Chinese vehicle manufacturers have plans to produce vehicles in the country: Geely, Great Wall, BYD, Foton and Sinotruck. Chery’s plant is already under construction and its estimated investment will be Real 700m.
However, in the last few days, the scenario changed drastically. In September, the Brazilian government announced an increase of 30% over the country’s IPI industrial product tax for vehicles that have less than 65% local content and are manufactured outside the South American Mercosur trade region or Mexico. The government said the measure was aimed at “protecting the local industry”.
The announcement stunned the Chinese OEMs. Jac Motors, for example, halted construction of its plant while it tries to reach a deal with the government. Jac representative, Sergio Habib, stated that no plant anywhere in the world could ever reach 65% of local content on its cars in the first year. He said the tax increase had made the development of new suppliers impracticable.
In this highly competitive market, Chinese cars have a very important USP that attracts Brazilian consumers: price.
Had all these projects been realised, Brazil would have been the country with the largest number of Chinese OEMs outside China. In this highly competitive market, Chinese cars have a very important USP that attracts Brazilian consumers: price. In fact, Chinese vehicle manufacturers were seeking to gain an advantage in the face of the extremely high prices charged for cars in Brazil, and had begun offering good vehicles with added value and extended warranty (six years) at lower prices than other well-known car brands in Brazil.
Some other vehicle manufacturers, such as Ford and Renault, have lowered their prices in order to compete with the Chinese OEMs. Now, though, the tax increase means these OEMs and others already installed in Brazil may face no competition whatsoever, and are likely to consider raising their prices.
To what degree will these measures benefit the Brazilian market and workforce, should the lack of competition see car prices rise in Brazil? Local vehicle manufacturers have given their assurances that prices will not change, but this remains a distinct possibility.
The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.
Jeannette Galbinski is the Director of Setec Consulting Group (www.setecnet.com.br). Setec Consulting Group is one of the largest consulting, training and auditing companies in Latin America. Founded in 1994, it is headquartered in Sao Paulo, Brazil, with offices in Manaus (Brazil), Buenos Aires (Argentina) and Santiago (Chile).
Jeannette Galbinski has a doctorate in Production Engineering from the University of Sao Paulo (USP), M.Sc. Quality and Reliability from Technion Institute of Technology and a degree in Statistics from USP, and she specialised in Industrial administration at Fundacao Vanzolini. Jeanette is a certified Master Black Belt and international consultant specialised in implementing Quality Systems and Tools and Six Sigma projects. Jeannette also writes for Banas Qualidade, Brazil’s most recognised quality magazine.
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