The Economic Policy and the Brazilian Automotive Industry ...

The Economic Policy and the Brazilian Automotive Industry Performance1 Enéas G. de Carvalho2 e Marcelo S. Pinho3

1. Introduction The vehicle production in Brazil underwent a vigorous growth between 2002 e 2007, from 1.79 million to 2.98 million units, which guaranteed the country the seventh position in the manufacturers world ranking, just a little after France. Although along the period a very expressive average growth rate of 10.7% pa was reached – which lasted until the international financial crisis was triggered -, the production kept a tendency of an additional acceleration in the expansion rhythm, so as the manufactured volume achieved, in September 2008, the amount of 3.41 million vehicles in an annual basis. Naturally, the crisis deployments culminated in an interruption of this growth impulse. Considering, however, the effects of the incentive policies in December, centered in an important reduction on the taxes on the vehicles and the transference of resources of State banks to finance the sales, the demand picture is, in the beginning of 2009, much better than in most parts of the world, specially if compared to the situation of the automobile market in the developed countries. In fact, although uncertain, the predominant opinion in the sector seems to be that the demand will be the as in 2008, at least as far as internal sales in concerned. If the prognostic is confirmed and assuming that the resumption of the adverse macro economical environment occurs from the end of this year, the Brazilian automobile industry would face again the same situation in the middle of 2008. That is, with a level of utilization of the productive capacity near a total occupation, an internal market with great growth potential in the medium and long term and a production with favorable conditions to the competitiveness in the international markets. Under those circumstances, it is natural that the discussion on the sector expansion and emergency of a new investment cycle turns up again. Once the emerging crisis have temporarily relegate them to a second plan, turns up again. This paper aims to contribute to that discussion, focusing mainly a question: are the present public policies for the automobile industry in Brazil sufficient to give not only the necessary support to a new investment cycle but also deepen its insertion in the international market, or would it be necessary to retake a further – and costly – set of incentives, as the one that characterized the Automotive Regime in the 1990s? In order to give a solid basis for the treatment of this issue, this paper begins by retaking the main aspects of the current policies in the industrial, technological, regulatory and of foreign trade plans, which affect the Brazilian automobile industry. Then, we try to explain the recent evolution of the vehicles production and demand in Brazil, covering the three biggest 1

This paper is based on Carvalho, E. G. de e Pinho, M (2009). Perspectiva do Investimento no Brasil: Indústria Automobilística. Elaborated by the authors of this paper by solicitation of the BNDES (Banco Nacional de Desenvolvimento Econômico e Social)-, the referred research is within a broader project, which intended to accomplish a prospective picture of the investments in many sectors of the Brazilian industry. 2 Assistant Professor of the Departamento de Economia/Economics Department of the Universidade Estadual Paulista (UNESP- Brasil) and researcher of the Grupo de Estudos de Economia Industrial (GEEIN)/Group of Studies of Industrial Economy. E-mail: [email protected]. 3

Associeted Professor of the Federal University of São Carlos- Brazil. E-mail:[email protected]

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segments in which the industry is divided: light and heavy vehicles and autoparts. Afterwards, we present the results of a broad survey on the investment projects announced by the assemblers. Finally, in an argumentation presided by the question above, we discuss the central aspects of the policies directed to the sector. 2. Public Policies 2.1. Trade Policy In the context of trade policies, there is no doubt that the most relevant agreement to the Brazilian automotive complex is the Agreement of Mercosul, in particular the Automotive Bilateral Agreement between Brazil and Argentina. The agreement between Mercosul and Mexico4 has also demonstrated a growing importance. It also should be mentioned in the context of Mercosul, the agreement between Brazil and Uruguay5, and in South America, the agreements Mercosul-Chile and Mercosul-countries of the Andean Community of Nations (CAN). We can not forget, moreover, the agreement between Mercosul and South Africa, which was in 2007, the seventh largest market of destination for Brazilian exports of vehicles.(Anfavea, 2008). Concerning the agreement between Brazil and Argentina, in last July 23, new rules for trade in automotive products were set. The newly agreed set of rules were: (1) the length of the period is six years - from July 1, 2008 through June 30, 2014 -, that is, the 6th and final year of the trade agreement of any automotive product is no longer subject to taxes and not to any quantitative limitations6; (2) flow of bilateral trade of cars, light commercial vehicles, trucks, buses and auto parts, monitored in each three months, since 01/07/2008, in general; (3) automotive trade between the two countries, with a margin of preference of 100% (the rate of 0% II) based on the coefficient of deviation of the annual exports (flex), which is calculated as the rate between imports and exports of each country7, and 4) There will not be a limit for exports between the two partners, with a margin of preference of 100%, once the "flex" of each country8 is observed. In the case of the Mercosul Automotive-Mexico Agreement, running since 05/11/2002, further changes were made in 22/08/2007. For vehicles with maximum load of 8,845 kilograms and for the auto parts in the Agreement, now runs the free trade between Brazil and Mexico.

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That country has become the second main destination of the Brazilian automobiles exports in 2007, being overcome only by Argentina (Anfavea, 2008).

5 In the new version of the agreement between Brazil and Uruguay, recently held, that country received special and differential treatment by Brazil (see: www.mdic.gov.br/sitio/interna/interna.php?area=2&menu=704). 6 The length of the agreement is not, however, subject to a possible in force entry of the Mercosul Automotive Policy, which occurs, for example, in the case of the new agreement between Brazil and Uruguay. There is no reference of any change of the Index of Regional Content - ICR, which thus remains equal to 60%. There is neither any reference in this new agreement with Argentina to changes in TEC for final products and for auto parts . As known, the Mercosul countries consist of a customs union and adopt, therefore, a common external tax (TEC) (www.mdic.gov.br/sitio/interna/interna.php?area=2&menu=704). 7 If the trade deficit occurs in Argentina, the "flex" of this country can not exceed 1.95. If the deficit occurs in Brazil, the "flex" should not exceed to 2.5, that is, with this new agreement, Argentina’s access to the Brazilian market, without tariff, may be superior to the Brazilian access to the Argentine market. 8

www.mdic.gov.br/sitio/interna/interna.php?area=2&menu=704

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2.2. Industrial and Technological Policies In last May, it was announced the new industrial policy - the "Productive Development Policy (PDP) - which has as a main aim to give sustainability to the general growth of the Brazilian economy. And the specific PDP aims are to enlarge and to encourage productive investment, to increase the rates of economy growth and to create conditions so that the growth occurs on a sustainable basis9. In this specific case, in the automotive complex, this policy includes a set of goals (and challenges), initiatives and measures. Besides that, it makes a brief diagnosis of the current state of the complex10. The goals to be achieved are: (a) accumulated investments (from 2007) of about $ 15 billion by 2010 and $ 19 billion by 2013 (b) achieve the production of 4 million of units in 2010 and 5.1 million in 2013, (c) expand the vehicles production capacity to 4.7 million and 6 million in 2010 and 2013, respectively, (d) to achieve exports of 930 thousand vehicles in 2010 and 1.08 million in 2013 (e) achieve relative share in global exports of 5.5% and 6.5% respectively in 2010 and 2013, and (f) increase the participation of the relationship between expenses on R, D & I and the complex revenue for 2 % and 2.5% in 2010 and 2013. The challenges involved are: (a) increase the density and modernize the production chain and (b) strengthen the project engineering of the companies in the complex. The relate initiatives are: (a) the investment exemption, (b) support the strengthening of the project engineering and (c) financing the auto parts segment expansion and consolidation. The investment exemption includes the following features: (1) accelerated depreciation on the purchase of machinery and equipment for the automotive vehicles and auto parts segment – half of usual time, (2) extending the period of gathering of PIS / COFINS for thirty days, in the case of assemblers, and (3) recovery, in the acquisition month, of PIS-PASEP and COFINS credits on the purchase of capital goods. Support for the strengthening of engineering design is based on the Program for Support of Automotive Engineering (PAEA), with funding of R$ 1 billion in 200811 (this program will be detailed below). The funding for the expansion and consolidation of the auto parts segment involves the following instruments and measures: (1) FINEM to finance the purchase of tools from the first tiers auto parts; (2) establishment of private equity funds, through BNDESPAR; (3) creation of the FDIC - the investment fund in Credit Rights - to the auto parts segment (with BNDES shares: 25%) (4) development of structured finance operations, based on the receivables from the assemblers as warranty, (5) use of equipment through leasing operations, funded by FINAME Leasing; (6) launch of REFIS 4. The Program of Support for the Automotive Engineering (PAEA), mentioned above, deserves a more detailed evaluation, although preliminary, due to its potential impact and relative innovation. Firstly, we need to emphasize that the information on this program was obtained only in an indirect way, since even in the site of BNDES - the institution responsible for its implementation – there is no specific information available about the program. The detailed information below is based, therefore, as it has been published in the press and in just one more 9

www.desenvolvimento.gov.br

10

www.mdic.gov.br/politica/setores/complexoautomotivo

11

Among the questions that have not been clarified so far, there is the question about the length and, therefore, about the nature of the program. Is it scheduled for only a year or the planned budged informed concerns only the first year of the program? It would be desirable that such program would last for some years. (This point will be reviewed in a proper moment).

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issue of journalistic nature also present at the site of BNDES: www.bndes.gov.br/noticias/ this report 2008/not111_08.asp As it has been disclosed in the press, this program of BNDES (PAEA), which has resources of $ 1 billion until December 2008, concerns the funding of expenses of engineering performed in Brazil. "Among the financial items are the hours worked by engineers in a project of technological development, financing of basic project, the development of prototypes and new products, the detailing of parts and components, purchase of materials of precision, construction of development center, among others "(BNDES, news: 2008)12. By the time this paper has been writing, only two approvals of loans by BNDES under the PAEA were reported by the press, which seems to be something quite surprising13. This is funding for Ford and for Mahle Metal Leve. The loan to Ford in the amount of R$ 78 million for the biennium 2008-09, relates mainly to the maintenance of engineers involved in product development and new processes to reduce the level of atmospheric emissions of vehicles14. The funding granted to Mahle, of R$ 45 million, relates to the implementation of a modern center of automotive engineering company, which involves the construction of several laboratories to measure emissions and develop solutions for reducing emissions of pollutants. In an interview to the journal Aluauto ABAL (Brazilian Aluminum Association), the manager department of BNDES heavy industry also refers to the final stage in which he is considering a request to fund a center of technology. The request came from a large of trucks assembler 15. Although, there aren’t any specific measures to support innovation for the automotive complex in the Productive Development Policy (PDP), with the exception of PAEA, presented above, it seemed that it would be appropriate to summarize here the new measures of systemic character to support the innovation. The measures included in the PDP, can also be used by the automotive sector. The measures in question are: 1) accelerated depreciation (under responsibility of the MF): permission for immediate depreciation of machinery, equipment, apparatus and new instruments for the activities of technological research and development of the technological innovation. BNDES's resources of R$ 6 billion for the triennium 2008-2010, to finance: 2a) New line of innovative capital: support to the efforts of innovative companies - especially training, intangible assets and engineering. Charges: TJLP + 0%. 2b) New line of technological innovation: support for research projects, development and innovation. Charges : 4,5% a.a. 2c) FUNTEC (technological funding): support non-refundable. Focus in 2008: health, renewable energy and reducing emissions applicable to the automotive sector. 3) Funding for emerging companies (under the responsibility of BNDES): structuring 8 funds involving R$ 800 million, with participation of the BNDES to 25%. 4) Resources of FINEP: a) financing R$ 740 million in 2008, and b) economic grant innovation of R$ 325 million in 2008. 12

www.bndes.gov.br/noticias/2008/not111_08.asp

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Especially if the program is of short duration, there are probably underestimated reports in the press that, in general, only covers the assemblers and the major auto parts manufacturers. This problem can only be improved with the disclosure, by the BNDES, of the complete information about approved funding, which, however, has not occurred yet. 14

See interview given by the department manager of BNDES heavy industry, Paulo Castor de Castro, to the magazine Aluauto (aluminum in automobiles) 3rd quarter of 2008: www.abal.org.br.

15

In past interviews, this news could not be confirmed. When asked about, the Iveco did not confirm, but nor denied that the company would be the concerned one.

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2.3. Environmental Policy and Regulatory Framework Brazil has adopted with some delay - usually around 4 years - the European standard for emission of pollutants. Thus, the introduction of Euro 4 was due to 2009 - equivalent to P6 Proconve16 - which has, however, been postponed, with the alternative decision that Euro 5 would be adopted in 2012. That means, Brazil would leap from the Euro 3 standards currently in verve directly to Euro 5. This will require the availability of Diesel S10 (with only 10 ppm sulfur) and the improvement of propulsion systems and vehicle exhaust. Up to that moment, there will be an effort to improve the quality of fuel supplied in large metropolitan centers (now S500) and also in other regions of the country (today S2.000). Moreover, the Anfavea compromised to stimulate the creation of emission laboratories by its members and to make campaigns for clarification related to the importance of vehicles maintenance (Automotivebusiness, 04/11/08). 3. Production and consumption In 2007, Brazilian production of autoveículos was the seventh largest in the world, only slightly lower than the French production. Traditionally, the relative importance of Brazil is the largest in the segment of heavy vehicles, but with the growth in recent years of the internal market for light vehicles, there was an approximation of the shares of the country concerning the two products. However, both the placement in the ranking of producers as the share of the world production continued to be higher in heavy vehicles (6th position, with 4.5% of total) than in lighter vehicles (8th position, with 4% of total)17. The important position on the list of major producers is reflected, moreover, in a very significant weight within the structure of the Brazilian economy. In 2007, according to Anfavea, revenue from automakers installed in Brazil was equivalent, according to the average exchange rate of the year, to R$ 52.3 billion. On the other hand, the estimates of Sindipeças (National Association of Industry of Components for Motor Vehicles) indicate a total turnover of U.S. $ 36 billion. Even if this last estimate - and, more importantly, in a possible addition to this amount of assemblers revenue - there is obviously a large margin of double counting, the figures express themselves the relevance of the auto industry as an economic activity in Brazil. Graphic1. indicates that there is a very close relationship between the production of vehicles in Brazil and revenue in real terms of the manufacturers of auto parts installed here. Although there may be some differences in some periods, in a longer time, the adhesion between the two variables is very large18. In the period 1980-2007 the cumulative growth of sales of the

16 Failure to meet the standards of Conama, which should be running in 2009, began with the specification of the fuels of ANP in the investment program of Petrobras - which should have had the S50 Diesel (50 ppm sulfur) available in time for the testing by manufacturers. Besides that, there was a lack of commitment of the majority of others interested. 17

In market terms, the Brazilian shares are slightly lower: 3.4% for light vehicles and 3.1% in heavy, concerning the last percentage that fits the exception, which means that the international statistics seem to underestimate Chinese volume related to heavy vehicles.

18

The periods in which there are discrepancies in the graph can be explained without difficulty. In the second half of the'80s, the growth of the largest revenue of auto parts manufacturers reflects the intensity of the drive segment exporter of that period. Between 1983 and 1989, Brazilian automobiles production grew 13%, but the auto parts export, in current dollars, increased by 165%. In the 90s, the largest growth in automobiles production reflects the impact of intense transformations in the automobile industry in terms of pressure on the auto parts manufacturers - with replacement of imported domestic components by tougher price negotiations - and the changing composition of production in favor of 'popular' cars, that is, smaller, simpler vehicles and, therefore, which require a lower demand for auto parts.

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auto parts segment (143%) is only slightly lower than the national production of vehicles (156%). More than that, the correlation coefficient between the two series is 0966. Recent performance in the production of vehicles, can be drawn from Table A.1 (see the Annex), they deal successively with vehicles as a whole, light vehicles, trucks and buses. They provide not only data on production, but also information on domestic demand19 and foreign trade, which will be explored in the sequence of this paper. Graphic 1.

40.000

3.500.000

35.000

3.000.000

30.000

2.500.000

25.000

2.000.000

20.000 1.500.000

15.000

Unidades

US$ milhões de 2007

Brazil – Vehicles production evolution and the auto parts segment revenue (1980-2007)

1.000.000

10.000

500.000

5.000

0

19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06

0

Faturamento em Autopeças

Produção de Autoveículos

The annual production of vehicles in Brazil has been growing continuously since 2003. Although the pace has varied considerably, not only the average growth rate was very significant - 10.7% per annum during 2002-2007 – but also there was a prevailing trend of acceleration until the moment when the international financial crisis began to manifest itself in more acute way in September 2008. Effectively, after the 27.8% increase in 2007, production in 12 months to September 2008 continued to present a growth of 20.8% and reached 3.41 million units (see Letter from Anfavea #269, October 2008), 65% more than in 1997 which represents the peak of the previous extensive cycle in the Brazilian automotive industry20. The growth of production of vehicles in Brazil during this period 2002-2007, as in previous times, has been largely depending on the internal demand. Although by 2005 the effect 19

From 2001 onwards, the domestic demand, in each of the segments and categories, was inferred from data on the licensing of vehicles. Before that, the information refers to sales at wholesale. Considering the mixed origin of the series that shows the domestic demand. In this paper the terms "domestic sales", "domestic demand" and "licensing" are exchangable without distinction. Another important caveat is that the data source the Yearbook of Anfavea - suggests that the information on imports is not accurate for the three decades prior to 1990. Undoubtedly, however, in this period, Brazilian automobiles imports were insignificant.

20

The previous growth cycle, that started in 1992, extended until 1997 and had the marks of the agreements to reduce prices and tax burden, then the stabilization of prices associated with the Real Plan,. During this period the increase in production was higher: 116%. Since this is a period of openness to imports, it is understood that the production has been lower than the performance of domestic demand, which grew 146% in six years.

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of the increase in exports was much higher and even predominant in the period as a whole, domestic sales contributed 69% of the impulse of growth. Since the crisis of the early 80s, the anti-cyclic component of the exports behavior of auto industry has enabled the movements of the production to be more tenuous than those recorded in domestic sales, but domestic sales remain the dominant variable in their dynamics (Graphic 2.). Although all areas of industry have benefited from the recent period of growth, there are significant differences in behavior between the segments: (1) the intensity of the production growth was higher in trucks and buses than in light vehicles (Graphic 3), (2) but in terms of domestic sales (licensing), the situation is reversed and the growth was more vigorous in light vehicles than trucks and buses - in heavy vehicle segments, the strongest boost for the growth actually came from foreign markets, up to the point that the contribution of exports to the expansion of total demand was the majority in both trucks (54%) and buses (57%) (3) while the pace of expansion was more regular in light vehicles, in heavy vehicles there was a rotation of years of strong growth in retreat periods, such was the case in 2006, and (4) the behavior of the segment of auto parts follows the pattern of light vehicles, with a growth in revenue in real terms, slightly slower (8, 5% p.a.), but more regular and dictated by domestic consumption. Graphic 2. Brazil – Production Evolution and Vehicles Licensing (1977-2007) 3.500.000 3.000.000 2.500.000 2.000.000 1.500.000 1.000.000 500.000 0 1977

1980

1983

1986

1989

Produção

1992

1995

1998

Vendas Internas

Source: Anfavea (2008).

7

2001

2004

2007

Graphic 3. Brazil – Production Average Annual Growth Rates and Vehicles Licensing (2002-2007) 14,9%

16% 14% 12%

10,5%

11,4%

10,9% 8,4%

10%

6,9%

8% 6% 4% 2% 0% Veículos Leves

Caminhões Produção

Ônibus

Licenciamentos

Source: Anfavea (2008).

Despite the intra-sectoral differences, it is clear that the dynamics of production of the Brazilian automotive industry as a whole has relied mostly on the evolution of domestic demand. In the main segment, the light vehicle, the evolution of domestic consumption in long term, is basically determined by (1) the behavior of income and (2) the availability of appropriate forms of financing, but we should not ignore (3) the sensitivity to the price, that more than once, has been demonstrated in episodes of agreed reduction in price. As regards the demand dependence in relation to income, it is expected that a high unitary value product, and that is not essential and that compete with cheaper substitute goods (such as used cars and motorcycles, for example), has a high income-elasticity, especially in countries with intermediate level of development, such as Brazil. In this context, sometimes causes amazement, the relatively low values, the range from 1.1 to 1.5 for the value of the demand income-elasticity for automobiles in Brazil, found in the most recent known estimate (De Negri, 1998). Anyhow, one should interpret this estimate as corresponding to movements over long periods. As the current situation shows, in times of uncertainty and adverse expectations about the future, the demand for cars in the short term responds negatively in a much more elastic way. Besides the features mentioned above, this helps to explain the fact that most of the demand for automobiles is subject to the logic of replacement of a durable good, which implies also a cyclical dimension to the purchasing decisions. Due to the high unitary value, the availability of credit with appropriate charges and time is another critical determinant for the evolution of the internal market. And certainly a major increase of consumption in recent years can be explained by the combination of reduced interest, extended time and expansion of access. According to data from Anef (National Association of 8

Financial Companies of assembler) in the first half of 2008, only 34% of sales of new cars were awarded the spot21. The average term funding was 42 months - still below the average of 63 months recorded in the U.S. - and the leasing has become the predominant mode, after the increasing of costs of the tax credit directly to consumers in early 200822. An important aspect of strengthening the system of financing, largely operated by the financial arms of the assemblers, has been the development of efficient mechanisms to recover the vehicle in cases of default23. Naturally, the demand for trucks and buses has different determinants from light vehicles. Unlike them, from which only a minority are used for commercial purposes, heavy vehicles are capital goods and they are subject to purchasing decisions typical of productive investment. But the decisions do not depend, at least directly, on the evolution of income and on the wages. The largest fluctutation in the level of domestic sales, remarkable especially in Brazil among the trucks, reflects more precisely the instability of investment. Furthermore, the purchase of new trucks and particularly bus is strongly influenced by policies set in the three spheres of government and with different aims: public transport, vehicular safety, environment etc. Among the differences, we can also visualize a less favorable position in terms of market saturation. Indeed, after the strong growth already reported, the internal market of trucks reached in 2007 the historic record of 98.5 thousand units. But the volume of sales was only 9.1% higher than the previous peak, which occurred 30 years before, in 197724. In the same period, consumption of cars tripled. If at all these plans are different, there is convergence between the characteristics of the demand for light and heavy vehicles on the dependency of funding. As capital goods, the sale may be financed by the BNDES line Finame and “Procaminhoneiro” program. The increase of access to credit on privileged terms has certainly contributed to the recent growth of the internal market25. In the auto parts segment, it is important to emphasize that the majority of sales is a derived demand for intermediate goods of use. According to data from Sindipeças, on the average over the last 30 years, the market for replacement was 23% of domestic sales of manufacturers of automotive components. With the growth of production of vehicles, this proportion fell in the

21 There is evidence that funding is perhaps even more important in sales of used cars, at least that part of the transactions carried out in specialist shops. According to Assovesp (Association of Retailers of Motor Vehicles in the State of São Paulo), in August 2008, 77% of sales of used cars and 83% of used motorcycles depended on funding. See Folha Online, on 08/09/2008, "Sales of used cars in August up 1.5% in São Paulo." 22 The balance of credits - including leasing and direct credit to the consumer (CDC) - to finance sales of vehicles to individuals totaled R$ 129.8 billion at the end of June 2008, approximately ⅓ of the entire loan in Country to individuals. See reports from Reuters, on 05/08/2008, "Leasing exceeds CDC sales of vehicles in 1st half", and the Valor Economico, on 04/04/2008, "Bank reduces the term of credit vehicles." Folha Online, on 08/09/2008, "Sales of used cars in August up 1.5% in São Paulo" 23 Specifically in the operations of CDC, the rate of default, defined by more than 90 days of delay, stood in June 2008 on the level of 3.56%, half the proportion recorded in credit to the person in general. See Reuters, on 05/08/2008, "Leasing exceeds CDC sales of vehicles in 1st semester.” 24

We can also evaluate the dynamic that in the recent past, showed activities that are characterized by producing and / or move large volumes of capital low value - such as mining, agribusiness and the construction - not only promotes the demand for trucks, but also tends to affect the composition of its market. Anfavea's data (2008: 84) show that in the period 2002-2007, sales of trucks grew much more rapidly than those smaller. If the heavy and semi-heavy trucks are grouped into a single category and - that is, those with weight less than 15 tons - and in the other category semilight trucks, light and medium, we can obtain the annual growth rates of 14% and 2.9%, respectively. Therefore, the composition of the market has changed more widely and trucks have become numerically dominant (57.1% in 2007 and 44.4% in 2002). Naturally, this change in favor of products of higher unit value means that the performance of the sector in monetary terms has been better than in terms of physical units.

25 The funds invested by BNDES through Finame in transport in general tripled in nominal terms between 2002 and 2007, from R$ 3.7 billion to R$ 11.5 billion. Only in 2007, growth was 67%.

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triennium 2005-2007 to 15%. Thus, the domestic demand for auto parts tends to depend on the performance of the auto industry, particularly of the light vehicles segment. In order to conclude this topic, we should also mention the recent performance in the geographical distribution of the automobile industry in Brazil. Table 1.(see below) demonstrates relevant data. Firstly, we can notice that, although declining, concentration of industry in the state of São Paulo is still very prominent, particularly in the auto parts segment. The movement of deconcentration that marked the block of investment of the 90’s had significant effects on the units of the assemblers. The Sao Paulo's manufacturing automobiles, in physical terms, retreated more than 30 percentage points between 1990 and 2007. At the same time, the share of Minas Gerais – the only other state that has significant production in 1990 - remained stable. Despite the absence of data with the same temporal coverage for the auto parts segment, the deconcentration in this case was certainly inferior, this happens because approximately 70% of the plants are still located in Sao Paulo in 2007. Part of the movement of deconcentration, however, may not be reflected by a table that shows only the industrial distribution by states: the relocation of industry within the state of São Paulo towards the countryside. In the case of auto parts, for which data are available, the result was that between 1997 and 2007, the participation of Great São Paulo in the number of factories fell from 63% to 46%. 4. National Framework 4..1. Recent Evolution: Features and Main Determinants As it has been widely acknowledged, the 90 decade was defined by several important changes in the Brazilian automotive industry. Among them the most important were: the resumption of domestic demand and production, the consolidation of Mercosul and the creation of the Automotive Regime, the advent of a cycle of investment - with the capacity growth and the introduction (upgrading) of new models - the entry of new players in the domestic market (BNDES, 2000, Carvalho, 2003 and 2005, Sarti, 2002). The investment by manufacturers of vehicles, in this context, have increased since the mid-90s, rising the level of about US$ 900 million, observed in the 1990-93 period, to US$ 1.2 billion in 199426 . In the period 1996-2000, the investments totaled $ 10.7 billion, that is an average of US$ 2.1 billion per year, which meant an average commitment of 12.5% of the assemblers revenues in the during. (Carvalho, 2003). According to Anfavea, in the period 1997 to 2007, the total investments in the Brazilian automotive industry - including assemblers (U.S. $ 16.5 billion accumulated, or an annual average of $ 1.5 billion) and auto parts manufacturers (U.S.$ 12 billion accumulated, annual average of U.S. $ 1.1 billion) - would have been U.S. $ 28.5 billion (Anfavea, 2008). The amount above and the resumption of domestic demand, in 2003, and investments from automakers and auto parts, especially since 200527, have led some analysts to postulate the hypothesis that the Brazilian automotive industry is entering a new cycle of investment (BNDES, 26

"In the period of five years 1991-1995, the investments of car manufacturers in Brazil were U.S$ 5.6 billion – U.S$ 1.2 billion a.a on average -, which represented 8.5% of the assembler average revenue in the referred period "(Carvalho, 2003: 185).

27 Indeed, the inversions resumption began in 2003 - but from very low numbers - and in the two segments they only overcame the level of U.S. $ 1 billion in 2005 (Anfavea, 2008).

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2008a and 2006b). (See below, Graphic 4. for the autovehicles segment investiments data and Graphic 5 for the auto parts segment corresponding data ). Table 1.

Brazilian Automobile Industry Distribution by States

Number of Industrial Units

Part. % Automobiles Production

in Part. % sector

Automotive

Motors Final Assembler

And/or

Of (%)

Light

Components 1990

1997

2007

Units

Units

Revenue States

Heavy

2007

Amazonas Ceará

1,1%

0,7%

0,2%

0,1%

0,8%

0,9%

2,7%

1,9%

24,6%

9,5%

10,3%

5,6%

1,5%

1,2%

1

Pernambuco Bahia

1

7,6%

Goiás

2

0,9%

Minas Gerais

2

1

1

1

São Paulo

7

3

Paraná

2

1

Rio Janeiro

24,5%

de 4

74,8%

43,7%

0,5%

10,9%

Santa Catarina Rio Grande do Sul 1

1

Total

7

17

4

81,6%

71,1% 69,8% 4,4%

5,8%

3,8%

4,0% 5,2%

0,2%

6,8%

5,1%

100,0%

100,0%

100,0 % 100,0%

Source: Anfavea (2008) and Sindipeças (2008). Note : Ford's plant in Sao Bernardo do Campo, which produces both light and heavy vehicles, is counted in both columns in São Paulo.

It should be noted that the previous assessment was made before the worsening of the international crisis and was based on information spread by the press, by Anfavea and by Sindipeças on new investment scheduled and / or forecasted by the companies of the sector. Before making a new assessment of the prospects - to be held in the next topic – we will be discussing here, though briefly, two issues. Firstly, we will discuss about the resumption of the Brazilian automotive industry recent dynamism. Secondly, about the consequent intensification of investments, which followed the first, although there was a slight delay. 11

Graphic 4. Brazil: Autovehicles Segment Investment, Production and Productive Capacity1 (19902007) 3500000 3000000 2000 Em unidades

2500000 1500

2000000 1500000

1000

1000000 500 500000 0

19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06 20 07

0

Em US$ milhões constantes de 2007

2500

Capacidade prod. (unidades) 1

Produção (unidades)

Investimentos (US$ milhões)

1

Available Data since 1995 and which refers only to light vehicles (automobiles and light commercials) Source: Self-Elaboration from Global Automotive Outlook Data (2008) e ANFAVEA (2008). Graphic 5. Brazil: Auto parts Segment Revenue and Investment (1990-2007) 3000

40000

2000

25000 20000 15000

1000

10000

Faturamento

Investimentos

Source: Self-Elaboration from Anfavea Data (2008).

12

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

0

1991

5000 0

Investimento (US$ milhões 2007)

30000

1990

Faturamento (US$ milhões 2007)

35000

Regarding the recovery of domestic demand for cars and light commercial vehicles from 2003, it also should be highlighted: the relative improvement of the macroeconomic framework and, more specifically, the rising levels of income and the mass wage, the credit availability expansion and payment terms, as well as the credit cost reduction of due to a relative reduction of interest rates (BNDES, 2008a). For the trucks segment, in particular, it should be added that their demand, which is generally pro-cyclical, has been determined mainly by the agricultural production expansion and in particular the segments of the grain, sugar and alcohol (Carvalho and Melo, 2006)28. In the same period (2004-2007)29, the production of vehicles grew 13% a.a, on average, compared to a growth of 15% a.a from the respective domestic sales, which showed, moreover, an expansion of imports greater than exports. Indeed, depending on the behavior of the exchange , there were alternations with periods of better and worse performances of the sector trade balance. Thus, there was a better performance of exports between 2003 and 2005 and imports between 2005 and 2008 (BNDES, 2008th; Anfavea, 2008, Letter from Anfavea, jan. 2009). (See Graphic 6. below for details of foreign trade in the light vehicles segment.) Graphic 6. Brazil: Autovehicles Exports and Imports (1990-2007) 1.000.000 900.000 800.000

Unidades

700.000 600.000 500.000 400.000 300.000 200.000 100.000

Exportações

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

1991

1990

0

Importados

Source: Anfavea (2008). 28

There are indications that the demand for heavy trucks is suffering, more recently, also from the impact of the mining, civil construction and investment growth in general. These factors do not affect directly the sub-segments of medium and light trucks. The latter is, however, benefited from the restrictions of movement in large and the economy growth in general. The demand for buses, especially the domestic, is a behavior guided by the policies of public transport, especially the urban areas (Carvalho e Melo, 2006).

29 In 2008, the production increased 8.1% and domestic sales (new vehicles licensing - domestic and imported) increased in 14.5%, respectively. In the last year, while the national new vehicles licensing increased 11.9%, the imported vehicles licensing increased in 35.4% (Letter from Anfavea, jan. 2009).

13

4.2. Medium Term Prospects The forecasts on the Brazilian production growth of light vehicles (cars and light commercial vehicles) carried out by specialized consultants varied significantly even before the emerging of the global economic crisis. Indeed, the latest forecasts disclosed by PwC for the period 2007-2011 showed an average annual growth of 3.8% for light vehicles segment in the Brazilian industry (Autofacts, 3rd quarter 2008). While the latest detailed estimates of CSM Worldwide had, for the same five years, an average annual expansion of 8.1% (CSM Worldwide, 3rd quarter 2008)30. Differences also remain when we try to calculate the Brazilian contribution to the world production growth. For example, in an exercise based on the information from the CSM, we calculate that Brazil will be responsible for 7.3% of the global expansion of light-vehicles between 2,007 and 20,011 and will be overcome only by China (36.8%), India (14, 7%) and Russia (7.7%). In a similar exercise, based on PwC (Autofacts, 3rd quarter 2008)31, Brazil would be in fifth place with a contribution of 5.4%, and also overcome by Thailand (6.5%), also by China (30 , 1%), India (14.1%) and Russia (8.8%). Although there is a discrepancy that can not be ignored relative to the future development of the Brazilian production of light vehicles, there is a reasonable consensus that Brazil is among the key markets that will lead the automotive industry worldwide growth, as noted earlier. That scenary - perhaps a little optimistic in regard to the short term32, about the future of the segment of light vehicles and of trucks and buses - was partial (and preliminary)as it was recorded by BNDES Informe Sectorial in last July: "The aim here is rise information on, briefly, what constitutes this new cycle of investments and the strategies of each player whom had to be placed in the new structure of supply. This is a free estimate, and in many cases, not confirmed by the respective companies "(BNDES, Sector Report, July, 7th, 2008: 2)33. Given this preliminary survey as a starting point, we aim to - based on press reports and business associations (Anfavea and Sindipeças) and interviews with the automakers and the two associations - update the investments information of the Brazilian automotive complex when the international financial crisis began. As known, the crisis has spread further to the productive sphere and it has strongly reached the demand and the credit terms34 - in terms of availability, time and costs - of the Brazilian automotive industry. At the time this paper had been written, the latest information disclosed by Anfavea, on the performance of the Brazilian automobile industry

30

The forecasts about trucks are not very frequent. The only forecast found on the production and sales behavior until 2014 was: "The response was encouraging, showing that the curve rises and vary only in 2011. [...] It reflects the delayed entry of the Euro 4 with tough rules that determine the emission levels of engines. In the preceding months, before the Euro 4 entry, the transportation companies must accelerate purchases, taking advantage of better prices offered by Euro 3 vehicles. [...] In 2014, sales of buses in Brazil will be around 34,140 units, while trucks [will be] in 146,551 (AUTOMOTIVEBUSINESS, 29/05/08).

31 This last calculation is not strictly equivalent to the former, by us, because it concerns the period of six years 2007-2012, while the exercise based on data from the CSM was based on the period 2007-2011 (see the explanation for this choice in topic 3.1) 32

We have already taken into account the potential consequences of the crisis.

33

In last December, the BNDES (2008c), through the Sector Report No. 9, has updated and adapted as far as possible the previous forecasts. In the latter report, new and successive forecasts made by the GM were presented (in October and November) and Booz & Co (in December), respectively (BNDES, 2008c). 34

"According to Anfavea, the funding has come to represent 65% of sales in the country, especially of popular models. Now it has 46% of the shares. " (...) "Even in November the business was weak and sales totaled (...) a retreat of 25.7% compared to October." (Gazeta Mercantil, 05/12/2008).

14

in 2008, covered the growth of the total production of vehicles of 8.0% (3.21 million to 2 , 98 million in 2007) (Letter from Anfavea, January 2009)35. Despite these new circumstances, the assumption we adopted in this paper - based on information available (including those obtained through interviews) - is that the previous scenary tends to be adapted, introducing the effects of the delay of some projects, and therefore, the lags of the original projections. Although, there are some more pessimistic forecasts, most of the new ones are that production of 2009 will repeat the 2008 production and that domestic demand will grow again in 201036. Some decisions related to the capacity growth may be postponed37 - but not all of them because, as it is known, the average degree of the sector idle capacity, both in the assembler as in the auto parts, is relatively low38. While the decisions related the introduction of new models and to the modernization tend to be kept, albeit with some delay39. This new context of the Brazilian automotive industry and its likely growth should not be seen as a very negative fact, because the current widespread crisis. Besides that there is no evidence that the Brazilian situation is worse in relative terms than the more direct competitors, except perhaps China and India (Gazeta Mercantil, 05/12/2008). Moreover, the possible recovery of the domestic market growth in 2010, after only one year of stability (or slight decline), an assessment that seems to be reasonably realistic in the present time, would not put at risk the previous estimates and nor even the PDP's goals for the automotive sector40 would become totally unviable. Anyway, the viability of these previous targets will depend heavily on performance of the current year. Stability (even a slight decrease) in the production would not hinder their viability41, but a more strong decrease (or longer) would imply in an unavoidable delay of the production growth goals. Taking into consideration those assumption (and qualifications), we decided to continue (and try to update) with the previous effort of BNDES (2008a) to map the information concerning new investments planned by the Brazilian automotive complex. Just as in that survey, we limit our effort to update the information given by the assemblers, also adopted for the auto 35

If the initial estimate of Anfavea, 3.4 million units had been confirmed, the annual growth of production would have been of 15%.

36

After the most pessimistic moments, and now taking into account some of the effects of government aid package announced on 11 December last, the Fenabrave, for example, is already planning a "growth of 3.1% [of domestic sales] for all the segments [in 2009] "(Fenabrave, 28/01/2009). This view is also consistent with assessments of the industry professionals consulted by the authors.

37

In the limit, even canceled. See footnote 113 below.

38

According to several reports, and even reaching the total use in some cases. Therefore, the growth even below the expected may, in some cases, result in a level of use still comfortable. Note that the maintenance of growth rates, previously referred to the crisis, would imply on average levels of occupation, but that are very high.

39 "The president of Anfavea ensures that the industry investments have being kept and he bears in mind that planning aims the long term. He explains that those who announced new factory in the middle of this year, for example, will only have results in 2010. 'By now all investments are confirmed, but it is clear that the industry will follow the market, he says" (Agência Estado, 01/12/2008). Actually, until now, only the Hyundai announced changes in investment plans, informing the suspension of construction of the plant in Piracicaba (SP) (Protec, 2009). Toyota, however, confirmed in an interview given on 28/01/2009 to the authors of this research, that the investment in new plant in Sorocaba (SP) is maintained. The Japanese assembler confirmed, as has been disclosed in the Brazilian press, the maintenance of the investment plans announced and rejected reports in the international press that all their plans for investment in emerging countries, including Brazil, had been postponed. 40

As exemplified in the estimates of BNDES (2008a), a growth of production of around 6% a.a from 2009, would lead to production of vehicles to the desired value of 5 million units around 2014. Admitting to the new hypothesis postulated here - zero growth in 2009 - the average growth to achieve the desired goal of the PDP would have been of 7.2% pa, between 2010 and 2014. It would be more difficult, but not impossible.

41

This assumption may not be too optimistic if we take into account: 1) measures to stimulate demand recently announced by the government: "exemption from the Tax on Industrialized Products (IPI) for cars with 1.0 engine and a 50% reduction in the rate charged for larger models (...) and the largest cut in Income Tax of Individual Tax and Financial Operations (IOF), which, in the beginning, will be running until March 31, 2009 (Agencia Estado, 12/12/08), 2) the release of $ 7 billion in credit lines - $ 4 billion the federal government through the Bank of Brazil, and U.S. $ 3 billion from the government of São Paulo state, through the Nossa Caixa – to the assemblers banks, trying to support consumer credit (BNDES, 2008c), and 3) the effects in terms of sales recovery, already detected in the second half of December and January.

15

parts segment the estimates disclosed by Sindipeças (BNDES, 2008a). Table 2. summarizes the information we obtained and compared to those previously collected by the Informe Sectorial BNDES (2008a). Our estimate (R$ 22 billion) is slightly higher than that obtained by the BNDES (R$ 19.5 billion) in function, especially of recent announcements of new investments made by Mercedes-Benz (R$ 1.5 billion), by Toyota - in the new plant to manufacture small cars in Sorocaba (SP) - and a discrepancy, the largest, the values released by Renault42. Table 2. Brazil: Investments Announced by Assemblers (estimates) Investments Investment

Announced

by

Assemblers

Assemblers

BNDES (R$ millions)

Forecast(R$ millions) 1

GM

3.920

3.920

Toyota

1.120

2.200

VW

4.323

4.323

Fiat

4.925

5.000

Ford

3.100

3.214

Mercedes Benz

-

1.500

Renault

710

1.000

Peugeot-Citroen

610

610

Honda

160

160

Hyundai

600

-

Agrale

-

25

Total

19.468

21.952

1

Forecast prepared by the research – information related to the period of 2008 forward.

Dollar rates adopted: R$ 2,183. Both our survey as the BNDES reach a figure much inferior from the forecast of investments - U.S. $ 23 billion, by 2011 - announced without detail by Anfavea at the meeting of the entity with the President of the country, in August last (FSP, (28/08/2008). It should be noted, however, that the projection of Anfavea includes, not only the automakers, but also the auto parts manufacturers. Considering that, both our assessment and that made by the BNDES, it is estimated that the auto partsegment will make, between 2008 and 2010, a total investment of R$

42

In the opposite direction, of course, the recent cancellation of the previously announced investment by Hyundaí had a great weight.

16

9 billion43. For this reason our total estimate (assemblers and auto parts) is of approximately R$ 31 billion while the BNDES (2008th) was R$ 28.5 billion.44 5. Sectoral Policies: Reflections and Suggestions This topic aims at addressing some key issues concerning sectoral policies for the Brazilian automobile industry. We do not intend to outline a policy for the sector, but rather reflect on some important aspects of this plannning. The discussion that follows begins by explaining an overall strategic objective to be pursued, and continues by addressing three different areas which are relevant to the sector: policies for foreign trade, and policies for taxes on consumption and the regime of tax incentives. A starting point for this discussion is the principle that the retaking of the recent phase of modernization, the new investment cycle and the growth of Brazilian sales in the automotive industry should also be accompanied by an expansion and improvement of its external insertion. This is not, however, a trivial goal, since, due to its importance both quantitatively and qualitatively, the automotive sector is normally too regulated and subject to actions and vigorous public policies in almost all developed economies and several emergent economies (Sarti, 2002, European Competitiveness Report, 2004). One of the most common actions is to impair and, under certain circumstances, even prevent access to their local markets. Restrictions include tariff and non-tariff barriers (requirements of origin, fees etc), technical standards (pollutant emission ceilings, energy efficiency requirements and safety standards) and even voluntary restrictions on exports (Vickery, 1996, Sarti, 2002). A change in the current pattern of foreign insertion in Brazilian automotive sector is not only necessary because of its positive effects in terms of generating additional income, employment and foreign exchange, but also to enable the consolidation of the Brazilian automotive industry as an outstanding international agent. This goal involves more than a relatively large and dynamic internal market. It seems also to be a main requirement that Brazil (and, by extension, Mercosul) should become a strong platform for regional exports. That is, the objective of establishing a wide and integrated automotive industry requires a strengthening of the external integration of this sector of Brazilian industry (Sarti, 2002). The recent cycle of investments - with its consequences in terms of growth of production capacity, modernization of designs, plants and production processes and efficiency gains and productivity within the entire automotive supply chain – of the Brazilian automotive sector (which, as mentioned earlier, must continue to overcome the crisis) and the devaluation of the Brazilian currency seem to have restored some of the basic conditions45, although not 43

Actually, the interview with Sindipeças informed an estimated of U.S$ 1.6 billion annual investment in this and the next two years.

44

An alternative procedure would be to estimate the inversion of the auto parts segment based on a historical relationship with the investment by automakers. Indeed, the relationship between inversions in both segments during the period 1997-2007 allows us to infer that for each U.S$ 1,000 invested in the assembler would result in U.S. $ 700-750 investment in auto parts producers. Based on this reference, we can reach an amount of about U.S. $ 39 billion for investment all over the industry, closer to the statements of Anfavea, especially considering the possibility of adoption, by the entity, an exchange rate lower than the one in force at the end of 2008.

45

In addition to these conditions,the conclusion of trade agreements that minimize and / or eliminate restrictions on access to local markets, when granting the margins of preferences to the signatories should also be highlighted. Thus, trade agreements would also be a necessary condition, but not enough, for effective expansion of exports (see below).

17

necessarily sufficient for a quantitative (and perhaps) qualitative resumption of the external performance of the Brazilian automotive industry. Despite the advances made, we must remember that the expansion of exports and trade balance also depends crucially on the strategic decisions and the role of local subsidiaries within the division of labor (and market) of each automobile corporation. In this sense, advances in competitiveness and the devaluation of the exchange rate46 conditions are necessary but not enough, to obtain the desired progress in terms of foreign trade. For this important reason, we must consider the implementation of a more active and articulated strategy of the government (and not just in federal terms) with subsidiaries of foreign companies (not just assemblers), to make the segments of vehicles and auto parts a consistent and significant surplus. This strategy should be built on converging interests between the public and private sectors (Sarti, 2002). The granted incentives and benefits that include significant input of public resources and / or tax exemptions, the granted credit lines for exports and the encouragement of domestic sales and the recent reductions in rate seem to qualify the public sector to enter counterparts in part of the generation of surpluses47, and, of course, the usual demands for job maintenance and / or creation. In this sense, it would be appropriate, to some extent, for the automakers and major manufacturers of auto installed here to compromise with the goal of expanding exports for Productive Development Policy (PDP) and industrial policies yet to come. The immediate possibility is trying to encourage both the extension in the diversification of markets and the export tariff. This effort is particularly necessary and urgent in the case of the auto parts segment, which in 2007 suffered a sharp reversal from a significant surplus position, already accumulating two years of negative business results. As it has often been reported, a quite considerable number of the smaller size auto-part companies, especially the ones with national capital, has faced difficulties to participate in the first level of supply to manufacturers of vehicles. In many cases, these difficulties seem to owe more to lack of appropriate scale of production than to the levels of technical training. Accordingly, emphasis should be given to financing the growth and consolidation of the auto parts segment as provided for in PDP, to facilitate future internationalization of some of these businesses – also relying on funding for this purpose. It can not be forgotten, however, that access of auto parts (whether of national origin or not) to the international market depends largely on the strategic decisions of the assemblers and also on the role of local subsidiaries. Thus, the possible qualification of local subsidiaries to 'host [some] projects, products' would undoubtedly expand the possibility of involvement of local auto parts, in more convenient conditions in the supply network of the respective models (Salerno, 2008). The desirable internalization of part of the production of the components and raw materials imported nowadays would help to reduce imports and, additionally, to obtain trade surpluses. Furthermore, it would certainly facilitate the expansion of production, income and employment procedure. An occasional (competitive) replacement process of imports would 46

We must not forget that some of the major vehicle and auto-part exporters take the depreciated exchange rate as one of the central points of their industrial policies and the growth of exports.

47 In fact, we believe that the counterparts in terms of FDI and the expansion of activities of R & D performed in the country could also be required.

18

consolidate the Brazilian automotive chain, without compromising its competitiveness and it would, afterwards, promote its export performance. Indeed, a "policy of competitive replacement of imports' would require, in the Brazilian case that a significant (and not too variable) portion of the auto parts production was directed to the external market. In addition, it would require suitable production scale, which, on its turn, would demand an increase in the internal production of vehicles (Sarti, 2002). On the other hand, as the access for third countries to the markets of other economies has been an increasingly problematic and costly task, it becomes more and more necessary to carry out multilateral and / or bilateral trade agreements. Under these trade agreements, attention and care must be taken in relation to rules of origin and the coefficient of local content. Very flexible rules (as the current ones) in relation to the origin of production and the launch of new models always cause major impacts on imports of components and inputs. On the other hand, taking into account the prospect of a "competitive replacement of imports' of auto parts, the general rule for imported content - which currently is 40% - can be complemented (and reduced) “by the adoption of a minimum criteria of nationalization by the vehicle groups and systems, thus preventing the importation of an entire segment of auto parts and components "(Sarti, 2002: 94). The adoption of a more rigid rule of origin for the automobile is important but should be complemented by the inclusion of these products as sensitive in future negotiations - with the Alca, and especially with the European Union, which has a very competitive segment of the auto parts, and compared to which we are greatly deficient - to discover different treatment and extended time for tariff reduction (Sarti, 2002). On the other hand, in future negotiations of the bilateral agreement with Argentina, special attention should be given to avoid unnecessary rigidity that hinders the expansion of bilateral trade and / or creates unwanted obstacles during any negotiations among Brazil (and / or Mercosul) and other countries and trading groups. In the latter case, the values of the Common External Tariff (TEC) of Mercosul and of the automotive policy are also included. Under the policies of taxation on consumption, a first important aspect is to evaluate that taxes on consumption of non- essential goods, which creates enormous demand for public investment in infrastructure and where the demand is concentrated in the levels of the highest income in society, tend to be higher in poorer countries - in which the imposition of direct taxes was hampered by major difficulties - than in rich countries. The comparison between the levels of taxation on consumption in countries of East Asia and the prevailing in the developed countries, informed by Anfavea (2008: 45), makes clear that a high rate of car tax is not an eccentricity of Brazil. In any case, the charge differences of the IPI between several models are an important tool to strengthen the Brazilian expertise in small and cheaper cars. That is an element we believe as important among the strategies for development of the sector. It is, indeed, to continue an existing expertise and is expressed, first of all, in the high rate, although declining since 2002, of vehicles with engines of less than 1,000 cc. This specialization is consistent not only on the production and engineering skills of the Brazilian automotive industry, but also on the international market trends, as well as the most dynamic markets of emergent countries, the development and dissemination of low cost cars, the effects of environmental concerns and fuel consumption even in developed countries. Concerning the incentive scheme, it should be noted, first, that after benefiting from both an unusual degree of effective protection and a very comprehensive system of investment incentives in the mid-90s, the Brazilian automotive industry has, within the PDP, a range of measures of incentive which are much more limited and focused on mechanisms of accelerated 19

depreciation, tax exemption on part of the acquisition of capital goods and provision of various means of financing the investment in R & D and manufacturers of auto parts. The question we might ask is whether the current system of incentives would be enough to support an expansion of the magnitude projected in the previous section48. Although it does not fit here a detailed assessment of the Automotive Regime adopted in the mid-90s - since it would require an effort and methodology for collecting information on the costs and benefits of this policy that is beyond the objectives of this article – it must be acknowledged that this policy has helped to improve investment in the sector and it was instrumental for the consolidation of the industry's recovery that started with the sectoral agreements to reduce taxes and prices. Anyway, any analysis about the need to retrieve instruments used at that time must take into consideration some circumstances that differentiate the current situation of the one that predominated at the time of introduction of the Automotive Scheme: (1) there is nothing like the threat of relocation of automobile production in Argentina that the asymmetry of incentive policies announced after the establishment of Argentine automotive regulations (Zauli, 2000: 78). (2) Despite the subsequent deterioration to the reversal of the cycle of exploitation of commodities, the prospects of the Brazilian balance of payments should not remotely be compared to the situation of 1995, a year after the introduction of a program of stabilization based on exchange rate anchor, and after Crisis in Mexico (Hollanda Filho, 2003: 782). (3) The structure of the segment of the assembly of auto vehicles is now very different, with local production capacity of eight of the ten largest car manufacturers49, which makes it possible to long for the benefits of an environment with strong competition without having to make the effort to attract new producers. 4) The segment of auto parts, subjected to very strong pressures in the context of policies of components imports which is underlying the Automotive Regulations, suffered extensive restructuring and it is now much more efficient than in the past, implying that such large differences in the structure of pricing protection would certainly not be justifiable, as if it has been one day. (5) Considering the recent announcements of investment, the trend of devolution of the space industry - which, during the 90s, encouraged the parliamentarians to introduce in the rules of the Automotive Regime a generous package of additional incentives for investment outside the most industrialized regions of Country (Zaulim 2000: 80) - seems to have been at least stuck. With the companies signaling differently in relation to the location priorities, a new attitude of the State of São Paulo government under the so-called 'war tax', there seems to be no support in the political sector to introduce measures of regional deconcentratio, which, in addition to affecting the efficiency of an activity defined by significant economies of agglomeration, did not produce very effective results, except perhaps for the Ford factory in the state of Bahia. (6) The variety of financing instruments available for investment in public institutions such as BNDES and Finep are not only greater than 90’s, but also their charges are lower and therefore more attractive to the companies. Consequently there is, a possibility that the composition of incentive policies give more emphasis on funding credits and less of the tax.. 48 Considering the disparity of bargaining power and capacity of accumulation along the production chain, the challenge of financing the investment is, at least in the context of a growing demand, relatively higher in case of the auto parts segment, which suggests that the BNDES should give particular attention to this segment in the allocation of its resources. 49 Of the ten largest manufacturers of auto vehicles in the world, do not have factories in Brazil only the Korean Hyundai (6th), which in the midst of the crisis would retreat the investments that had once announced, and the Japanese Suzuki (10th).

20

All this suggests, on the one hand, that the incentive scheme may be leaner and less expensive than it was during the Automotive Regime. On the other hand, there should be given greater emphasis on other strategic objectives beyond the growth of productive capacity, as well as the deepening integration of export and technological skills of companies installed in Brazil.

21

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De NEGRI, J. A. (1998) Elasticidade-Renda e Elasticidade-Preço da Demanda de Automóveis no Brasil. Textos para Discussão do Ipea, # 558, Brasília: Ipea. De NEGRI, F. et al. (2008) Determinantes da Acumulação de Conhecimento para Inovação Tecnológica nos Setores Industriais no Brasil: setor automotivo. Brasília, dezembro. European Competitiveness Report (2004) The European Automotive Industry: Competitiveness, Challenges and the Future Strategies. In: European Competitiveness Report. HOLLANDA FILHO, S. B. (2003) O Estabelecimento de um Regime Automotivo Diante da Criação da OMC. Estudos Econômicos, 33 (4), Oct-Dec., pp. 771-792. HUMPHREY, J.; SALERNO, M. (2000) Globalisation and assembler-supplier relationships: Brazil and India. In: Humphrey, J. et al. (eds.). Global Strategies, Local Realities: The Auto Industry in Emerging Markets. Basingstoke, Macmillan, pp.149-175. LUNG, Y. (2002) Coordinating Competencies and knowledge in the European Automobile System (CoCKEAS). Final Report, www.cockeas.org.

22

MARX, R.; MELLO, A. M. (2008) Setor de Veículos Leves. Nota técnica do projeto ‘Uma agenda de competitividade para a indústria paulista’. IPT-FIPE. NUTEK (2007) Globalisation and regional economies: case studies in the automotive sector. Nutek, 2007. PwC (2008) Global Automotive Outlook. PriceWaterhouseCoopers, 3rd Quarter. PwC Autofacts (2008) Autofacts light vehicle capacity data. PwC Autofacts, 2008. QUADROS CARVALHO, R. et. al. (2000) Globalização e Reestruturação da Cadeia Produtiva na Indústria Automotiva: Qual é o Papel do Mercosul? Campinas: Relatório final, fevereiro. SALERNO, M. et al. (2008) Setor de Autopeças. Final report of the project ‘Uma agenda de competitividade para a indústria paulista’. IPT-FIPE, 2008. SARTI, F. (2002) Estudo da Competitividade de Cadeias Integradas no Brasil: Impactos das Zonas de Livre Comércio: Cadeia Automobilística. Final technical report. Campinas, dez. 2002. SINDIPEÇAS (2008) Desempenho do Setor de Autopeças. São Paulo: ABIPEÇAS. VICKERY, G. (1996) Globalisation in the Automobile Industry. OCDE (ed.) Globalisation of Industry. Paris: OCDE. ZAULI, E. M. (2000) Políticas Públicas e Targeting Setorial: Efeitos da Nova Política Industrial sobre o Setor Automobilístico Brasileiro. Revista de Economia Política, 20 (3), Jul.-Sep., pp. 76-94. ZILBOVICIUS, M.; A. M. MELLO (2008) Setor de Veículos Pesados (Caminhões e Ônibus). Nota técnica do projeto ‘Uma agenda de competitividade para a indústria paulista’. IPT-FIPE, 2008.

23

Annex Table A.1.a. Brazil –Production, Exports, Imports Evolution and Vehicles Licensing (in units) Exports Production

Exports

New Vehicles Licensing

coefficient Total

Nationals Imports

Imports Coefficient Assembler Indepen- Total

Assembler

[D]

[E]

dents

[D/C]

[E/C]

Years [A]

[B]

[B/A]

[C]

1960 133.041

0

0,0%

131.499

131.499

0

0

0

0,0%

0,0%

1970 416.089

409

0,1%

416.704

416.704

0

0

0

0,0%

0,0%

1980 1.165.174 157.085 13,5%

980.261

980.261

0

0

0

0,0%

0,0%

1990 914.466

187.311 20,5%

712.741

712.626

115

115

0

0,0%

0,0%

1991 960.219

193.148 20,1%

790.773

770.936

19.837

4.688

15.149

2,5%

0,6%

1992 1.073.861 341.900 31,8%

764.016

740.325

23.691

16.742

6.949

3,1%

2,2%

1993 1.391.435 331.522 23,8%

1.131.165 1.061.467 69.698

52.900

16.798

6,2%

4,7%

1994 1.581.389 377.627 23,9%

1.395.403 1.206.823 188.580 158.833

29.747

13,5%

11,4%

1995 1.629.008 263.044 16,1%

1.728.380 1.359.332 369.048 321.011

48.037

21,4%

18,6%

1996 1.804.328 296.273 16,4%

1.730.788 1.506.783 224.005 200.609

23.396

12,9%

11,6%

1997 2.069.703 416.872 20,1%

1.943.458 1.640.243 303.215 273.938

29.277

15,6%

14,1%

1998 1.586.291 400.244 25,2%

1.534.952 1.187.737 347.215 318.333

28.882

22,6%

20,7%

1999 1.356.714 274.799 20,3%

1.256.953 1.078.215 178.738 161.110

17.628

14,2%

12,8%

2000 1.691.240 371.299 22,0%

1.489.481 1.315.303 174.178 146.140

28.038

11,7%

9,8%

2001 1.817.116 390.854 21,5%

1.601.282 1.422.966 178.316 158.331

19.985

11,1%

9,9%

2002 1.791.530 424.415 23,7%

1.478.619 1.363.377 115.242 103.806

11.436

7,8%

7,0%

2003 1.827.791 535.980 29,3%

1.428.610 1.354.807 73.803

67.909

5.894

5,2%

4,8%

2004 2.317.227 758.787 32,7%

1.578.775 1.517.053 61.722

56.451

5.271

3,9%

3,6%

2005 2.530.840 897.144 35,4%

1.714.644 1.626.683 87.961

80.263

7.698

5,1%

4,7%

2006 2.611.034 842.812 32,3%

1.927.738 1.785.372 142.366 130.411

11.955

7,4%

6,8%

2007 2.977.150 789.379 26,5%

2.462.728 2.185.645 277.083 241.865

35.218

11,3%

9,8%

Source: Self-Elaboration based on Anfavea (2008) and Sindipeças data (2008).

24

Table A.1.b. Brazil –Production, Exports, Imports Evolution and Light Vehicles Licensing (in units) Expor-

Exports New Vehicles Licensing coef.

Production tation

[B/A]

Imports coef.

National Total

Years [A]

[B]

1960 91.354

0

0,0%

89.497

1970 373.643

253

0,1%

vehicles

[C]

Imports

Indepen- Total

Assembler

[D]

[E]

dent

[D/C]

[E/C]

89.497

0

0

0

0,0%

0,0%

374.414

374.414

0

0

0

0,0%

0,0%

1980 1.048.692 135.717 12,9%

886.796

886.796

0

0

0

0,0%

0,0%

1990 847.838

173.956 20,5%

661.337

661.222

115

115

0

0,0%

0,0%

1991 887.912

180.435 20,3%

732.444

712.607

19.837

4.688

15.149

2,7%

0,6%

1992 1.017.550 323.809 31,8%

724.651

700.960

23.691

16.742

6.949

3,3%

2,3%

1993 1.324.665 312.520 23,6%

1.081.386 1.012.308 69.078

52.280

16.798

6,4%

4,8%

1994 1.499.817 354.811 23,7%

1.330.459 1.146.101 184.358 154.611 29.747

13,9%

11,6%

1995 1.536.866 248.210 16,2%

1.652.278 1.287.530 364.748 316.711 48.037

22,1%

19,2%

1996 1.738.273 282.516 16,3%

1.673.136 1.453.621 219.515 196.119 23.396

13,1%

11,7%

1997 1.984.403 397.359 20,0%

1.873.665 1.573.847 299.818 270.541 29.277

16,0%

14,4%

1998 1.501.060 379.531 25,3%

1.466.423 1.122.590 343.833 314.951 28.882

23,4%

21,5%

1999 1.286.503 261.813 20,4%

1.195.609 1.020.635 174.974 157.346 17.628

14,6%

13,2%

2000 1.596.882 355.978 22,3%

1.403.833 1.237.296 166.537 138.499 28.038

11,9%

9,9%

2001 1.716.522 377.190 22,0%

1.511.187 1.335.932 175.255 155.270 19.985

11,6%

10,3%

2002 1.700.146 412.175 24,2%

1.396.139 1.283.137 113.002 101.566 11.436

8,1%

7,3%

2003 1.721.841 513.840 29,8%

1.346.330 1.274.237 72.093

66.199

5.894

5,4%

4,9%

2004 2.181.131 720.190 33,0%

1.478.118 1.418.537 59.581

54.310

5.271

4,0%

3,7%

2005 2.377.453 839.863 35,3%

1.618.947 1.533.959 84.988

77.290

7.698

5,2%

4,8%

2006 2.471.224 788.633 31,9%

1.831.712 1.692.719 138.993 127.038 11.955

7,6%

6,9%

2007 2.801.011 732.734 26,2%

2.341.032 2.067.323 273.709 238.491 35.218

11,7%

10,2%

Source: Self-Elaboration based on Anfavea (2008) and Sindipeças data (2008).

25

Table A.1.c Brazil –Production, Exports, Imports Evolution and Trucks Licensing (in units) Exports Production

Exports New Vehicles Licensing

Imports Coef.

coef.

Total

National Imports

Assembler Indepen- Total

Assembler

Years [A]

[B]

[B/A]

[C]

vehicles [D]

[E]

dent

[D/C]

[E/C]

1960 37.810

0

0,0%

38.053

38.053

0

0

0

0,0%

0,0%

1970 38.388

122

0,3%

38.167

38.167

0

0

0

0,0%

0,0%

1980 102.017

18.977

18,6%

81.933

81.933

0

0

0

0,0%

0,0%

1990 51.597

8.371

16,2%

41.313

41.313

0

0

0

0,0%

0,0%

1991 49.295

6.416

13,0%

41.464

41.464

0

0

0

0,0%

0,0%

1992 32.025

8.915

27,8%

25.659

25.659

0

0

0

0,0%

0,0%

1993 47.876

11.049

23,1%

38.383

37.769

614

614

0

1,6%

1,6%

1994 64.137

14.532

22,7%

52.349

50.409

1.940

1.940

0

3,7%

3,7%

1995 70.495

8.700

12,3%

58.734

56.963

1.771

1.771

0

3,0%

3,0%

1996 48.712

8.545

17,5%

42.134

40.573

1.561

1.561

0

3,7%

3,7%

1997 63.744

12.438

19,5%

54.931

52.305

2.626

2.626

0

4,8%

4,8%

1998 63.773

14.550

22,8%

52.768

49.919

2.849

2.849

0

5,4%

5,4%

1999 55.277

8.498

15,4%

50.665

46.906

3.759

3.759

0

7,4%

7,4%

2000 71.686

9.293

13,0%

69.209

61.624

7.585

7.585

0

11,0%

11,0%

2001 77.431

6.762

8,7%

73.517

70.509

3.008

3.008

0

4,1%

4,1%

2002 68.558

5.475

8,0%

65.886

63.706

2.180

2.180

0

3,3%

3,3%

2003 78.960

12.820

16,2%

66.291

64.688

1.603

1.603

0

2,4%

2,4%

2004 107.338

25.650

23,9%

83.005

80.870

2.135

2.135

0

2,6%

2,6%

2005 118.000

38.312

32,5%

80.334

77.366

2.968

2.968

0

3,7%

3,7%

2006 106.001

38.188

36,0%

76.258

72.930

3.328

3.328

0

4,4%

4,4%

2007 137.052

41.213

30,1%

98.498

95.170

3.328

3.328

0

3,4%

3,4%

Source: Self-Elaboration based on Anfavea (2008) and Sindipeças data (2008).

26

Table A.1.d Brazil –Production, Exports, Imports Evolution and Buses Licensing (in units) Exports

Exports

Production Years [A]

New Vehicles Licensing Total

[B]

1960 3.877

Imports Coef.

National Imports

Assembler Indepen- Total

Assembler

Coef. [B/A] [C]

vehicles [D]

[E]

dent

[D/C]

[E/C]

0,0%

3.949

3.949

0

0

0

0,0%

0,0%

1970 4.058

34

0,8%

4.123

4.123

0

0

0

0,0%

0,0%

1980 14.465

2.391

16,5%

11.532

11.532

0

0

0

0,0%

0,0%

1990 15.031

4.984

33,2%

10.091

10.091

0

0

0,0%

0,0%

1991 23.012

6.297

27,4%

16.865

16.865

0

0

0,0%

0,0%

1992 24.286

9.176

37,8%

13.706

13.706

0

0

0,0%

0,0%

1993 18.894

7.953

42,1%

11.396

11.390

6

6

0

0,1%

0,1%

1994 17.435

8.284

47,5%

12.595

10.313

2.282

2.282

0

18,1%

18,1%

1995 21.647

6.134

28,3%

17.368

14.839

2.529

2.529

0

14,6%

14,6%

1996 17.343

5.212

30,1%

15.518

12.589

2.929

2.929

0

18,9%

18,9%

1997 21.556

7.075

32,8%

14.862

14.091

771

771

0

5,2%

5,2%

1998 21.458

6.163

28,7%

15.761

15.228

533

533

0

3,4%

3,4%

1999 14.934

4.488

30,1%

10.679

10.674

5

5

0

0,0%

0,0%

2000 22.672

6.028

26,6%

16.439

16.383

56

56

0

0,3%

0,3%

2001 23.163

6.902

29,8%

16.578

16.525

53

53

0

0,3%

0,3%

2002 22.826

6.765

29,6%

16.594

16.534

60

60

0

0,4%

0,4%

2003 26.990

9.320

34,5%

15.989

15.882

107

107

0

0,7%

0,7%

2004 28.758

12.947

45,0%

17.652

17.646

6

6

0

0,0%

0,0%

2005 35.387

18.969

53,6%

15.363

15.358

5

5

0

0,0%

0,0%

2006 33.809

15.991

47,3%

19.768

19.723

45

45

0

0,2%

0,2%

2007 39.087

15.432

39,5%

23.198

23.152

46

46

0

0,2%

0,2%

Source: Self-Elaboration based on Anfavea (2008) and Sindipeças data (2008).

27