Carmakers Flock to Brazil, Seeing It as 'China of Today'

The "land of the future" is becoming the hottest car market of today.

Brazil is "the land of tomorrow - and always will be," or so goes the old joke. Indeed, the country has frequently been on the verge of financial success, only to crumble under the weight of hyperinflation, mismanagement, and endemic corruption.

But times are changing, says Ivan Fonsecae Silva, president of Ford Brasil, with the auto industry leading the country's economic upturn. New-car sales are rising almost exponentially, and the auto industry is rushing into Brazil with dollars, German marks, and yen - an estimated $13 billion going into new plants and products before the end of the century.

"Brazil is the China of today," says Mark Hogan, president of GM do Brasil, a subsidiary of General Motors Corp. "It's our fastest-growing region and will continue to be until China and Southeast Asia come on board sometime after 2000."

Last year, GM lost nearly eight percentage points of market share here - not to competition, but simply because its factories couldn't keep up with the demand. GM is starting to claw back. It is opening a new plant in Argentina, which, with Brazil, dominates the Mercosur common market of four South American nations. And according to Mr. Hogan, GM is likely to add another assembly line in Brazil within the next two to three years.

Investments are mounting by the day. Consider what happened in April: Ford launched production of the Fiesta subcompact at its So Bernardo plant, capping a $750 million modernization program. Fiat unveiled the Palio, a small car aimed at developing-world markets, and is building it first in Brazil. Honda announced plans to invest $600 million in a new assembly plant. And Mercedes-Benz finalized terms for a $460 million factory that will build its new A-Class minicar.

The Mercedes plant, in the state of Minas Gerais, will be only the second major Mercedes assembly line outside Germany, and it's expected to serve as an export base for the rest of the Americas and perhaps even Asia.

But the bulk of all this new capacity is earmarked for Brazilian buyers and, to a lesser degree, those in other Mercosur markets. Barring another meltdown of the Brazilian economy, the carmakers still might have a hard time keeping up with demand.

Sales have doubled since 1992, and should top 1.7 million vehicles this year. Rising production could push Brazil past Canada on the list of the world's largest carmaking nations. By 2000, output is expected to reach 2.5 million to 3 million cars and trucks, with Brazil challenging Italy as the No. 5 producer.

A government austerity program has finally brought inflation under control. At the beginning of the decade, it surged as high as 10 percent a day. It's currently running at well under 2 percent a month. Banks are beginning to loan money again, though typically for just three months at a time. But it has begun to bring Brazil's emerging middle class back into the market.

The market was also spurred by a 1992 agreement between the auto industry, labor unions, and the Brazilian government. Manufacturers created a new class of stripped-down subcompacts, equipped with modest 1 liter engines and rock-bottom prices, while the government agreed that its generally steep taxes would be rolled back on this new class of vehicles. Today, these "popular cars" account for more than 50 percent of the Brazilian market.

Although they may be inexpensive, these cars are much more sophisticated than the costlier ones offered to Brazilian consumers only a few years ago. The Ford Falcon was sold, essentially unchanged, for 30 years. The new Fiesta is the same world-class sedan that was introduced in Europe only a few months ago.

As Brazil enters the top tier of carmaking nations, its workers are demanding world-class salaries. Assembly-worker costs average around $11 an hour - a figure that includes wages, benefits, and taxes - nearly the same amount paid British autoworkers.

Productivity is soaring: In 1990, 117,000 workers produced 800,000 vehicles. Last year, only 104,000 workers were needed to build 1.6 million cars and trucks.

Despite all the optimism, Brazil isn't entirely out of the woods. After a flood of foreign-made cars threatened to create a huge trade imbalance, government ministers jacked up tariffs on imported autos. And many investors pulled hard currency out of Brazil in the wake of the financial crisis in Mexico. The impact was even worse in Argentina, where new-car sales slumped 40 percent last year, and many companies, including Ford, had a hard time finding enough money to pay their workers.