Ford, VW team up to lead the auto industry in South America. Companies will link 15 plants in Brazilian joint venture
Detroit — By teaming forces in South America, the Ford Motor Company and Volkswagen hope to trim their costs while preparing for what could become a lucrative outpost for boosting Latin American sales and exports to the United States. In fact, both manufacturers are leading the way as the auto industry looks to South America, and Brazil in particular, as an alternative to Japan, South Korea, and other Asian automaking nations as a source for low-cost automobiles and components.
Ford and VW recently announced plans to link their 15 separate Brazilian and Argentine component and assembly plants under a new joint venture, AutoLatina. Volkswagen will be the dominant partner, with 51 percent.
The two carmakers plan to invest $1 billion in capital over the next five years, but while they stress that their goal is to increase their economies of scale by pooling research and development and production costs, they intend to maintain their independence when it comes to individual products and dealer marketing base.
There is the possibility, however, that they may team up to design and produce a passenger car that would be marketed by both companies in Latin America.
Together, VW and Ford have 1,500 dealers in Brazil and Argentina, with combined sales of about $4 billion. By far the largest market is Brazil, where Volkswagen holds a 43 percent share of the new-car market, and Ford 19 percent.
It is unclear at this point exactly how AutoLatina will affect the international plans the two carmakers have been developing for their Brazilian component and assembly lines.
Starting in early 1987, says US VW vice-president Jim Fuller, ``We'll have a Volkswagen for the low-priced, entry-level segment of the market for the first time since the Beetle'' was phased out in the 1970s. VW's Brazilian-made Fox is priced under $6,000, Mr. Fuller notes.
The company expects to import as many as 100,000 of the subcompacts annually, and, according to William Pochiluk, chief analyst for the Pennsylvania-based consulting firm, AutoFacts Inc., ``A lot of people inside the auto industry will be watching to see how well Volkswagen does.''
If the Fox proves a success, a number of other manufacturers could turn to that country for fully assembled automobiles. Many manufacturers already use Brazilian plants as a source for components, however.
Ford's Brazilian operations, for example, currently export two-liter engines and a small number of medium-duty trucks to the US. Brazil is a major source of 1.9-liter engines for General Motors' J-cars, such as the Chevrolet Cavalier.
``Brazil is the next major auto producing country,'' insists Stephan Sharf, who recently retired from Chrysler, where he was in charge of developing an international import and manufacturing strategy. ``That country provides a tremendous opportunity, and any company that avoids Brazil is stupid,'' he says emphatically.
For several years, Mr. Sharf has been encouraging other Chrysler executives to return to Brazil, where the company was forced to sell off its operations in the late 1970s to raise capital to forestall bankruptcy in the US.
Now, it seems, some important people at Chrysler are listening. ``We're looking very seriously at Brazil. We recently signed an agreement with the government for a major export program out of Brazil. We're developing an increasing number of long-term relationships with suppliers in Brazil,'' says Chrysler president Gerald Greenwald. He adds that these relationships focus ``on components, not vehicles,'' though there is also some indication that Chrysler may eventually try to negotiate a deal with Fiat, the fourth largest Brazilian auto producer, to ship subcompact cars to this country.
Like South Korea, the other rising star in the auto-export field, Brazil offers the advantage of a low-cost labor rate that can add up to hundreds of dollars saved on each small car, even taking into account shipping costs.
Then there's the fact that the Europeans and American carmakers have Brazil essentially to themselves. Of all the Japanese, only Toyota has an even minuscule presence, selling a few thousand pickup trucks.
Meanwhile, there is one significant difference between Brazil and South Korea. The Koreans have a relatively undeveloped auto infrastructure, relying heavily on components shipped to their assembly lines from Japan and the US. On the other hand, because of Brazil's domestic-content laws, virtually 99 percent of the parts used on assembly lines in that country are built in its own factories.
That is one major reason VW and Ford found it necessary to seek a greater economy of scale through AutoLatina.
Compounding that issue, because of the country's political, social, and particularly its economic problems, sales have tumbled in recent years, though they are slowly beginning to recover. They reached a high of 864,000 in 1979, and then fell to 459,000 by 1981.
That slump, combined with a government-ordered price freeze, is among the reasons VW of Brazil posted a $38.5 million loss last year.
The government is thawing prices, and a resurging economy should boost overall Brazilian car sales to 650,000 this year, but that still leaves tremendous unused capacity, which could eventually serve US and European carmakers hoping to come up with a way to battle low-cost Asian manufacturers.