Carmakers launch new wave of investments

Until recently, Renault’s Brazilian operation imported from Turkey aluminum parts used in the engines it makes in São José dos Pinhais, Paraná. Last year the carmaker decided to build its own aluminum-injection plant. It will be opened early next week. About 700km from there, in the interior of São Paulo state, Volkswagen not only ceased to depend, two years ago, on imported crankshafts from Germany, but now will make the other way round. The company has just signed a contract to export the engine part it produces in São Carlos to a plant of its parent in Chemnitz, eastern Germany.

The auto industry is undertaking a new investment wave, which comes largely because of the increase in the domestic production of components, stimulated by the incentives of federal program Inovar-Auto, ended in December. But it is not only that. A good part of the idle capacity, which marked the industry’s crisis, is beginning to be utilized thanks to the recovery of the domestic market and the winning of new contracts abroad.

Some carmakers planned new investments, others expanded their existing ones. Their plans for a period ranging from 2014 to 2022 add up to more than $30 billion in projects spread across several cities. But most of the funds will be disbursed in a shorter period — between 2017 and 2020. Practically all of them are also adding new shifts, with the return of workers who were temporarily laid off and some hires.

Most of the new investments, result of projects that began being designed about two years ago, were announced in the last quarter of 2017, when industry leaders were encouraged by the economic environment, which included the passage of the government’s spending cap and a calendar of reforms that seemed firm. “Two years ago the heads of carmakers felt that Inovar-Auto offered predictability,” says the vice president of General Motors Mercosur, Marcos Munhoz.

A large portion of the announced investments will be used in the modernization, localization of production and expansion of capacity of engine factories. Renault has invested R$750 million to make its own aluminum parts and modernize foundries. The project involved 2,000 people in 11 countries. In Joinville, Santa Catarina, GM has just increased its engine plant’s capacity fourfold. The company intends to turn the operation into an export platform.

GM announced the largest and longest investment program. A total of R$13 billion will be spent between 2014 and 2020. In addition to expanding the engine production, the company is modernizing factories and preparing to launch new vehicles. Renewing the lineup is also the main goal of VW, which in late 2017 announced a R$7 billion plan to launch 20 vehicles by 2020. Of those, 13 will be produced in Brazil. Nissan planned R$750 million for its Resende, Rio de Janeiro factory.

The updating of industrial facilities means machinery purchases. GM’s program allocated R$1.2 billion for its oldest plant in Brazil, in São Caetano do Sul, São Paulo. Most will be spent on new machinery. Mr. Munhoz cites the ones purchased in Brazil: automatic conveyor systems, plastic-stamping systems and devices for body assembly.

GM uses its own funds to invest in Brazil, Mr. Munhoz says. VW also resorts to Brazilian Development Bank (BNDES) loans, says Pablo Di Si, its president in South America.

The need to invest in expanding engine factories comes largely from exports, both of engines and vehicles. Mr. Di Si says he has been working to sign contracts with at least five new markets outside Latin America to sell cars produced in Brazil. From São Carlos go the engines that equip the Jettas and Golf built by VW in Puebla, Mexico. Recently, the Brazilian unit began shipping engine blocks to the Polo and up! Models produced in Germany. In 2017 VW exported $5.4 billion, almost one-third of all Brazilian exports of vehicles and auto parts.

Toyota will use R$1 billion to build a new model in Sorocaba, São Paulo, the Yaris, and more R$600 million to increase the capacity of its engine assembly line in the neighboring Porto Feliz. This plant is an example of investments that emerged from Inovar-Auto. Since it set foot in Brazil, in 1958, Toyota imported all engines for the cars produced in Brazil. But because of the new requirements of the automotive program, in 2016 it began manufacturing the engines in Brazil.

“I was in Brazil between 2000 and 2002 and well recall the type of car we had,” Mr. Di Si says, defending Inovar-Auto. Praising the advances in terms of fuel efficiency and technology in the cars, guaranteed by the automotive program that was in effect between 2012 and 2017, has been the way industry leaders find to try to convince the federal government to adopt a new program, which is practically ready. But the Ministry of Finance rejects the idea of granting carmakers more tax incentives for research and development.

The truck industry is also planning investments to renew products. Mercedes-Benz will disburse R$2.4 billion from now to 2022. Scania raised to R$520 million from R$100 million its annual average investment in the São Bernardo do Campo, São Paulo, plant, adding up to R$2.6 billion between 2016 and 2020. MAN is in the middle of a R$1.5 billion program, its largest ever, to be concluded by 2020. Last year, Volvo announced a R$1 billion plan to be disbursed between 2017 and 2019.

Both in the truck and car segments the outlook also encourages companies to open new work shifts. The factories of VW in São Bernardo do Campo and of GM in Gravataí, Rio Grande do Sul, are operating with three shifts. Mr. Munhoz says GM is studying also reviving the third shift in São Caetano do Sul, and Toyota considers doing the same in Sorocaba for the first time in its history. Volvo announced a few days ago it would hire workers temporarily to have a second shift in Curitiba, Paraná. Moreover, Mercedes and MAN workers have been doing overtime on some Saturdays, something companies used to do in the past but that disappeared during the crisis.

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