Tony Danby reports on how Chinese and other OEMs are investing in local production and distribution in Brazil.

Although the Brazilian market has seen a slowdown in vehicle sales over recent months, the country is still a hotbed of automotive investment. The National Association of Automotive Vehicles Manufacturers (Anfavea) reports that $5 billion was invested by vehicle and agricultural machinery makers in 2011. Moreover, Anfavea estimates that a new cycle of investment totalling $22bn has been earmarked up until 2015. For instance, General Motors has announced plans to invest R$470m ($261m) to build a factory in Santa Catarina state, while Ford will pump R$400m into another plant in the northeastern Bahia state.

Beside investments by these existing players, the arrival of Chinese manufacturers has also been notable. The first Chinese-made vehicles entered Brazil in 2006, while Effa Motors, Chery and CNAuto (which is a holding company for the Chinese brands Hafei and Jinbei) started importing cars and small trucks into the country in 2008 and 2009, followed in 2011 by the arrival of JAC, a carmaker that quickly picked up around 1% of the market, selling around 30,000 cars.

brazil-2To date, the Chinese cars have been mainly built in China or from knockdown kits in Uruguay, then shipped to Brazil. However, under pressure to reduce lead times as well as to avoid a 30% tax hike targeting exports outside the Mercosur trade bloc, these Chinese carmakers are moving towards local production in Brazil. JAC and Chery have both announced plans to build factories–JAC promoting a 50-50 JV with SHC, while Chery will be a direct subsidiary of the Chinese company. Effa and CNAuto are also developing plans to set up production in Brazil.

These investments and new players are sure to drive increased demand for supply chain and logistics services within Brazil, as well as internationally with China.

Chinese players become established

China-made cars are now widespread in the market and increasingly visible in showrooms and on the streets of major cities. According to Monica Jorgino, director of operations at JAC Motors Brasil, the carmaker now has 70 points of sale and it plans to expand to 100 outlets by the year-end. JAC expects to sell close to 40,000 units in 2012.

According to Jorgino, JAC used to import the cars through the port of Vitoria, about 500km north of Rio de Janeiro, but now the manufacturer is directly shipping its vehicles from Shanghai straight to the northeastern city of Salvador in Bahia state. After customs clearance at the port, JAC distributes the vehicles to the dealers nationwide.

The port is near to JAC’s future plant location, where it will invest R$900m. JAC selected Bahia state because of its proximity to suppliers, consumer markets and logistics facilities, says Jorgino. As JAC is still finalising its plans, it will only take decisions about contracting logistics service providers for its production operations at a later date, she says.

Because of the large volume, burgeoning market demand and current long lead times from China, Jorgino says JAC needs to be able to react faster to market changes. “We need to adjust our operations–in terms of production, colour mix, model and shipment dates–to be very fast and very flexible,” she says, adding that, while Brazilian and Chinese cultures vary widely, they converge in their flexibility and ability to react quickly, something that is important in managing logistics, too.

For the aftermarket, JAC currently has a central warehouse in Barueri, in São Paulo state, which is operated by an in-house team. The 15,000m2 space, in operation for just a year, handles about 700 tonnes of parts and receives around 10 containers per month.

The company uses best practices from its Chinese operation for logistics. “Our partner [JAC China] has in-depth experience in logistics and managing supply chains, along with good relationships with many shipping and transportation companies. For sure we will share those experiences for our plant in Brazil,” Jorgino says.

Chinese pick-up business

CNAuto sold 13,500 units on behalf of Hafei and Jinbei in 2011, mainly light commercial vehicles and mini-vans. CNAuto’s CEO, Ricardo Strunz, says the segment for LCVs is growing at twice the rate of the passenger car sales.

CNAuto receives vehicles from China by vessel and unloads them at Vitoria port. Then Brazul, a local vehicle logistics provider, collects the vehicles at the port and trucks them to around 70 independent retail dealerships.

To save costs, Brazul often sends full loads of vehicles to major urban centres in the southeast region, then shares its loads with other brands on the route back to Vitoria. In this way, the transport process is more economic.

CNAuto owns two logistics centres in Brazil, both staffed by in-house teams. The main PDI centre is based at Vitoria port, with a nominal capacity to handle 100 vehicles per day. CNAuto manages a kind of assembly line for a wide range of PDI activities, including a final inspection and any paintwork.

The logistics team also carries out alterations to vehicles that are specifically required for the Brazilian market, such as adding fire extinguishers or certain self-destructing identification tags on the vehicle. The company also needs to make adjustments to engines that function using gasoline, which is mandatorily blended with ethanol in Brazil.

Meanwhile, for aftermarket logistics CNAuto joins JAC in running a parts centre in Barueri in São Paulo state, which handles and prepares service and spare parts to be sent to dealerships.

Like JAC, CNAuto is now assessing setting-up its own manufacturing operation in Brazil. According to Strunz, CNAuto expects to establish a joint venture partner, the location and the volumes over coming months.

Strunz admits, however, that the plant will be in the south or southeast of the country, because the poor upkeep of the highway infrastructure makes moving vehicles across long distances a challenge. “Poor quality highways and lack of rail, ocean vessel and waterway [transport] mean that you need to be close to a port, close to the supply chain, and close to a consumer market”, he says.

The CEO explains that the decision to open a plant is largely the result of the recent tax hike on imported vehicles. Strunz now expects CNAuto’s sales will remain steady at around 13,000 units in 2012 as prices rise because the import taxes have risen to 35% compared to 5%, previously.

Strunz complains that decision-making is difficult due to a lack of clarity from the government, which has wavered over when the tax may be withdrawn and other measures aimed at encouraging local sourcing. “Making a prediction for 2013 and beyond is crystal ball time,” he says. “As an entrepreneur, there is still no clear picture about government policy for the sector.”

Incumbents remain strong

The challenges of delivery also remain complex for established players in the market. Mauricélio Gomes Faria, Fiat’s director of logistics in Latin America, says the carmaker’s operations need to be more competitive and better organised to avoid distribution bottlenecks.

Carmakers and LSPs alike will need to tackle an aging and often inadequate infrastructure. Although the government’s infrastructure programme, known as PAC, has various motorway, port and airport projects, these are often behind schedule and some are not even underway. Faria says that the priorities need to be the improvement of roads, the development of rail, a reduction of red tape related to fiscal issues and taxes and large-scale investments in the ports and airports.

To help manage its inbound logistics operation, Fiat, which has its main factory in Minas Gerais state, also has a consolidation centre in São Paulo to optimise the transport for each region and the carmaker receives and stores a large volume of imported components here, with the rest moving directly from the suppliers to the plant.

LSPs eye new business

Despite the recent sales drop, the arrival of new manufacturers and development of the established players is being seen positively among LSPs.

“We are always looking for new business and talking to potential new players in the market,” says JSL’s Simões. “We have many conversations with these manufacturers before they enter Brazil, and as we know the market, we can advise on issues such as costs or location,” he says.

JSL, one of the country’s largest LSPs, generates around 10% of its sales from the automotive sector. Simões says that, increasingly, these services are becoming more complex. There is a current trend for more sequencing, which means that LSPs need to carefully deliver items to assembly lines and ensure they are delivered on time and to the right place.

Looking for opportunities

Hernan Barrientos, director of business development at global logistics provider Ceva, says that Chinese manufacturers’ new operations and plants will bring opportunities to LSPs. “Chinese manufacturers are starting plants and we are focused on helping them at the earliest point of these projects,” he says. For example, Ceva recently signed an agreement for customs clearance services with a Chinese manufacturer whose name Barrientos does not reveal.

brazil-3“Ceva is investing further in Brazil’s automotive sector. Warehouses will be set-up according to our customers’ needs and contracts–a consolidation centre in the south of Brazil is being doubled to accommodate a client’s needs, for example.”

One of Ceva’s best relationships in the sector is with GM in Gravataí, in the south. Ceva is responsible for GM’s operations in the São Paulo and Rio Grande do Sul states.

The partnership between the two companies, which began 13 years ago, has evolved to encompass material management, parts packaging, supply line and assembly of suspensions and engines. Besides these operations, Ceva is responsible for global material management and monitoring the flow of international goods, an example of Ceva’s end-to-end supply chain management strategy, says Barrientos.

Tuning logistics operations

Matthew Davies, FedEx’s managing director for sales, says the company has introduced new distribution methods to improve logistics.

brazil-4FedEx Brazil, which has five world service centres and three cargo aircrafts for the country, developed a project allowing GM to send auto parts from a single point of origin to hundreds of recipients in another country.

Using the FedEx international priority direct distribution solution, GM consolidates the parts and has them clear customs as a single shipment. In GM’s previous distribution model, Brazil exported to Mexico and other countries through the use of hundreds of air waybills. When the parts reached their destination, GM would then need to subcontract a third party to deliver each package to its distributors and dealers.

Davies says now, the entire air shipment leaves Brazil consolidated as a large unit, which then receives faster clearance by customs. FedEx also delivers every package to each local recipient in the destination country, which eliminates the need for warehouses and intermediaries.

To help meet the high demand ahead, Davies adds that logistics companies are trying to overcome obstacles such as the education gap. The industry tries to compensate by providing technical training and qualifying new employees, he says. This allows the sector to perform better and should lead to a better service for customers. It’s an approach that would help the entire Brazilian automotive logistics sector.