The Restructuring of the Brazilian Automobile Industry in the Nineties

Mariano Francisco Laplane-NEIT/UNICAMP-Brazil - Fernando Sarti-NEIT/UNICAMP-Brasil


The automobile industry constitutes one of the most important and strategic segments of manufacturing in the industrialized countries due to its productive and technological links with other sectors of the economy both "downstream" and "upstream". In conjunction with the electronic complex, it today accounts for more than half of the products, employment and investments in electro-mechanics of the developed countries.

After suffering great instability during the eighties, the Brazilian automobile industry has undergone widespread production increases. An examination of the strategies of the car makers in Brazil makes the identification of important differences between them possible. However, all reveal a relatively adequate performance during the period from 1992-1995, reversing the productive and technological stagnation faced during the 1980s and the beginning of the 90s, which eventually put the survival of the local productive base at risk and complicated its incorporation of the growing internationalization of the sector. This recuperation may be seen not only in terms of the increase in production and productivity, but also in the return of investments and innovations in production and processes, although not yet with the same intensity characteristic of more advanced countries.

There is no consensus among experts about the factors involved and the degree of contribution of each of these factors in the recuperation of the level of activity. The objective of the present article is to analyze the factors which have contributed to this recuperation, as well as existing limits and those which will likely come to bear on its future development, above all when two of the main tendencies for restructuring the sector today are considered : growing globalization/regionalization and the impact of recent technological changes, especially in the supply structure.

1. Evolution of the Automobile Sector

1.1. International Scene

At the end of the 1960s, the automobile industry showed clear signs of having achieved maturity. Not only the products, but also the processes were technologically mature, as were the techniques of organization and management. The main markets were relatively saturated and the demands for automobiles in the developed countries was growing slowly. In the developing countries, however, automobile sales were booming. The industry was organized in the form of a large international oligopoly composed of three American companies (Ford, General Motors and Chrysler, which occupied the leading position) and various European companies (Volkswagen, Fiat, and Renault, among others).

The sector underwent profound changes after the second half of the 1970s, due to the raise in the prices of petroleum and attempts of Japanese companies to take over the leadership of the oligopoly. The Japanese threat and new market conditions induced innovative responses by other producers. In this way, the sector progressively lost the characteristics of a "mature industry" (Morales 1994a and 1994b).

During the 1980s, the recuperation of growth of the economies of the developed countries generated additional impetus for the revitalization of the automotive industry and created the potential for the transformation of the sector. The annual production of motorized vehicles (vehicles for passengers and light and heavy transportation) in the twenty major producing countries increased from 36 million units in 1982 to almost 49 million in 1989 (Table 1).

Due to its dimensions and dynamism, the American market was the first to be disputed by the Japanese car makers (Table 2). During the eighties, the instability in monetary exchange rates and protectionist restrictions stimulated significant direct investment of the Japanese car makers in the USA (at the end of the decade, the Japanese companies had the installed capacity to produce 1.3 million units in the USA). Canada and Mexico were transformed into support bases for the strategies of the Japanese and American companies although they also attracted large investments. Korean companies, allied with the Japanese and American manufacturers, took advantage of the favorable conditions to enter certain segments of the market. The large European companies progressively lost their share of the American market which they had taken over during the seventies.

The dispute for the expanding markets, under the conditions of great instability in monetary exchange and financing policies, as well as the serious commercial conflicts between the major developed countries and technical progress in microelectronics stimulated innovative initiatives by the producers. Technical, organizational and market innovations were the main target of competitive company strategies (Womack et alii, 1990). The new products developed tended to have a shorter life-span and involve greater "customization". Electromechanical devices were replaced by electronic devices. The use of lighter plastic and aluminum components increased ; more rigorous specifications for safety and reduction of pollution levels were introduced and there was a significant increase in the energy efficiency of vehicles.

The most important innovations, however, were introduced in the equipment used and in the organization of production. Since the 1960s, the Japanese companies had tried to develop production techniques which would enable them to compete actively, despite the limited scale of production in relation to American car makers. The aim was to make the use of the productive capacity more flexible, intensifying automation and reducing the stock of materials and components, which was possible once stricter and more agile forms of articulation with suppliers were developed (just in time, kanban, etc.) ; in this way, costs could be reduced and the quality improved. Under the conditons of instability and segmentation of the market during the eighties, these new organizational, production, and administrative processes proved to be more efficient, benefitting from technological advances, especially in computer technology (Coutinho, 1992 ; UNCTC, 1990 : cap. II.c.). The capacity to reach the market rapidly with 'customized' products and the production of high quality goods at a low cost became very important competitive advantages.

The competitive edge of car makers became increasingly dependent on an agile and efficient leadership capacity of the network of specialized suppliers and dealers. The response to the challenges of competition relied more and more on cooperative arrangements with suppliers and dealers for the identification and exploitation of market opportunities with those who had formerly been rivals. The division of work between the participants in the productive chain increased progressively, even to the point of the inclusion of R&D activities, which became the object of cooperative efforts. The introduction of simultaneous engineering made it possible to reduce the time required for the development of products, thus agilizing the capacity of response to market tendencies and reducing product life spans.

During the first half of the nineties market growth in the developed countries lost impetus and production remained stagnant. Recuperation after the 1990 to 1992 recession was slow and in 1995 output reached 50 million, only 2.4% above 1989 (Table 1). Developing countries, like Brazil, where markets experienced rapid growth became important frontiers for the expansion plans of world car manufacturers.

1.2 Panorama in Brazil

1.2.1. Instability in the Eighties

Although the Brazilian automobile industry did not remain totally isolated from the international tendencies of the 1980s, there was a limited participation of the Brazilian subsidiaries of the American and European car makers in the reorganization of the sector on a world level. During this period, the strategies of the car makers installed in Brazil were simultaneously a reflection of the strategies of the head office (mostly focused in competition in the developed countries markets) and the circumstances of the local market.

The Brazilian vehicle market accompanied the oscillations of the economy as a whole during the 1980s ; there was a decrease in gross sales of the car makers during the recession of 1981 to 1984 and a recuperation and expansion during the second half of the decade (Table 3). The deacceleration of the domestic market during the recession was partially compensated for by a significant increase in exportations (Table 4). The sales abroad, which in the second half of the seventies were concentrated in the segment of heavy vehicles, motors and components, expanded to include passenger cars as well. Despite an increase in importation, especially after 1986, the commercial balance of the sector improved (Table 4).

Instability was the most marked characteristic of the domestic market during the decade of the 1980s. In a relatively short period, the industry experienced phases of drastic reductions in sales (with thousands of vehicles parked in the lots of the factories) followed by equally expressive outbreaks of demands for cars (causing long waiting lists, agio, etc.). In addition to oscillations in supply of the final product, there was also instability in production, since continuous conflicts with suppliers, transportation firms and workers created constant obstacles for production and distribution.

Given these problems in supply and demand, the sector was unable to reach the level of production of 1980, even in the better years of the decade (1986 and 1988) (Table 5). The relative stagnation of the industry and instability in production were accompanied by only modest investment (Table 3). The productivity gains of the period seems to reflect a lack of adjustment between production and employment, rather than an actual tendency for increase associated with some sort of systematic effort towards modernization (Table 5).

During this time, however, the Brazilian automobile industry did not undergo such widespread and profound transformations as those verified in other producing countries. In general, the Brazilian subsidiaries did make selective efforts at modernization, not only of products but also of processes, and in certain instances and during specific periods, even served as bases for exportation to other markets where the head offices faced direct competition with the Japanese (Ferro, 1990). The limited investments in modernization can be at least partially explained by the unfavorable macroeconomic conditions (unfavorable exchange rates and financial imbalance), the instability of the domestic market, and the conflicts with economic authorities over price control during the various plans for stabilization. In this context, the head offices did not even consider investment in the local subsidiaries.

The instability of the period led to serious conflicts with the suppliers of automotive parts and workers, weakening the links of the productive chain. The heated conflicts involving these complexly interrelated interests was certainly not propicious for the adoption of cooperative procedures such as those implemented in various producing countries, especially Japan. In the second half of the decade, the car makers faced a long impasse with the government due to their resistance to the establishment of joint ventures with national firms for the supply of electronic systems and robotized equipment, as proposed by the National Computer Policy.

The various local car makers adopted different strategies, with General Motors and Ford following the lead of their head offices and introducing 'world cars' (Monza and Escort, respectively) during the first half of the decade. At that time, these 'world cars' constituted an important part of the American answer to the Japanese challenge. Volkswagen, on the other hand, continued its alternative strategy based on adapting the old Polo design for the development of a local model -- the Gol -- and a whole family of models based on it. Then, in the middle of the 1980s, Ford and Volkswagen announced the formation of the Autolatina, a strategic alliance to facilitate integrated action in the regional market. Fiat invested in the local production of the Uno and exported the Fiorino model to Italy.

On the heavy vehicle market, the local car makers assumed a more active role in the strategies of the head offices than they did in the case of passenger cars. Given the dimensions of the domestic market and the low cost of local production of buses and trucks, Brazil became an important pole for exportation of these vehicles to Latin America and the United States. Exportation also offered a solution for the parts industry under the unfavorable local market conditions prevailing during the eighties. Brazilian parts manufacturers thus became relatively less dependent on orders from the local car makers, as they gained direct access to the North American market.

1.2.2. Performance and Policy Changes in the Nineties

As was the case for all Brazilian industry, the automotive sector was submitted to an important change in protectionist policies early in the nineties (policy measures for the automobile industry in Brazil during the nineties are summarized in Table 10). In 1990 the Collor Administration announced a schedule for the gradual reduction of tariffs for the importation of vehicles in an attempt to stimulate competition and, hence, the modernization of products and companies. The goal was to reduce tariffs from 80% to 35% in a five-year period (1990-1994). Programs of financial incentives such as Befiex (fiscal benefits and special programs for exportation), which had benefitted the automotive sector greatly during the eighties, were now suspended. The Collor government also established fiscal incentives (a redution of taxes on industrialized products, the so-called IPI) to encourage the production and sale of small cars.

At the same time, the Collor Administration in Brazil and the Memen Administration in Argentina, together with the governments of Uruguay and Paraguay, initiated the process for the criation of Mercosul. The bilateral Economic Cooperation Agreements between Brazil and Argentina signed in the second half of the eigthies were thus replaced by stronger economic integration in the regional market.

The reactions of the car makers to these new conditions at the beginning of the 1990s were rapid, consisting mainly of bringing the production lines up to date, implementing plans made at the end of the 1980s, and integrating of Brazilian and Argentinian markets. The main beneficiary of the reduction in the IPI was Fiat, the only car maker at the time to have a model with a motor of appropriate size (up to 1000 cc).

During the two-year period from 1990-1991, the First Collor Plan induced a tremendous decrease in economic activity. Effects of the new economic picture on the automotive sector included a drop in gross sales and exportation, an increase in importation, and a reduction in production and jobs. On the other hand, investments grew from 500 million dollars a year to around 800 million (Tables 3, 4 and 5). Given the unfavorable conditions prevalent in the dometic market, the Mercosul became a new frontier for the car makers, since the Argentinian program of stabilization had resulted in a rapid growth in demand for motorized vehicles. Exports to Argentina expanded rapidly (Table 8).

In march, 1992, the agreement reached at the Sectorial Arbitration Process (ëC‚mara Setorialí), created conditions for the recuperation and expansion of the domestic automobile market. The negotiation of the Agreement prompted tripartite understandings, overcoming the climate of conflict between the car makers and suppliers, workers and government which had existed since the 1980s. In the Agreement, a 22% reduction of prices was negotiated (the margin of profit for the car makers was reduced by 7.5% and that of the dealers by 2.5%), as well as changes in the mechanisms and terms of financing, the maintenance of the level of employment, salary recuperation, and a reduction in taxes (reduction of the IPI and of the State Tax-ICMS).

Gross sales of the sector thus increased, as well as exportation and importation levels (Tables 3 and 4). The trade balance practically doubled in 1992. Despite the increase in the number of vehicles produced, however, the number of jobs remained the same, due to an increase in worker productivity in 1992. Investments reached 900 million dollars. Although the increase in productivity may have been the result of intensive efforts at modernization, it is worth noting that at least in part, it was also related to an increase in production due to the strategy of working overtime.

Renegotiated in February of 1993, under the Itamar Franco Administration, the Agreement brought further reduction of prices (10%), taxes (IPI and ICMS) and the margin of profit, while establishing production goals (2 million vehicles), investments (10 billion dollars) and an emphasis on exportation. In April, 1993, the Agreement was expanded by the Protocol of Fiscal Incentives (a reduction to 0.1% for the IPI, a further reduction of the ICMS and exemption from the payment of Cofins, a required social tax) for 'popular cars' with motors of up to 1000 cc. Price reductions for small car prices ranged from 12% to 22%.

Gross income and output growth (Table 3 and 5) show that, as a result of the new policy measures, the Brazilian automobile industry had a very strong performance in 1993. Production (1,391 thousand units) surpassed the 1980 level, investment and employment remained at their previous levels. Exports (mostly to Argentina, according to Table 8) grew, but expanding domestic demand made imports grow faster. As a result, the trade surplus fell by more than 50% compared to 1992.

In 1994, the sector again showed a very favorable results. Gross income and production grew significantly. The production of motor vehicles reached 1,582,900 units (13.8% more than in 1993), and approximately 380,000 vehicles were exported. Imports, however, had risen to 193,516 units, representing an explosive growth of 142% (of this total, 62% were imported by the car makers themselves). Given these figures, the internal market was approximately 1.4 million units. A large part of the expansion was due to the rush for 'popular cars', the segment where the car makers were focusing their efforts and increasing their production at the cost of the production of medium-sized and luxury cars(Table 7). Despite the increase in production and the introduction of new models by General Motors (Corsa) and Volkswagen (new Gol), the exaggerated expansion in demand -- driven by the sucess of the economic stabilization program (ëPlano Realí) -- led to the formation of long lines of would-be purchasers and the coverage of significant sums as agio in order to acquire a 'popular car'. This year confirmed the success of the strategy of Fiat in its bid for leadership, a result of efforts to bring its models up to date and diversify the array of models available, as well as the modernization and streamlining of the productive capacity, the emphasis on 'popular cars' for local production, and innovations in the area of marketing. While their competitors faced problems in the expansion of production and delays in the introduction of new models, Fiat capably dominated the expanding market. By the end of 1994, the company had surpassed the performance of Volkswagen, the previous leader in domestic production, although the relative position of the two firms was again inverted in the first semester of 1995.

The reacceleration of the market after 1993 and the success of Fiat seriously shook the local automobile oligopoly, leading to a new phase of heated disputes and profound transformations in the structure inherited from the 1980s. One important element here is that, in contrast to other markets, including those in the rest of the Latin America and Mexico, the absence of intensive participation of the large Japanese companies reduced the degree of competition in Brazil and Argentina, thus lessening the effects of the destabilization of the local oligopoly. Nevertheless, competition was strong among local car manufacturers and the oligopoly in Brazil gradually destabilized. The most visible signs of this destabilization were Fiatís aggressive expansion strategy, the introduction of new models by GM and Volkswagen, the increase of investments in modernization and expansion of capacity, the growing difficulty of car makers to coordinate their efforts in negotiations with the government, internal conflicts, and the rupture of strategic alliances (i.e., the break-up of the Autolatina).

A superficial evaluation might attribute the rejuvenation of a formerly 'mature' industry to the reduction of tariffs (which reached in 1994 the targeted level of 35%) and the threat of external competition. It involved, however, a much more complex process, influenced strongly by the reacceleration of sales prompted by the Agreement of the Sectorial Arbitration Process. The reduction in tariffs and the regional integration in the Mercosul introduced new incentives and provided new instruments for combatting competitors. However, the effects of the opening of a stagnant or highly instable market such as the Brazilian car market of the 1980s would not necessarily have been so great as those actually observed in the context of renewed growth. What actually happened was that the car makers showed they can take the initiative in the face of external competition and undertake massive importation. More important, however, was that not all of the local car makers had the same capacity for exploiting the 'popular car' boom. Hence, policy measures aimed at promoting that market niche in fact contributed strongly to the destabilization of the oligopoly and the reawakening of the sector.

In October, 1994, under intense political pressure because of the presidential election campaign, reacted to price increases and to consumer claims against the practice of agio by intervening in the automobile market. It unilaterally took the initiative of anticipating the reduction in tariffs (from 35% to 20%), originally planned for the year 2001. The car makers reacted by increasing importation and threatening to reconsider projects for investment in local production. They announced an even greater increase in importations for 1995, estimating that these would reach approximately 400 thousand units. Car makers were unanimuous in rejecting the reduction of tariffs, but had conflicting views on other issues. The lack of agreement within the oligopoly was obvious in the proposals made by Volkswagen, Ford and General Motors to renegotiate the Agreement of the Sectorial Arbitration Process, and increase taxes on 'popular cars', while reducing those on medium-sized vehicles. Fiat obviously opposed these modifications, as they would have weakened the strength of its position based in its leadership in the ëpopular carsí niche.

The conflict in interests between car makers, the failure of the government to take a firm stand, and the insatisfaction of parts suppliers and workers became obvious in the Sectorial Arbitration meeting in February 1995. In the aftermath of the december 1994 Mexican crisis, the Fernando H. Cardoso Administration, concerned with the increasing volume of importation of vehicles and with growing trade deficits, decided to increase the tariffs again (initially from 20% to 32%), leaving the program of gradual reductions (to 20% by the year 2001) to be worked out with the Common External Tariffs (TEC) of the Mercosul ; the IPI on popular cars (which had been reduced to 0.1% in the previous Agreement) was raised again to 8%, although no concomitant reduction for medium-sized vehicles was introduced (as asked by General Motors, Ford and Volkswagen). The increase in tariffs reflected the concern of the government about the effect of the importation of vehicles on the trade balance. The increase of the IPI seems to have been motivated more for fiscal reasons in an attempt to acquire for itself some of the funds otherwise being diverted to agio.

In march, 1995, importation tariffs for consumer goods, including vehicles, were increased to 70%, in an attempt to reduce the growing trade deficit. This measure implied restoring nominal protection for the automotive industry almost to the levels enforced before 1990. In fact, effective protection was higher, since tariffs for components had been reduced compared to pre-1990 levels.

In June, 1995, the government signed a provisional measure (MP 1,024, modified by the MPs 1,947, 1,073, and 1,165) setting quotas for the importation of vehicles (which could not surpass 50% of the number imported in the first half of 1995. Although these quotas faced strong reaction from other countries, the system remained in place, together with the 70% tariff for importation of cars. After negotiations with the Argentinian government, imports from that country were excepted from the new restrictions. In addition to these emergency measures aiming at improving the trade balance, incentives were adopted to attract investment to Brazil : tariffs for the importation of machines, equipment, and raw materials (parts, petrochemicals and metalworking) were established at 2%, although these importations were linked to exportation performance ; moreover, measures defining an accelerated depreciation of capital goods were also adopted. This new policy for the automotive sector was very similar to the one enacted by the Argentinian government since 1991. These new measures, were the object of severe criticism by the major local suppliers of the car makers (raw materials, equipment and parts manufacturers), concerned about possible reductions in the level of nationalization of locally-produced vehicles and a consequent shift to foreign suppliers.

Measures to restrain consumption were also enforced. A reduction in credit terms, and the suspension of formation of new "consórcios" (temporary associations formed for the purchase of goods, especially cars) led to a certain deacceleration in the expansion of the sector during the second half of 1995.

In spite of slow growth in the second semester, the performance of the automobile industry was very favourable in 1995 as a whole. Gross income grew and production reached a new record of 1,629,000 units (Tables 3 and 5). Importation of vehicles also reached a new record of 369 thousand units, 73% of which were imported by local subsidiaries of car manufactures. Most of the importations (299 thousand units) concentrated in the first semester. This explains why the government enacted strong restraint measures in june of that year. Nevertheless, the significant increase in the value of imports and the fall of exports resulted in a huge sectorial trade deficit that year (Table 4).

2. Main Trends in the Transformations in the Automobile Sector of Brazil :

The previous section showed that from 1990 to 1995 the Brazilian automotive sector traversed a phase of great changes. Three aspects of this process are worth special attention, in order to assess the prospects for the second half of the decade : market growth and investment, a greater degree of internationalization and specialization, and the reoganization of the productive and distributive chains.

2.1. Market growth and investment

The good performance of the automotive industry during the period from 1992 to 1994 allowed car manufacturers to operate at full capacity. Investments, organizational changes and increases in the number of shifts in the productive units, had made it possible to elevate productive capacity -- from 1.4-1.5 million vehicles up to 1.7 million in 1995.

At the end of 1995, car makers predicted significant growth for the domestic market in the second half of the nineties. The projections made by the National Association of Manufacturers of Motorized Vehicles (ANFAVEA) suggested that the Brazilian market at the turn of the century might be absorbing from 2.5 and 3.0 million vehicles per year, which implied an annual rate of growth of 9-12%.

Two important factors supported their optimistic assessment of long run growth potential. One of these was the elevated number of inhabitants per automobile (11.5), which compares quite unfavorably to the average of advanced countries (2.5 for the European Community ; 1.7 for the USA and 3.0 in Japan) and even that of other developing countries (6.9 in Argentina). Another important factor was the advanced average age of the Brazilian fleet.

Integration with the Argentinian market also contributed to the optimistic long run market assessment. The Argentinian market surpassed 500,000 units in 1994 (408 thousand produced locally and 137,000 imported ; 38 thousand vehicles were exported). Together, Brazil and Argentina represented in 1994 a market of approximately 2 million units, a size similar to that of the market of Italy, France, or the United Kingdom (Table 2). Regional production integration in the first half of nineties generated intense trade flows between the two countries, not only of completed vehicles, but also of parts and components. Moreover, car makers can count on the productive capacity installed in the two countries, and expansion programs can consider complementary operations. Thus, despite the 1995 slowdown in demand and production of vehicles in Argentina, which resulted from the recession caused by the Mexican crisis, car manufacturers felt optimistic about the opportunities offered by the regional market.

Expected market growth, plus the stiffening of competition between the companies already installed in the country and the threat of the entrance of new competitors created favorable conditions for the investment in the Brazilian automobile industry. Lack of the required investments would result in increasing importations and trade deficits or would force demand restraining measures (with inflationary impacts).

In 1995, the car makers gave clear signs to the government of the need for consolidation of "the local industry as the principal supplier of of the internal market, limiting importation to the minimum to complement the availability of vehicles" (Anfavea, 1995 :11) ; only "if the Brazilian automobile industry is permitted to exercise its rights to be the principal supplier of the national internal market will it reach a size sufficient in scale to improve its position on the international level." (ANFAVEA, 1995 : 12) (underlining by authors).

Local car manufacturers were in fact asking the government to restraint importations in exchange for investment. They had already shown they could engage in massive importation to supply the local market and fight external competitors. Investment would allow larger scale economies and would allow local production to become competitive, preventing large trade deficits or avoiding demand restraining measures. On the other hand, timely investments by local manufacturers would turn more dificult the entrance of new car makers, above all the Japanese and Koreans, who could tend to destabilize the local (or regional) oligopoly even more.

The policy implemented by the Brazilian government in 1995 in fact aimed at promoting investment by severely restraining importation. Thus, government and car manufacturers aparently agreed on the diagnose of the required measures to ensure further expansion and modernization in this sector. As already mentioned, unions and parts suppliers were not as enthusiastic. Unlike the Sectorial Arbitration Process, the new policy did not involve employment or wage targets. In spite incentivating the use of 60% of locally produced parts, the new policy crearly allowed higher importations of equipment, parts and components by local car manufacturers. Independent vehicle importers also reacted strongly against the quota system.

After the new policy was implemented, local car manufacturers announced large investment projects for the second half of the decade. The investments planned by the makers of cars and light commercial vehicles summed up to approximately 5.5 billion dollars by the year 2000 : Volkswagen with 2.5 billion ; Ford with 1.1 billion ; General Motors with 950 million ; Mercedes Benz with 400 million (for the production of vehicles) ; Scania with 150 million ; and Fiat with 250 million.

Volkswagen of Brazil initiated the building a new factory for the assembly of trucks and buses in Resende (Rio de Janeiro), since the unit in Ipiranga in São Paulo had passed to Ford during the breakup of the Autolatina. Investments were also started to expand the production of cars -- especially the new Gol, the vehicle most sold on the domestic market --, by means of the adoption of a third shift in the unit in Taubaté. In addition, the building of a new factory for small-sized motors (for 'popular cars') was started in São Carlos, SP (with an investment of 250 million dollars), with an eye to the domestic market and that of the Mercosul.

Ford of Brazil also programmed new investments after its separation from the Autolatina, including modernization of the factory in Ipiranga and the introduction of a new small model (the Fiesta) into the country. The lack of a new ëpopular carí model costed Ford severe market share losses in 1994/95, so investments in this project were urgent. The existing unit in Taboão (which was left to Ford in the dissolution of the Autolatina) was also modernized.

General Motors of Brazil, which in 1995 had two productive units, one in São José dos Campos and the other in São Caetano do Sul, had plans for the construction of new units. These investments were seen as necessary to expand the production of the Corsa. The company itself attributed its loss in participation in the Brazilian market to the exhaustion of its productive capacity. GM had 28% of the Brazilian market in 1990 but in 1994 this had dropped to 20%, and the company relinquished the second place to Fiat. This drop was attributed principally to the strategy of the home company not to invest in 'popular cars', but rather to concentrate on more sophisticated models to maintain greater per-unit profitability. The introduction of the Corsa was felt to have been late and problematic, with pervasive bottlenecks in the productive structure (especially during the painting phase). In 1995, the increase in production was made feasible by the reorganization of the existing installations, with the adoption of a third shift in São José dos Campos and the transfer of assembly lines for the D series pickups to Argentina (besides owning a factory in Córdoba, GM of Brazil also announced the building a new factory in Rosario (Argentina).

Fiat invested in expanding productive capacity during 1993 and 1994, increasing its production without building new plants. In this way it could expand its market share while the competitors faced capacity shortage and bottlenecks. With the installation of the fourth assembly line in Betim, this strategy seemed to have reached its limit. Investments in Argentina were started in 1995 for the arrival of a new model (Palio/Project 178), to be produced also in Brazil.

Massive investments announced by local manufacturers did not prevent new competitors from expanding or starting their activities in Brazil. Toyota, which was already installed in Argentina and manufactured the utilitarian Bandeirante in Brazil, decided to expand its Brazilian operations to furnish parts for the production of the Hilux Pickup in Argentina. Other Japanese and Korean companies also announced investments in Brazil : Honda, Asia and Kia. Renault, which already operated a factory in Argentina, announced the construction of a plant in Curitiba (Brazil) for manufacturing the Megane model. Mercedes Benz, which already manufactured trucks and buses, decided to build a new factory in Juiz de Fora (Brazil), with an investment of 400 million dollars for the manufacture of its new A-Class model. Moreover, it announced plans to transfer all of its activities in the manufacture of trucks and buses from Argentina to Brazil. Facilities in Argentina were adapted for the production of vans.

2.2. Growing Internationalization and Productive Specialization

The previous section identified an important change in the strategies of world car manufacturers in the face of recuperation and rapid growth in the entire Mercosul market. In the first half of the nineties, Brazil and the surrounding region were again included in the growth strategies of these companies. The size and the expansion of both national and regional markets lead to a focus on Brazil as a central target for commercial, administrative and productive operations in the Mercosul region.

The profile of local activites is the result of regional market features, of the protective structure adopted and other policy measures. During the first half of the nineties, policies for the automobile industry in Brazil (and in Argentina as well), stimulated local assembly of vehicles, with 60% content of local components and allowed low tariff importation of parts and equipment in exchange of exportation. Importation of asssembled vehicles from outside the Mercosul region was restricted, both by high tariffs and quotas. Therefore, internationalization, during the first half of the decade was mostly restricted to regional boundaries.

As for specialization in the production mix, the policy of promoting 'popular cars' led to a specialization in small vehicles, basically to supply the domestic and regional market (intra-industry trade whithin Mercosul). In the case of buses and trucks, Brazil had a favorable international presence outside Mercosul.

By promoting and facilitating a greater flow of trade between Brazil and Argentina and uniting the two consumer markets, the formation of the Mercosul stimulated car makers to adopt a strategy of even greater specialization in regional production for small models, with productive integration between Brazil and Argentina for benefits based on larger production scale to accrue. This productive integration already became a reality in the regional trade flow, even prior to the criation of Mercosul, facilitated by the simultaneous action of the car makers in the two countries. Volkswagen, Ford, Fiat, and General Motors were all active in both countries in the first half of the nineties. For the manufacture of commercial vehicles, Scania and Mercedes Benz were also present on both sides of the border. Renault which initially had assembly lines only in Argentina, decided to invest also in Brazil.

Also in the parts segment, extensive regional integration occurred, resulting in the installation of subsidiaries of Brazilian manufacturers in Argentina. According to the National Union of the Industry of Components for Motor Vehicles (SindipeÁas), by 1994, 25 Brazilian companies were already installed in Argentina, in addition to 12 in the phase of installation, and 33 conducting feasibility studies ; one other company has established a joint venture with an Argentinan company (Gazeta Mercantil, March 2, 1995).

Trade conflicts involving the automotive sectors of Brazil and Argentina became bitter during 1995. Argentina had already adopted a policy which aimed at attracting investments in 1991 (decree 2,677/91), which established, among other things, a) the elevation of importations tariffs from 20 to 40% for cars and from 26 to 42% for light commercial vehicles, while maintaining the percentage for heavy commercial vehicles at 42% until 1999 ; b) the linking of importation to exportation, with compensations permitted annually or over various years ; c) the establishment of an importation tariff of 2% for parts and vehicles for the car makers in the country with a positive commercial balance, although it was 18% for other companies ; d) the establishment of quotas for the importation of private vehicles (10%) and commercial vehicles (15%) in relation to the domestic production. Although Brazilian parts were accepted as national in the calculation of the minimum of 60% national parts, for exportation of parts to Brazil each dollar in exported mechandise permitted the importation of merchandise worth $1.20. The cheaper importation of components from international suppliers was felt to provide an unfair advantage for Argentina, as the tariff in Brazil was 18% instead of 2%.

When the Brazilian government announced in 1995 the new measures to regulate the automotive sector, however, it provoked great hostility in Argentina. The Brazilian policy was designed to provide enough incentives to attract investment by car makers to Brazil, and the adoption of a special 2% tariff for machinery, equipment, and raw materials (for car parts, petrochemicals and metalworking) matched that of Argentina. As mentioned above, the new brazilian policy initially established quotas and 70% tariffs on the importations of vehicles from Argentina, an action which generated vociferous protests from the authorities of that country. Although the Brazilian automobile sector had indeed shown a noticeable trade deficit after the reduction of tariffs to 20% at the end of 1994, Argentinian importation were not responsible for much of this deficit (Table 9) ; moreover, Brazil had a considerable surplus in the bilateral sectorial exchange, motivated principally by the explosive growth in exportations (Table 8). Given these facts, Brazil rescinded the policy and conferred preferential treatment to Argentinian imports.

A reconciliation between the two national policies of the two countries was inevitable, and some sort of common tariff was necessary for productive integration of the automotive industry in the region. According to Mercosul agreements the common external tariff would be reduced to 62% in January of 1996, to 30% in April 1996, to 28% in 1997, to 24% in 1999, to 22% in the year 2000, and finally to 20% in 2001.

2.3 Reorganization of production chains and of distribution

The world automotive industry operates as a network constituted by a large number of specialized producers of parts and components of the most diverse types. The operation of this network of suppliers leads to serious problems in planning and control for the car makers. The network of manufacturers supplying the car makers, either directly or indirectly, is largely internationalized. This reduces costs, and car makers can deal with suppliers located on various continents through global sourcing. On the other hand, the existence of important regional markets, with specific characteristics and of a reasonable scale, makes the establishment of more compact networks of suppliers with a certain geographic proximity between suppliers and assemblers an interesting option. The first option has the advantage of providing high quality parts at competitive prices. The second option stimulates cooperation and facilitates joint learning about the peculiar conditions of the specific local and regional market. In practice, most car makers tend to adopt a combination of the two types of solutions, depending on the existing opportunities and the nature of the markets and the components involved.

The car makers also control a large network for the distribution of vehicles and replacement parts, through which they interact with the consumers. Car makers must take over the functions of planning and control of distribution. The operation of such networks of supply and distribution locates car makers in a powerful situation of controling a flow of great quantity, complexity and intensity, not only of merchandise, but also of financial resources. The efficiency of administration of financial flow is essential for profitability of the operation, especially under inflationary conditions. Articulation with the banking system is another important aspect of the situation and depends, in addition to negotiation and alliances, on the support of an adequate infrastructure for communication.

Finally, the implementation of simultaneous engineering projects posses challenges for the capacity of planning and control of the car makers. In this case, the difficulties do not involve only the problems of planning and administration of projects of cooperative development, but also the complexity of the flow of information itself (data and images) between participating companies. The cost, speed and reliability of the infrastructure of communications are important elements determining the feasibility of such undertakings.

In Brazil, the revitalization of the sector has been accompanied by the reorganization of the chains of production and distribution so that the position of the car makers is strengthened. In relation to the suppliers, besides increasing importations, this reorganization reduced the number of suppliers and increased the pressures for cost and delivery time reductions. In relation to distributors, in spite of the attempts by car manufacturers to increase control over dealers and to enhace the flexibility and agility of response to demands of the market, changes were modest.

2.3.1.Supply Networks

In the seventies and eigthies, the market for vehicle parts and components in Brazil was mostly supplied by local production. Small and medium sized brazilian firms were very active in the domestic market and some of those firms sucessfully exported their products to developed countries. During the first half of the nineties, visible tendencies of the vehicle assemblers in Brazil, were an increase in the use of imported parts, a reduction in the number of direct (first tier) suppliers, as well as greater interaction and cooperation between car makers and manufacturers of auto parts. The average number of direct suppliers for the automotive makers in Brazil has been reduced from five hundred in the 1980s to three hundred in 1994.

This process accompanies the international trend and is linked with the initiatives of the car makers to reduce the number of platforms (and motors) on the assembly line in order to make the development of new products less expensive and facilitate the adoption of a strategy of specialization. The reduction in the number of direct suppliers permits a more intense interaction with the car makers, which can then pass on certain responsibilities for the organization of the respective segments upstream in the production line to these suppliers. The new hierarchical structure of supply makes an economical scale of production and scope feasible, as well as permitting greater control over the number of components and raw materials maintained in stock and frees the car makers for more concentrated efforts in the development of products, marketing and coordination and control of the chain.

This new structure increases the market power and the control which the car makers exert over the first tier suppliers, especially when they become exclusive suppliers (single sourcing). These are required to absorb the inefficiencies and cost pressures of the suppliers upstream without necessarily being able to pass on increases to the car makers. Moreover, they must be capable of meeting the demands of the car makers as to delivery terms, quality, specifications, development of innovations, etc. On the other hand, the direct suppliers receive support from the car makers in the form of training, technical assistance, and, especially, regular orders.

Given deficiencies in transportation and telecomunications infrastructure in Brazil, geographical proximity to suppliers results in competitive advantages by avoiding complex logistics. This strategy was sucessfully exploited by Fiat, which in the early nineties developed a program for attracting progressively more suppliers to its base in Minas Gerais (Brazil). In contrast, General Motors and Ford faced bottlenecks caused by logistic problems in the importation of parts for new models when attempted to expand production rapidly in 1994/95.

New investments in Brazil are being used to assess the potential of new configurations of supply systems. In Volkswagenís new truck factory in Resende, the assembly line takes the form of a "consortium", with each of the modules under the coordination of an independent supplier, each of which assumes the responsibility for the mounting of a special set of parts (chassis, axle, cab, transmission, motor, etc.). Such a ìconsortiumî for the assembly of vehicles carries the strategy of specialization to the extreme. The reduction of vertical integration and the subcontrating drastically should reduce costs for fixed capital, as well as demands for circulating capital.

2.3.2.Distribution Networks

The network for distribution of vehicles in Brazil is extremely concentrated. ANFAVEA members network comprised aproximately 2,650 dealers in the first half of the nineties. Distribution networks are also highly regulated, both by government and by car manufacturers.

Rapid growth during the fist half of the decade put strong pressure on distribution networks. Independent importers had to establish new sales networks as well as repair services and parts distribuition. Distributors of local manufacturers had to deal with imported models and face consumer complaints for supply shortage of ëpopular carsí. Conflicts over profit margins of cars and services, as well as over number of cars delived to dealers were as widespread as in the eighties.

Car manufacturers innovated to increase the control of their distribution networks, since efficient distribution became a competitive edge in the growing market. An example of sucessful innovation was that of Fiat's 'Uno On Line' system implemented in 1994 to combat agio and reduce the waiting time for a car. In 1995, a similar system was implemented for the model Tipo. The company developed a program which gave dealers access to Fiat's data bank so that information about the progress in manufacturing of specific vehicles ordered could be obtained. But, in spite of pressures, conflicts and innovations, distribution systems in Brazil did not experienced significant changes.

3. Conclusions

Throughout the 1980s, the world automobile industry underwent a marked loss of the characteristics of a 'mature' industry and began showing signs of rejuvenation in the major developed markets. Paradoxically, however, the situation of the brazilian automotive industry was quite different. During the seventies, it had been a dynamic entity, arousing great optimism for future develoment, but the eighties ushered in a period of great frustration. Conflicts between car makers, suppliers, dealers, workers, government and consumers were widespread. The conditions thus established suggested the need for a shock treatment to revitalize the sector and encourage its restructuring. Since the industry was a closed oligopoly, the opening of the market was seen by many to be main weapon for modernization and the reduction of prices to levels closer to those encountered on the international scene.

As has been seen in this article, since the beginning of the nineties, the Brazilian automotive industry has indeed been submitted to a successive series of shock treatments : the opening of the market, a severe recession, the strengthen of regional integration with the Mercosul, the concession of incentives for small cars (1990), the Agreements in the Sectorial Arbitration Process (1992 and 1993), fiscal incentives for 'popular cars' (1993) an explosion in sales after the economic stabilization plan, the reductions of tariffs to 20% ahead of schedule (1994), the return of tariffs to the level of 32% and the reduction of incentives for 'popular cars', a new increase in tariffs levels to 70% and the imposition of quotas, the creation of incentives to attract investment (1995).

By the end of the first half of the nineties, it was obvious that the Brazilian automotive industry had not only overcome the stagnation of the past decade, but that it had survived the general economic instability of the country, taking important initiatives to bring its models, production processes and means of administration up to date. It is also undeniable that this industry presents clear signs of rejuvenation, with a stiffening of competition between the various car makers already installed in the country, especially in the face of the threat of the entrance of more companies. The acceleration of investments is the most visible sign of this revitalization.

Although the reduction of tariffs did encourage changes in the sector, the restructuring of the Brazilian automotive industry was also driven (and more effectively) by other factors, such as the policy measures the reactivated the domestic market -- particularly the small cars niche --, and the establishment of Mercosul.

The back and forth oscillation of policies concerning tariffs in the first half of the nineties has clearly shown that the effectiveness of tariff reductions as a policy for promoting competition in the brazilian automobile industry is restricted. The reasons are obvious. In first place, a restriction on the balance of payments imposes limits on the capacity to import. Thus, the use of the opening of the market as an instrument for the modernization of the sector faced objective limits. In second place, over the past few years, the car makers already installed in the country have shown that they were capable of efficiently neutralizing the threat of foreign competition, taking the initiative in the area of importation themselves and thus effectively reducing the power of tariffs to disarticulate the local automobile oligopoly.

At the end of 1995, local car manufacturers had won the battle against the threat of importations, since the government decided to protect the domestic market and promote local investment. The Mercosulís common tariff reduction schedule establishes that 20% tariffs will be reached only in 2001. In exchange for protection, car manufacturers offered large investments and exportations to balance to some extent their imports of vehicles, machinery, parts and components.

The government, in turn, expected that policy measures would succeed in enhancing the revitalization of the sector, especially with the adoption of innovations similar to those incorporated abroad in the past decade, such as the reduction of costs, an increase in quality, a shortening of development time for products, and a reorganization and strengthening of the links of the productive chain. The success of the strategy choosen by the Brazilian government will depend, to a large extent, in its ability to promote competition among car manufacturers already established in Brazil and on the credibility of the threat of entrance of new competitors.

At the end of 1995 there was some evidence of positive results (investments in productive capacity expansion, new models and the announcements of the entrance of Renault, Mercedes Benz, Toyota, Honda, Asia and Kia). It was too early, however, for a final assessment. It was also too early to assess international reaction to the new measures.

What seems clear is that the Brazilian government set, in 1995, the policy framework for the restructuring of the automotive industry in the second half of the nineties. Such framework has, so far, the support of local car manufacturers. Given such policy, local production will be expanded and importations restrained. Regionalization of investment, production and trade is one important feature of the restructuring of the automotive industry in Brazil. Especialization in small cars is another visible feature. In spite of the increase in the use of imported parts and components, local production will remain an important source of supply for local car manufacturers. Exportations of parts and components, mainly to the regional market will also expand. The reorganization of supply systems will result in strong pressures on local parts suppliers.

Post Scriptum

This article was originally written in early 1996, to be presented at the Gerpisa International Colloquium held in Paris in june of that year. The present revised version benefited from valuable comments by Mario S. Salerno, to whom the authors are grateful.

At the time this revised version was being prepared for publication (february 1997), data on the performance of the Brazilian Automotive Industry in 1996 was already available. Optimistic estimates made at the end of 1995 became true. Production reached a new record of 1,800,000 units (11.3% above 1995), 367,000 units were exported (20% more than in 1995) and importations decreased to 224,000 (39% less than in 1995). Given these figures, the brazilian market for vehicles grew to 1,657,000 units. The size of the domestic market in Argentina in 1996 was 390,000 units, hence the brazilian and the argentinian markets added, in 1996, to 2,047,000 units. Regional integration continued intense, almost half (103,000 units) of brazilian importations came from Argentina, while more than 93% of argentinian exportations went to Brazil. Brazilian car manufacturers took advantage of the policy that allowed importations with lower tariffs (35%), in exchange for exportations, by importing machinery, parts and components and vehicles (160,000 units, which represented more than 70% of total importation of vehicles). After strong international pressure, the quota system was changed in august, 1996 : independent vehicle importers were granted quotas to import 47,500 units with a 35% tariff. Additional importations would have to pay the full 70% tariff.

More investments were announced during 1996 : General Motors started three new plants in São Paulo, Santa Catarina and Rio Grande do Sul States ; Volkswagen inaugurated its engine plant in São Carlos, initiated production in Resende and started to build a new plant in the State of Parana (allegedly for assembling Audi A3 and Vento units) and Fiat inaugurated its new Palio plant in Cordoba (Argentina) in december. New competitors (Chrysler and BMW) also announced investments. Toyota and Honda are building instalations allegedly destined to assemble CKD models of Corolla (15,000 units per year) and Civic (30,000 units per year) models, respectively. After gaining fiscal incentives from the State of Bahia, ASIA announced it will build there a plant for Towner and Topic models. Skoda announced that it plans to build a plant for trucks in the State of Santa Catarina. Investments in progress and projects announced imply a significant expansion of productive capacity, in addition to creating new poles of productive activities mostly outside of the State of São Paulo.


Table 1 - World Motorized Vehicle Production (1)

1981-1995 (in thousands of units)
YEAR1981 19821983 19841985 19861987 1988
WORLD PRODUCTION37.230 36.11339.726 41.73944.279 45.23345.680 48.616
ANO1989 19901991 19921993 19941995
WORLD PRODUCTION 48.989 48.19146.502 47.58048.428 49.64950.169

(1) Twenty main producing countries.

Source : Anfavea.


Table 2 - Major Motorized Vehicle Markets (1)

1981-1993 (in thousands of units)

1981 1983 1985 1987 1989 1991 1993 1994 1995
USA10.629 11.90115.564 15.06114.953 12.53914.199 15.41115.116
Japan5.127 5.3825.557 6.0187.257 7.5256.467 6.527na
Germany2.479 2.5712.513 3.0693.005 4.4913.457 3.470na
France2.169 2.3642.108 2.5232.723 2.4242.007 2.299na
Italy1.948 1.5631.760 1.9772.520 2.4951.999 2.139na
United Kingdom1.703 2.0602.119 2.3262.672 1.8011.975 1.764na
Canada1.173 1.0541.310 1.4791.455 1.2931.189 1.219na
Brazil581 728763 580762 7711.061 1.3971.728
Spainna nana na1.422 1.126913 1.087na

(1) Licensing of new vehicles in the year.

Source : Anfavea.


Table 3 - Brazilian Automotive Industry : Gross Income and Investments

1980-1995

Year Gross Income Investments Inv./Income (%)
198011.952 4884,1
19819.157 6447,0
198210.500 5295,0
19839.938 3723,7
19849.783 2923,0
198512.428 4773,8
198611.914 5254,4
198712.806 5794,5
198814.458 5723,9
198913.406 6014,5
19909.997 7897,9
199110.275 8808,5
199212.761 9087,1
199314.785 8856,0
199423.542 1.1955,1
199524.476 1.6946,9

Source : Anfavea.


Table 4

Brazilian Automotive Industry Trade Balance - 1974-1995 (US$ million)

Year Exportation Importation Balance
1974202 348-146
1975334 30232
1976385 235150
1977490 226264
1978610 292318
1979759 276483
19801.101 524577
19811.566 4681.098
19821.154 318836
19831.187 367820
19841.433 3941.039
19851.603 4351.168
19861.487 656831
19872.453 8261.627
19882.617 6951.922
1989 2.570 6781.892
1990 1.897 7331.164
1991 1.915 8481.067
1992 3.012 1.0781.934
1993 2.622 1.809813
1994 2.689 2.550139
1995 2.415 4.795 -2.380

Source : Anfavea.


Table 5

Brazilian Automotive Industry : Production and Productivity - 1980-1995

Year Production
(units thousands)
Employers
(thousands)
Productivity
(vehicle/employer)
1980 1.165 1338,7
1981 780 1037,5
1982 859 1078,0
1983 896 1018,9
1984 864 1078,0
1985 966 1227,9
1986 1.056 1298,2
1987 920 1138,1
1988 1.068 1129,5
1989 1.013 1188,6
1990 914 1177,8
1991 960 1098,8
1992 1.073 10510,2
1993 1.391 10613,0
1994 1.582 10715,6
1995 1.629 105 15,6

Source : Anfavea.


Table 6 - Market Share in the Importations of Vehicles by Type of Importers

(number of units)

1992 (%) 1993 (%) 1994 (%) 1995 (%)
ABEIVA 10.388 3234.444 4373.289 38101.453 27
CAR MAKERS 14.545 4540.444 50120.227 62267.564 73
INDEPENDENT 7.309 225.050 6n.a. n.a.n.a. n.a.
TOTAL 32.242 10079.938 100193.516 100369.017 100

Source : BNDES (1995) and ANFAVEA.


Table 7 - Distribution of Brazilian Automobile Production per Segments (%)

VEHICLE

1995 (a) 1994 1993 1992
1.000 C.C. "popular cars" 60 45 29 16
Up to 100 hp20 35 51 66
More than 100 hp 20 20 20 18

Source : BNDES (1995) and ANFAVEA.


Table 8 - Brazilian Exportation of Vehicles to Argentina

(in thousand units)

Year 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
Exportation to Argentina 24,331,0 45,830,8 37,183,6 204,7231,6 266,9159,5
Percentage in total (%) 138 1411 1943 6069 7159,3

Source : Anfavea


Table 9 - Brazilian Importation of Automobiles

(percentage by origin)

Jan/May - 1994 Jan/May - 1995 Jan/oct -1995
Argentina 13,66% 5,91%5,2%
Italy 28,92% 12,39%25,1%
Germany13,70% 39,06%18,0%
USA13,24% 11,95%7,9%
France5,86% 9,82%n.d.
Others21,32% 19,00%28,1%
Total (US$ million) 954 1.072 2.852

Source : Journal "O Estado de São Paulo" jun/1995 and MF/RF.


Table 10 - Policy for the Automotive Industry in Brasil (1990-1995)
Collor Administration1990-1992 1990 : Schedule for tariff reductions (80% to 35%) from 1990 to 1994. Financial incentives suspended, Non-tariff barriers eliminated. Fiscal incentives (IPI tax reduction) established for small cars. Mercosur initiative with Argentina, Uruguay and Paraguay.

1992 : Sectorial Arbitration Process (C‚mara Setorial). Targets for prices, output, investment, exportations, employment and wages were negotiated by car makers, suppliers, unions and government. Tax reductions (IPI and ICMS) were enacted to promote demand growth.

Itamar Franco Administration1993-1994 February, 1993 : Sectorial Arbitration Process Renegotiated. New targets are set.

April, 1993 : Tax incentives were granted for ìpopular carsî : IPI falls to 0.1%, ICMS reduced and exception from COFINS.

October, 1994 : government reacts to agio and price increases by lowering tariffs to 20% (which was the target for the year 2001).

Fernando H. Cardoso Administration
1995-February, 1995 : new meeting of the Sectorial Arbitration Process (tariffs are increased again to 32%, IPI for ëpopular carsíincreased to 8%).

March, 1995 :tariff increased to 70%.

June, 1995 : new policy established by government (importation quotas are set, tariff reduction to 2% for equipment and components linked to exportation performance, investment incentives - accelarated depreciation - granted). Car imports from Argentina excepted from new measures.


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