The Inovar-Auto program in Brazil, its objectives and the automakers adhesion

Type de publication:

Conference Paper

Source:

Gerpisa colloquium, Paris (2020)

Résumé:

Purpose
The State has a central role in the development of industry structures in different sectors. In emerging countries, this role is even more relevant because national companies face competition from large global oligopolistic groups. In this sense, public policies are used as State instruments which guide the evolution of specific sectors. In Brazil, an industrial sector of economic relevance in terms of GPD participation is the automotive sector. The automotive industry established in the country has historically benefited from public incentives.
A tax incentive that promoted substantial changes in the automotive Brazilian sector was Inovar-Auto. Implemented in 2012, effective until 2017, the Inovar-Auto program was an industrial policy of the Brazilian government that provided tax incentives to automakers, with a counterpart to investment in technological innovations. More than stimulating investment in Research and Development (R&D) (with a focus on incremental innovations), Inovar-Auto HAS also established goals for nationalization of autoparts purchases, as a way to reinforce the chain effects to local suppliers, and regulated aspects of consumption efficiency and pollutants emission. One of its goals was to attract new investments - either by expanding the companies already established in the country or through the arrival of others that did not yet produce on national soil.
This paper aims to evaluate the Inovar-Auto program development in terms of the Brazilian automotive sector modification, through the participating projects analysis, namely to describe the projects of the companies that participated in Inovar-Auto, evaluating its effectiveness, such as automakers who proposed to install factories, or expand their operations. In addition, the study analyzes three facts that occurred during Inovar-Auto and interfered in its progress: the difficulty in controlling the rules defined by the State requiring national content, the complaint in the World Trade Organization (WTO) that the program contradicted international agreements, and the economic and political crisis that began during the execution of Inovar-Auto.

Design
For the evaluation of the automakers projects, developed under the Inovar-Auto program, a research was carried out on two fronts: on one hand, a documentary survey was carried out, with collection of secondary data, on the other, public authorities or class association (employers and workers) professionals who participated in the Inovar-Auto program were interviewed, with the application of a semi-structured questionnaire, between 2017 to 2019.
Official documents from the then Ministry of Development, Industry and Trade (MDIC) were consulted. By the metrics of Brazilian government, Inovar-Auto surpassed the goal of new investments, reaching 146% of the predicted value. From this observation, the hypothesis that Inovar-Auto was a successful public policy and that it leveraged investments was raised, increasing the automotive market standard in Brazil. Two fronts of analysis to test this hypothesis were developed: an analysis of automakers participation, case by case, during the program, through scientific and journalistic publications; and, finally, an analysis of external factors that helped or hindered the execution of the program, confronting such factors with the perspective of THE actors who participated in the elaboration and development of Inovar-Auto.

Findings
When observing Inovar-Auto based on the goals of Brazilian government, the program was highly successful. Even the WTO dispute settlement, which could be taken as a possible criticism of its elaboration, proved to be a successful strategy. And as for the companies’ adhesion, despite the fact that there was a relevant dropout rate, the program implementation as a whole resulted in something that, although it was not a stated goal, can be considered as a positive effectiveness for the actors involved: the postponed installation of manufacturing plants in Brazilian territory by Chinese automakers.
This result, namely the exit of Chinese companies from the program (namely, Chinese companies drawing out of the program), with the consequent postponement of the local subsidiaries installation, resulted IN a market protection for the national chain actors’ business, given the possibility of Chinese cars gaining Brazilian market, during world crisis, post-2007/2008.
The analysis of the individual cases of the companies that participated in Inovar-Auto also showed that there was a predisposition for these companies to settle in Brazil even before the program launching, due to the fact that it was a rapidly growing consumer market. On the other hand, when the country faced a political and economic crisis after 2013, the program was weakened, inhibiting the desired positive effects. Therefore, the analysis showed that the limits and scope of Inovar-Auto cannot be related only to the factors intrinsic to the program formulation itself, namely to its incentive and evaluation instruments, requiring to consider, in addition, factors such as competition between companies in the local market and dynamics of the relationship between the government and civil society at a time of political crisis and economic recession.

Practical and theoretical implications
Based on the analysis of Inovar-Auto, as a State incentive program aimed at a specific sector in an emerging country, the present study highlights the difficulty that the emerging country State has in acting in the architecture of a dominated economy sector by global oligopolistic groups. The practical implication highlighted in the analysis is the demonstration of the difficulties faced by a country like Brazil, an economy considered emerging, in directing incentives to a sector dominated by foreign companies of the USA, Europe and Japan (and more recently South Korea), aiming to generate local investments in R&D (in addition to increasing the rigor of controlling pollutant emissions). As the case of Inovar-Auto reveals, there was even an unfavorable result for Chinese companies, also belonging to another emerging country, which, in the same process, have confronted the sector's global dominance.

Texte complet:

THE INOVAR-AUTO PROGRAM IN BRAZIL, ITS OBJECTIVES AND THE AUTOMAKERS ADHESION

Tiago Bernardino Vargas and Geraldo Augusto Pinto

Abstract: The tax incentive policy for the Brazilian automotive sector Inovar-Auto was in effect from 2012-2017. Despite its legislative complexity, the program served, additionally to the explicit objectives, a common interest of the national automotive chain actors: the protection of the internal market in the face of imports. During the program development, other aspects interfered with its effectiveness, such as the difficulty of traceability, the questioning of WTO, and Brazil's economic and political crisis during this period. This study qualitatively analyzes the objectives of Inovar-Auto and the adhesion of the automotive industry; based on documents, secondary data, and interviews with actors from from organizations that participated in the elaboration and execution of the program. It is concluded that the program has achieved, in addition to its explicit objectives.

Keywords: Inovar-Auto; Automotive Public Incentives; Automakers.

1 Introduction

The State has a central role in industrial development in different sectors. In emerging countries, this role is even more relevant, as companies installed in their territories are confronted with those of other countries, especially when it comes to national companies in the face of global oligopolistic groups. In this context, public policies are used as State instruments that direct the evolution of specific sectors. In Brazil, an industrial sector of economic relevance in terms of GDP participation is the automotive sector. The automotive industry installed in the country has historically benefited from public incentives. A fiscal incentive that promoted substantial changes in the national initiative was Inovar-Auto implemented in 2012 and effective until 2017.

The Inovar-Auto program was an industrial policy of the Brazilian government that aimed at creating tax incentives for companies in the automotive industry to invest in technological innovations. More than stimulating investment in Research and Development (R&D) for improvement in specific technical areas (with a focus on incremental innovations), Inovar-Auto also established nationalization goals for auto parts purchases, as a way to reinforce the chain effects in local suppliers, and regulated aspects of consumption efficiency and emission of pollutants. One of its goals was to attract new investments - either by expanding the industries already installed in the country or by the arrival of companies that did not yet produce on national soil.

This paper aims to evaluate the development of the program in terms of modification of the sector through the analysis of the projects participating in the programs, to describe all projects that participated in Inovar-Auto and their effectiveness, for example. These automakers installed themselves from the program and automakers that expanded their operations. Additionally, the study analyzes three facts that occurred during the program, and that interfered in its progress: the difficulty of controlling the rules defined by the State of the requirement of national content, the complaint in the World Trade Organization (WTO) that the program contradicted international agreements, and the economic and political crisis that began during the execution of Inovar-Auto.

For assessing the developments of the Inovar-Auto program, applied research was conducted with a qualitative approach. For this, documentary research and secondary data collection were carried out. Professional interviews were carried from the public sector, trade union and employer associations who participated in the formulation of the Inovar-Auto program, with the application of a semi-structured questionnaire, in the period from 2017 to 2019.

First, official documents from the then Ministry of Development, Industry and Trade (MDIC) were consulted. By the federal government's metrics, Inovar-Auto surpassed the goal of new investments, reaching 146% of the predicted value. From this observation, the hypothesis was raised that Inovar-Auto was a successful public policy and restructured the automotive market in Brazil. Two analyzes were used to test this hypothesis: analyzing the participation of automotive companies, case by case, during the program through scientific and journalistic publications; and, analyzing external factors that contributed or hindered the execution of the program, confronting the perspective of actors who participated in the elaboration and development of Inovar-Auto.

This article is divided into five sections, including this introduction. In the second session, the objectives of Inovar-Auto will be discussed. In the third session, the development of Inovar-Auto is presented based on the adhesion of the automotive industry and three facts that marked the initiative's execution. In the fourth session, the results are discussed. And in the last session, the practical and theoretical implications of the study results are presented. At the end of the article are the references that were cited throughout the text.

Finally, it is essential to emphasize that the people interviewed in this investigation were chosen because they participated directly in the process of constituting Inovar-Auto while working in organizations in some way linked to the automotive industry. That does not mean that their opinions are consensual in these organizations and, therefore, cannot be taken to represent these organizations' official position in the face of the research questions.

2 Inovar-Auto's objectives

The elaboration of the Inovar-Auto Program started in 2011, during the first term of President Dilma Rousseff, and it will take effect in 2012. Ended in 2017, it was a policy of incentive to technological innovation and densification of the motor vehicle production chain.

The incentive was destined to three types of companies: those that manufactured in the national territory the products covered by the program (in short, automobiles, light commercial vehicles, trucks, and buses or chassis with engines); those that had projects for new industrial plants to manufacture them; and those that marketed products in the country (Brasil, 2012a).

To qualify for the program, companies must meet two mandatory requirements and three optional requirements. The mandatory requirements were the fulfillment of fuel consumption efficiency targets and the maintenance of a typical situation concerning federal taxes. As for optional requirements, companies could choose which ones they would meet. In the case of passenger car manufacturers, they should choose three out of four, which were: reaching a minimum level of nationalization percentage of parts and operations; the same concerning the percentage of revenue in expenditure on research and development; ditto the percentage of the income of the expenses on engineering, basic industrial technology, and supplier development; and, finally, participation in the Brazilian vehicle labeling program (Brasil, 2012b).

In short, analyzing only the Inovar-Auto legislation, it is understood that, in essence, it provided tax incentives to vehicle assembly companies that met energy efficiency requirements for their products and investments in technological development in the country. Otherwise, the economic incentive aimed to benefit the local industry, aiming at national technological development.

However, from reading the program's legislation, it is possible to question whether the intended purposes were different or not for each company involved. In addition, to the explicit purpose in the legislation, it is fair to ask whether there were different expectations on the part of the participating companies, whether they belong to the same sector (such as automakers) or different sectors (importers, assemblers, auto parts manufacturers, companies of capital goods, etc.). In order to investigate, semi-structured interviews were carried out with specialists working in organizations linked to the automotive chain in Brazil, who had some participation in Inovar-Auto.

Inovar-Auto, as part of a sectorial industrial policy, sought to meet businesspeople's interests linked to the automotive industry, especially large corporations such as automakers. But both its formulation and its results were also related to the interests of the working class, the metallurgists. As a starting point of analysis, to ascertain these different class actions and their different results, one can start by the context in which Inovar-Auto is promulgated.

The global financial crisis that started in 2007 in the USA substantially impacted the Brazilian automotive trade balance. Considering the period from 2006-2012, after 2008 there was an increase in vehicle imports, while exports remained at the same levels.

The trade balance for vehicles in 2006 had a positive balance of US $ 4,687 million, arriving in 2012 with a negative balance of US $ 5,917 million (ANFAVEA, 2019). The trade balance data points to a trend of loss of market for national vehicles to those imported into Brazil. When analyzing the number of car licenses in the country, it can be seen that, although national car licenses increased by 59.6% from 2006 to 2012, the percentage of imported vehicle licenses in relation to the total of vehicles licensees went from 6.4% in 2006 to 21.7% in 2012. In turn, the domestic market expanded, reaching a total of 3,115,223 licensed cars in 2012 (ANFAVEA, 2019).

These two conditions - growing market and increased imports - express the context of Inovar-Auto and appear in the narrative of two interviewees linked to union organizations in the Brazilian automotive sector, a director member of a metalworkers union (Union Member, 2018) and a member of a Brazilian union statiscs organization (Statiscs Member, 2018):

[...] that was a significant impact that year, 2010. [...] I think the domestic imported market has grown to over one million cars, historically extrapolating the share of imported ones in Brazil. And the big international automakers that did not have plants in Brazil, set up operations to explore the Brazilian market via import, not via local production: "look, in a little while, we will no longer have an assembler here like that, the Chinese coming here, how will it be?" [...], and the government had to do something (Union Member, 2018, our translation).

When Chery announces that it will arrive here, it promises to arrive with a car, at the time, at the price, if I'm not mistaken, of around 12 and 13 thousand of Brazilian Reais, while the entry car in Brazil was 22 [thousand Brazilian Reais]. So the Chinese threaten to arrive here in Brazil with a car at half of the price. Well, that puts automakers in panic, in general (Statiscs Member, 2018, our translation).

Inovar-Auto was designed under a spectrum that surrounded the Brazilian industry: the spectrum of Chinese products. Workers, automakers, auto parts, and capital goods companies in the automotive chain have awakened to the possibility of losing their position concerning imports. And they organized themselves to face this reality. Each entity had its skills, and after continuous debate and negotiation with the federal government, Inovar-Auto was created.

3 Automaker's adhesion and Inovar-Auto development

After Inovar-Auto had been promulgated, the automakers' adhesion was unanimous. But the execution had its intricacies. Among the facts that disrupted the program's operation, the following stand out: the autopart national content traceability and complexity of monitoring; the complaint at the World Trade Organization (WTO); and, the economic and political crisis.

In 2012, in the first ordinance enabling the program, all 20 manufacturers that already had facilities in the country were already listed: Agrale SA, Caoa Montadora de Veículos SA; Fiat Automóveis SA; Ford Motor Company Brasil Ltda .; General Motors do Brasil Ltda .; Honda Automóveis do Brasil Ltda .; Hyundai Motor Brasil Montadora de Automóveis Ltda .; International Indústria Automotiva da América do Sul Ltda .; Iveco Latin América Ltda .; MAN Latin America Indústria e Comércio de Veículos Ltda .; Mercedes Benz do Brasil Ltda .; MMC Automotores do Brasil Ltda .; Nissan do Brasil Automóveis Ltda .; Peugeot Citroën do Brasil Automóveis Ltda .; Renault do Brasil SA; Scania Latin America Ltda .; SVB Automotores do Brasil SA; Toyota do Brasil Ltda .; Volkswagen do Brasil Indústria de Veículos Automotores Ltda .; and, Volvo do Brasil Veículos Ltda (MDIC, 2018).

At the first moment, seven companies with eight investment projects in the country also qualified for the program. MMC Automotores do Brasil Ltda. (Mitsubishi) signed up with two projects for new plants at the beginning of the program. It already had an installed plant. In August 2016, Mitsubishi enabled another expansion project to produce the Outlander vehicle. However, it signed up for another company, HPE Automotores, which is in the same group as MMC. Nissan do Brasil Automóveis Ltda., as well as Caoa Montadora de Veículos SA, already had factories and presented expansion projects, the first of a factory, the second of a new production line. BMW do Brasil Ltda., Chery Brasil Importação, Fabricação e Distribuição de Veículos Ltda., DAF Caminhões Brasil Indústria Ltda., and JAC Motors do Brasil Automóveis Ltda., which did not have factories in the country, joined the program in the category of new facilities (MDIC, 2018).

Therefore, as soon as the program was launched, 24 companies qualified in the manufacturing and investment project categories. Nevertheless, others have applied throughout the program, and some that have applied lost their qualifications or have not renewed.

At the Graphic 1 the summary of the dynamics of entry and exit of companies to the program is illustrated. We have in it: companies that did not have factories in the country, but that at some point presented a factory project (having accomplished it or not); companies that already had a local manufacturing structure and that also presented expansion projects - whether of new factories or new production lines. Of the 20 manufacturers that already had factories in the country and joined the program, 15 did not qualify with projects for new plants or new lines; therefore, only five appear in the aforementioned chart, as they have qualified for new expansions (of production lines or factories), in this case, Caoa, MMC / HPE (Mitsubishi), Volkswagen, Nissan, and Mercedes-Benz.

So the Graphic 1 shows only the changes in the country's manufacturing structure during the period of Inovar-Auto. Three types of participation are described in the analysis: qualification for companies that did not manufacture locally and that signed up for “projects for new factories (new entrants)” - in orange; companies that already had factories and qualified in Inovar-Auto simply as “manufacturers” (therefore, they would not expand their plants, but would have to fulfill 3 of 4 program criteria, as discussed in the previous section) - in gray; and, in blue, companies that already had a local factory were distinguished, but who qualified for Inovar-Auto with a project for new factories or production lines, henceforth “projects for new factories (expansions)”.

Graphic1: Gantt chart of new installations and new projects by the company during the Inovar-Auto period - Brazil

Source: Own elaboration based on MDIC (2018).

Five business groups, Caoa, MMC / HPE, Volkswagen, Mercedes-Benz, and Nissan, already had a production plant in Brazil and signed up for new investment projects. The first two groups, which have national capital in their composition, will be explained in greater depth.

Caoa had, prior to Inovar-Auto, a plant in Anápolis, in the State of Goiás, where it produced some lines from the South Korean manufacturer Hyundai. The factory was set up in 2007 by the Brazilian businessman Carlos Alberto Oliveira Andrade, who had worked in the sector since the opening of the market promoted by Brazilian president Collor in 1992 as an exclusive importer of Renault and, subsequently, of Subaru. The beginning of the relationship between the Brazilian and the South Korean automaker was also under an import contract, which evolved into manufacturing the Tucson model in Anápolis. This success story of the businessman, however, had its problems: he came to be accused of corruption in two Federal Police operations, denounced for having paid bribes to the Minister of the Ministry of Industry and Commerce (MDIC), Fernando Pimentel (Barbieri, 2019).

The MMC company participating in Inovar-Auto holds the Mitsubishi brand concession in the country. The Japanese brand has been present in Brazil for over a century, with several imported products, and to automobiles. However, a brand assembly plant in the country was only opened in 1998 in Catalão, in the State of Goiás, with 100% national capital, by entrepreneurs Eduardo Souza Ramos and Paulo Ferraz. The first entrepreneur also held a concession for another Japanese brand, Suzuki, by the company SVB Automotores do Brasil. In 2011, the year before the promulgation of Inovar-Auto, SVB announced the installation of a Suzuki vehicle plant in the municipality of Itumbiara, also in the State of Goiás (G1, 2011). The automaker qualified for Inovar-Auto during the entire program period. Still, in 2015 it ended its operation in Itumbiara and transferred the production of the Suzuki brand to the MMC plant in Catalão (Riato, 2017).

In total, companies owned by businessman Eduardo Souza Ramos had five qualifications at Inovar-Auto: as installed assemblers, MMC and SVB were qualified; and as a project for new factories, two projects from MMC and one from HPE were enabled. One factor that marked the group in 2017 was the outbreak of a corruption scheme involving at least 14 people. In operation named “Zelotes”, the Federal Prosecutor's Office accused MMC of corruption, influence peddling, and money laundering, based on investigations since 2014 (Mano, 2017). The businessman was acquitted for lack of evidence, but his position vis-à-vis Japanese investors and manufacturers was affected.

However, there have been cases of manufacturers already installed who qualified for a new factory project, such as Nissan. In mid-2011, more than a year before the enactment of Inovar-Auto, the Nissan president announced the Japanese automaker's plan to install a new plant in Brazil. The automaker's cars were being manufactured at the Renault plant in Paraná (Moraes, 2011). When the program was launched, at the first ordinance, she was qualified to design a new factory. The production complex was installed in Resende, in the State of Rio de Janeiro - a city that has hosted Volkswagen's bus and truck factory since 1996.

This process of a previous local installation project stimulated or facilitated by Inovar-Auto, is even more explicit in the case of BMW. Navarro, Dias, and Valle (2013) analyzed the negotiations that took place between the luxury carmaker BMW and the Brazilian federal government for the installation of a production plant in the country. In the middle of the negotiation, Inovar-Auto was launched, which changed the installation plans. BMW, which had a strategy of gradually evolving local operations, changed its plan to complete production in the country.

The truck manufacturer DAF had a similar behavior: they already had plans for installations and, attracted by conditions other than the tax incentive, later adapted to the rules of Inovar-Auto to benefit from IPI credits. In an interview of Santos (2014, p.104) research, the company's tax director, Augusto Freitas, says that the automaker's arrival was motivated by the program, although it was not preponderant.

A new entrant who may have received more influence from the program was Chinese Chery. The company has already imported into the Brazilian market since 2009, but with the promulgation of Inovar-Auto, it qualified for two installation projects. The first, right at the beginning of the program, resulted in the Jacareí plant in the State of São Paulo. The second project enabled at the end of the program provided for the production of the Tiggo SUV. It is noteworthy that Chery was the Chinese manufacturer that adapted to the requirements of compliance with the incentive and enjoyed tax benefits throughout its duration. This fact is surprising, since, as previously noted, the other companies that were present during the five years of duration had previous installation plans (Reis, 2014).

Of the companies that participated since the beginning of Inovar-Auto, seven presented projects for new factories, three of which qualified for manufacturing and already had a local plant (therefore, the projects were for the expansion of their facilities). The other four changed modes throughout the program, starting with a new factory project and ending with the manufacturing mode, which refers to innovations in production processes or expansion of production lines.

It is noteworthy that, of the latter, there are indications that had previous projects and only adapted them to the conditions required by Inovar-Auto. Only one company publicly stated that the program was a significant motivator at its local facility, as there were no plans to settle in the country, Chery. Even so, Sturgeon, Chagas, and Barnes (2017) point out in an analysis by the World Bank that even the Chinese company had already decided to install the plant before the promulgation of the program, which contradicts the speech of the company's president in the country.

There were also cases of companies that qualified during the program but continued their projects until the end. Three companies have had this behavior: Mercedes-Benz, a company that already had local factories; Audi, which also had local production; and Jaguar Land-Rover, which did not have a factory in the country.

The same was not observed in other cases that were frustrated throughout the program. The six cases that qualified at some point, but were discontinued, were all from Chinese companies. Among these, the one that gained the most significant projection, from its installation project to its cancellation, was JAC Motors.

In 2011, the company had reached the second largest car importer position in the country, having opened 50 dealerships in 28 Brazilian cities until then, advertising its products on national television on Sunday programs. With the announcement of Inovar-Auto, the importer was compelled to qualify for a factory project, which would be installed in Camaçari, in Bahia. The investment that would be made with financing from the State of Bahia. The Chinese headquarters encountered obstacles, and when, in 2014, bureaucratic problems between the headquarters and the Brazilian partner were triggered, the national market had a drop in consumption, which resulted in the project being abandoned (Brandão, 2016).

Another similar case was that of Foton, a Chinese manufacturer that produces both trucks and cars. Still, in Brazil, it was represented by the Brazilian importer of trucks only, Foton Aumark do Brasil. With Inovar-Auto, the Brazilian importer negotiated the installation of a local factory and qualified for the tax incentive. However, similar to the case of JAC, when in 2014, the economic crisis affected the national market, the construction plan in Guaíba, State of Rio Grande do Sul, was extended. The solution found by the group was production at the premises of Agrale, an assembly plant in the sector located in Caxias do Sul, in the same State. Thus, the company managed to extend its qualifications within the program until 2017 (Automotive Business, 2016).

SBTC, which has imported trucks in the country since 2008, would produce the Sinotruk truck on land provided by the municipality of Lages, in Santa Catarina, and with lines of financing granted by the State government for the construction of the plant (Jurgenfeld and Lima, 2012). Slowly the project was canceled, and the Chinese set up a CKD operation in Paraguay, continuing to market the vehicles by import (Toporowicz, 2017).

Metro-Shacman, which has imported trucks since 2011, negotiated a project to be installed in the city of Tatuí, in São Paulo, but the project did not leave the paper (Alerigi Jr., 2013; Reis, 2016).

It is estimated that the sum of the discontinued projects resulted in a reduction of $ 1.968 billion in investment, representing 21% the total (Sturgeon et al., 2017). A more atypical case among all the previous ones is that of BYD do Brasil. The Chinese company competed globally for the electric vehicle market and qualified in Inovar-Auto to manufacture electric vehicles in June 2016, without having previously qualified for an investment project.. In 2015, it inaugurated a truck factory in Campinas, in the State of São Paulo, and, since then, it has been developing partnerships with municipalities for the supply of electric vehicles (Reis, 2014). Concurrent with this participation in the automotive industry, the company also started producing solar panels, forklifts, electric tugs, and batteries (da Silveira, 2018).

It is noted that the Chinese companies that qualified for the program, mostly had a negative result. Even if they have negotiated concessions for facilities and public resources for investment, the market retraction postponed or canceled the project approved by the MDIC. The most famous case was the JAC company, as it had gained an expressive market share in the years preceding the program. The other ventures were frustrated with Chery's exception: Foton, Foton Aumark, SBTC, and Metro-Shacman.

Such companies were previously importers and, either because they already had a previous plan or because they were compelled by the benefits of Inovar-Auto to promote local production, they chose to launch an investment project. However, the program included importers, as long as they complied with the rules. A possible alternative would be to continue to be importers and adapt to the requirements to enjoy the tax benefit. Fifteen companies opted for this modality, with eleven of them having been enabled since the launch. The Table 1 lists the companies that signed up for this modality, the period in which each company was qualified, and the brands marketed by each one.

Table 1: Companies authorized to import vehicles in Brazil, their respective period of authorization and the brands of imported products 

 

Company Name

Qualification period

Imported brands

SNS Automóveis Ltda

2013 - 2017

JAC and Aston Martin

Stuttgart Sportcar SP Veículos Ltda

2013 - 2017

Porsche

Chrysler Group do Brasil Comércio de Veículos Ltda

2013 - 2017

Crysler

Jaguar and Land Rover Brasil Import. e Com. de Veículos Ltda

2013 - 2014

Jaguar Land-Rover

Venko Motors do Brasil Import. and Export. de Veículos Ltda

2013 - 2017

Chery

Volvo Cars Brasil Import e Comércio de Veículos Ltda

2013 - 2017

Volvo

Districar Importadora e Distribuidora de Veículos Ltda

2013 - 2015

Ssangyong, Changan and Haima

British Cars do Brasil Vitória Ltda

2013 - 2017

Bentley

Audi Brasil Distribuidora de Veículos Ltda

2013 - 2014

Audi

Via Itália Comércio e Importação de Veículos Ltda

2013 - 2017

Rolls-Royce, Ferrari, Lamborghini and Maserati

Rising Imports Eireli

2013 - 2016

Wiessman and Argo

Brazil Trading Ltda (KIA)

2014 - 2017

Kia

CN Auto SA

2013 - 2014

Brilliance, Hafei and DFSK (Effa)

Elecsonic Comercio Ltda

2013 - 2014

Sinotruk

Ever Electric Appliances Industria e Comercio Ltda

2013 - 2015

Hafei, Brilliance, Jingdezhen Changhe and Dandong Huanghai

Source: Own elaboration based on MDIC (2018)

Of the fifteen participating importers, only one has signed up after 2013, the importer of the South Korean manufacturer KIA. Interestingly, the company was the largest vehicle importer in the country and was a major critic of the program throughout its duration (Revista Carro, 2013). Although the participation in Inovar-Auto as an importer represented a benefit, the limit of 4,800 cars per year required by the program represented less than ten percent of its current annual sale in the country, prior to the program. At the end of the program, the company celebrated and outlined positive prospects for the resumption of import volumes it used to practice (G1, 2017).

Another fact that can be observed by Table 1 is that Jaguar Land-Rover and Audi participated first as importers and then qualified for new investments and manufacturing. Sinotruk is similar to these cases. However, it allowed late as an importer, evolved into the investment project modality, and ended up discontinuing the project.

Other members of the list are divided between importers of Chinese products, which compete in low-priced products, and importers of luxury vehicles, whose import volumes are within limits imposed by the program.

Two other cases need further clarification: the companies that import the brands JAC and Chery. Despite the troubled and conflicting experience in other modalities, the first continued to be qualified as an importer until the end of the program. Similar was the case with Chery, which, added to the qualification for new investments given to Caoa (which would later produce Chery's Tiggo model), had five qualifications to participate in the program, in the three categories.

One last possible finding of the Table 1 refers to importers that did not continue to be eligible for the program until 2017. Discounting the cases of Audi, Jaguar, Land-Rover and Sinotruk, which evolved their participation in other modalities, there were four cases of discontinuity of projects in the Inovar-Auto of the importers. One of these, from Rising Imports Eireli, an importer of particular luxury cars, produced in very small batches. The rest were importers of Chinese vehicles, as was Sinotruk. Once again, the Chinese appear as the negative cases of the program: of the 15 qualified importers, they represented seven of these, of which four did not reach the end of the program (including Sinotruk).

As will be shown below, market conditions changed throughout Inovar-Auto, which may have been an essential variable in the adhesion of these companies. However, the program itself has changed over time.

One aspect that changed during Inovar-Auto was the penalty for participants who did not reach the established goals. In its original wording, the qualification would be canceled in cases of non-compliance. However, in April 2013, the mandatory minimum efficiency targets became less critical: the penalty for non-compliance would constitute imposition proportional fines for non-compliance (Brasil, 2013).

Another change occurred in 2014, adding to the regulation the exception for information failures and the consequent credit calculation higher than due. For these cases, there would be no cancellation of the license, just the reversal of the amounts unduly collected (Brasil, 2014). This last change also complemented a modification that occurred in April 2013, which defined that purchases in the national territory would prove the required local content.

In other words, after the beginning of the use of credits and with the program already in place, the MDIC published the ordinance that regulated the calculation system to measure local acquisitions by qualified companies: expenditures made in the country. Until September 2014, therefore, the calculation of credits could be computed by national acquisitions without quantifying the national content: "the expenditure may be equivalent to the amount included in the Transfer Invoice between establishments of the qualified company" (MDIC, 2013, p. 45, our translation). This form of verification was criticized by a director member of a machinery Brazilian industry association of machinery industry interviewed in this research, as there was, in his words, the possibility that “a lot of imported equipment, sold overpriced, for the guy to assemble inside, became nationally. Nationalization" (Machinery Industry Member, 2019, our translation). This possibility was confirmed by other interviewees as current practice, as reported by a member of a union statiscs organization member:

A complaint comes to the union. The complaint is about the oil filter. We receive information, and then we go to the factory to check with the production, and the complaint said the following: they are packing imported products. [...] They will pack the auto part in Brazil, and give Brazilian invoices, with this import model, because the tax control was this: invoice versus import invoice (Statiscs Member, 2018, our translation).

The fragility of the measurement was remedied with the edition of Ordinance 257 of the MDIC (2014), which imposed an assessment of the traceability of acquisitions and that the calculation of credits should be carried out only for national content. For this new measurement, it was created the obligation of the automakers' suppliers to provide information regarding their inputs, with penalties for non-compliance: “that is, an accessory obligation, liable to sanction, was created for a company that is not qualified in the program, but it provides for companies that are” (Cunha, 2017, p. 58, our translation). If, on the one hand, traceability controlled the evolution from products with national content, with the intention of increasing the demand for national auto parts, on the other, it required an effort to adapt them to the new tracking system. In an interview, a member of a Brazilian autoparts industry association describes the impact of this change for the sector:

Look, the big problem, moreover, a challenge, was when it demanded the implementation of the local content measurement system process. Why do I say that? A good part of the companies were not prepared, they demanded expenses on software, etc., which was not necessarily passed on to the price. And in that, some companies have spent a lot. On the other hand, this was the main challenge in the implementation of the development of the system for measurement and then also the risk of having a problem there in the declaration with the [Federal] Revenue and etc., ahead. So a lot of companies were afraid (Autoparts Member, 2019, out translation).

The automakers were only responsible for mobilizing their suppliers to inform the content of their acquisitions so that they reached the credit potential. The program foresaw a progression in need for spending on local content so that the company would benefit from the 30% presumed IPI credit (Brasil, 2012b).

Thus, with the initial rules of national content and the imposition of traceability, the program favored local production. However, favoring local production is contrary to international trade agreements. Brazil is a member of the World Trade Organization (WTO) and, as such, is subject to the General Agreement on Tariffs and Trade (GATT).

Brazil had already been questioned at the WTO in government tax incentive programs for the automotive sector carried out before Inovar-Auto (as was the case with the Automotive Regime, under the government of Brazilian president Cardoso). Would the federal government, under Dilma Rousseff, have taken into account the possibility of a new questioning of the country, this time with Inovar-Auto? Respondents were unanimous in stating that the program was designed to take into account, from the beginning, that it could be questioned at the WTO at specific points. However, its short duration would mean that it was closed before it was even tried at the WTO. Below, some of the interviewees' reports on the topic:

They knew the risks of a future WTO condemnation, but they knew that it is not [something that unfolds] fast (Union Member, 2018).

We knew this was going to happen, there was nothing new. Now, we knew that someone was going to report it, that the Japanese were left with us, and we knew that it would take five years for the deal to be tried, to create some big problem, until we open a panel, the government would respond. In five years, Inovar-Auto had already run, it was expected to end the program. You would already be in the next step. As the WTO allows you to protect technological development, the route was: make the turn, then you will apologize to the WTO, end the 30 percent, it will say that it was really a mistake, we shouldn't have protected it, I couldn't demand local content, then you went on the normal route, which was to encourage technological development (Statiscs Member, 2018).

The conviction at the WTO was published on August 30, 2017. The organization demanded that Brazil suspend the program and match the import and local production rates. Brazil appealed the decision, and, after a few more steps, in 2019, the decision was accepted by the country, at which time the program had already ended.

Assuming the strategy was successful, its developers and the federal government could celebrate. However, the federal government did not survive the political and economic crisis installed in the country as of 2015. On the one hand, the protection of local content influenced the achievement of the desired goals, on the other, there was a crisis that reduced the desired possibilities, as stated by an interviewee from a director member of a public development organization from a Brazilian traditional automotive production region:

[...] When the project was taking on the shape of an executive project, I mean, in detail, the public finance crisis started. Remember 2015? There it ended. It's over, there was no way. This R&D money was all. There begins the first public finance crisis and then the political crisis. [..] You have half of Inovar-Auto under economic crisis (Public Organization Member, 2018).

In its economic aspect, in 2015, the program was threatened. In the period, the forecasts were for investment and production reduction, in addition to actions to reduce the level of employment or flexibility, through lay off. Countercyclical measures were taken by the government, which in summary were credited for working capital and investments. Although the measures are relevant, the Brazilian automotive industry depends on the domestic market and the international scenario was unfavorable; in other words, the measures had a short-term focus without structural transformation of the chain and would not promote a gain in competitiveness (Lima, 2016).

To illustrate the relevance of the economic crisis in the automotive industry during the term of Inovar-Auto, it is possible to observe the number of cars licensed annually (Graph 2). The significant reduction in the number of annual licenses in 2015 and 2016 reveals the domestic consumer market's shrinking due to the economic crisis. In 2016, the lowest level of the period, 1,688 million national cars were licensed, 54% of the number of cars licensed at the beginning of the program, in 2012 (a return, in fact, to the levels before 2007).

Graphic 2: Licensing of new and imported cars in Brazil from 2012 to 2017

Source: Own elaboration based on Anfavea (2019).

The economic and political crisis sealed the fate of the program. All respondents mentioned it as the limiter of the results. Although the three factors discussed, tracking national content, questioning the WTO and the economic and political crisis, marked the development of Inovar-Auto, the third prevailed in the difficulty of Inovar-Auto as a policy to encourage the development of the automotive sector.

If these aspects did not exist, would the adherence behavior have been different? What was observed by the adhesions and exits of the program is that the companies that gave up before its closure were mainly Chinese and that, in general, they already worked with imports in the country. Manufacturers and brands of other nationalities persisted, despite the negative points that developed.

On the other hand, among the interviewees' reasons for the formulation of Inovar-Auto, the limitation on the entry of imported goods is central. The economic crisis that affected the country during the program had a generally negative impact on the national automotive market. However, Chinese entrants, who grew in the previous importing period, qualified with projects from local factories and were frustrated by the economic setback. The crisis's misfortune resulted in the achievement of an undeclared objective, but present in the interviewees' speeches: to drive the Chinese away. What unfolds, therefore, is a reflection on the effective results of the incentive, which will be developed in the following section.

4 Findings

When observing Inovar-Auto through the goals of the federal government, the program had an expressive success. Even the questioning of the WTO, which could be a limiting factor of its results, proved to be a practically non-existent problem, as there was not enough time for the country to be penalized. And the adhesion of companies to Inovar-Auto, which on the one hand had a relevant dropout rate, on the other, resulted in the implicit objective most desired by the actors: the extension of the arrival of companies of Chinese origin. The early departure of Chinese companies that entered the program and the extension of the installation of new Chinese factories in Brazil ended up resulting in a favorable scenario for companies that, even though they are large transnational oligopolies, already operated in the national market.

The analysis of the individual cases of the companies that participated in Inovar-Auto showed a predisposition by the industries to settle in the country before the program, due to a growing market. Similarly, when the country faced a political and economic crisis, the program was weakened, inhibiting the desired positive effects. Thus, the analyzes made it clear that the success and failure of this sectorial policy aimed at the automotive sector were much more related to external factors than to its formulation and execution.

5 Practical and theoretical implications

Based on the analysis of a public incentive such as Inovar-Auto, aimed at a specific industrial sector such as the automotive sector, it highlights the strategies and articulations carried out by the State in the face of the complexities posed by the process of attracting new productive investments and fixing technological development inherent in the national territory. The difficulties of such a process are even more evident in the case of a country like Brazil, whose automotive chain is mostly composed of foreign companies - and these, mainly from the USA, Europe, and Japan triad. The case in question (from Inovar- Auto) is also useful in demonstrating that other countries with late industrialization, such as China, in seeking to expand their operations to a rising automotive market such as Brazil, they end up facing difficulties that go beyond simple price competition with the products and services of the companies already installed there. The very formulation of a State incentive policy, such as Inovar-Auto, seems permeated by the interests of the transnational companies already installed. What, seen on a global scale, points to a tendency to maintain the concentration of market power, which has already been historically verified in this sector.

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