Brazil: Autos and Ethanol – marriage of international investors and local resources

In common with other industries (e.g. energy), since the 1973 oil crisis the automobile industry has witnessed substantial investment in new technologies that are designed to address the economic and environmental costs associated with continued reliance upon oil. Such concerns have been exacerbated more recently by political considerations too and a desire to be increasingly energy self-sufficient. In recent years, major developed country manufacturers have made progress in introducing vehicles affording technological innovation in terms of fuel, and in 2011 several have or are introducing their first all electric vehicle(s). However, in many if not all developed country markets, conventional vehicles and gasoline continue to dominate the market.

There is one notable exception and that is Brazil and its reliance upon flexible-fuel vehicles and ethanol. This is a noteworthy example of the automobile industry adjusting successfully to the specific traits of the primary industry – in this case the local agricultural sector and sugar cane. Brazil is the world’s second largest producer of ethanol (34%), after the USA (55%).

In 1973 the Brazilian government introduced laws to compel the use of ethanol with gasoline. However, it was not until some 30 years later that Volkswagen launched in Brazil the first ever  flexible-fuel vehicle. The fleet in Brazil is now the largest in the world, and a total of 10.6 million cars and light trucks have been produced up to June 2010. By 2010 manufacturers that build flexible fuel vehicles include other major European and Japanese producers as well as GM and South Korean Kia. There are though significant regional variations in terms of ethanol use within the country.

This paper has a unique focus in that attention focuses upon a country that is simultaneously one of the most prominent Big Emerging Markets, namely Brazil, and which is also a huge auto market that is dominated by foreign auto producers. Despite foreign domination, multinationals have been adept at local adaptation, and thus Brazil is unique in that a large proportion of vehicles are dependent upon ethanol.

This paper therefore examines Brazil as a major host nation, and sheds light on a crucial aspect of international business strategy and management, namely foreign subsidiary strategy and entrepreneurship. At the same time, it considers too the role of government policy in directing manufacturers to develop flex vehicles. The Brazil example highlights the challenges facing international players as they seek to be locally-responsive and at the same time globally competitive. It provides an opportunity to consider whether aspects of the Brazil experience are transferable to other economies. As world food prices escalate to record levels in 2011, controversy surrounds ethanol derived from corn.

 

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