You think you can make cars in Brazil? Buster, you can't handle Brazil! That's the message emanating from General Motors (GM) in this high-growth country, as new investments pour in. But the established carmakers may have a point. It could be extremely difficult for upstarts from Asia to get their share -- or much of any share at all.
It's a pop-culture thing
This is from Forbes, commenting on Brazil's rapid growth and the money it will attract:
New manufacturers, mainly from South Korea and China, will play key roles in this development. Only in new factories, investments will amount to $ 5.22 billion....The remainder [of the expected $19 billion investment], about $14 [billion], will be mainly spent in the expansion of existing plants of Volkswagen, Ford, General Motors and Fiat.Oh, smack! But Ardila is right: Attempting to transfer the ultra-cheap labor model from China to Brazil will be a significant challenge. But there's another factor: pop culture. Latin Americans have a very long history of relating to major Western brands.
The executives of German and American automakers, established decades ago in the country, view the pretensions of the newcomers with suspicion. The president of General Motors of South America, Jaimes Ardila, stated: "Let's see if they will be competitive with the cost of producing in Brazil."
This extends to automobiles. The Fiat 127 was an icon in Brazil, where 10,000,000 were built from 1976-1986. It's probably safe to say that nobody in Brazil hasn't had a ride in Fiat's version of the VW Beetle. And Fiat outsold Italy in Brazil last year -- the first time that's happened in the company's history.
Volkswagen and Chevy, too
Volkswagen has been in Brazil since the mid-1950s, while GM's Chevy brand has been around since 1968 and has sold millions of small rides (GM itself has been in the Brazilian market since the 1920s). Fiat, VW, and GM have also all produced cars that can run in ethanol, a major automotive fuel in Brazil.
Now clearly you could look at this and argue that Asian manufacturers could enter the Brazilian market and offer compete with the stalwarts on quality. For Chinese companies, that's unlikely to happen, however. Their vehicles are generally inferior to what Western automakers are building. So the Chinese will have to compete on price. And that means prospecting at the bottom of a market that's already defined by small, inexpensive cars.
The South Korean stand a better chance. Hyundai-Kia has shown in the U.S. that it can enter with lower-priced alternatives to their established brands, capture some market share, then gradually raise quality.
Does anybody have a choice?
Brazil's goal is to just about double the size of its market, from roughly 3.5 million vehicles produced annually now to over 6 million by 2025. For comparison, the U.S. market boils own to approximately 15 million per year, although it's been as high as 17 million.
And it's ferociously competitive. Brazil could turn out to be the same, on a smaller scale. Fiat, VW, and GM rule the realm, but Ford (F) and the Japanese are hot to get in on the action. Additionally, Brazil is engaged in various macro-economic practices that are designed to nurture growth in this sector.
You can see where this leads: the big guys will fight to hold share, while everyone else will scrap for crumbs. In a context like that, I'd say GM is right to be cocky. Brazil is growing fast. But for the next 20 years, it can't grow big enough to accommodate every automaker that wants to tap the boom.