From October 27th to November 7th of 2010 the 26th International Car Fair will take place in São Paulo – the biggest and most important automobile event in Latin America. According to the specialized press, this year’s edition, which commemorates its fifth year of existence – promises to make history for being considered the main entrance for a dozen new models into the Brazilian market, the world’s fifth biggest, but likely to move to fourth position this year, coming behind China, Japan and the United States.

It is not  by chance that seven Chinese car companies will be in Brazil by 2011: Chana, Chery, Great Wall, Hafei, JAC, Jinbei and Lifan. Among those, only Great Wall has not confirmed its presence at the 2010 International Car Fair, something which it is going to do soon. While the Chinese brands try to adapt their cars to both American and European security and pollution standards, they grow their car exports to the emerging countries, taking Brazil as an example. It is by focusing on emerging markets that the Chinese companies have outlined their brand expansion and internationalization strategies in the global market.

According to the Brazilian representatives of Chinese brand evaluation, by 2015, at least 5% of the Brazilian automotive market will belong to car companies coming from the East’s emerging power. The entry of those companies into Brazil occurs after they have conquered more than a half of the local market in China, a country which fifteen years ago practically did not have private cars and nowadays possesses 38 cars for every thousand people, a ratio of 38:1.000. In Brazil, this ratio rises to 200 cars for every thousand people, in Japan 400, and in the USA, 800.

This article does not intend to show the process by which Chinese car companies are fast expanding, since these, as is known, are strongly stimulated by this country’s government and use designs which are successful in the West – the biggest examples of which are perhaps the cars produced by BYD. Rather, it aims to point out some of the effects which the entry by those companies may bring about in Brazil, following the pattern of the Chinese advance in the Brazilian automotive market, or that is to say, giving emphasis to the clauses of the contracts set up by Chinese companies with the Brazilian government.

In the early stages, this entry may seem to be only advantageous. Those who purport to put forward this idea justify their position by saying that it would raise the number of jobs, the expansion of taxes receipts by the government, the fall in prices and the raising in the quality of the cars manufactured in Brazil due to the intensifying of competitiveness generated by the increase in competition within the Brazilian automotive industry. It is the truth, albeit, a half-truth because this reasoning works only in the short term.

Following the Chinese automotive industry expansion’s pattern in other regions of the globe, we observe that they follow the same path: install factories, absorb technology if it is possible, hire part of the work force from local people, but keep the higher positions in Chinese hands. For countries with a consolidated automotive industry like Brazil, wages are maintained at the levels reached prior to their entering, since the advantages of the Chinese car companies abroad come through the importation of parts which come from China, where the production cost is very low.

As previously mentioned, Chinese auto industry expansion occurs in large strides, even to the point of being frighteningly fast. The Chinese brands have improved significantly the quality of the cars they produce. Part of this success comes from the acquisition of foreign brands such as the Swedish Volvo by the Chinese Zhejiang Geely Holding Group Co. or by the British MG Rover, which was acquired by Nanjing Automobile Group. The acquisition of these foreign brands allows the almost instantaneous transfer of technology from these well-known brands in the international market to the Chinese companies. Hence, if the Japanese took 30 years to produce good cars and the South Koreans, 15, it is possible to deduce that in 7 or 8 years from now, the Chinese will have cars of good quality and be highly competitive in both national and international markets.

Those who think that in Brazil we will have a likely fall in the level of worker wages in the long term, as consequence of the entering of Chinese car companies, are mistaken. This is a wrong perception, which leaves the history in the background. In Brazil, we had a historical trajectory of struggle for workers’ rights, which gained power and influence from the part of Brazilian history known as “Estado Novo” (the New State) where Getúlio Vargas, the most important president Brazil ever had, ruled the country. This struggle for the consolidation of the workers’ rights – which includes the continuation of wage levels when there are crises – institutionalized itself into the Brazilian automotive industry during the 1980’s in the course of strikes in the Paulista ABC region, which were led by the São Bernardo do Campo trade union, whose biggest exponent was Luiz Inácio Lula da Silva, Brazil’s current President.

This argument is confirmed if we observe the modus operandi of the Brazilian car companies when there are crisis underway. Instead of lowering wages for keeping good competition in the face of the sector’s players, the companies, which come under pressure from the trade unions, reach out for collective vacations at the outset and, if the crisis persists in stretching out for longer than expected, the lowering of wages does not occur, since mass layoffs is the solution most commonly put into practice. This modus operandi was no different in the world crisis which started in 2008, and affected the world’s automotive sector.

The effects of Chinese entering in Brazil may at first glance seem harmonious to our interests, but can turn out to be detrimental over the years, mainly to the Brazilian government.

Such understanding comes by observing how Chery intends to get into Brazil. Although we do not have access to the contract clauses written for the building of its US$ 700 million factory – the first Chinese car company factory in Brazil which will start its operations in 2013 in Jacareí, located in the interior of the state of São Paulo – we know that the factory will follow the model called CKD(1) (completely knock-down), which means that all the parts are imported and the cars are assembled here. With this, the Chinese brand will reduce the import cost of cars, that is 35% in Brazil, to 18%, which is the import cost for car parts built here.

Sérgio Habib(2), Brazilian businessman responsible for bringing in JAC to Brazil, says a CDK plant is not viable, because it takes China’s big competitive advantage away, which was previously mentioned: its production cost. Seemingly, Habib gets it wrong by not taking into account that Chery’s strategy may go beyond simply raising its sales in Brazil. The Chinese car company, as it points out, is going to skyrocket in the Brazilian market by getting costumers familiarized with this brand, since there will be one of the company’s plants installed here. In the same way, a considerable part of the Brazilian car fleet is fuelled with ethanol and the preference for cars with flex engines increases everyday. This means that for Chery to be competitive, it will have to develop flex technology, which afterwards could be exported to China, which, as it is known, has been very concerned about the CO2 emission into the atmosphere(3). 

Soon, the Chinese companies, which will count on both parts came from China and an increasing quality of its cars, should get a significant part of Brazilian market, which nowadays belongs to Ford, GM, Fiat, VW, Honda, Toyota, Mistubishi, Hyundai, Kia, Peugeot and Citroën. At a certain moment within the competition crisis, it is likely the car companies listed above  will start laying off employees. The mass redundancies will pressure the trade unions, which in their turn will undergo an internal split. It is because such trade unions, already being quite alienated, could split themselves between those who advocate dismantling a part of the Brazilian workers’ rights so that the car companies may compete with the Chinese factories and those who will keep fighting for the maintenance of workers’ rights, even in the face of mass layoffs. This breaking away from the Brazilian trade unions will not be the most, but one of the most interesting effects worthy of observation because of the entry of Chinese car companies into Brazil. In this case, it seems more likely that the conservative side, which will fight for the maintenance of workers’ status quo, has the advantage. 

With the trade unions in internal disarray, the powers that will fight against layoffs will go on to put pressure on the Brazilian government. The government, on its turn, will have its hands tied, because it set up and agreed legally on the clauses of the contracts established by the Chinese when they came on in Brazil, just as happens in the case of Chery. What is it possible to do to stop the almost unfair competition that will be imposed by the Chinese brands with their plant production in Brazil if the contracts set out are enforceable from the legal point of view? For the Brazilian government, there only remains one of its many skills inherited from the imperial times: to manage mistakes of the past in the best possible way.  


My special thanks to Gabriel Garcia Ferreira Silva, from the Production Engineering course, and to professor Cesar Augusto Lambert de Azevedo, for their observations and comments which contributed for the development of this article.

Notes:
(1) Even if Chery had agreed on a different CKD model, or that is to say, a model which may have only some of its parts, the described effects would be softened; nonetheless they would continue to be the same. (2) Sérgio Habib got famous for bringing the Citroën cars to Brazil in the 1990’s, when the French brand was almost unknown to Brazilians. (3) The fact that the flex engine was developed in Brazil to work with pure ethanol will not be  a problem for China in the future if we imagine that most of the projects China has developed in the African continent’s agricultural sector, mainly in southern Africa, may mean the African countries’ preference on exporting sugar cane to China for its ethanol production, with the sort of technology came from Brazil.