Brasilian x chinese

BRAZILIAN X CHINESE AUTOMOBILE INDUSTRY: PERSPECTIVE OF GROWTH AND DEVELOPMENT FOR SOUTH AMERICA 2010/2012 Xinye Kang e Eduardo BomямБm Machado Organizadora: Simone Gelmini Araujo

BRAZILIAN X CHINESE AUTOMOBILE INDUSTRY: PERSPECTIVE OF GROWTH AND DEVELOPMENT FOR SOUTH AMERICA 2010/2012

Xinye Kang e Eduardo Bomfim Machado Organizadora: Simone Gelmini Araujo

Copyright © 2013 by Academic Publications Centre from Centro Universitário Newton Paiva 1st Edition - 2013 Belo Horizonte

CENTRO UNIVERSITÁRIO NEWTON PAIVA COORDINATION OF EXTENSION AND COMMUNITY AFFAIRS INTERNATIONAL RELATIONS’ COURSE COORDINATION AIESEC

ISBN 978-85-98299-38-9

PUBLISHED

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EXPEDIENT FORMAL STRUCTURE OF THE INSTITUTION SPLICE GROUP PRESIDENT: Antonio Roberto Beldi RECTOR: John Paul Beldi VICE-RECTOR: Juliana Salvador Ferreira de Mello ADMINISTRATIVE AND FINANCIAL DIRECTOR: Marcelo Santos Vinicius Chaves SECRETARY GENERAL: Dorian Gray Rodrigues Alves

INTERNATIONAL RELATIONS’ COURSE COORDINATOR: Prof. Simone Gelmini Araújo COORDINATION CENTER FOR EXCELLENCE IN TEACHING: Prof. Ana Lúcia Fernandes Paul

ORGANIZER: Simone Gelmini Araujo AUTHORS: Kang Xinye and Eduardo Machado Bomfim SUPPORT: AIESEC ADMINISTRATIVE SUPPORT: Sandra Maria de Brito REVIEW: Rita de Souza Andrade Monica and Marisa Santos Moura

TECHNICAL SUPPORT ACADEMIC PUBLICATIONS CENTRE FROM CENTRO UNIVERSITÁRIO NEWTON PAIVA: Cinthia Mara da Fonseca Pacheco Publisher of Art and Graphic Design and Layout: Helo Costa – Professional Record #127/MG

BRAZILIAN X CHINESE AUTOMOBILE INDUSTRY: PERSPECTIVE OF GROWTH AND DEVELOPMENT FOR SOUTH AMERICA 2010/2012 CENTRO UNIVERSITÁRIO NEWTON

SUMÁRIO ABSTRACT

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OBJECTIVES

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METHOD

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PARTICIPANTS

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EXECUTIVE SUMMARY

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MARKET OVERVIEW

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MERCOSUR COUNTRIES STATISTICS

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MARKET PLAYERS

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BACKGROUND OVERVIEW - AUTOMOBILE MARKET STATISTICS

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AUTOMOBILE INDUSTRY TRADE

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AUTOMOBILE TRADE BY COUNTRY

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BRAZIL CAR INDUSTRY IN NUMBERS

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IMPORTATION

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EXPORTATION

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BRAZIL´S FUTURE OUTLOOK (ANFAVEA, 2012)

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ARGENTINA´S FUTURE OUTLOOK (ADEFA, 2012)

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CHILE´S FUTURE OUTLOOK (ANAC 2012)

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DEVELOPMENT OF CHINESE AUTOMOBILE INDUSTRY

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PREDICTION INTO 5 YEARS

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WORK CITED

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ABSTRACT Since 1992, when the president Fernando Collor de Melo opened the Brazilian automobile market to the international products, the share of foreign brands in this market has increased. Nowadays, the growth of the members of the BRICS in the international automobile market has become more visible; purchase or in the manufacturing either, the numbers of MERCOSUR are quite relevant, due to the strength of the internal market. Nevertheless, China might be a competitive force due to its industrial development and exportations.

This research has searched for further information and the data from the sectors in the Brazilian and Chinese automobile markets and has analyzed the information collected, in order to build a scenario that can be used by the Brazilian and Chinese students and by the ďŹ rms that work in this sector, as well.

KEYWORDS: MERCOSUR. China. Automobile. Automobile market.

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OBJECTIVES  To build a strategic scenario for the automobile

sector in the MERCOSUR region, having China as a stakeholder.

To analyze the automobile markets of the main MERCOSUR (Southern Common Market) members. 

To map the corporations that explore this region directly. 

To display data about the meaning and potential of the Chinese automobile industry in this region.

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To develop a comparative study of the policies and commerce between the members of the MERCOSUR and China.

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To predict a scenario for this sector in the next five years.



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METHOD This research is based on the search for electronic data in the ofďŹ cial websites of the associations that represent the automobile industry of the selected countries. The companies that have already been trading in this region, either producing or trading, have also been studied. Information about the Chinese automobile industry, its potential to this region and its tendencies were also searched, exploring the preliminary numbers of brands, models and technology.

After that, a comparative study was necessary to show the policies between the two members of MERCOSUR and China, pointing out the similarities and differences. At the end, there will be a compilation based on the information collected in the years of 2009, 2010 and 2011.

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PARTICIPANTS EDUARDO BOMFIM MACHADO Professor of the Strategic Planning and International Organizations subjects in the International Relations graduation course at the Centro Universitário Newton Paiva – Belo Horizonte – MG. Brazil.

XINYE KANG Assistant Researcher from AIESEC Brazil, graduated at the University of Washington – UW – Seattle, USA.

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EXECUTIVE SUMMARY Since the establishment of the MERCOSUR, the member countries, including Argentina, Brazil, Paraguay, Uruguay and Venezuela have experienced significant integration in the regional trade.

In relation to the automobile industry in MERCOSUR, it has been strongly controlled by Brazil and Argentina since the integration, which began with the signing of the Economic Complementation Agreement in Buenos Aires in 1990.

The growth of the automobile industry in Brazil is primarily driven by the rapid pace of urbanization and wealth accumulation. Argentina has got an experienced market and its growth is promoted by its internal dynamics and its share at MERCOSUR. Chile has its own market performance, which may have been affected by the recent earthquake recovering; nevertheless, it still stands a meaningful wealth distribution. Despite the lack of full membership in MERCOSUR, Chile represents the third largest market in South America, followed by Brazil and Argentina.

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MARKET OVERVIEW Due to the number of automobile sale in 2011, Brazil became the fifth largest market. Between 2002 and 2011, the automotive market grew by 145%, at an annual average of more than 10%, while production grew by 109% in this period, averaging 8.6% per year.

The strong domestic demand is fed by the increase in the household income, the stable economic growth and the access to a broader credit. ANFAVEA forecasts a positive outlook, with the automobile sale reaching six millions a year in the medium and long run.

Despite the growth in income, the infrastructure for transportation remains underdeveloped in Brazil. It has 1,751.868 km of highways, the 4th in the world ranking, from which only 212,679 km are paved (VASCONSELLOS, 2009), making up only 12% of the total. The long dirt road network and the lack of railway infrastructure have shaped Brazil’s demand for specific models of trucks, buses and cars. In recent years, Brazil has experienced intense urbanization and most of the population is now living in the urban area; as a consequence, there is traffic jam

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in nearly all major cities, such as São Paulo, Rio de Janeiro and Belo Horizonte.

Argentina’s extensive geographical area (2,791,810 km2) and limited population density (14.2 inhabitants per km2) are serviced by a road network of 38,920 km, of which 88.4% is paved. The investment on the infrastructure of roads, mainly new ones, has increased significantly in recent years. These characteristics have resulted in a high demand for cars; 201 for each 1.000 inhabitants. However, deterioration in the rail network and urbanization have caused traffic jams in large cities, for instance, Buenos Aires.

Argentina ranked the second largest market in South America following Brazil, with 828.771 units in 2011, in reference to the number of automobile sale. With a population of 40 million, Argentina has got the highest GNI per capita ($17.250) in South America and this number has been increasing at a rate of 10% since 2009. As it can be seen by the significant increase in vehicle registrations, the demand for vehicles is high because of the strong purchasing power.

By the number of cars sold in 2011, Argentina and Chile ranked as the second and third largest automobile markets in South America. As a member of MERBRAZILIAN X CHINESE AUTOMOBILE INDUSTRY: PERSPECTIVE OF GROWTH AND DEVELOPMENT FOR SOUTH AMERICA 2010/2012 CENTRO UNIVERSITÁRIO NEWTON

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COSUR, Argentina has been an important partner of Brazil since the signing of the Economic Complementation Agreement in 1990 and a series of complementary agreements during the 1990s. These agreements have allowed for tariff free trade, although subjected to the balancing trade quotas (MANCHESTER), in automotive products between the two countries.

The treaty is effective once it covers an exchange of vehicles in all categories, including parts, components and accessories, with a 100% preferential customs treatment (0% tariff), provided that the products comply with the requirements of origin of the MERCOSUR area. The manufacturers from outside the area are subject to a MERCOSUR customs tariff of 35% (BBVA, 2011). As a result, Argentina has become heavily dependent on the demand from the Brazilian automobile market; 52.9% of the cars produced in Argentina were exported to Brazil, making up 84.6% of total export.

MERCOSUR is a regional integration established on March 26th, 1991, which is composed of Argentina, Brazil, Paraguay, Uruguay and Venezuela. The States, which are part of it, share a communion of values that ďŹ nd expression in its democratic and pluralistic attitudes, in the defense of fundamental human rights, in the

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protection of the environment, in the sustainable development, in the legal security, in the combat of poverty, in the social and economic development with equality, as well as in the commitment to the consolidation of democracy.

The reasons why Chile has been included in this paper, even though it is not a true member of MERCOSUR, are based on its automobile market and its high economic force in the region.

The involvement of Chile with MERCOSUR has been emerging gradually over the years. The member countries invited Chile to sign, in 1991, the Treaty of Asunción but Chile refused, arguing that the rules of the treaty would reduce its freedom of action and deprive it of opportunities to enter other markets. The negotiations continued until 1996, when a special agreement was reached; Chile entered MERCOSUR in an “association” that excluded certain subjects and sectors, particularly contact services, investment and the automobile sector.

The agreement obliged Chile to adopt the common external tariff established by the member countries of the MERCOSUR customs union.

The automobile sector remained in the subBRAZILIAN X CHINESE AUTOMOBILE INDUSTRY: PERSPECTIVE OF GROWTH AND DEVELOPMENT FOR SOUTH AMERICA 2010/2012 CENTRO UNIVERSITÁRIO NEWTON

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-regional agreement. In the first semester of 2000, MERCOSUR countries agreed to converge existing national tariffs on extra-regional imports with a common external tariff of 35%, effective from January 1st,, 2006; the requirements of the local contents for intra-regional tariff-free trade in the sector were set at 60% and the fiscal incentives at the sub-national level were supposed to end.

Despite the fact that Chile ranked the third position in the automobile sale in 2011, the market is still small if compared to Brazil and Argentina. Its population of 17,067,369 is one tenth of that of Brazil and its GNI per capita fell behind Argentina in 2009; its current fleet is 174 cars x 1,000 inhabitants. These characteristics, combined with early liberation of the market and less restrictions in trade, resulted in an automobile industry entirely based on import.

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MERCOSUR COUNTRIES STATISTICS Chart 01 - Population in 2011 (in thousands)

As it can be seen in the chart, there is a great difference among the three countries but Argentina and Chile are more similar to each other than Brazil.

Chart 02 - GDP in 2011 (in $ millions)

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As it can be seen above, the GDP follows the population size, keeping the proportional rate.

Chart 03 - GDP per capita (in USD, IMF)

As it can be seen in chart three, although the Brazilian GDP is high in absolute terms, it is not sufficient to match the Argentinean or Chilean proportions.

Chart 04 – GNI per capita, PPP (current international $)

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The GDP per capita presented in chart three is useful to comprehend the bases of the GNI distribution but there are other causes, based on social and cultural terms.

Chart 05 - GDP growth (2011)

In a short term, Argentina and Chile were more successful in their growth efforts but in absolute values, the 2,73% of Brazil, taken in the USD, were the highest mark in this region.

Chart 06 - Motor vehicles per 1,000 population.

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As it can be seen above, Argentinean’s fleet is proportionally greater than the Brazilian or Chilean ones but these values must be understood by the total population and GNI numbers.

Chart 07 - Exports to Mercosur (2010 DG Trade)

The numbers above are not exclusively related to the automobile sale. The three different results do not explain exactly the automobile market but they are the basis to learn about the relationship between them and China without considering the other export values.

Chat 08 - Imports from MERCOSUR

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As it can be seen above, these three countries have different economics status in MERCORSUR; Argentina is more dependent than Brazil or Chile. Brazil is the largest in many aspects due to its commerce, the latest technological products and other products that cannot be found in the other member countries.

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MARKET PLAYERS There are currently more than forty automobile manufacturers present in MERCOSUR. From fast vehicles to heavy trucks, there are many brands and companies working in this region, either importing or exporting.

Distinct history, politics and trade policies have determined the present differences in the market operations in Brazil, Argentina and Chile. Prior to the establishment of MERCOSUR in 1991, Brazil had 50 years of experience in car manufacturing. Nowadays, production and sale have been dominated by the “big four”: VW, GM, Fiat and Ford, with production of 481,361, 430,884, 487,687, 200,241, respectively, making 80% the total production in 2011. Nevertheless, more and more market shares have been “taken” by new agents, namely the Chinese automakers. The import from the Chinese automakers has increased by almost 1,000% over the past four years and some agents are planning to set up factories in Brazil in the short run.

Argentina started its automobile production in the beginning of the 1950s through a government act

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to produce the ďŹ rst car entirely manufactured in the country; this action has opened a new market for the opening of foreign plants there. At present, there are eleven manufacturers in the country.

Since the president Fernando Collor de Mello opened up the Brazilian automobile market to the international makers in 1992, the presence of foreign automobile brands has been consistently strong. Currently, the growth of the BRICS members in the international automobile market is getting more and more evident.

The internal market force of MERCOSUR members and the advances in the Chinese automobile technology have been catalyzing the connection between the two markets, either through trading or manufacturing.

This project aims at examining the potential growth and the opportunities of cooperation between the two markets through the analysis of the market conditions.

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BACKGROUND OVERVIEW - AUTOMOBILE MARKET STATISTICS AUTOMOBILE INDUSTRY NET REVENUE Average exchange rate of 2011 (IRS) Brazil Real to US Dollar: Argentina Peso to US Dollar: Chile Peso to US Dollar:

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1.742:1 4.299:1 478.347:1

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AUTOMOBILE INDUSTRY TRADE BRAZIL: The Brazilian automobile market has got typical short-run policies created by the government to protect its automobile industry, or maybe the interest of the four strongest manufacturers.

Since 1970, several policies have been used to protect the growth of the Brazilian customs barries on the imported cars, on the other brands and on car parts.

This particular way of seeing the fragility of a not quite recent Brazilian automobile industry has created a strong relationship and self-dependence among the companies and the government, since the protectionism time.

Due to the maldistribution of the Brazilian income, rich people are forced to buy imported cars that are twice or three times more expensive than in the other markets; these buyers can pay the taxes and the high proďŹ t rate. In the other hand, the products offered to the rest of the population are technologically way behind, when compared to the other models sold in the global market at the same price.

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Argentina: The car industry in Argentina can be analyzed through the Brazilian model by its nationalism common start. It was not a particular company interest, instead the government efforts to creates a car industrial park and its economic and social benefits.

Nowadays, it’s seen clearly the management of big global players acting, even in Argentina also in Brazil with different plants, but with the same goals.

The macro policy to this region includes some particular differences in models, colors, additional car parts to these different markets. Despite, the price, culture and numbers of models fewer than USA, Europe and. China Due to this intent to explore this region with two plants installed in Argentina and other in Brazil, the macro policies lead an attempt to make a sharing of resources and minimizing the lack of manufacturing and distribution in these countries.

Chile: As a higher dependably car market in South America, Chile´s positioning is clear about

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importation. The trade of cars, car parts and other relating products are a result of a past government decision.

Nowadays Chile’s interest is based on car industry advances, like new fuels and environment concerns.

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AUTOMOBILE TRADE BY COUNTRY Argentina with Brazil: Export increased from 23,1% in 2006 to 44,1% in 2011 in gross values, but 83,1% of Argentina’s production takes Brazil as destination, while Chile’s reaches 1,3%. Import remained constant at 22,9% in 2006 to 22,7% in 2011.

Brazil with Chile: Brazil is the 4th target market to Chile’s exportations; also Chile is the 4th target market to the Brazilian products. (2010) It includes cars and parts of cars made in Brazil. In this year the total exported was 972.625.488,00 USD. Brazil with China: Volume of export is insignificant; Import increased from a sharing of 4,2% in 2006 to 7,6% in 2011. In short, it’s almost twice the size in five years.

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TAXES Argentina: The total of taxes spent in Argentina buying a car reaches 24%.

Brazilians spend 30,4% of consumer price of car on tax, ranking the highest in the world (as or Dec 2011).

Second highest being Italy, with 17,3%. In USA the tax spending is 5,7%. The IPI is calculated without tax; ICMS is calculated with tax, for example.

Chile: There´s two taxes added to Chilean cars, IVA and Importation tax. It reaches about 18% of the final price.

ESTIMATE OF VEHICLE FLEET 2011.

Argentina: The car registration in Argentina reaches 743.792 vehicles in year of 2011.

Brazil: As of 2011, Brazil has a total of 2.775.3 thousand cars. São Paulo, Minas Gerais, and Paraná rank the top 3 states with the highest number of vehicles, with 35%, 11%, 8% respectively. 92,5% BRAZILIAN X CHINESE AUTOMOBILE INDUSTRY: PERSPECTIVE OF GROWTH AND DEVELOPMENT FOR SOUTH AMERICA 2010/2012 CENTRO UNIVERSITÁRIO NEWTON

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cars registered in 2011 are fueled by flex fuel, 7,5% fueled by gasoline; 51,4% of LCVs registered in 2011 are fueled by flex fuel, 25,8% by diesel, and 22,8% by gasoline; 100% trucks and buses are fueled by diesel. As of 2011, 81% of vehicles produced in Brazil are also registered nationally, which indicates that the domestic production satisfies mostly domestic need.

Chile: In 2011, Chile had a total of 356.183 vehicles, being 334.052 light vehicles (cars, SUV, minibuses and pickup trucks) and 22.131 heavy vehicles (buses and lorries). The north region had the most part of sails, with 72% of the whole light vehicles sails and 77% of the whole heavy vehicles sails. The second region is the south, being 18% and 14% respectively.

PRODUCTION A) Argentina: The three most important car brands in Argentina market are Peugeot Citroen, General Motors and Volkswagen.

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Table 01 – Car Production in Argentina per Company (2011).

Table 02 – Car Production in Argentina per Model (2011).

B) Brazil:  Brands: Top 4 by dealers: FIAT, Volkswagen, GM and Ford. More recently the French companies Peugeot Citroen (PSA). Brands: Top 5 by employment: Volkswagen

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(25.689), GM (24.075), FIAT (16.060), Mercedes-Benz1 (14.290), Ford (10.632).

Production of cars has decreased in recent years (2010) from 60.3108 to 57.6029. Production of LCVs has been steadily increasing. Sales: in 2011, 507.674 cars sold are nationally manufactured, 89.186 are imported; 155.167 LCVs sold are nationally manufactured and 2.248 are imported. Export has significantly decreased in early 1995 due to the “tequila shock” (devaluation of pesos). In recent years export has been steadily increasing.

Production of cars has peaked in 2009 with 241,573 and decreased to 206,160 in 2011. In 2011, sales of domestically manufactured cars is 182,056, sales of imported cars is 62,009 (75%). Export in 2011 is higher for LCVs than cars.

Volkswagen: It’s the second place car industry, but it’s the most profitable company. Its production reaches 485,028 cars in between January and October 2011. New models are being imported from Mexico, where there is a new plant designed to Nafta market.

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In Brazil, General Motors explore only the Chevrolet Brand, changing models from Opel and Suzuki to Brazilian market only through this brand.

Production of cars in 2011 is 513,051, LCVs 130318.

Total production peaked in 2010.

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BRAZIL CAR INDUSTRY IN NUMBERS Plants: 53 in total. Southeast has 28/53% of plants (São Paulo, Rio Grande do Sul, Rio de Janeiro and Paraná). 

Type: in late 1970s, Brazil started to produce cars and LCVs fueled by ethanol, whose production peaked in early 1990s. Commencing in year 2003, cars and LCVs fueled by flex fuel were produced, and within years this type of vehicle has taken over the market and became the most produced cars in Brazil. In 2011, 86% of cars and 61% of LCVs produced in Brazil are fueled by flex fuel.

100% trucks and buses produced are fueled by diesel. 

c) Chile: Brands: Top 5 light vehicles sales: Chevrolet (56.640), Hyundai (35.063), Nissan (34.597), Kia (27.871), Toyota (23.151).

Brands: Top 5 heavy vehicles sails: Mercedes Benz ( 3.949), Freightliner (1.773), Chevrolet (1.520), Volkswagen (1.430), Jac Motors ( 1.382). 

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78,7% cars registered in 2011 are fueled by gasoline; 21,1% fueled by diesel, and 0,13% fueled by gas.

IMPORTATION A) Argentina: Most of imported car in Argentina came from Europe, Japan, China, and USA. But its production almost matches the internal market needs, in exception to the high technological models or fancy cars.

B) Brazil: Table 03 – Brazilian Imported vehicle share of new vehicle registrations %

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Total import of 659.000 units up until November 2012. The peak was 2011, with total of 857.900. 

Top 5 countries from which Brazil import vehicles in 2011 are Argentina, South Korea, Mexico, China, Germany. 

China shows the highest rate of growth in export, 908% in cars, 127% in LCVs, and 431% in trucks. 

c) Chile: First consideration about Chile’s market is based on car imports, or kits assembled. The car industry in Chile is not as developed as in Argentina and Brazil. In this point of view, Chile didn´t have such exceeding production target to other market places.

Most cars sold in Chile came from Japan, Australia, USA, China and Europe.

Table 04 – Imported car in Chile per year

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EXPORTATION A) Argentina: Table 05 – Exportation of Argentinian cars during the last 10 months.

B) Brazil 

Total export in 2010 totals 767.432 units;

55,6% of vehicles exported in 2010 were to Argentina; 21,7% to South Africa; 9,6% to Mexico. A total of 63,2% were exported to South America. 729 cars were exported to China in 2009, but no export is recorded for 2010; 



Total of US$ 7.049.814.000 vehicles, engines

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and parts are exported from ANFAVEA member companies to the world; In 2009, 57% of export in value contributes to Argentina, followed by Mexico 11,5% and Germany 6%. (Indicates that export to SA is low value product). 

Table 06 – Exportations of Brazilian cars per year in thousand units

c) Chile: There´s no data to be displayed on Chile´s exportation. As a high depended market to imported cars, there’s no production to be offer to other countries as well.

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BRAZIL´S FUTURE OUTLOOK (ANFAVEA, 2012) Brazil: Between 2002 and 2011, the automotive market grew by 145%, at an annual average of more than 10%, while production grew by 109% in this period, averaging 8.6% per year.

The outlook of the market is encouraging and with potential for more growth in the upcoming years, with Brazil perhaps reaching 6 million car sales a year.

Recently, the government policies to minimize crisis effects to the Brazilian economy consist basically in decreases of IPI tax, which has made the final price car going down as well. It´s a short-run policy, although it’s quick results are very strong.

Another example of Brazilian government intervention, consist, in the other hand, rise up the foreign cars taxes, to “protect” the other companies, which have better cars and more sophisticated models than the 4 Big Ones.

There are also serious challenges ahead. Brazilian engineering and innovation require industrial BRAZILIAN X CHINESE AUTOMOBILE INDUSTRY: PERSPECTIVE OF GROWTH AND DEVELOPMENT FOR SOUTH AMERICA 2010/2012 CENTRO UNIVERSITÁRIO NEWTON

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policies and structural policies to strengthen competitiveness of Brazilian industry. Those companies didn´t invested in their plants as they take gross results during last 20 years. Letting, this way, the Brazilian plants older and with low competitive than Mexico or even Argentina.

In 2011, revenue of automobile industry totaled 105 billion, with 93 billion in vehicles (cars, LCVs, trucks, and buses), 12 billion in agricultural machines, accounting for out 18.2% of total GDP. 



doubled

In the past 10 years, revenue has in both vehicles and machineries.

In 2011, investment totaled 5,3 billion, with 5 billion in investment in vehicle, and 0,3 billion in agricultural machinery. 

Since 2002, investment in automobile industry has quadrupled. (1 billion in 2002 to 5 billion in 2011).

In 2011, import (20.656 billion) in vehicles exceeded export (12.971 billion); import in agricultural machines(3.645 billion) at similar level as export (3.259 billion); from 1976 to 1994 export exceeded import. 

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ARGENTINA´S FUTURE OUTLOOK (ADEFA, 2012) Argentina’s goals to its car industry bring some concerns about the future economy status and effects of global crisis. Trying to increase the investments in this sector the government is very aware to the keeping of employ level and exportations to Mercosur.

As an example, the car industry from Argentina has a better technology level than Brazilian one. So, new GM models are preferred to be start its production from Argentina then goes to Brazil market.

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CHILE´S FUTURE OUTLOOK (ANAC 2012) Upon the Chile´s ANAC organization concern, the central point of the car industry policies for the Chile future car market is based on environmental questions.

Carbon issues, recycling parts, quality of air, new fuel sources, bio fuels are some points of these policies that raise several commercial barriers to old cars imported.

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DEVELOPMENT OF CHINESE AUTOMOBILE INDUSTRY Despite of the fact that China has surpassed the United States in 2009 to become the largest automobile market in the world, automotive production is a relatively new concept when comparing to rest of the world, such as Brazil or Argentina. Production of passenger car did not start until late 1980s, prior to which all production was limited to only trucks and buses, with the technology provided by the Soviet Union. In late 1970s, the Reform and Opening Up policy initiated by Deng XiaoPing revitalized the automotive industry as tourism and foreign companies became possible in China, and soon demand for passenger cars and taxis rose dramatically.

However with a lack of manufacturing capacity, demand was largely met by foreign import.

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Table 07 – China´s vehicle Imports, 1981-1990

As shown in the table, import of vehicles in 1985 alone reached 353.992 units, more than quadrupled the demand of 1984, despite of a 260% import tax. To correct the worsening trade deficit on automotive import, the government launched an import substitution mechanism, intending to substitute import with domestic production. In 1987, the government issued “Notice from State Council of PRC on the reinforcement of Controlling the Importation of Passenger Vehicles” to authorize China First Auto Work (FAW), Shanghai Automotive Industry Corporation (SAIC), Dongfeng Automobile Company, Beijing Automotive Industry Corporation

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(BAIC), Tianjin Automotive Industry Corporation and Guangzhou Automotive Industry Corporation as the only domestic players for passenger vehicle manufacturing (state council of PRC, 1988). Throughout 1980s and 1990s, a number of policies were reinforced by the state to limit new entrants from entering the market, and a highly protected oligopoly of a few state-owned-enterprises (SOEs) was formed.

Chinese automotive production underwent major advancement throughout 1980s and 1990s as a result of joint-venture (JV) agreements with well-established multi-national enterprises (MNE). While limiting imports and restricting new entrants, the government intended to boost domestic production by supporting JV contracts with taxation and financial benefit. Multi-national automotive manufactures (MNEs) also realized the growth potential of Chinese auto market; In 1983, American Motors Corporation (AMC, later acquired by Chrysler Corporation) signed a 20-year contract to produce their Jeep-model vehicles under Beijing Jeep Corporation joint venture. The following year, Germany’s Volkswagen signed a 25-year contract to make passenger cars in Shanghai under Shanghai-VW. By the end of 1989, at least 20 JVs were established at the modest count (Wang). The government on one hand encourages the BRAZILIAN X CHINESE AUTOMOBILE INDUSTRY: PERSPECTIVE OF GROWTH AND DEVELOPMENT FOR SOUTH AMERICA 2010/2012 CENTRO UNIVERSITÁRIO NEWTON

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SOEs to take on JV investment, but on the other hand it restricts that market to contain a few big players to nurture domestic industry and develop economy of scale.

During the early phase of JV production, price of the cars was much more expensive than the rest of the world, not to mention for Chinese households.

Take Jetta, one of the most common sedans for example, in 1997, the price of a Jetta is approximately RMB 135,000, which accounts for 22 times as per capita GDP at that time (RMB 6,079) (Jin). For this reason, demand in the 1990s mostly came from government and companies, and rarely was there demand for family cars from the general population. However, as income of Chinese households rose sharply during the 1990s, and competition among JVs intensiďŹ ed, price gradually dropped and became much more affordable to the average household.

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Chart 09 - China GDP and GDP per capita after 1990

Market competition is elevated not only by the intensifying competition among JVs, but also by the emergence of Independent Chinese Automotive Manufactures (ICAMs). To be qualified as an ICAM, the maker has to develop its indigenous brand, and develop R&D and manufacturing process independently from foreign manufactures. Different types of companies have transformed into ICAMs overtime: companies originated from defense system such as Chana; companies that branched out from state-owned projects such as CHERY; and privately owned companies such as Geely. Today there are more than 20 enterprises that can be considered ICAMs by definition, but due to high entrance barrier and government restriction, only eight have successfully delivered BRAZILIAN X CHINESE AUTOMOBILE INDUSTRY: PERSPECTIVE OF GROWTH AND DEVELOPMENT FOR SOUTH AMERICA 2010/2012 CENTRO UNIVERSITÁRIO NEWTON

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passenger cars, including CHERY, Geely, BYD, Brilliance, Lifan, Great Wall, Hafei and Jianghuai (JAC Motors).

Meanwhile in China, infrastructures permitting road transportation has seen much improvement. According to a 2009 report by KPMG, since 2000, China’s expressway network which is already the second largest in the world, has been growing at an average of 20 percent a year. China has the highest rate of toll roads in the world, representing 70% of the total. As of 2009, there is total of 3.8 million km of road network, of which more than 50% is paved (World Bank). The fast construction of roadway, especially expressway, fueled the demand for private car ownership. Infrastructure investment is also critical for the success of China’s “Go West” policy to develop central and western China, where development fell far behind that of the Southern, costal areas.

Process of urbanization has also encouraged freight transportation and private car ownership, as exchange of goods and services became more frequent and necessary. The pace of urbanization has been consistently 3% - 4% since the beginning of 1990s. As of 2010, roughly 50% of Chinese live in urban areas, and the growth is predicted to continue into the future, so is Chinese government’s plan to improve road conditions and build more expressways.

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Chart 10 - Urbanization of China after 1990

As a result of increased wealth, improvement in road infrastructure and process of urbanization, domestic demand for cars has risen dramatically in the past two decades. And to meet the growing domestic demand, competition among JV and ICAMs car makers has intensified, although today the JV companies still control majority of domestic market. As CAAM reported, in 2009, the seven large JVs make up almost 78,8% of China’s market. However, the focus of this study is away from the emerging domestic market of China.

The tables show recent sales data from CAAM in sedan and SUV categories. Sales in August totaled 1.495.200 in August, 8.3% more than a year earlier.

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Ford Focus, Chevy Sail, and Buick Excelle are the top 3 brands in Sedan category. The market is dominated by JVs such as GM, Ford, and Volkswagen. Chery’s Cruze ranked 9th, the highest ranking achieved by independent carmakers.

There is no available information on total sale of September, however there was a significant slide of sales on all Japanese brands due to the Chinese nationalism movement against Japan and Japanese products. As of August, four of China’s 10 best-selling SUVs were Japanese: the Honda CR-V, Toyota 5% to over 30%, Toyota RAV4 even dropped out of top 10 list. The short-term RAV4, Toyota Highlander and Nissan Qashqai. But as the anti-Japan demonstration erupted, these brands all experienced drop in sale, ranging from winners of the movement are Great Wall and Hyundai.

Great Wall’s Haval experienced a 13% jump in sale from August to September, and Hyundai ix35 jumped from 9th to 3rd of the list, a 66% increase in sales.

How is the anti-Japan movement going to affect the future of Chinese automobile industry? Domestically, Chinese consumers are forced to find alternative to Japanese models, and many feel obligated to support Chinese car brands. Competition in price will acce-

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lerate as Japanese carmakers lower price to regain market share, and overall consumption might experience an increase in the short-run. It is a great opportunity for Chinese brands to grasp more market share, especially in the fast growing SUV market which Japanese brands had long dominated. In the long run, it is hard to predict when the Sino-Japan tension will be eased, or which companies will be the biggest winner. However, if Chinese carmakers take advantage of this opportunity to attract more automotive talent and enhance independent innovation, they might be able to gain a stronger position globally.

Table 06 – Ranking of Sales Chinese Market, 2012 per group of car type SEDAN

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SUV

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PREDICTION INTO 5 YEARS Prediction into the future is no easy task, but judging from the current economic environment and policies we could foresee some trends that will carry on to the future. As Chinese automakers showing momentum in capturing the emerging markets, it is not hard to conclude that Chinese brands will be an important part of the Mercosur market in the future.

Brazil Growth of Brazilian economy has slowed down in recent years. While domestic demand is high, domestic supply is suffering from currency appreciation and protectionism over the past years. The automotive industry is closely related to the macroeconomic environment.

The appreciation of Brazilian real over the past 5 years has hurt Brazilian exports and encouraged imports of automotive products from countries such as Argentina, South Korea, Mexico, and Germany, etc. Import from China has experienced a dramatic increase, and this trend will likely to continue as JAC Motors, Chana, and Chery, among others, announced plan to establish factories in Brazil this year. However there are many chalBRAZILIAN X CHINESE AUTOMOBILE INDUSTRY: PERSPECTIVE OF GROWTH AND DEVELOPMENT FOR SOUTH AMERICA 2010/2012 CENTRO UNIVERSITĂ RIO NEWTON

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lenges and obstacles ahead for all foreign carmakers as the Brazilian government tightens regulation on foreign imports. Chinese carmakers need to seek alternative ways to tackle Brazilian market while maintaining their price advantage. One possible solution is to establish production in other “minor” Mercosur countries such as Paraguay and Uruguay, and then assemble parts produced by these countries in Brazil to avoid high import tax. Lifan, a Chinese carmaker, adopted this method as it acquired Uruguayan company Besiney and planned to start manufacturing in Uruguay and Brazil by 2014.

In short-run, the protectionism policies seem to help nurturing the underdeveloped Brazilian automotive industry; however, in long-run, these measures will reduce competitiveness of the market, boost price of cars further, and give automotive giants such as FIAT and Volkswagen less incentive to improve productivity and innovation. It is crucial that the Brazilian government adjusts on its foreign policy to meet its growing domestic demand.

Argentina Despite of its long history of auto production and the highest per capita income in South America, Argentina is one of the countries with the least favorable in-

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vestment environment and toughest import regulation in the world today. The protectionist measures Argentinean government has taken will likely continue into the short future, considering president Cristina Fernandez de Kirchner’s recent actions. For instance, this year in June, Argentinean government unilaterally abolished the tariff-free agreement it has negotiated with Mexico, and began levying a 35% tariff on all imported cars.

Earlier in May, Argentina has already stopped issuing import declaration documents to countries outside of Mercosur in order to balance its trade deficit. These actions have set off discontent and protests from the international community.

Domestic production has also suffered from sluggish economic growth. Investors in manufacturing industry have lost confidence as Kirchner’s government nationalized the largest energy company YPF and seized control over key economic measures including oil and gas price. Foreign investors are now reluctant to increase investment in Argentina amid the large reserve it possesses.

As a result of the protectionist and authoritarian measures, the picture of the future of Argentina automotive industry is not so bright. If the government does BRAZILIAN X CHINESE AUTOMOBILE INDUSTRY: PERSPECTIVE OF GROWTH AND DEVELOPMENT FOR SOUTH AMERICA 2010/2012 CENTRO UNIVERSITÁRIO NEWTON

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not resolve the trade conflicts with other countries, we would expect to see contraction of foreign investment in the future. The data from ADEFA already showed that production and sale for the first 9 months of this year dropped 14% and 21% from that of 2011, respectively. Despite of the complex situation, a few Chinese carmakers are still considering expanding production into Argentina, using other Mercosur countries as stepping-stones. Geely, for instance, is planning on establishing production in Uruguay early next year using imported parts from Mercosur, then selling cars to Argentina, a similar strategy used by Chery.

Chile Chile is one of the fastest growing Latin American countries. Its GDP per capita ranks 2nd following that of Argentina, and the GDP growth rate maintained a 6% in 2010 and 2011. Many analysts gave negative forecast for Chilean economy in 2012 because of the contingency effect of the Euro crisis; however, Chile’s close tie with the rising Asian countries should help it withstand the weakness of European economy.

As mentioned previously, Chilean automotive industry in marginal to its economy and roughly all cars sold domestically came from imports. In contrast with

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Brazil and Argentina, Chile has adopted an open market regime, and established trade agreements with automotive powerhouses such as Korea, Japan, EU, the United States, and China. In recent years Chinese carmakers have been consistently gaining market shares; data provided by ANAC in August shows that the sales of Great Wall Haval ranked 7th in the SUV category, surpassed sales of global manufactures such as Volkswagen. The Chilean market is getting more and more saturated, as some of the top Japanese brands are losing ground and more competitions from China entered.

Another notable trend is the launch of new energy vehicles. Earlier this year Chinese brand BYD negotiated with Chilean government to introduce electric-powered taxis and buses to the city of Santiago. When the plan is implemented, Santiago would become one of the pioneer cities in South America to introduce electric-powered cars to its public transportation system. And because Chile has no domestic manufacturing capacity, the economical and innovative auto products from China would be appealing to a government that seeks new energy solutions.

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ENDNOTES

1 This company is a bus and trucks assembler, with few operations with vehicles and vans.

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