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An analyses of the interaction between the local and global level in the
Brazilian automobile industry
A.M.C Krakers
Rijksuniversiteit Groningen, Faculty of International Business and Management July 12th, 2012
a.m.c.krakers@student.rug.nl
Abstract:
The presence of multinational corporations (MNCs) in Brazil, heavily contributed to the existing automotive industry of Brazil. In this paper I will investigate the interaction between the local and the global level in the automobile supplier industry of Brazil. There is evidence that the global level, in this case the Multinationals, has influences on the local level, in this case the domestic firms. With the attraction of foreign direct investment in to Brazil, mainly to actions took by the government, the number of MNCs was growing. With this presence of MNCs in Brazil, the domestic firms could learn from multinationals in terms of knowledge and managerial expertise. Furthermore, because of the presence of MNCs in Brazil, the number of clusters and global value chains has risen. Automobile producers prefer suppliers near their plants in order to reduce transportation and inventory costs. Automobile suppliers were therefore setting up production near the big automobile producers. This process leads to cluster forming. Global value chains are embedded in cluster in the automotive industry of Brazil. With the growing number of clusters, also the number of Global value chains has risen. Being part of a cluster or global value chain offers opportunities for domestic firms.. Upgrading within the global value chain of cluster through learning, is the main opportunity. That the local level influences the global level is founded, only not as much as expected. The main reason for this is that the Brazilian automobile suppliers were not prepared to face the increased caused by FDI.
Keywords: Brazilian automotive industry, Global Value Chain research, Cluster theory,
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1. Introduction
Recent decennia have seen a strengthening of cross-border economic relationships and an increasing integration of the world economy. The greater mobility of services, goods and factors of production has led to the widening and deepening of economic linkages within the world economy. Closer economic integration, which means internationalization of economic activities, will lead to more efficient resource activity and therefore to faster economic growth. This process of growing international integration has been variously described as globalization and regionalization by for instance Cook and Kirkpatrick (1997) or as Glocalization by for instance Sucháček (2011). Glocalization comprises both the processes of globalization and localization and is often interpreted as “think globally and act locally”. This means tailoring the company's products and services in order to comply with the interests of strongly differentiated local markets across the globe. In this paper I will use two theories which examine the different ways in which global economic and local economic actions are linked, namely the Global Value Chain (GVC) approach and the cluster theory. This paper defines clusters as a geographical concentration of firms and associated institutions in related industries, linked by economic and social interdependencies, as stated by Porter (1998). The geographical concentration could be a region, a state, or even a city. The GVC perspective attempts to provide an explanatory framework for the development of vertical coordination between firms. A firm´s global value chain can be described as the functions involved in turning a raw material into a final product. Firms from several countries are involved and thereby the chain has a global reach (Gereffi et al, 2005). Both theories are criticized in previous research (Humphrey and Schmitz (2000), Giuliani et al (2005) and Nadvi and Halder (2007) ), because the GVC approach lacks interaction with domestic, local Brazilian, firms and institutions, while the cluster theory lacks interaction with external linkages such as global buyers. However, according to Rocha and Stenberg (2005), clusters can have external linkages, for instance the presence of multinational corporations (MNCs). External linkages provides a cluster new knowledge and managerial expertise. MNCs can also be a stepping stone for domestic firms to participate in a global value chain. A thing to note is that a cluster always contains at least one value chain, but that not all value chains can be considered clusters. However, whether that value chain is global depends on the actors involved in the chain.
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formed because MNCs starting operations in foreign countries and that attract other, mostly business related, firms in to the same region. This geographical concentration of firms causes cluster forming. Furthermore, value chains are also becoming more global due to the activities of MNCs. Multinational firms are spread their operations throughout the world, using different actors from different countries in the chain in order to turn a raw material into a final product. Especially firms and countries in developing markets rely on FDI in order to become competitive in the global economy. For instance, Cook and Kirkpatrick (1997), Altenburg (2000) and Fan (2002) suggest that developing countries receiving FDI, see their domestic firms become more competitive in the global economy. Domestic firms in developing countries are under pressure to improve their performance and increase their competitiveness in order to compete in the global economy (Humphrey and Schmitz, 2002). By attracting FDI, local economies try to increase their knowledge through attracting MNCs hoping that their knowledge will transfer to domestic firms and increase their productivity in both clusters and global value chains.
The interaction between local and global economies through clusters and global value chains will be investigated in this paper. That the global economy influence the local economies is investigated by many authors, for example Ernst and Kim (2002) and Humphrey and Schmitz (2000). These research aims the role of MNCs in transferring knowledge and management expertise into a country which, can be useful for domestic firms. This goes for both the GVC approach and the Cluster theory. However, regardless which theory is used, there is limited research available on how the development of domestic companies from developing countries are influencing the structure of global value chains and clusters. It is reasonable to assume that not only the global industry has influence on the local industry, but that a strengthened local industry can also influence global networks. Thus we can determine that it is often overlooked that domestic firms also play an important role in the process of globalization. The latter is one of the main incentives of this paper.
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and services and receivers of capital. Most studies show that there may be a major shift in global economic balance and it is argued that BRIC countries may emerge as global economies in the future (Kumar and Fodea, 2009). In this paper we will be focusing on one of the BRICs, Brazil. Like other emerging countries, Brazil also experienced continuous pressure to strengthen its industries’ competitive position. In Brazil, major companies are experiencing a new wave of internationalization (Santiso, 2007). The automotive sector has developed particularly well, it is one of the biggest industries in Brazil, together with the iron and steel production, petroleum processing and chemical productions. Therefore this paper will investigate the interaction between domestic and foreign firms in the Brazilian automotive industry through clusters and global value chains. Because the automotive industry consists of multiple branches, to be more specific, this paper focuses on the automobile supply industry, which supplies parts and whole systems to the automotive industry. In order to find answers, the main question will be “How do the local and the global level interact with each other in the Brazilian automobile supply industry?”. To answer the research question, this paper is looking at the GVC approach and the cluster theory in order to see how these theories contribute to this interaction between the local and global level.
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2. Background
In this section, I explain both theories, namely the GVC approach and the cluster theory, which are used in previous literature to describe the integration of domestic firms and MNC’s in the global economy. Because this paper focuses on the automobile supply industry, I also look at how these theories interact with this industry. Furthermore, in the last section of this chapter I will compare the two theories. What are their similarities and differences? How do both theories contribute to the interaction of global and local economies? And how do they contribute to the automobile supply industry?
2.1 Cluster theory:
In previous research there are many definitions used to describe a cluster. This paper defines clusters as a geographical concentration of firms and associated institutions in related industries, linked by economic interdependences, as stated by Porter (1998). The area of geographical concentration could be a region, a state, or even a city. Firms within a cluster can be horizontal or vertical integrated with each other. The horizontal dimension of a cluster relates to the firms within a location that produce similar goods and compete with one another. It means that they have an equal position in the supply chain. In this respect, Porter (2000), has demonstrated that strong competition is an important incentive for innovation and product differentiation. A vertical cluster dimension consists of firms with complementary products and competencies that are linked through supplier and customer relations (Depner and Bathelt, 2003). In order words, a vertical cluster is a supply chain where several layers of this supply chain are represented.
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automobile producers are aware of the specific interests and requirements of the local markets. In Brazil the local customers have specific interests in small vehicles which triggers the automobile producer to produce a specific model in and for the Brazilian market (Lang and Mauerer, 2010). Thus because of globalization the local interests are become more noticed.
Being part of a cluster can be important for a variety of reasons. According to Pietrobelli and Rabellotti (2004), clustering can be considered a major facilitating factor with respect to a number of resulting developments such as an increase in the division of labor and specialization, the growth of a wide network, specialized producer services, a pool of specialized and skilled workers and the formation of business associations. Furthermore, according to Selfin et al (2010), clusters are important because they can provide three main benefits for the industries that are located in a cluster, namely: a specialized labor force, inputs in the production process that are located nearby, and a network of companies and individuals in which business-related knowledge transfers rapidly and with few barriers. Porter (2000) points out that being part of a cluster allows firms to operate more efficiently in sourcing inputs, gaining information, technology and needed institutions. Furthermore locating within an industrial cluster has further advantages that are not available to firms situated elsewhere (Bathelt et all, 2004). These advantages could be quicker delivery, lower transportation and inventory costs. For domestic firms the advantage of being involved in a cluster is to learn from MNC, the knowledge and managerial expertise these bring into the cluster. According to Lazonick (2000), each individual firm knows that is has more to gain from being part of a cluster than from doing business alone. The rivalry between the firms in a cluster may create the incentive for individual firms to engage in continuous innovation (Ibid).
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of international integration of domestic firms by bringing knowledge and managerial expertise (Giblin and Galway, 2008). The domestic firms are organizing themselves around a foreign-owned company, which contributes to cluster formation. This relation between global and local in cluster formation can also be reversed. Also domestic firms can create clusters. This is the case when a local cluster attracts the presence of a MNC. The significant presence of similar industry activity in a region will attract FDI, if that MNCs will benefit from local economies, such as access to resources, technological capabilities or knowledge spillovers (Ibid).
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2.1.1 The global automotive industry from a cluster perspective:
Clusters of MNCs’ exist in industries that are characterized by technologically more complex activities, such as the automotive industry (Altenburg, 2000). The triggering factor for the formation of automobile clusters in Brazil was the arrival of FDI to the region (Jaklic et al, 2004). Foreign companies started automobile production plants in a specific region and thereby attracting other sector-related firms, like automobile supply firms, into the same region. Because they are organized around a company, automobile suppliers are responsive to the formation of clusters when they enter new market regions. Depner (2005) describes this by saying that the foreign automobile producers are the primary force for clusters. Especially in Brazil, many clusters emerged in large part through FDI. Automobile suppliers are settled nearby the automobile plant because those automobile producers prefer suppliers nearby in order to take advantage of quick delivery and to lower the transportation and inventory costs (Humphrey, 2003). In other words, many clusters nowadays exist because of foreign automobile firms having set up operations in emerging markets like Brazil. This means that the global level has influence on the clusters, which were previously considered to be more on a local level. However, this global influences in the cluster can be an advantage for domestic firms. Domestic firms can learn from the foreign automobile producer and suppliers by the knowledge and managerial expertise that those MNC bring into the cluster (Wad, 2006).
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In the automobile supply industry this means that they have to upgrade from a complementary, mostly second tier suppliers, to a system supplier which is a first-tier supplier. Furthermore, automobile suppliers want to be part of a cluster because clusters are easier to spot than an individual producer. In the automotive industry, clusters are settled near an automobile plant. Those automobile producers prefer firms nearby, which means they first look at cluster localized in the same region. At last, clustered companies may also generate collective efficiencies that make them more attractive for global producers (Porter, 2000).
To conclude, by being part of a cluster a domestic firm has multiple benefits which increases their productivity in process and in product innovation. By the use of upgrading a domestic firm is able to compete within and outside the cluster. This also applies for the automobile suppliers industry where competition between domestic and foreign supply firms is intense. To compete a firm should upgrade itself in a cluster by being innovative in their production and processes. Hereby a firm can use the knowledge and managerial expertise present in a cluster, mainly because of the presence of MNCs.
2.2 Global Value Chain (GVC) approach:
From an analytical point of view made by Kaplinsky (2001) and Wood (2001), the value chain perspective is useful because the focus moves from manufacturing only to other activities involved in the supply of goods and services, including distribution and marketing. Guilliani et al (2005) point out that GVC research focuses on the nature of the relationships among the various actors involved in the chain, and on their implications for development. The influence of actors in the chain can vary, affecting their ability to determine the parameters of production, including what is produced, how, when, and at what price.
In this paper the GVC approach is defined as an explanatory framework for the development of vertical coordination between firms. A Global value chain can be described as the functions involved in turning a raw material into a final product, in which firms from several countries are involved and thereby the chain has a global reach (Gereffi et al, 2005).
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value chain is a way for firms in developing countries to obtain information for access to global markets. Firms always participate in a value chain. Argued by Pietrobelli and Rabelloti (2004), individual companies rarely undertake the full range of activities alone, that is required to bring a product to the market. The design, production and marketing of products involve a chain of activities divided between different companies often located in different places, sometimes even in different countries. However if this value chain is global or not depends on the actors operating within the chain. According to Gereffi et al (2005), value chains involving firms from several countries can be called global value chains A global value chain could have a wide geographical reach because actors in the chain are not geographical linked.
To be part of a global value chain, domestic firms should improve technology, knowledge and skills. By improving those points, a domestic firm has the ability to face the competitive pressure and to become more globally involved (Gereffi et al, 2005). Once participating in a global value chain, a firm can use upgrading to improve their position. According to Palpaceur and Parisotto (2003), upgrading a supplier position indicates an improvement in the global value chain. This improvement depends on the firm’s current state. For example a firm can move from a second- to a first tier supplier by producing more sophisticated products. The learning dynamics by which local suppliers can develop their competencies and capabilities within the GVC are important to this upgrading process (Ibid). However, researchers likeGiuliani et al (2005) and Nadvi and Halder (2007), have criticized the GVC approach because it lacks interaction with domestic firms and institutions. The focus of a global value chain is on supply firms who deliver the most suitable products, regardless their location. For domestic firms it is difficult to be part of a value chain because global firms rely heavily on their existing suppliers and if they set up a production network in another region, they pressure their existing suppliers to be involved.
The global automotive industry from a GVC perspective:
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suppliers also to establish plants in the host country, preferably near the plants (Depner and Bathelt, 2003). In the automobile global value chain, automobile producers operate at the top-end of the value chain (Dicken, 2006). The global value chain starts with a raw material and ends with a final product, in this case the automobile. The automobile producers is responsible for the final product and choose the actors involved in this process. Therefore the automobile producer is at the top-end of the value chain.
The automobile global value chain focuses on the move from manufacturing only to the other activities involved in the supply of goods, for instance distribution and marketing (Kaplinsky, 2001). Nowadays, those activities are outsourced by the automobile producers which means it shifted to another tier in the global value chain. Mostly, automobile producers are outsourcing to first-tier suppliers. The first-tier supplier became responsible for organizing these activities and thus for organizing this global value chain (Humphrey and Memodovic, 2003). Widespread mergers and acquisitions during the 1990’s created mega-suppliers. As a result the industry came to expect that first-tier suppliers take responsibility for promoting supply chain learning so as to ensure that producers in the second, third and fourth tier develop the capabilities to meet the industry’s critical requirements (Kaplinsky, 2001). Furthermore, according to Veleso (2002), first tier suppliers are nowadays responsible not only for producing products but are also assumed to have an active role in design, assembly and delivery. In response, first-tier suppliers are outsourcing to firms activities down the chain, mostly to the second-tier suppliers. This reorganization of the global value chain calls for more frequent and closer interaction between firms.
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value chain. As Wad (2006) argued, upgrading in the GVC by local auto suppliers raise two challenges; first, linking up with the global value chain and becoming efficient in order to stay competitive as a supplier; and second, upgrading functionally and moving up the global value chain and in the end become a first-tier supplier. By being part of a global value chain a domestic firm can upgrade itself through learning. MNCs bring their knowledge and managerial expertise into a global value chain which can be transferred to domestic firms (ibid).
Concluding, automobile producers have huge power within the global value chain and are able to pressure firms to move abroad with them. However, due to the changes in the 1990s, the global value chain structure has changed. First-tier suppliers are becoming more responsible for organizing the chain and are moving from manufacturing only to other activities in the chain. If a firm wants to be part of a global value chain, it should improve its technology, knowledge and skills. Once participating in a global value chain, a domestic firm can learn from the other actors in the chain and thereby upgrade itself within the global value chain.
2.3 Comparing the Global Value Chain approach and the Cluster theory
As mentioned by Humphrey and Schmitz (2002), both the cluster literature and the global value chain research emphasize that interaction between actors is central to economic upgrading. Also Barrientos et al (2010) mention in their paper that in both theories economic upgrading is the key factor for domestic firms to participate in the global economy. Economic upgrading is defined as “the process by which economic actors, firms and workers, move from low-value to relatively high-value activities in global networks”. Another similarity is that, as Humphrey and Schmitz (2002) argued, both forms of organization offer opportunities to foster competitiveness by learning. According to Giuliani et al (2005), MNCs can play an important role in determining the upgrading opportunities of local producers. MNCs bring knowledge into a global value chain or cluster, which can be used by domestic firms. In almost all of the existing value chains and clusters in the automotive industry in Brazil, global firms are present.
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associated institutions in related industries. The GVC approach is not geographical linked, instead it could have a wide geographical reach. Furthermore a global value chain always has more foreign firms involved, in a cluster theory it is not necessary that a MNC is present. Another difference is that the GVC approach lacks interaction with domestic firms and institutions, while the cluster theory lacks interaction with external linkages such as global buyers. However, for cluster theory previous research is contradicting. According to Guiliani et al (2005), cluster theory neglected the increasing importance of external linkages while researchers like Rocha and Stenberg (2005) and Birkinshaw (2000), argue that external linkages within a cluster can be pursued. One way for clusters to develop external linkages is the presence of MNCs. Furthermore, A cluster always has one or more value chains. On top of the cluster is the automobile producer who has suppliers participating in the same value chain. However, those suppliers have their own suppliers which are not necessarily involved in the cluster. This makes that a cluster could have more than one value chain. Whether those value chains are global or not depends on the actors involved in the chain. If these value chains are global or not depends on the actors involved in the chain. However, a global value chain is not always embedded in a cluster. Mainly because of the geographic concentration of that global value chain.
With the presence of MNCs in the Brazilian automobile clusters, we can assume that those value chains are global because MNCs mostly have a value chain were actors from several countries are involved. Furthermore, those global value chains within the cluster can offer external linkages. The MNCs who operate in the cluster and are part of a global value chain, can transfer knowledge obtained externally into the cluster. According to Pietrobelli and Rabelloti (2004), firms and clusters often operate in several types of global value chains simultaneously. This implies that the skills acquired as a result of participation in one global value chain may be applied and adapted to supplying other chains and/or clusters. Concluding, both theories have similarities and differences, however when using the two theories in the automotive industry in Brazil, we can say that both theories are woven.
3. Method
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investigates a contemporary phenomenon within its real-life context; when the boundaries between phenomenon and context are not clearly evident; and in which multiple sources of evidence are used”. Within case study research it is possible to distinguish between single and multiple case studies. In this paper I am using a single case study in order to see how local and global automobile suppliers are influencing each other. I look at one single industry, namely the Brazilian automotive industry. In order to find the interaction between the local and global level, I use one single case, namely an automobile supply firm originally from Brazil.
Comparing Brazil with the other BRIC countries, according to Lang and Mauerer (2010, Brazil has the most stable and mature automotive market and is the front-runner in terms of auto companies’ localization. The other BRIC countries have a much shorter history of FDI in the automotive sector. Like China who’s automotive industry grew rapidly after 2001, when they decided to join the World Trade Organization or India who opened his market for foreign direct investment much later namely in the 1990s. The Russian automotive market history is even shorter than that of India and besides that it is much more volatile and its future development is less predictable (ibid).
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Some of the major exporters in Brazil are operating in the automotive industry such as Volvo from Sweden, which sells nearly 50% of its Brazilian-based production abroad. Also General Motors, Ford, Fiat, Renault and Volkswagen have plants in Brazil (Santiso, 2007). Because of the reason mentioned above, Brazil is chosen in this paper. Also the automotive industry as a whole gives a good example of the linkages between local and global. As mentioned before, many big automobile manufacturers have plants abroad, which means that they have localized their production activities. To investigate how local and global firms are interacting, looking at global value chains or clusters, this paper will focuses on the automobile supply industry.
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Automobile supply firm Note
AJAX No overseas activities
Ampel parts No English company website
Arteb No overseas activities
Borlem Acquired by Iochpe Maxion
Botto auto gear No overseas activities
Chinelatto No overseas activities
Ciamet No overseas activities
Cindumel No English company website
Cinpal No overseas activities
COBREQ Acquired by TMD, UK
Cofap No English company website
Coplatex Subsidiary of Aunde, Germany
Delphia No overseas activities
DHB Joint venture with Delphi, USA
Di Mello sistemas automotivos No company website
Dorkr No company website
Dytech No English company website
Estradeiro Auto Pecas Ltda No English company website
Fania No company website
Fras-le 100% Brazilian owned
Freios Controil Acquired by Fras-le
Freios Varga Acquired by Lucas Varity, UK
Fremax 100% Brazilian owned
Hubner Joint venture with AAM, USA
Industria Marilla de auto pecas No overseas activities
Iochpe Maxion 100% Brazilian owned
Mangels No overseas activities
Mangotex 100% Brazilian owned
Megastamp No overseas activities
Metagal. No overseas activities
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Table 1.
Out of those ten companies, only five clearly showed overseas activities like production plants or sales offices. To collect information about the automobile suppliers, I looked at their websites, annual reports and in newspapers. Those five automobile suppliers are marked red in table 1 and are explained more in detail in the result section.
4. Results
In order to see the interaction between the local automobile supply industry and the global automobile supply industry, we will focus mainly on local automobile supply firms originally from Brazil with overseas activities. First of all, I will show a map to see were the four big automobile producers in Brazil are located and why they are located there. I will also explain why those four big automobile producers are important for the Brazilian automotive industry and what their link is with the global value chain and clusters. After that I will give an introduction of the Brazilian automotive industry with special attention to the FDI flows. Furthermore, I will describe the influences of local firms into the global industry and vice Moura Acumuladores 100% Brazilian owned, no overseas
production
MWM Subsidiary of Navistar International, USA
Plascar Acquired by IAC, USA
RCN No overseas activities
Sabo 100% Brazilian owned
Sachs Acquired by ZF Friedrichshafen AG,
Germany
Schadek 100% Brazilian owned, not enough
information
Santa Marina Acquired by Saint-Gobain, France Seeber-Fastplas Joint venture with Seeber, Germany
Suprens No overseas activities
Target international No overseas activities
Truffi No English company website
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versa. I will explain the benefits and barriers of FDI into the Brazilian automotive industry and explain what domestic firms can and need to do to keep competitive with foreign firms.
4.1 The four big automobile producers of Brazil: Ford, Volkswagen, General Motors and Fiat
One of the main reasons why clusters and global value chains are existing in Brazil is the presence of MNCs. Because of the rising FDI into Brazil, the number of MNCs has grown the last decades. Those MNCs are setting up plants in specific regions which attracts other, sector related, firms into the same region, which causes cluster forming. In order to see why clusters and global value chains are located in a specific region, I will look at the four big automobile producers in Brazil, namely Ford, Volkswagen, Fiat and General Motors. Those four automobile producers are the leaders in the automotive industry of Brazil. Together they account for almost 80% of the market share, as seen in figure 2.
Figure 2.
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However, according to Gomes and Filho (2002), the automotive sector in Brazil has undergone considerable changes since 1996. A new phase of investments, both on the part of automakers already established in the country and on that of newcomers, has manifested in the establishment of new plants and in the modernization of existing ones. As we can see in figure 3, this lead to automobile plants in different regions in Brazil. Ford, General Motors and Volkswagen were setting up new plants in other parts of Brazil, mostly in the South and Southeast.
Figure 3.
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Because of the settlement of the four big automobile producers in Brazil, clusters of automobile suppliers have been formed. Automobile producers prefer suppliers nearby (Humphrey, 2003). For this reason, many automobile supply firms set up operations in the same region as their clients. For Brazil this means that the East coast, the South and Southeast are attractive to suppliers, mainly because in those areas the main automobile clusters are established. I will describe the biggest automobile clusters in Brazil. The main production cluster is centered around Sao Paulo, where the plants of the three big automobile producers; Ford, General Motors and Volkswagen are located. Foreign investment into auto assembly in the Sao Paulo cluster has totaled US$ 4.6 billion since 2003. The Brazilian auto manufacturers association, ANVAFEA, expects to see an additional US$11 billion of investment by automobile producers by the end of 2012 for Brazil as a whole. Sao Paulo is expected to become one of the key global clusters over the next thirty years. It is now half the size of Detroit in terms of vehicles assembled but should overtake it before 2040 (Selfin et al, 2010). The second largest automobile cluster in Brazil is located in the metropolitan area of Curitiba. According to ANFAVEA (2009), this area has, in recent years, shown significant growth in the automobile manufacturing and received investments of US$4,2 billion in that period. Ford, Volkswagen and General Motors all have manufacturing plants in this region. Another cluster in Brazil is the Nova Serrana cluster, nearby Belo Horizonte in the state of Minas Gerais. According to a rapport of the Federation of Industries of Minas Gerais (2000), the automotive sector in Belo Horizonte exists about some hundred companies which generated a turnover that reached US$ 4,8 billion in 1999 and it provides jobs to 20,700 people. The sector developed around the FIAT plant, which is the chain leader in this cluster (Pietrobelli and Rabelloti, 2004). Global value chains are mostly embedded in clusters, also in Brazil, which assumes that when the amount of clusters rise, the amount of value chains rise as well. However, because actors in a global value chain are not geographically linked it is hard to notice where they are operating.
4.2 Effects global to local, the case of Brazil
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One of the main reasons MNCs play an important role in the development of many emerging markets is because of the attraction of FDI made by the government. As Meyer (2004) mentioned, the expectation that FDI will benefit the local economy has motivated many governments to offer attractive packages to stimulate investors, so too in Brazil. Since the government of Brazil undertook some actions to attract FDI into the country, the amount of clusters and value chains has risen. Those clusters arise because foreign automobile producers are starting business in Brazil by setting up a production plant. This attracts other automobile producers and suppliers, both domestic and global firms. Together those firms are forming a cluster in a specific region in Brazil. As explained earlier, mostly when the amount of clusters rise, the amount of value chains are rise as well.
Why did the government undertook actions to attract FDI? The rise of the Brazilian automotive industry was created during the 1950s through a planned action of the government whose target was developing the Brazilian industry and improving the standard of living to the levels of the United States and European countries. They attract foreign companies by using by promising profits deriving from a large potential market (Neto and D’Angelo, 2001). During this so called “first wave” of FDI into Brazil between the late 1950s and 1970s, the number of foreign automobile producers in Brazil was growing. The plan of the government to develop the automotive industry worked out and foreign, mostly European automobile companies, such as Volkswagen and Fiat, automobile companies were moving to Brazil. These foreign investments were, with the exception of Fiat, concentrated in the Sao Paulo region. Before this “first wave” only Ford and Volkswagen were operating in Brazil, but up until then sold only imported cars. After a decade, in the 1960s and 1970s, the Brazilian industry grew. Ford, Volkswagen and General Motors saw the potential of the Brazilian automotive market and expanded their operations (Huallachain and Wasserman, 2008). During this “first wave” of investments, the automobile supply industry in Brazil was also growing. With the investments of the automobile producers, many saw the potential of the market and set up new automobile supply firms or changed business into the automobile supply industry.
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Furthermore, they relaxed the requirements of component nationalization (Bede, 1997). The difference with the “first wave” was that during this expansion the industry was not geographically concentrated. Automobile producers, as well as new entrants and those companies who were already operating in Brazil, set up plants in different states, as you can see in figure 4.
Source: Brazilian vehicles assembled by region in 1990 and 2008, ANFAVEA (2009).
Figure 4.
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avoid dependence or poor quality locally produced components (Huallachain and Wasserman, 2008). The consequences for the local firms depended on which operations the automobile producers internalized. Later, in the early 1990s during the second wave of FDI, President Collor opened the Brazilian market to imported cars, reduced domestic content requirements and loosened other regulations protecting domestic suppliers in order to give firms more flexibility with respect to sourcing and to reduce the time required to introduce new models (Shapiro, 1996). The number of new automobile plants set up during the “second” wave of investment increased by 400 percent, as compared to the 1980s. This increased competition may pressure local firms to operate more efficiently and introduce new technologies earlier. However, according to Quadros (2003), the Brazilian assemblers were not prepared to face the competition of imported vehicles. By attracting MNCs through FDI, the ownership of most large Brazilian supply firms was transferred to foreign businesses. By the end of the 1990s, the automotive industry had become polarized, with foreign automobile producers and suppliers of high value-added components and simple domestic suppliers, most of them small and medium sized firms (SMEs). As a consequence of these massive investments by multinationals in the late 1990s, product and process technology development grew rapidly, which has acted as an activator to attract new FDI in the industry. According to Lang and Mauerer, (2010) Brazil is a prime choice for localizing research and development (R&D) because it has very specific customer requirements, highly qualified local capabilities and a relatively low risk of intellectual property loss or employee attrition. Because of these strengths, foreign automobile producers are using Brazilian R&D centers in their product and process development. The Brazilian R&D centers are developing products for both local and global demand.
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stagnation. As you can see in figure 5 from 1992 till 1997, the automobile production was growing every year.
Figure 5.
In the paper of Gomes and Filho (2002) there is a survey, which observed the existence of 63 agreements such as acquisitions and joint ventures in the automobile supply sector. Among these, 45 involved at least one foreign company.
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Thirdly, in the 1990s the supplier-buyer relation changed. As reform took hold, most automobile producers subcontracted parts production to selected tier one suppliers. Tier one suppliers assumed an active role in the design, manufacture, assembly and delivery. If tier one suppliers remain to rely on domestic suppliers, they risk delivering low quality systems to automobile producers. The globalization of supplier production enabled first tier suppliers to guarantee quality, safeguard designs and manufacturing technologies. Because the first-tier supplier assigning more competences, producers have reduced their number of direct suppliers.. This reorganization of the global value chain calls for more frequent and closer interaction between firms (Gereffi et al, 2005).
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However, regardless of the opportunities, for a domestic firm it is hard to catch up with foreign firms. Those firms are mostly the first tier suppliers in the chain. As Humphrey and Memodovic (2003) point out, when the globally preferred supplier is unable or unwilling to establish a local production facility nearby, the assembler’s second preference is to use another of its global suppliers. This company will have experience in supplying parts to the assembler, and it should have the required level of management and quality expertise. As Humphrey and Salerno (2000) mentioned, the least preferred option is for a domestic company to produce the part, either under license or using its own design. In this case, the assembler has much more work to do in monitoring the production processes and quality systems of the domestic supplier.
Concluding, the effects of the globalization of the automotive industry, which is considered highly globalized, has influences on the local economy in both negative and positive ways. The negative points are that many domestic supply firms are taking over by the bigger foreign supply firms, that foreign automobile producers are taking their own suppliers with them and that automobile suppliers are cutting their amount of suppliers in the chain. On the other hand, because of the presence of foreign companies, important assets are transferred into the country such as knowledge and management expertise. Furthermore, domestic supply firms are benefiting from the fact that automobile producers prefer suppliers nearby in order to enjoy the advantages of lower transportation costs, quicker delivery and market knowledge. At last, because of the geographical shift of automobile producers in Brazil, the number of clusters and global value chains has risen. This gives domestic firms the opportunity to be in a new cluster or global value chain.
4.3 Local to global effects
The automotive industry is a very important industry in Brazil. Since its installation, about 60 years ago, the Brazilian automotive industry has become one of the most important industries in the country, being responsible, in 2007, for 18% of its industrial GNP (Limoncic, 2009).Today, the Brazilian automotive industry is a major driver of economic growth.
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domestic firms. One of the constraints was, from the end of the 1950s, that cars had to contain 95% domestic parts. This was a positive effect for the domestic automobile supply firms because they guaranteed high profits and provided few incentives to cut costs or to improve quality. However, in response automobile producers internalizes some of their parts to avoid dependence or poor quality locally produced components (Huallachain and Wasserman, 2008). Still, during the “first” wave the numbers of Brazilian automobile suppliers was growing. As you can see in table 2, four out of five companies studied started business before the 1960s. Because of the entrance of new foreign automobile producers, locals saw the opportunity to start a supply firm or to switch businesses so that they were able to serve those automobile producers.
Supplier Firm Established
Fras-le 1954 Fremax 1986 Mangotex 1960 Sabo 1942 Iochpe Maxion 1918 Table 2.
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Brazilian subsidiary as a “center of competence”. For example Fiat who localized R&D activities in the technology of suspensions and absorbers. Another reason why Brazil is becoming an emerging market leader for technology development is because of the presence of highly skilled and qualified engineers and relatively low labor costs compared to developed countries (Automotive Resource Guide, 2011). In Brazil, specifically, companies can benefit from the more than 40.000 well trained engineers who graduate each year, as well as from Brazil’s large population of experienced engineers who have acquired deep familiarity with the automotive industry over decades (Lang and Mauerer, 2010). MNCs subsidiaries in Brazil have experienced an increase of product and process development activities with the goal to serve the global firm. Also the big automobile producers, with the exception of Ford, made their Brazilian subsidiaries recently project centers of automobile designs for developing countries. The investment in R&D activities also favors the position within a global value chain or cluster. Improving in product and processes gives the domestic firm the opportunity to upgrade in a cluster of global value chain.
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What do those this R&D activities mean for the domestic supply firms? First of all, most of the Brazilian R&D centers, namely the local R&D hubs, are developing products to meet the requirements of Brazilian customers. This is an advantage for the domestic suppliers because they know the market better than foreign firms. Furthermore, thirty percent of the Brazilian R&D centers make the global products to local requirements, which is again an advantage for the domestic suppliers who know the market better than the foreign firms (Lang and Mauerer, 2010). Noticed in the same paper of Lang and Maurer (2010), the supply firms who are developing products and technologies for both local and global, are able to compete with the foreign suppliers inside as well as outside Brazil. Furthermore, as Quadros (2003) mentioned, the R&D activities in those subsidiaries have given Brazilian subsidiaries decision making powers in the selection of suppliers, which has helped raise demand for domestic suppliers. At last, automobile producers who produce cars especially for the local market, will use a supply firm who are able to produce components or complete systems which are used in the production of a car for the local market. This gives the domestic firm the opportunity to enhance themselves in a cluster or a global value chain.
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However, even if the expectation is that the Brazilian automotive and supply industry experiences further expansion, most of the Brazilian automobile supply firms were acquired by MNCs, joint ventured with a foreign company or became a subsidiary of a MNC. Even companies which were considered to have an international level of performance were sold. According to a rapport of the Automobile Components Manufacturers’association (1997), the Brazilian based automobile producers have always been multinational companies, the automobile suppliers principally have been small and mid-sized Brazilian family-owned companies. As the Brazilian market opened up and becomes more competitive, many of the family owned automobile supply were not able to do the investments needed to compete with the foreign supply firms. The number of 100 percent Brazilian-owned companies has become smaller day by day. According to Sindipeças, in 1994 the market share of Brazilian automobile supplier industries was around 50 percent. In 1999, using the same criteria, the market share of Brazilian companies is around 30%. During the 1980s Brazil had 38,000 automobile supply companies, in the 1990s 8,000 and they predict that this will decline even further (Neto and D’Angelo, 2001).
Concluding, FDI is increasingly being seen by governments in emerging markets as an instrument for stimulating improvements in products and services of domestic suppliers. Also the Brazilian government undertook actions to improve the automotive industry and thereby their domestic suppliers actions. According to Altenburg and Meyer-Stamer (1998), FDI generates economic activity, transfers technological and management skills into Brazil and gives many of their domestic suppliers a foothold in international markets that may eventually enable them to compete worldwide. Also the investments made in R&D by domestic supply firms to compete with the global firms has been successful. As a consequence, some MNCs have chosen their Brazilian subsidiary as a “center of competence”. However, the Brazilian automobile supply firms were not ready to compete with the global firms. By opening up the market for FDI, many of the small and medium supply firms were taken over by MNCs.
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What does this information about the five automobile supply firm originally from Brazil tell us? As you can see four out of the five companies have plants in the state of Sao Paulo, which is still one of the biggest automobile clusters of Brazil. Furthermore also the states of Minas Gerias and Rio Grande do Sul have automobile activities and are considered one of the biggest clusters in Brazil. Because of this we can see that the location of production is still important. We can also assume that those supply firms are part of a cluster because their productions plants are nearby the big automobile clusters in Brazil. Because of their international activities, we can assume that they are in a global value chain. As mentioned before in this paper, supply firms are starting business nearby automobile producers’ plants because those firms prefer suppliers nearby for multiple reasons. This latter also counts for the five suppliers who have plants in particular regions were also one or more of the four big automobile producers are settled. For instance Ford, General Motors and Volkswagen who are settled in the state of Sao Paulo. These automobile producers are the main clients of most of the five suppliers who are also settled in the state of Sao Paulo. Due to this information we see the link between main customers and location.
We also can concluded that FDI has influences on the automobile supplier industry. Four out of the five companies are established before 1960. Between 1950 and 1970 the first wave of FDI took place in Brazil. At that time, the four big automobile producers were or expanding their operations or were new entrants. This investments of the foreign automobile suppliers stimulated the locals to set up business in the automobile supplier industry. Secondly, all the companies do have facilities abroad in the form of production plants and/or sales offices. Because of their operations overseas, those firms turned themselves from a local to a global supplier. Most of them set up operations abroad to better serve the customer. For instance, Fras-le who mentioned to set up a production plant in China to better serve the Asian market. As mentioned before, automobile producers prefer suppliers nearby. Thus by setting up facilities in different region throughout the world, the firm is able to locate themselves nearby the automobile producers in different markets.
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provide component parts directly to the automobile producer or to the system supplier. Hereby a system supplier is mostly a first-tier supplier whereby the system supplier is mainly a second or even a third tier supplier (Jaklic et al, 2004) Thus the supply firms studied are second tier suppliers whereby Mangotex is even a third tier supplier because it produces raw materials in the form of rubber items. In combination with R&D activities, this second-tier suppliers need to improve processes and products in order to stay competitive. If they want to upgrade to a first-tier in the global value chain or in a cluster, it needs to produce whole systems. Because automobile producers are outsourcing R&D activities to first and second-tier suppliers, it is important for those five suppliers to have the capacity to improve their products in-house. At least Fras-le, Sabo and Mangotex have their own R&D centers. Taking all this aspects mentioned above into account, we can see that all the five supply firm are global firms because of their overseas activities. However, in order to upgrade to the first-tier position the suppliers need to produce whole systems. Nowadays those supply firms are relatively small as we can see by the number of employees. Furthermore, None of those companies, not even one originally from Brazil, is in the top 100 suppliers list (Automotive News, 2010).
In the following I will now take a closer look at Fras-le, the biggest Brazilian automobile component supplier to date, that has developed from a local to a global supplier. Fras-le, formerly Francisco Stedile SA, was founded in 1954. During this “first wave” of FDI investment, the automotive industry of Brazil was growing. With the restrictions made by the government that 95% had to contain domestic parts content, starting business in the automobile supplier industry was an opportunity for domestic firms. Fras-le is a Brazilian-based company which product line comprises over 9000 part number that mainly include brake linings, brake pads, clutch facings and brake shoes. It is a leading manufacturer in the domestic market and is present in the international market. Fras-le has two plants in Brazil, namely in the state of Sao Paulo and in the south of Brazil in Caxias do sol, state of Rio Grande do Sul.
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Figure 6.
Fras-le has its two plants in Brazil located near some of the four big automobile producers. General Motors has a plant in the state of Rio Grande Do Sul, which is one of the biggest automobile clusters in the country. Volkswagen, General Motors and Ford are having plants in the state of Sao Paulo, which is still considered the most important automobile cluster in the country. As mentioned earlier it is now half the size of Detroit in terms of vehicles assembled but should overtake it before 2040 (Selfin et al, 2010). In terms of location, Fras-le has advantages by being a domestic firm. As described earlier, because of their geographical proximity to the manufacturing plant, local suppliers can offer the advantages of quicker delivery and reduced transportation and inventory cost. Furthermore a domestic supplier has a better knowledge of the local market.
Fras-le owns two brands: FRAS-LE, with products sold in three markets: automakers, aftermarket and exports, and LONAFLEX, with products sold in the aftermarket and export market. The aftermarket is the sale of replacement parts (Sadler, 2010). Fras-le is the leader in Brazil’s aftermarket, exports its products to more than eighty countries on all continents and has a presence in all of Brazil’s major automakers.
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Figure 7.
Fras-le was the first manufacturer of friction materials in Brazil to achieve the ISO 9001 certification, in addition to ISO 14001 and ISO TS 16949. These certifications confirm the company `s constant concern with quality, technology and environment. In its advanced R&D center, Fras-le has chemical, physical and pilot labs that enables it to develop high performance products. It also has a modern providing ground which includes 18 test tracks. In its R&D center Fras-le supports the development of new technologies and assure ISO certifications, in order to stay competitive. The development of new materials which were competitive in terms of cost and functionality has opened new external markets and new market segments for Fras-le, increasing its competitiveness in the US market.
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Concluding, Fras-le turns itself from a local to a global supply firm. I assume that they are in a cluster because their production plants are settled in the of Sao Paulo and Rio Grande do Sol. In those states the main clusters of the Brazilian automotive industry are settled. Thereby we see that Fras-le has as their main customers Fiat, Volkswagen, Ford and General Motors which are all having production plants in one of the regions. Furthermore, it is also possible that they are in a global value chain because of their interaction with global buyers due to their international activities. Thus Fras-le is an example of an 100% Brazilian owned firm which turned itself from a local to a global buyer. Despite all the negative effects MNCs have on domestic firms, Fras-le survived and nowadays is global company.
5. Discussion
The influence of globalization on the local firms have been investigated in many papers in the past by for instance Ernst and Kim (2002) and Humphrey and Schmitz (2000). That the local firms also play a role in the process of globalization has been mostly overlooked. This study provides the investigation of the interaction between the local and the global level in the Brazilian automobile suppliers industry. Towards this end, I use two theories, namely the GVC approach and the cluster theory, which are used in previous research to describe the integration of the global and local economy. Important to the results is the note that a cluster always contains at least one value chain, but that not all value chains can be considered clusters. However, whether that value chain is global depends on the actors involved in the chain. If firms from several countries are involved and thereby the chain has a global reach, the chain can be considered global.
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setting up a production plant. This attracts other automobile producers and suppliers, both locally and globally, into the same regions as the automobile producers. Another reason why firms are settled in the same region is because automobile producers prefer suppliers nearby. The geographical proximity to the manufacturing plant offers advantages for domestic suppliers in terms of quicker delivery, reduced transportation and inventory costs. However if the foreign supply firm follows their main automobile customer to Brazil, this advantage disappears. Because of the reasons mentioned above, clusters and global value chains are formed. Due to the decentralization of the automotive industry in Brazil, mainly because of fiscal incentives which were most favorable in the South and Southeast, more clusters were formed throughout the country. Since the government favored decentralization and have given more power to state governors, these local governments in Brazil started to offer attractive fiscal incentives to attract foreign investors (Ernst and Kim, 2002). Global value chains are embedded in the automobile clusters in Brazil, and therefore the global value chains in Brazil were also moving throughout the country. A global value chain can also operate without being involved in a cluster. Because automobile producers often pressure their existing suppliers to set up production facilities nearby, it is hard to determine whether the amount of global value chains has increased. If those automobile suppliers follow their main customer, who operates at the top of the global value chain, a new global value chain is not created. If the automobile producer uses other actors as first, second or third-tier suppliers, a new value chain has been created which is global if firms from several countries are involved. The presence of MNCs in the local economy creates new clusters and global value chains. Furthermore, MNCs bring domestic firms into a global value chain. If an foreign automobile producers chooses a domestic firms as his, for instance, second-tier supplier than this domestic firm participate in the global value chain of this MNC.
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foreign automobile suppliers and contributed to the upgrading process within a cluster or global value chain.
That the presence of MNCs into the local economy has influences on clusters and global value chains has been proved. I also noticed that MNCs have other positive aspects for domestic firms in Brazil, regardless the involvement in a cluster or global value chain. The number of automobile producers during the first wave of investment, namely between the 1950s and 1970s, was growing significantly and thereby the number of automobile suppliers as well, which tells us that the presence of MNCs contribute to the development of the automotive suppliers industry of Brazil. The domestic firms saw the potential of the automotive market and set up new firms or switch business in order to serve the MNCs. However, during the second wave of FDI, many domestic supply firms were acquired by MNCs. The main reason for this is that the domestic, mostly small or medium sized firms, were not able to invest in new processes and product upgrading in order to compete with the foreign supply firms.
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survived the competition, are mostly small firms who do not have overseas activities. Only five out of the forty companies founded, are 100% Brazilian owned, do have overseas activities and provide information about their activities on their websites. The reason for this is that most automobile supply firms in Brazil are medium and small sized companies. These companies were not able to make the investments necessary to compete with the foreign firms. Also the changes in the buyer-supplier relation contributed to the decline in Brazilian-owned supply firms. First-tier suppliers are nowadays responsible for not only producing products but also assumed to have an active role in the design, assembly and delivery. Because of this, the automobile producers reduced the number of direct suppliers. However, such changes in the buyer-supplier relation can also be an advantage for domestic firms. The first-tier suppliers also outsource their production activities, mostly to the second-tier suppliers. In Brazil most domestic firms are second or third-tier suppliers due to the fact that they produce components instead of whole systems.
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6. Conclusion
The local, domestic firms, and global, MNCs, level interact in different ways in the Brazilian automotive industry. With the global level having more influences on the local level than vice versa. The main reason for this is the impact of FDI made by MNCs. MNCs contributed heavily to the existing automotive industry in Brazil. Foreign automobile producers started business in Brazil by first setting up a production plant. This then attracted other automobile producers and suppliers, both local Brazilian and foreign multinational firms. Furthermore, MNCs’ in, to them, new markets prefer suppliers close by in order to reduce transportation and inventory costs. If the existing suppliers are not present in Brazil or do not want to set up a new plant in Brazil, the geographical proximity which automobile producers prefer could be an advantage for domestic firms. When chosen as a first, second or third-tier supplier, a domestic firm enters a cluster or a global value chain. This offers a change for domestic firms to learn from global buyers about how to improve their production processes, attain consistent and high quality and how to increase the speed of response, which could strengthen domestic firms and it increase competition in domestic markets.
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I would argue that the currently existing clusters and global value chains in Brazil were mainly created as a result of the entry of MNC’s into the Brazilian market. As MNC’s entered into value chains with local Brazilian firms, these value chains became global as a result of MNC’s global reach. Once established, these value chains quickly evolved into clusters. On top of the value chain are the automobile producers, which in the case of Brazil are MNCs. Other actors in the chain are both Brazilian and foreign firms. Because automobile producers prefer to bring their own suppliers when establishing a new cluster of value chain, it is reasonable that most of the actors, especially higher in the chain, are foreign firms. Domestic firms can learn from MNCs due to the knowledge and managerial expertise the MNCs bring into a cluster or value chain. Domestic firms can use the achieved knowledge and managerial expertise to upgrade. Upgrading a supplier position indicates an improvement in the global value chain. This paper shows the interaction between the local and the global level in the automobile supply industry in Brazil. Looking at the two theories, GVC approach and the cluster theory, we are able to provide the evidence of the interaction between domestic firms and MNCs.
Limitations and further research
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global value chain? Furthermore, this paper can be used to compare new emerging markets in the future or to look at other new industries who are developing quickly in Brazil.
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