SAO PAULO – A century ago, Henry Ford came to Brazil and established the city of Fordlandia, hoping to become an Amazonian rubber baron, but retreated into the red.
Today, the automaker he founded is once again licking his Brazilian wounds, having abandoned production in the tough market after burning around 61 billion reais ($ 11.6 billion) in the past decade. .
Ford Motor Co announced the shutdown of its manufacturing plants in January, dealing a blow to its more than 5,000 workers nationwide and nearly 300 dealerships.
The previously unreported business deposits show the extent of the financial difficulties that led to the decision. Ford had burned 7.8 billion dollars, most of the accumulated losses but also injections of liquidity, according to documents filed in the state of Sao Paulo, where the automaker is registered in Brazil.
Add to that the $ 4.1 billion that Ford will spend to evade its commitments, and the cost of the Brazilian operation is almost $ 12 billion.
Almost all of the losses and cash injections have taken place in the past eight years, when the company has lost around $ 2,000 for every car sold, according to Reuters calculations based on deposits and sales data.
Ford, which does not separate Brazil from South America in its financial results, declined to comment on the losses, cash injections and calculations.
The costly decline of US heavy-duty trucks underscores the risks for global automakers in Brazil, a country considered not too long ago to be one of the most promising growth markets in the world, but where tax costs, of labor and logistics are high.
The COVID-19 pandemic has strained finances as Ford’s troubles also reflect, in part, a strategic misstep that has seen it lag behind in transforming its lineup of unprofitable compact cars into SUVs at higher margin, according to half a dozen sources close to the company’s Brazilian. surgery.
Ford had actually drafted a plan to switch to SUVs, bigger cars with higher profit margins, but it was too slow to implement it, they said.
“There were no other viable options,” Lyle Watters, Ford’s head of South America, told Reuters in a statement on the decision to leave the country.
Watters, who will begin a new role at Ford in China in July, cited “an unfavorable economic environment, declining demand for vehicles (and) greater industry idle capacity” for Brazil’s retirement.
He declined to comment on the SUV project, saying he would not “speculate on new product plans.”
A spokesperson for Ford in Brazil said the company is implementing “a lean, lean business model in the region, with a truly customer-centric mindset.”
Brazil vs Mexico
Brazil is largely a loss-maker for global automakers, although the government has provided federal subsidies totaling $ 8 billion over the past decade and a 35% import tariff to protect local production. .
Domestic costs are high. Even though local factories can make 5 million cars per year, more than double the number sold domestically, exports are minimal because prices are not competitive. And it costs automakers money to keep factories open while operating at low capacity.
Mexico, on the other hand, exports more than 80% of the cars it manufactures, aided by free trade agreements with the United States and Canada, making it an attractive alternative for the same automakers that already operate. in Brazil.
A 2019 study by consultant PwC found that selling a Mexican-made car in Brazil was 12% cheaper for an automaker than selling a locally-made vehicle, including production costs, taxes and logistics.
The study was commissioned by Brazilian auto industry group Anfavea, which is lobbying the government to cut taxes and lower labor costs.
Brazil’s high costs mean that even automakers who switched to higher-margin SUVs earlier than Ford, like the Brazilian units of players like Volkswagen AG, General Motors Co. and Toyota Motors Corp., are struggling. to stay in the dark.
Volkswagen Brazil has lost $ 3.7 billion since 2011, according to documents filed by companies in the state of Sao Paulo. GM Brazil has received $ 2.2 billion in cash injections since 2016, and Toyota Brazil last year requested the cancellation of $ 1 billion in intercompany debt, the documents show.
Volkswagen, GM and Toyota have all declined to comment on the filing figures.
Brazil’s economy ministry did not respond to a request for comment on Ford’s exit and the problems facing the auto sector.
The outlook is dropping
Ford has failed to develop a viable production business in Brazil despite a practice of tax subsidies, which have totaled more than those of its rivals over the past decade.
Since 2011, Ford has collected about $ 2.6 billion in tax subsidies, or one-third of all federal auto incentives distributed during that period, according to Reuters calculations based on official forfeiture figures.
Ford declined to comment on its tax benefits.
In 2013, however, the business outlook began to change, as commodity prices collapsed and dragged the local currency with it, plunging Brazil into a deep recession made worse by corruption scandals. At the time, it was the fourth largest automotive market in the world. He now ranks seventh.
Weak domestic demand and uncompetitive exports prompted Ford to quintuple its bulk fleet sales between 2011 and 2019 and increase discounts to 30% or more, someone familiar with pricing said.
Ford’s headquarters in Dearborn, Mich., Supported its Brazilian subsidiary with $ 1.3 billion in cash injections, in nine transfers between March 2018 and January 2021, according to documents from the Sao Paulo company. .
At the end of 2019, Ford was considering the key strategic shift to make SUVs in Brazil and had three models planned, according to three of the source.
Yet many of its competitors had already revamped their lineup to produce such vehicles for around two years.
âThe truth is that Ford has failed to modernize its product line at the same speed as its competitors,â said Ricardo Bacellar, automotive manager of KPMG’s consulting division in Brazil.
In the end, the SUV plans never materialized.
In April 2020, economic pain caused by the pandemic forced Ford to reassess its plans for Brazil, the automaker said.
Still, Ford made a commitment to the government at the end of November last year to invest more in Brazil and told its dealers in December that it expected sales to improve in 2021, according to an announcement. government and concessionaires association.
However, a few weeks later, production was halted.
It has closed its three factories, the largest in Camacari, in the northeast of the state of Bahia. It only keeps a small import sales operation, a niche market for high-end cars that import tariffs make prohibitive for many people.
Ford launched its new Bronco Sport SUV in Brazil on Thursday. Made in Mexico, it’s exported to the United States where it starts at $ 26,820. In Brazil, where per capita income is much lower, Ford said the Mexican-made car would cost $ 48,000.
While Ford sold 18,000 cars in Brazil in April 2019, it sold 1,500 in the same month this year.
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