Henry Ford arrived to Brazil a century ago and founded Fordlandia in the hope of becoming an Amazonian rubber baron, but he retreated into the red. Now, the automaker he established is eating its wounds in Brazil, having halted production after spending about 61 billion reais ($11.6 billion) in the country previously. In January, Ford Motor Company announced the shutdown of its manufacturing plants, affecting more than 5,000 employees and almost 300 dealerships around the country. Financial issues that led to the decision are revealed in previously disclosed corporate documents. According to documents filed in Sao Paulo state, where Ford is registered in Brazil, the carmaker had spent $7.8 billion, the majority of which came from accumulated losses and minor financial injections.
When you factor in Ford’s $4.1 billion outlay to get out of its contractual obligations, the total cost of the Brazilian enterprise approaches $12 billion. According to Reuters calculations based on filings and sales data, almost all of the losses and cash infusions occurred in the last eight years, when the business lost roughly $2,000 for each car sold. Ford declined to comment on the losses, cash infusions, or estimates because it does not distinguish Brazil from South America in its financial reports.
The costly departure of the American heavyweight highlights the dangers for global automakers in Brazil, which was once considered one of the world’s most attractive development markets, but now faces high tax, labour, and logistics expenses. According to a half-dozen sources familiar with Ford’s Brazilian operation, the COVID-19 outbreak has put a strain on finances, and the company’s woes are partly due to a strategic blunder, that saw it fall behind rivals in converting its inventory of unprofitable compact vehicles into higher-margin SUVs. Ford had created a plan to get into SUVs, larger automobiles with higher profit margins, but was too sluggish to implement it.
“There were no other feasible solutions,” Ford’s South American boss, Lyle Watters, said in a statement. Watters, who will begin a new Ford position in China in July, blamed the Brazil retreat on an “unfavourable economic environment, reduced car demand (and) more industry idle capacity.” He said he wouldn’t “speculate on future product plans” and declined to comment on the SUV project. Ford is establishing “a lean and asset-light business strategy in the region, with a truly customer-centric approach,” according to a spokesman for the firm in Brazil.
Mexico Versus Brazil
Despite Government subsidies totalling $8 billion over the last decade and a 35% import tariff to protect domestic production, Brazil is essentially a loss-making market for global automakers. The price of living in the United States is very expensive. Despite the fact that local companies have the capacity to produce 5 million automobiles per year, more than double the amount sold in the country, exports remain low due to uncompetitive prices. Keeping plants open while running at low capacity also costs money to automakers. Mexico, on the other hand, exports over 80% of the automobiles it produces, thanks to free-trade agreements with the US and Canada, making it a viable alternative for the same automakers who currently operate in Brazil.
According to a 2019 report by consulting firm PwC, selling a Mexican-made automobile in Brazil is 12% less expensive for a carmaker than selling a locally-made vehicle, when production, tax, and logistical costs are factored in. Anfavea, a Brazilian auto industry lobbying group, commissioned the study in order to persuade the government for lower taxes and labour costs. Even carmakers which switched to higher-margin SUVs before Ford, such as Volkswagen AG, General Motors Co, and Toyota Motor Corp’s Brazilian divisions, are battling to stay in the black due to the high Brazilian prices.
According to the state of Sao Paulo’s corporate papers, Volkswagen Brazil has lost $3.7 billion since 2011. According to the records, GM Brazil has received $2.2 billion in financial injections since 2016, and Toyota Brazil required $1 billion in inter-company debt forgiveness last year. Volkswagen, General Motors, and Toyota all declined to comment on the numbers in the filings. A request for comment from the Brazilian economics ministry on Ford’s leaving and the car sector’s troubles was not returned.
Opportunities Drop
Despite a policy of pursuing more tax subsidies than its competitors over the last decade, Ford has been unable to create a successful production business in Brazil. According to Reuters calculations based on official tax forfeiture numbers, Ford has received approximately $2.6 billion in tax subsidies since 2011, accounting for roughly a third of all federal automotive incentives awarded in that time. Ford has remained tight-lipped about its tax advantages.
According to the Sao Paulo corporate papers, Ford headquarters in Dearborn, Michigan, bolstered its Brazilian business with $1.3 billion in cash injections during nine transfers from March 2018 to January 2021. According to three insiders familiar with the operation, by late 2019, Ford was exploring a major strategic move to produce SUVs in Brazil and had three models in mind. Many of its rivals, on the other hand, had been overhauling their line-ups over the past two years, in order to create such vehicles. “The truth is, Ford’s product selection did not upgrade at the same rate as its competitors,” said Ricardo Bacellar, automotive head of KPMG’s consultancy arm in Brazil. The SUV ideas, in the end, were never realised.
The pandemic’s economic toll caused Ford to rethink its plans for Brazil by April 2020, according to the company. According to a government declaration and the dealers’ association, Ford made commitments to the government to invest more in Brazil as late as November last year, and notified its dealers in December that it expected higher sales in 2021. However, it abruptly ceased production only a few weeks later. It shut down three plants, the largest of which was in Camacari, Bahia, in the northeast. It only has a small business selling imports, a niche market for high-end vehicles that are prohibitively expensive for many people due to import tariffs.
For example, Ford’s all-electric Mustang Mach 1, which starts at $53,000 in the United States, will cost $94,000 in Brazil, which has a far lower per capita income. In April of this year, Ford sold 1,500 vehicles in Brazil, compared to 18,000 in April of last year.
