Since 2005, auto sales in South America's largest markets — Brazil and Argentina — have grown by 20 percent.
Ford is expanding operations in Brazil. Fiat is building a new assembly plant. Honda just completed a new site. Hyundai will open its newest Brazilian operation by the end of this year.
Even Chinese automakers are taking note, with Chery Automobile Co. Ltd. set to begin production by 2014.
South America is a market that the global auto industry cannot ignore. But it is also one that is difficult to operate in, suppliers and analysts warned Aug. 2 during the Management Briefing Seminars in Traverse City.
There is a saying that applies across the board for the cost of doing business there: “Custo Brasil,” said Jon Sederstrom, director of Brazil operations for J.D. Power and Associates. Brazil's auto manufacturing trade group estimates operating costs there are 60 percent higher than in competing sites in Mexico, China and India.
Custo Brasil is a phrase that can be applied to an infrastructure with overtaxed roads in major cities — São Paulo saw a day in 2009 when there were 182 miles of traffic jams — but one that lacks good roads between some regions.
Kurk Wilks, director of sales and engineering for automotive supplier Mann + Hummel GmbH, noted it would take weeks to ship parts from its plants near coastal Brazil to inland customers, and the trip would include a boat journey up the Amazon River.
Mandatory benefit packages result in high labor taxes, but there is a shortage of the right workers and engineers, forcing manufacturers to do nearly all their own training for line work.
“You can find skilled labor in Brazil, but we're all competing against each other for them,” said Thomas Schmidt, vice president of operations for commercial vehicle transmission systems with ZF South America, part of Germany's ZF Friedrichshafen AG.
Brazil passed Germany as the world's fourth-largest car market last year, and will see an expected 3.3 million car sales this year. By 2018, according to Westlake, Calif.-based J.D. Power forecasts, Brazilians will buy 6 million cars.
With an import tariff of 35 percent on cars, automakers want to focus on building cars locally, said Chris Powers, a Troy, Mich.-based specialist in the automotive practice of consultancy Oliver Wyman Group. And with a 19 percent import tariff on components, they also want to work with local suppliers. To qualify as a Brazilian-made car, a vehicle must have more than half of its contents produced there.
Free-trade agreements covering Brazil, Argentina (where 800,000 cars sell annually, making it the second-largest auto market in South America) and elsewhere in the region help, but the focus remains on creating cars and parts as locally as possible.
In Brazil, about 17 percent of auto modules are made at supplier parks adjacent to assembly plants to help limit delivery problems and reduce the amount of on-site warehouse space needed, Powers said.
Automakers also want to use the same global suppliers everywhere they operate, providing even more incentive for major parts makers to set up shop in the region. Carmakers also expect those suppliers to use the same lean manufacturing standards and hit the quality and reliability numbers they expect elsewhere, he said.
Mann + Hummel, based in Ludwigsburg, Germany, has been in Brazil since 1954, producing air- and oil-filtration systems. It launched molding of plastic air-intake manifolds in the early 1980s. When its customer, Honda, opened a motorcycle plant in Manaus — in north central Brazil along the Amazon River — the company knew it would have problems shipping from existing facilities in southern Brazil near São Paulo.
In February, Mann + Hummel opened a new plant in Manaus just to supply Honda with filtration parts. The plant does injection molding and assembly on site, just to ensure it can minimize delivery problems, Wilks said.
The region still needs more support industries, especially tooling and mold maintenance, suppliers noted. They said iIt may not be easy, but the area will only continue to grow.