#164 The End of Ford in Brazil
A few weeks ago, the news came down hard, but not unexpected – Ford would close its manufacturing operation in Brazil. To add insult to injury, the news came in the year in which the Detroit, US-based manufacturer was supposed to celebrate its 100th anniversary in the land of samba, feijoada, and cachaca.
In 1921, Henry Ford started operations in Brazil, hoping to grow rubber trees and produce rubber tyres – an endeavor that was brought to an abrupt halt when trees died after about 17 years. Ford stayed nonetheless and started to operate out of rented facilities in Sao Paulo. Over the next 100 years the car company built new factories, closed others, designed, modified, and adapted different models for the Brazilian market.
With vehicle sales dropping more than 26% in Brazil in 2020, the COVID-19 pandemic of 2020 and 2021 certainly accelerated Ford’s departure from Brazil, but it also wasn’t the only factor. The decision to close manufacturing plants is part of a larger, global restructuring of the car maker. At a deeper level, it is also is related to complex and long-lasting challenges in Brazil’s business environment. As The Economist reported, Brazil’s bureaucracy unduly burdens the automotive industry, and workers’ comparatively low productivity added its own difficulties – a phenomenon that is often described as the “Brazil cost”.
Oh, and did I mention that packing up and leaving a country doesn’t come cheaply either? Ford estimates that the cost of withdrawing from Brazil will be between $4 – $5 billion US$…
January 30, 2021 @ 2:08 pm
Even a 100-year celebration is of no use if a company decides to withdraw from a market. In this particular case, the production facility in Brazil was closed, bringing a long tradition to an end. It was clear from the outset that the Brazilian market was not an easy one. The slump in car sales accelerated the departure, which had been sealed for some time for internal reasons.
Of course, this happens again and again in the course of a company’s history, especially in the case of very large corporations, where attempts are made to increase production and profits in the medium term by restructuring and changing the global business area. However, I can only understand the reference to challenges in the local environment to a limited extent, since it is already necessary to take a close look at the situation in the course of a first-time entry into a specific global market as well as during regular re-evaluations and to act accordingly. The “Brazil costs” mentioned were hopefully calculated in advance and subjected to an appropriate risk assessment. Otherwise, one could only say: “Self-blame, obviously nothing learned”.
In the long term, the departure from the Brazilian market will be expensive for Ford. Not only because of the costs of withdrawal, but also in terms of setting up at another location. And building up competence, knowledge and experience at a new location was never cheap!
February 7, 2021 @ 3:54 pm
As unsurprising Ford’s decision to close their manufacturing operation in Brazil was, it still shows how challenging the business environment for manufacturing companies in the country has become (or always has been?). As highlighted by the Financial Times, the problems organizations are faced with are not only excessive and complicated tax rules, legal uncertainties but also low productivity. Most of the productions plants in Brazil only run at around 50% of their intended capacity and just recently other major player such as Mercedes and Volkswagen announced to close specific factories.
Given the massive shift happening in the global automotive industry right now and the opportunities that come with it, the question arises which role Brazil will play in the future tech-focused e-mobility? In order to attract global organizations to enter and invest in the Brazilian market going forward, the “Custo Brasil” might be ready for profound change.
After all, as one of the biggest car markets in the world, the country would have a lot to offer.
February 21, 2021 @ 12:30 pm
Like foreign investment, foreign divestment is an integral part of internationalization. It is a core strategic aspect of a MNE to select the best locations for conducting business. While investment and growth sound exciting, divestment leaves a stale taste to it.
Being the world’s seventh largest economy and the eighth biggest automotive producer, the closing of operations in Brazil is a huge setback. For Ford, this step is part of a strategic restructuring attempt to boost profitability in the region. After a century of business in Brazil, in recent times the company reported repeated losses in the region. Ford is not exiting the market but restructuring its operations by sourcing vehicles from nearby plants but maintaining the SA headquarters and other divisions in Brazil.
Despite the so-called ‘Brazilian cost’, the recent economic crisis and the major consequences of the Covid-19 pandemic hit the country hard and surely contributed to making this business decision. I can imagine it is not an easy step for Ford CEO Jim Farley to send roughly 5.000 people to unemployment. The announced of working out a plan to mitigate the impacts of closing production together with its unions is a necessary step for a responsible MNE.
February 21, 2021 @ 6:22 pm
The case of Ford shows the accelerating negative impact of the Corona crisis on the automotive industry. Already in the last few years, a paradigm shift towards e-mobility within the industry became apparent and it quickly became clear which companies were able to cope with these changes and which were not. As described, companies like Ford have to counteract financial losses through restructuring programs in order to be prepared for the future. As already known through media reports, similar decisions were made by Ford for the UK, France, Russia and Germany. However, example such as Tesla proofed, that companies can also act differently. The company is building so-called gigafactories worldwide. These facilities are built to cover the growing demand for battery systems. One can only hope for traditional companies like Ford, which is one of the pioneers of today’s industry (introduction of assembly line production), that their strategy for the future includes a balance between cost reduction and sustainable innovation.
Regarding Brazil, although a strategic decision has been made to make production more efficient, thousands of unemployed workers create a bitter aftertaste and generations of families who worked in Ford’s factories must now hope for better days to come.
March 26, 2021 @ 3:40 am
All good things must come to an end at some point. Ford leaving Brazil is no surprise to many, as sales began to slump, and the pandemic’s onset caused a global crisis that burdened many personally and financially. In 1921 when Henry Ford took Ford to Brazil, it was a different landscape, political environment, and people. With time, people and countries change with no mercy to businesses that internationalized over 100 years ago searching for rubber trees. Today, Ford’s exit clearly shows that Brazil is not a place for the automotive industry’s future. Though the exiting price is very steep, a business wouldn’t make such a drastic decision if the savings or the cost to relocate somewhere else wasn’t justifiable. Many countries other than Brazil have fewer environmental standards, more entry options, and workers with high productivity levels. Savings and new opportunities can be found in less restrictive countries that enable growth.
Another essential point is that as automobiles become more advanced and begin to electrify, new infrastructures and facilities will accompany this development, including finding new countries to operate within. By moving to a country that is closer to heavier parts (i.e., batteries, frame, chassis, etc.) not only generates cost savings but enables companies to tap into talent that could be more productive, qualified, and capable of manufacturing these new vehicles. Not all is lost when automotive companies exit a country and enter another, as there is much to be gained.
July 10, 2021 @ 10:22 pm
Brazil even provided federal subsidies and huge import tariffs on cars to shield the local production, yet Ford still decided to pull out. Why? The automotive sector is among the most, maybe even the most competitive industry sector. Even before the pandemic hit. In an industry where cost-cutting and the simplifying/streamlining of processes is so important, Brazil appears to have made it impossible for Ford to generate a competitive profit margin (or any profit at all).
Brazil itself ranks very high in terms of uncertainty avoidance, underlined by its strong need for rules and elaborate legal systems. The entire nation has been battling over-the-top bureaucracy for years. Back in 1979 they even created the, somewhat ironic, Ministry of Debureaucratization. Just taking a quick look into Brazil’s ever changing taxation system will give just about anyone a headache. Not to mention the process of importing goods and materials.
Thinning profit margins, declining buying power of the population, combined with an increasing economic and even political uncertainty in the region? I am not surprised by Ford stepping out of Brazil in an attempt to restructure themselves on a global scale.