#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.
December 10, 2021 @ 7:50 pm
The article was a supper interesting read.
I wonder how longer of an impact did Covid have on Ford’s operations in Brazil and the decision to leave. It was also interesting to hear about the Brazil cost and how that had an impact on their production. It is interesting to think works in other countries can have a better work ethic than others. Even with the government’s help, the automotive industry is so competitive that they were forced to leave. I think it was a good design considering they were losing large amounts of their profits. I think they should have been more reactive and taken better measures on what they were going to do next.
December 18, 2021 @ 8:40 am
I think its smart to leave now as opposed to any later. If Ford keeps trying to do Business in Brazil it will only be prolonging the inevitable. The political climate together with the unrest and torn up economy of Brazil is not one that attracts many companies. Although Brazil is a great country in many aspects, it is not exactly as attractive for business opportunities as it once was thought to be. It’s for this reason that I find it to be a smart decision for Ford to get out know even though it’s a costly decision. There might have been a way for them to make it in Brazil by manufacturing cheaper cars but it probably would not have accounted for much in revenue. Regardless I think it takes a lot for a company to stop business in a country. The fact that Ford recognized this was their time to leave speaks a lot to their history and the many lessons they have learned.
January 8, 2022 @ 5:06 am
Ford Leaving Brazil doesn’t catch me by surprise. It’s a decision that was bound to happen. Seeing as they continued to decline in sales can be a huge reason for their departure from Brazil. It’s not like Ford makes bad cars. The issue I believe is more of a branding issue. Their identity changed when Brazil ran out of trees. One of their main purposes for going to Brazil had to end. In doing so, they were playing catch up and were trying to find ways to make it work out. Ford in most recent years have been rebranding their products. They realized that Brazil was no longer a good location to conduct business. An example of how they have rebranded is that they only sell trucks and SUVs in the US. Of course, they have their Mustang line up but besides they rebranded to focus on their larger vehicles. Once they organize and rebrand then they can reconsider going back to Brazil. It is important that American companies like Ford really research the need and wants of the country. Once they identify their target then they can attempt again. They were well enough to survive 100 years, they are more than capable of making a comeback.
January 13, 2022 @ 6:23 am
I was quite surprised to learn about Ford’s extensive history in Brazil, I think it is a fascinating element of their company story. I cannot help but marvel at the significant cost of this move, being around $4 to $5 billion dollars. They have to have had foreseen significant financial bleeding to undertake a loss of that magnitude. On a surface level, this seems to be a reactionary response to the pandemic that may have been a long time coming on its own.
I also have to imagine that the Ford branding did not have as much of an impact on the South American demographic given how heavily they associate themselves with the United States. Their patriotism permeates their image, which may not always be well received or even understood abroad (given significant cultural differences).
I would be curious to hear a revisitation of this article given the current state of the automotive industry with serious rippling supply chain issues as a result of the pandemic. I would be curious to know if the used car industry has become as explosive in a smaller more walkable country as opposed to the vastness of the United States.
January 29, 2022 @ 6:47 am
The US behemoth car marker, Ford has seen it’s last days in Samba land Brazil. Henry Ford’s vision of manufacturing vehicles in Brazil was beyond the current times. I would say Ford’s vision was years ahead of the competition. He knew where the materials were located to create rubber tires for a cheaper price than in the US and he had a vision to enter new markets prior to his competition. It was uncertainty and the deserter of the rubber plants that caused Ford’s success in Brazil to tumble. Once the rubber trees died, Ford and his team should have had a exit strategy or a way to win and execute the car market in Brazil to the same extent as Ford has in the US. Henry Ford being the first automotive manufacture in Brazil should have used the same sales tactics as they used in the US by making a vehicle for the working class in Brazil and scaled up to production. Ford understood the concept of manufacturing vehicles in Brazil for lower wages and selling to LATAM helped them win market share from an early stage yet Ford did not prioritize LATAM as they do now to continue to grow. From the early stages of production, Henry Ford should have given back to the community in which they manufactured their vehicles to the same concept where as when Americans think of Detroit, they think of the automobile industry/ Ford. If Ford had the same impact in Brazil as they did in Detroit, the Brazilian government would not have let Ford fail due to the impact that it would take on the Brazilian economy and people as well they would not have to deal with the local bureaucracy and pay billions of dollars to exit a country. Somewhere down the line, communication was lost between corporate Ford and the Brazilian government which caused a clash between the two in which now Ford is paying the price.
February 15, 2022 @ 6:55 am
Making it to 100 years in not an easy feat and Ford Motor company was able to accomplish that in Brazil. Unfortunately, the 100-year celebration did not go quite as planned. Instead of Ford Corporate having a celebration to commemorate a 100-year history it made the tough decision to cease all manufacturing operations in Brazil. Ford blamed the high cost of operations: tax, labor and logistic as the reason at it was projecting losing $2,000/per vehicle sold in Brazil. Lyle Watters, Ford’s head of South America was quoted in blaming the “unfavorable economic environment, lower vehicle demand and higher industry idle capacity for the Brazil retreat” (Reuters,2021). Yet, it doesn’t seem that Ford is the only globally branded automaker that is said to be financially struggling in Brazil as it is projected that Toyota, Volkswagen and General Motors are also unprofitable. Ford’s demise cannot be solely blamed on the economic environment in Brazil, as critics say that Ford failed to modernize its product lineup at the same speed as competitors and was slow in transitioning from a small compact market to the SUV (more profitable) market. No matter the reason Ford decided to abruptly stop all manufacturing in Brazil a decision that will cost them an estimated $4.1 billion to expatriate themselves out of Brazil on top of the $7.8 billion in already reported losses. So, why did Ford wait until a loss of $12 billion to make the decision – the pandemic was the final straw. The pandemic spurred restructuring at Ford and the focused would now be on a lean and asset light business model in South America – Brazil and the high operating cost was not going to work. Fords exit from Brazil included the manufacturing of Ford vehicles, but it still plans to continue vehicle sales but will now import vehicles from manufacturers in Argentina, Uruguay and other market.
This move may not have set well with the estimated 5,000 manufacturing plant employees but it was a move Ford believed it needed to make.
Source
Reuters (Ed.). (2021). How Ford burned $12 billion in Brazil. The Economic Times. Retrieved February 15, 2022, from https://economictimes.indiatimes.com/news/international/business/how-ford-burned-12-billion-in-brazil/articleshow/82797449.cms?from=mdr
April 2, 2022 @ 8:02 pm
Basically, the news didn’t really surprise me. Even if I admire Henry Ford as a visionary and great entrepreneur, there were some magnificent challenges to be overcome in the 100-year existence in Ford-Brazil. And with the withdrawal from the Brazilian market, Ford joins a circle with Daimler and many other companies. Please note, Daimler withdrew from the market for the second time in 2020/2021. The reasons were similar to Ford and were communicated with a bad economy, CORONA but also with the rather atypical attitude to work for Europeans and North Americans. Brazil has become a problem for many internationally active companies – mainly because of a protectionist economic policy with high tariffs and the weak economic development.
From my professional experience, I can honestly agree. These topics and problems already existed around the turn of the millennium and have less to do with the Corona Pandemic. We learned this jokingly after eight years of powder coating production in Brazil and had to close our plant in 2014. The reason was the availability of raw materials and the enormous customs barriers. In hindsight, we saw a lot of potential in the Brazilian market but made the mistake of misjudging the 180° different culture on the other side of the equator and based it on the Central European standard.
April 3, 2022 @ 4:40 pm
Basically, the news didn’t really surprise me. Even if I admire Henry Ford as a visionary and great entrepreneur, there were some magnificent challenges to be overcome in the 100-year existence in Ford-Brazil. And with the withdrawal from the Brazilian market, Ford joins a circle with Daimler and many other companies. Please note, Daimler withdrew from the market for the second time in 2020/2021. The reasons were similar to Ford and were communicated with a bad economy, CORONA but also with the rather atypical attitude to work for Europeans and North Americans. Brazil has become a problem for many internationally active companies – mainly because of a protectionist economic policy with high tariffs and the weak economic development.
From my professional experience, I can honestly agree. These topics and problems already existed around the turn of the millennium and have less to do with the Corona Pandemic. We learned this jokingly after eight years of powder coating production in Brazil and had to close our plant in 2014. The reason was the availability of raw materials and the enormous customs barriers. In hindsight, we saw a lot of potential in the Brazilian market but made the mistake of misjudging the 180° different culture on the other side of the equator and based it on the Central European standard.
April 16, 2022 @ 8:13 am
The decision of Ford to set up their own manufacturing facilities in Brazil as part of their global market strategy dates back to the early days of the Ford Motor company. Ford´s decision to go to Brazil as their target market based on their corporate and product readiness might have been justified at that time. But such decision will have to reviewed and reanalysed regularly and products be adapted quickly to local requirements. But if your products are not competitive in markets like Brazil you also have to take the decision for market exit and focus on other target markets. Ford did not act in such way. They burned billions of USD over the decades in Brazil and were too slow to adapt and reposition themselves e.g. on the more profitable SUV market. One has to understand also the economic development of Brazil in the last 10 years – moving from a sound economic growth despite high labour costs, strict labour regulations, high bureaucracy and low productivity to a market collapse in 2014. This resulted in overcapacities due low car demands. Ford would have had to act already at that time in restructuring its set up accordingly and use other production hubs within its group to serve the Brazilian market. All this did not happen. I personally also made a similar experience in Brazil in 2013 to 2015. My company, being an automotive supplier opened a small set up in Brazil in 2013 – all looked prosperous. Situation changed drastically in 2014. However, we took a clear decision and closed our operations in 2015/16. Global operations always require a continuous market monitoring, benchmarking, fast decisions and actions on product adaptations or in worst case on market exit.
July 6, 2022 @ 7:28 pm
Really unusual that such a huge company should end its manufacturing operations in Brazil so close to a big event – 100 years of Ford. But you can also understand it, because on the one hand the Corona Pandemic has caused a large drop in sales and on the other hand one should also mention the rather lower masculinity in Brazil (according to the Hofstede Index). As mentioned, low masculinity, i.e., low productivity of the workers, leads to the so-called Brazil costs. These costs alone certainly played a major role in the decision-making process, which typically involves many people in Brazil (low individualism index according to Hofstede).
In view of these factors, I do not believe that this decision should be questioned.