BRAZIL: From Import to Capital Substitution

By Mario Osava Reprint | | Print |

Mario Osava

RIO DE JANEIRO, Aug 28 1996 (IPS) - Import substitution – more widely applied in Brazil than the rest of Latin America due to the size of the market – has run out of steam, giving way to a run on capital substitution.

And the process is not limited to privatisations either, where the private sector takes over sectors which were previously State owned monopolies, or near monopolies, like the steel industry, electricity, roads, railways and mining.

Bankruptcies, sales, mergers and associations of private companies all contribute to the dance of capital, which is more intense in sectors which need complex restructuring, like the spare parts sector – also haunted by the spectre of privatisation.

In 1988 there were 2,000 car parts producers in Brazil, in 1994, this number fell to 800 and in the year 2000 will be only 300, according to a sectoral analysis from the Single Workers Centre union, worried about the loss of 40 percent of the jobs, with the workforce falling from 350,000 to the current 210,000.

On behalf of the company owners, president of the chamber of industry, Paulo Butori, said he was afraid that 80 percent of the sector, mostly national until now, will be under the control of foreign capital within five years.

This fear gained credence when the Metal Leve pistons factory was sold to the German Mahle in June. The whole event was a trauma for the sector because the company had been the pride of national industry, for both its technology and capacity to compete in the demanding European and US markets.

Other important companies like, Varga Brakes, have become associates of or have been sold to the big transnationals, like the Dana Corporation, a big motor and parts producer in the United States, which has already acquired several Brazilian concerns.

“Its an irreversible process,” said Jose Mindlin, founder and main director of Metal Leve. The automobile industry changed and the assemblers now demand providers of complete systems, not isolated parts.

“This requires a scale of production, which favours transnational capital,” said Mindlin, who indicated that selling the company, founded in 1950 and now part of a conglomerate headed by Mahle in association with the Brazilian Cofap, was the only option.

For Mindlin, now dedicated to his other passion, books, nationalist arguments have not been enough, though he considers the company fell victim to disloyal competition in order to force the sale through.

“This was bound to happen in some form, one day,” he said.

However, he said it was ironic that many of the entrepreneurs who built the car part industry in Brazil in the last forty years were not taking part in the current automible industry party.

National production, stuck at around a million vehicles per year since the end of the seventies, has grown rapidly since 1993 and it is hoped it will reach 2.5 million by the year 2000. According to Brazilian legislation, 60 percent of the components must be made nationally.

The problem is that the autoparts industry is facing high speed transition and pressure from all sides, according to Alexandre Pereira Cruce, researcher with the Getulio Vargas Foundation and co-author of a recent study on the issue.

The liberalisation of the national market from 1990 imposes new demands for quality and cost reduction. At the same time, relations with the assemblers have changed as they now demand ready assembled systems, like motors and complete electrical units, from their direct suppliers.

This demands tight colaboration in design and engineering, to reduce the production time of projects and the costs, something which was not happening in Brazil. It is thus natural that auto part manufacturers near to the assembly plants, all of foreign origin, have a distinct advantage.

Also, national industry is facing unfavourable macroecnomic conditions, like the high interest rates and the lack of long-term credit, so that the foreign companies have far more advantageous conditions, added Pereira Cruce.

A “greater participation of foreign capital will be inevitable,” admitted the expert, who does not, however, believe in the denationalisation of the sector. The new production process will have second and third parts providers.

The restructuring through mergers, sales and associations between companies is happening worldwide, he said, and in Brazil the intermediation has become big business for the banks.

The biggest Brazilian private bank, Bradesco, also became an associate of the Mahle-Cofap group and contributed to the acquisition of Metal Leve.

This process does not exclude car parts. The mergers and acquisitions of businesses in general, in Brazil, totalled 213 last year, compared with 58 in 1992, 155 in 1993 and 175 in 1994, according to KPMG, a consultancy from Sao Paulo.

This financial whirlwind has been fed by three times more foreign than national capital in the last two years.