by The state of Brazilian exports has deteriorated over the last decade. The country has become more reliant on exporting raw materials compared to manufactured goods, and has suffered from the recent downturn in the prices of many commodities. Meanwhile, the cost of manufacturing goods in the country has surged over the past decade, rendering it less competitive in the global marketplace. How can the country compete more effectively? It must get back to its roots, said manufacturers at Credit Suisse’s 2016 Latin American Investment Conference in Sao Paulo in January. In other words, the place to start is by modernizing the country’s outdated manufacturing base. The recent story of Brazilian manufacturing is a story of ups and downs. Exports of manufactured goods soared between 1997 and 2005, stabilized for a time, declined in 2008, and have remained stable since. As a result, manufactured products, which represented 57 percent of exports between 1995 and 2005, only accounted for 48 percent of the total in 2015. The destination of manufactured goods has shifted, too, away from Europe and the United States (52 percent in 2002; 36 percent in 2015) and toward Africa, Asia, Latin America, and the Middle East (43 percent in 2002; 58 percent in 2015). Commodities exports, meanwhile, shot up from 27 percent of the total between 1995 and 2005 to 38 percent in 2015.
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The state of Brazilian exports has deteriorated over the last decade. The country has become more reliant on exporting raw materials compared to manufactured goods, and has suffered from the recent downturn in the prices of many commodities. Meanwhile, the cost of manufacturing goods in the country has surged over the past decade, rendering it less competitive in the global marketplace. How can the country compete more effectively? It must get back to its roots, said manufacturers at Credit Suisse’s 2016 Latin American Investment Conference in Sao Paulo in January. In other words, the place to start is by modernizing the country’s outdated manufacturing base.
The recent story of Brazilian manufacturing is a story of ups and downs. Exports of manufactured goods soared between 1997 and 2005, stabilized for a time, declined in 2008, and have remained stable since. As a result, manufactured products, which represented 57 percent of exports between 1995 and 2005, only accounted for 48 percent of the total in 2015. The destination of manufactured goods has shifted, too, away from Europe and the United States (52 percent in 2002; 36 percent in 2015) and toward Africa, Asia, Latin America, and the Middle East (43 percent in 2002; 58 percent in 2015). Commodities exports, meanwhile, shot up from 27 percent of the total between 1995 and 2005 to 38 percent in 2015.
China’s rise and the ensuing increase in demand for raw materials helped spur Brazil’s shift away from exporting manufactured goods, but the rising cost of manufacturing in Brazil has also made its products less attractive to foreign buyers in recent years. According to a study by the Boston Consulting Group, Brazilian manufacturing had a 3 percent cost advantage over the United States in 2004, but suffered from a 23 percent cost disadvantage in 2014. The study chalked the increase up to rising wages – factory pay in Brazil nearly doubled over the study period – and weak productivity growth. Inputs have also become more expensive: Industrial electricity prices in Brazil doubled between 2004 and 2014, while natural gas prices rose 60 percent. As they became less competitive abroad, many manufacturers began to focus on the domestic market, where demand was growing, credit was expanding, and the country’s relatively closed economy protected them from global competitors.
Brazilian industrialists at the LAIC said one challenge in getting manufacturing exports back on track is that it will require significant investment. José Velloso, CEO of the Brazilian Association of Machinery and Equipment Manufacturers (Abimaq), said that after five years of falling investment, the average age of equipment in Brazil’s industrial complex is 14 years, compared to about five years in Germany.
One area where the country can make immediate headway, says Fernando Garcia, commercial director of electric motor company WEG, is in its use of electric motors. According to Garcia, Brazilian manufacturing companies could save significant sums through decreased expenditures on Brazil’s expensive electricity by upgrading to more efficient motors. The industrial sector accounts for 44 percent of Brazil’s electricity consumption, with 70 percent of that power feeding electrical engines, and about 65 percent of Brazil’s industrial engines are more than 10 years old. If the country replaced every electrical engine made before 2009, when new efficiency requirements were introduced, with a newer, more efficient model, Garcia estimates manufacturers would reduce electricity use by 15,000 gigawatts per hour each year, an amount equivalent to 9 percent of the entire country’s current consumption.
Investing in automation would also help improve both the quality and productivity of Brazilian manufacturing, says Dan Ioschpe, a board member of the Brazilian Association of Auto Parts Manufacturers (Sindipeças). According to Ioschpe, the fact that Brazilian auto parts factories employ five workers to do the same work a single worker can accomplish in a German factory is largely due to higher levels of automation in Germany.
Several speakers at the LAIC noted that Brazil can also increase competitiveness by opening up its economy and improving the quality of its education system. But as Abimaq CEO Velloso noted, the need to modernize its manufacturing facilities is an imperative. The productive capital stock in Brazil is worth $50,000 per worker, compared to $100,000 in Russia and $300,000 in the U.S. and Japan. “In Mexico, workers are more productive than in Brazil, but less so than in the U.S.,” he said. “[But] if they cross the border, their productivity gets much better. It’s not because they got an education on the way to the U.S., it’s because in San Diego, they have much better working conditions.”
Finally, experts at the LAIC noted that the challenge Brazilian companies across a variety of industries face in order to thrive in the global marketplace is the same as that facing any company, in any industry, in any country: They must find the business models that best facilitate the innovation necessary to develop products that customers ultimately want to buy. José Carlos Magalhães, CEO and founder of private-equity firm Tarpon Investimentos, noted that instead Brazilian businesses have too often settled for copying their business models from the developed world, when local adaptation is required. “We were more focused on replicating from abroad with competence,” Magalhães said. “I think this will no longer exist or gradually disappear, and we will have to incorporate innovation and changes in business models into our management systems.”