Brazilian automotive suppliers are struggling to remain profitable

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Despite a successful first semester 2013 with strong sales and production increases over 2012, the current economic scenario in Brazil indicates a more conservative outlook for 2013 and 2014: 2013 passenger car sales are expected to stagnate at 3.6-3.7 million for the next 2 years with more attractive growth of 10% per year coming only from the commercial vehicles sector, which is finally recovering from its crisis. However, according to the Roland Berger barometer entitled “The Brazilian profitability challenge – Ensuring sustainable margins for automotive suppliers,” small overall industry growth will negatively impact total performance of automotive suppliers operating in Brazil.

Although Brazil has a track record of profitable business in the automotive sector, recent figures indicate that suppliers based in the country are facing a tough road ahead. A huge drop from the 2008 EBIT margin of 8.7%, last year was much less profitable for the first time in decades, with average margins of 2.5% in 2012,” says Stephan Keese, Partner and Head of the Automotive & Industrial Goods practice in South America. And what the most conservative players in the industry consider to be rock bottom is actually just the tip of the iceberg: Roland Berger Strategy Consultants forecasts an extremely thin margin of around 1-2% for 2013. “As mature markets are recovering – the global automotive supplier industry’s average EBIT margin will remain stable at 6.5% – suppliers’ head offices are expected to keep a close eye on their Brazilian operations in the near future,” adds Martin Bodewig, Principal in Roland Berger’s Automotive & Industrial Goods practice in South America .

Price pressure along the value chain and labor costs will squeeze margins in the months to come

To shed more light on what’s keeping figures down, Roland Berger mapped 5 drivers that are pushing costs:

  • Price pressure in all links of the value chain – New aggressive players, consumers with rising expectations, more vehicle contentand costly legislative changes as well as supplier transfer prices mean companies in Brazil will have to work significantly on their overall cost positioning
  • Labor costsare notoriously high across all industries in Brazil,especially considering the low level of productivity and automation. Taxes and non-wage labor costs for each employee are almost as high as the actual wages – and these are expected to continue to increase by 7-8% yearly in the years to come
  • Materials costs for both raw materials and local tier-2 component supplies are significantly higher than their global counterparts. In Brazil, the raw materials cost base is 15-20% higher than in Europe
  • Current exchange ratesrepresent an additional cost burden on all imported parts and may require companies to consider increasing their local sourcing content going forward.
  • Logistics costs are extremely high due to the predominance of road transportation, carrier inefficiency, bureaucracy, loading and unloading restrictions at urban centers, insurance costs for logistics, etc.

As a consequence of low competitiveness and annual cost increases, suppliers will see their profitability decline by up to 6% until the end of 2014, despite internal efficiency gains. In response to this development, the Roland Berger study recommends using a holistic cost efficiency approach designed to improve operational performance and lower the breakeven point in Brazil.

The measures contained in this approach can be applied to purchasing, production and logistics. To lower the breakeven point further, the consultancy recommends making plant adjustments, optimizing overhead and revising portfolios. “A combination of these levers used in practice shows that costs can be reduced by up to 10% in Brazil. It’s a challenge, but in light of shrinking margins, suppliers must take action as quickly as possible,” emphasizes Keese.

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