How Ford burned $12 billion in Brazil

SAO PAULO, MAY 20 (Reuters) – A century ago Henry Ford came to Brazil and founded the city of Fordland, hoping to become the rubber king of the Amazon, but retreated far halfway.

Now the automaker he founded is once again licking Brazil’s wounds, having abandoned production in a challenging market after spending some 61 billion reais ($11.6 billion) in the last decade.

Ford Motor Co (FN) announced the closure of its manufacturing plant in January, dealing a heavy blow to the country’s more than 5,000 workers and nearly 300 dealers.

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The company’s previously unreported filings demonstrate the scale of the financial woes that led to the decision. Ford has spent $7.8 billion, mostly in accumulated losses but also some cash injections, according to documents filed in the state of Sao Paulo, where the automaker is registered in Brazil.

Add to that the $4.1 billion that Ford will spend to break away from its commitments, and the price tag for the Brazilian operation rises to nearly $12 billion.

Nearly all of the losses and cash injections have occurred in the last eight years, when the company has lost about $2,000 for every car it sells, according to Reuters calculations based on filings and sales data.

Ford, which does not separate Brazil from South America in its financial results, declined to comment on losses, cash injections and calculations.

The retreat of the expensive US heavyweights underscores the risks for global automakers in Brazil, a country that was recently seen as one of the world’s most promising growth markets, but where taxes, labor and logistics costs are high.

The COVID-19 pandemic has weighed on finances while Ford’s troubles also reflect, in part, the strategic missteps that have seen it lag behind its rivals in turning its unprofitable line of compact cars into higher-margin SUVs, according to half a dozen sources familiar with the Brazilian company. operation.

Ford had actually laid out plans to shift to SUVs, bigger cars with higher profit margins, but had been too slow to implement them, they said.

“No other option was viable,” Lyle Watters, Ford’s head for South America, told Reuters in a statement about the decision to leave the country.

Watters, who will start Ford’s new role in China in July, cited “unfavorable economic environment, lower vehicle demand (and) higher industrial idle capacity” for Brazil’s pullout.

He declined to comment on the SUV project, saying he would not “speculate on any new product plans.”

A Ford spokesman in Brazil said the company was implementing a “lean and asset-light business model in the region, with a truly customer-centric mindset”.

BRAZIL VS MEXICO

Brazil is largely a loss maker for global auto companies, despite the government providing $8 billion in federal subsidies over the past decade and 35% import tariffs to protect local production.

High domestic costs. Although local manufacturers can make 5 million cars a year, more than double the number sold domestically, exports are minimal because prices are not competitive. And automakers need money to keep factories open while operating at low capacity.

In contrast, Mexico exports more than 80% of the cars it makes, aided by free trade agreements with the United States and Canada, making it an attractive alternative to the same automakers already operating in Brazil.

A 2019 study by consultancy PwC found that selling Mexican-made cars in Brazil is 12% cheaper for automakers than selling locally-made vehicles, including production costs, taxes and logistics.

The study was commissioned by Brazilian auto industry group Anfavea, which is lobbying the government to reduce taxes and labor costs.

Brazil’s high costs mean even automakers are turning earlier from Ford to higher-margin SUVs, such as units of Brazilian players such as Volkswagen AG (VOWG_p.DE), General Motors Co (GM.N) and Toyota Motors Corp (7203.T). ), is struggling to stay in the dark.

Volkswagen of Brazil has lost $3.7 billion since 2011, according to a company filing in the state of Sao Paulo. GM Brazil has received $2.2 billion in cash injections since 2016, and Toyota Brazil last year sought forgiveness of $1 billion in inter-company debt, according to the document.

Volkswagen and GM and Toyota all declined to comment on the filing figures.

Brazil’s economy ministry did not respond to requests for comment on Ford’s exit and the problems facing the auto sector.

PLUMMET PROSPECT

Ford failed to develop a viable production business in Brazil despite its practice of pursuing tax subsidies, which amounted to more than its competitors over the past decade.

Since 2011, Ford has raised about $2.6 billion in tax subsidies, or a third of all federal auto incentives distributed in that period, according to Reuters calculations based on official tax foreclosure figures.

Ford declined to comment on the tax benefits.

However, in 2013, the business outlook began to change, as commodity prices plunged and dragged down the local currency, sending Brazil into a deep recession exacerbated by a corruption scandal. At the time, it was the fourth largest auto market in the world. Now ranks seventh.

Weak domestic demand and uncompetitive exports prompted Ford to double sales of its mass fleet between 2011 and 2019, and deepen discounts to 30% or more, said a person familiar with the prices.

Ford’s headquarters in Dearborn, Michigan, supported its Brazilian subsidiary with a $1.3 billion infusion of funds, in nine transfers between March 2018 and January 2021, according to the company’s Sao Paulo filing.

As of late 2019, Ford is considering a major strategic shift to producing SUVs in Brazil and has three models planned, according to three sources.

But many of its competitors have refined their lineup to produce the vehicle for about two years.

“The truth is, Ford has failed to modernize its product lineup at the same pace as its competitors,” said Ricardo Bacellar, head of automotive at consulting firm KPMG in Brazil.

In the end, the SUV plans never came to fruition.

In April 2020, the economic hardship posed by the pandemic forced Ford to re-evaluate its plans for Brazil, the automaker said.

However, Ford made a commitment to the government through November last year to invest more in Brazil and told its dealers in December that it expects an increase in sales in 2021, according to government and dealer association announcements.

But just a few weeks later, it stopped production.

It closed three of its factories, the largest in Camaçari, in the northeastern state of Bahia. It maintains only a small operation selling imports, a niche market for high-end cars that makes import tariffs prohibitively expensive for many.

On Thursday, Ford unveiled the new Bronco Sport SUV in Brazil. Made in Mexico, exported to the US starting at $26,820. In Brazil, where per capita income is much lower, Ford said the Mexican-made car would sell for $48,000.

While Ford sold 18,000 cars in Brazil in April 2019, Ford sold 1,500 cars in the same month of the year.

($1 = 5,2821 reais)

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Reporting by Marcelo Rochabrun; Edited by Christian Plumb, Joe White and Pravin Char

Our Standards: The Thomson Reuters Trust Principles.

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