What Europe could learn from Brazil's 'laboratory' for Chinese car production

As the UK and other car-making countries in Europe fret about how to incorporate Chinese brands without destroying homegrown industry, a lesson in how to constructively engage is emerging from an unlikely location. Brazil is the world's sixth-largest car market, with sales of 2.7 million last year, and has been aggressively targeted by the Chinese in the past couple of years. So successful have they been that in the first six months of this year Brazil was the world’s number-two destination for Chinese cars, taking 410,825, behind Russia and ahead of the UK in third, according to figures from China Passenger Car Association. The Chinese market share in Brazil rose to 28% in August, with BYD now the country’s fourth best-selling brand, according to figures from data aggregator Best Selling Cars Blog. This success has put the frighteners on locally producing car makers, including Stellantis (which is still on top with its Fiat brand), Volkswagen, General Motors and Renault. “The market is completely disrupted,” Renault boss Fabrice Cambolive recently told journalists at an event in the country. The shock has come because Brazil, unlike the EU or the UK, has long been an almost completely closed market. High tariffs forced car makers to produce locally and until recently around 85% of cars sold in Brazil were built there. Most were small, cheap and made with older tech. However, in 2015 import taxes for electric vehicles were set to zero, and that prompted the Chinese to target the market – so much so that in the past couple of years they have completely rewritten consumer tastes. “It's a kind of laboratory with all the [Chinese] arriving with a very accelerated path of electrification,” Renault Brazil boss Ariel Montenegro said at the same event. “You don't come now with new models in Brazil that aren’t electrified.” Now comes the interesting part with relevance to Europe. In July this year, the tariff loophole for EVs imported to Brazil was shut, reverting back to 35%. In response, the Chinese are localising production in Brazil. They are either looking at building new plants, taking over existing plants from those established players scaling back (BYD took over a Ford plant, for example) or partnering with existing players. For Brazil this could be a masterstroke. Simply through judicious use of tariffs, it has theoretically managed to modernise its car industry by bringing in Chinese players, who are more focused on electric and hybrid tech. That in turn could make it a global export hub, instead of mainly serving Latin America. But as ever the devil is in the detail, and this where the UK and EU should pay attention. We were there to see in action Renault’s plant in Curitiba, southern Brazil, that the French company now operates alongside Geely after selling a stake to the Chinese firm. Alongside existing Renault models, the two have started production of the Geely EX5 EM-i plug-in hybrid SUV (sold as the Starray in the UK) and have the EX2 electric supermini coming later this year. “It’s a good model for a winning cooperation,” Geely vice-president Victor Yang said at the event. “We can come here quickly, make use of their local expertise, guarantee quality, have the local supply and, in the long run, generate economies of scale.” Meanwhile, Renault is developing a new electrified model on Geely’s GEA platform, due next year. “China has forced us to speed up electric localisation in Brazil,” Cambolive said. “The main point of our partnership with Geely is to gain speed and to gain cost.” The partnership is very similar to that agreed between Geely and Ford regarding the latter’s plant in Valencia, Spain: Geely will build two cars there and Ford one car based on the GEA platform. Just as it is in Europe, the big question concerns local sourcing. How much value is China adding by building in Brazil? Not enough, says local manufacturers’ association Anfavea. China has contributed to a boom in car manufacturing in the country, up 8.5% this year to 1.9 million by the end in August. However, of the additional cars built, two thirds are semi-knocked-down (SKD) or completely knocked-down (CKD), ie built from kits shipped from China, Anfavea noted. While EVs are now subject to the same 35% import duties as all other models in Brazil, those built from SKD and CKD kits are still exempt, at least for the next six months under quota rules. Allowing Chinese firms to build from kits is a pragmatic way to enable them to localise in stages. We saw first-hand how the Geely EX5 will progress through Renault’s Aryton Senna complex in Curitiba, from metal parts being welded in the body shop through to painting and on to final assembly. Each Geely going down the same line as the Renault Boreal and other Renault models adds to the workload of the plant’s 5120 employees, securing jobs and filling underused capacity. But the Geely EX2, built in the adjacent van plant, will be less integrated to allow faster time to market. What that means in practise we didn’t see, but it’s likely similar to that used by Chery in Barcelona, with cars arriving almost intact, needing minimal final assembly. Allowing car makers to dodge import tariffs by building from kits in so-called screwdriver plants has long been used by countries trying to grow their car industry. But Brazil, as with the UK and EU, has an established automotive supply chain. So at what point should it force localisation? “Take the example of BYD [in Brazil]. What is their strategy of localisation? To be as late as possible,” Thierry Charvet, head of industry, supply chain and quality for Renault, said at the same event. “In China you have overcapacity and a good competitive base, so even with some taxes the best trade is to send cars and not localise.” Balanced regulations have now attracted BYD, SAIC, Leapmotor, GAC, Geely, Dongfeng, Changan, Chery and GWM to build in Brazil, while GM is importing EV kits from its Chinese division for local assembly. But this has created tensions with those manufacturers that have heavily invested over the years. Stellantis CEO Antonio Filosa recently pointed out that in a single month Brazil had effectively imported around 50,000 tonnes of steel from China in the form of imported cars or kits, to the detriment of local steel producers, according to a report by Valor International. Renault and Geely have said they will source parts locally for GEA-platform cars in stages, likely starting with low-tech elements like stamped metal parts. “Localisation is a very weird sport, because there is one single solution for each part,” Cambolive stated. Factors including specific duties on that part, exchange rates, local capacity and free trade rules. The latter is a solid motivation to find alternative suppliers in Brazil. Cars with majority Chinese parts will be barred from exports to other South American countries, due to rules of origin clauses under trade agreements. More generally, Brazil is an experiment in what happens when China has almost unfettered access to a closed market. Brazil has no home-grown car maker, so customer loyalties are looser, but those that existed with long-standing players like Volkswagen are being broken. The Chinese brought over EVs and hybrids, introducing power, smoothness and low running costs at a price that matched combustion-engined equivalents. Cars were also larger, breaking apart traditional segmentation. “In Brazil you no longer buy a size but a price,” Cambolive said. As in China, European premium brands are hurting: Audi, Volvo, Porsche and Land Rover have suffered double-digit sales falls through August this year. Meanwhile, BYD-owned premium brand Denza overtook all premium rivals bar Mercedes-Benz and BMW. Perhaps as a result, JLR is reportedly in talks with Chery for the Chinese company to take over its SKD plant in Brazil. How China’s adventure in Brazil will play out is uncertain. This year Chinese have helped pushed the market to near record levels, with sales to the end of August the highest since 2014. The fierce rivalry has awakened the competitive spirit in existing players, with Fiat, Volkswagen, GM's Chevrolet, Hyundai and Renault all posting strong gains. “Now we’re in the hangover,” said Cambolive. “Now we have to come back to reality with many more [new] competitors and traditional competitors which are reacting and pushing their assets.” The Chinese could also get tougher as they look to consolidate their gains, added Cambolive: “They can decide to swallow the 35% [tariff] and take competitivity from us all.”

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What Europe could learn from Brazil's 'laboratory' for Chinese car production

Chinese brands are now localising production in Brazil – including Geely, building its models in a Renault plant

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What Europe could learn from Brazil's 'laboratory' for Chinese car production

Chinese brands are now localising production in Brazil – including Geely, building its models in a Renault plant

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