FOREIGN DIRECT INVESTMENT IN THE LATIN AMERICAN AUTOMOBILE INDUSTRY: RESPONSES TO GLOBAL CHALLENGES

The importance of the automobile industry as one of the main focuses for foreign direct investment (FDI) in Latin America is highlighted in the 1998 edition of ECLAC’s annual report, Foreign Investment in Latin America and the Caribbean. New corporate strategies by the principal automobile corporations are behind recent increases in FDI flows to the region, says the study.

For more than two decades, Japanese - and, more recently, Korean - automobile companies have been challenging leading US and European corporations in the global automobile industry. The market share of Japanese automobile assemblers, in particular, has been on the rise in both North America and Europe. The first response of the US and a number of European governments was to impose trade restrictions to fend off Japanese export penetration of their home markets, while also granting other preferences to their national assemblers. However, when major Japanese producers began to establish assembly plants within those national markets, less efficient US and European producers were forced to adopt new corporate strategies. While these varied considerable, in the 1990s they included a common element: extending their regional systems of integrated production to developing countries, especially to Latin America.

THE PRINCIPAL SUBSIDIARIES OF AUTOMOBILE ASSEMBLERS IN LATIN AMERICA, 1997
(millions of dollars)

Source: ECLAC, Unit of Investment and Corporate Strategies, based on information from América Economía, Expansión (Mexico), Exame (Brazil), Estrategia (Chile), Mercado (Argentina), Dinero (Colombia) and others as well as direct contacts with the firms.

During the early 1990s, the major producers’ main assembly plants were clearly localized by region: 16 of 17 Japanese plants were in developing countries of Asia, while 8 of 15 US plants and 8 of 11 European plants were in Latin America. It might have been expected that this decade would see a Japanese challenge to the rest of the world’s automobile industry in Latin America. In fact, US and European automobile assemblers set about modernizing their Latin American operations in order to compete better, as their 1997 sales figures suggest. More importantly, they did so in different ways.

If 1989-91 and 1995-97 production and export figures for passenger cars are compared, Mexico increased its average annual production from 585,700 to 783,900 units and its exports from 253,100 to 607,900 units. Brazil did so from 699,800 to 1,478,400, and 137,500 to 235,500, respectively, while Argentina went from 100,900 to 287,400 and 2,000 to 91,500. The shared element in this thoroughgoing modernization was new investment to increase production and improve competitiveness. The main differences lay in the corporate strategies behind the new investment.

A brief comparison of Ford’s strategy in Mexico with that followed by Fiat in Brazil demonstrates the point. In Mexico, Ford built world-class engine and vehicle assembly plants in order to specialize production in the Escort and Tracer models, achieve economies of scale, improve quality and compete better in the 4-cylinder, front-wheel-drive, small car segment of the US market. Its goal, through its association with Mazda, was to make its new Mexican plant efficient enough to export competitively to the US and win back market share from its Asian competitors. Preferences under the North American Free Trade Agreement (NAFTA) gave the effort a considerable boost. Chart 1 shows how little Ford sells on the Mexican market itself.

Chart 1:
Ford (Mexico) Total sales, imports and exports of passenger cars, 1990-97

Source: (AMIA)

In Fiat’s case, on the other hand, a substantial part of the company’s international system of integrated production was located in Brazil, and its concern was to defend its market share in that country as the local automotive industry was liberalized. Rather than establishing an export platform in Brazil, Fiat sought to maintain its access to the local market by improving the ability of its Brazilian facilities to withstand import competition. The company therefore specialized in vehicles - first, the Uno, then, the Palio - which enjoyed advantages in a national automotive regime favouring "economic" models. The MERCOSUR integration scheme was also useful for Fiat by facilitating trade between its plants in Brazil and Argentina.

Chart 2:
FIAT (Brazil) Total sales, imports and exports of passenger cars, 1990-97

Source: (ANFAVEA)

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