Brazil's auto market booming this year had prompted concerns of domestic auto parts industry may not be sufficient for the country's automobile demand, many of automakers also export substantial numbers of vehicles in both fully assembled and kit form.
Brazil will likely face a problem addressing its demand with current installed production capacity, which is currently at 3.2 million units. Several auto makers are already working triple shifts and having employees work on weekends and will soon have to consider expanding capacity. Auto makers with local production are able to invest in this capacity, and we already see this happening with companies like Honda and Toyota. GM is considering an investment of US$1 billion in Brazil and Argentina for its "Viva Project" that will introduce a new compact car to the market.
As it is 30 percent cheaper to produce vehicles in Argentina than in Brazil, that country is becoming an attractive alternative for auto makers looking for regional supply. Even though Argentina is currently going through an energy crisis, several auto makers are announcing investments. Honda will invest $100 million to construct its first factory in the country to distribute a new car to Argentina, Brazil and Mexico. FIAT, Brazil's leading producer, will also be reactivating a plant in Argentina (deactivated since 2002) to produce 50,000 vehicles per year. FIAT will also produce pick up trucks in the country through a partnership with Tata (from India). Renault will transfer the production of its most compact model to Argentina and launch a new line in the country in 2008, leaving its more high-end models to be produced in Brazil. These initiatives should help auto manufacturers reduce costs and guarantee production capacity to attend the growing demand.
Potential problems with exceeding production capacity lie with smaller suppliers, not the large players. Not all players in the Brazilian automotive supply chain are able to invest in expanding production capacity. The global auto parts players may be well-structured to make such changes, but the industry is also very dependent on hundreds of smaller local auto parts suppliers that will not be able to keep up with this rhythm without either private financing or government support. Without either public or private support, these companies will not expand their production and will cause a bottleneck in the industry's growth. According executives in local OEMs, however, "where there is demand, all other members of the value chain will find methods to attend, and in worst case scenarios, OEMs will assist companies at the lower ends of the value chain with financing or subsidies to ensure that demand is not left unattended."
