Local Manufacturing in Brazil: Bulletproof your Strategy

Production capacity has expanded rapidly in Brazil over the last decade, with around 40% more manufacturing plants in 2013 than in 2002. At an event in Sao Paulo in June this year, FSG asked a group of top executives from different industries, including consumer goods, healthcare, IT, and industrials, whether local production in Brazil had become more attractive to their companies over the last 18 months, and 67% of respondents stated that they were now looking at local production more closely as a key growth strategy in Brazil. So why has local manufacturing become so top-of-mind for executives operating in Brazil?

Although the reasons might vary by industry, common denominators can be easily found. First, Dilma Rousseff’s administration is deepening the country’s long-standing industrial policy, which protects local industries from international competition through high import tariffs and local content rules. Industrial policy alone might not have been able to attract high levels of foreign investment in manufacturing a couple of decades ago, but Brazil’s rapid economic expansion and middle class growth have created markets for most product categories that are now big enough to generate the economies of  scale required to make manufacturing worthwhile.

Second, the Brazilian government offers very attractive tax incentives for local production at the federal, state, and municipal level, with some companies reporting payback periods of less than two years for their initial investment in some states in the northeast, where tax incentives tend to be more generous. Finally, currency depreciation – the real has depreciated against the US dollar by almost 25% since January 2013 – forcing companies to consider hedging against rising import prices by producing part of their product portfolio directly in Brazil.

BrazilFactories121114

However, the decision of whether or not to produce in Brazil is not as straightforward as one might think. This is because Brazil has also seen the greatest rise in production costs among the top 25 export economies since 2004, mainly as a result of rising labor costs and energy prices. Therefore, although local production can in theory enhance market access and help multinationals tap into local incentives for domestic producers, it could also result in a more burdensome cost structure that compromises future growth and puts profitability at risk.

Because of the high complexity of the local manufacturing decision, FSG believes that before embarking on local production, multinationals should conduct a very thorough cost-benefit analysis that takes into account not only potential savings from the avoidance of import tariffs, along with government incentives and production costs, but also other factors such as speed-to-market, addressable market size, and reliability of suppliers.

To that end, FSG has recently published a report specifically addressing all of these factors, outlining the process that multinationals should follow when deciding the exact location for their production facility in Brazil, including information about industry clusters and regional trends. FSG clients can access the full report here. Not an FSG client? Contact us.

Leave a Reply

Your email address will not be published. Required fields are marked *