Brazil Debates High Cost of Car Plant in Poor State

SALVADOR, Brazil — Competition between states to lure big auto factories and the thousands of jobs that come with them is nothing new. Nor is the second-guessing about whether the enormous tax breaks and other incentives offered by governments are really worth it.

But that was the United States in the 1980s. This is Brazil today, where the phenomenon is stoking a novel debate over financial incentives given by governments that would seem ill-equipped to offer largess to rich multinationals such as Ford Motor Co.

The controversy ignited in June when the poor, rural northeastern state of Bahia shocked the nation by successfully wooing a new $1.2-billion Ford auto plant from a southern, union-dominated state where Ford had previously agreed to go.

The interstate Brazilian cat fight recalls the expensive battles in the American South and Midwest over the sites for General Motors’ new Saturn plant, and for Toyota, Mercedes-Benz and other car factories as auto makers sought out anti-union locales.

Brazil’s Bahia state--hundreds of miles from the country’s industrial core--is known mainly for sugar and tourism.

The good news is that Bahia is getting 5,000 jobs and a much-needed jump-start on industrialization. The downside is that it is giving up an estimated $300 million in free land, state taxes and infrastructure, a price that many say is too high for such an impoverished state. Construction on the ultramodern Ford facility began last month and will be completed in late 2001.

Ever since Ford’s startling switcheroo, the losing state of Rio Grande do Sul has been crying foul. And auto union leaders in Sao Paulo, where the auto industry is concentrated have charged Ford with making an end run toward cheaper labor. Indeed, Ford will probably pay its new Bahia workers less than a quarter of what auto workers get in Sao Paulo.

The political dust-up is indicative of the issues Brazil and Latin America in general are facing as they chase foreign investment dollars.

Brazilian lawmakers, who see the hand of powerful Senate President--and Bahia native--Antonio Carlos Magalhaes in the federal government’s Ford-Bahia incentives, are threatening to enact new statutes to drastically restrict giveaways in the future.

Proponents say Ford’s Bahia deal is no different from what’s available to any big industrial employer coming to this remote corner of the country, that the complaints are just sour grapes. They argue that huge incentives are essential in luring manufacturers like Ford to Bahia, which, in a manufacturing sense, is uncharted territory.

“Ford will open our horizons,” Bahia Gov. Cesar Borges said in an interview at his office here, the state capital. “We expect a lot. That’s why we are making a big sacrifice. But it is a decision that we feel will be very successful.”

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In joining the issue of government incentives for industry and whether they pay off, Brazil is wrestling with questions that have divided U.S. economists since the 1970s, when Japanese and German auto makers played one American state against another as they shopped for new car factories, mostly in the South.

In fact, Ford’s Bahia deal is strikingly similar to the $350-million package that Alabama gave Mercedes in 1993 to put a car plant in Vance, Ala. Like Bahia, Alabama was looking for an image boost but, to get it, it had to outbid other states in a costly and controversial incentives war.

Ford already operates three assembly plants in Brazil’s Sao Paulo state and is expanding to meet huge anticipated growth in the Brazilian car market.

While Ford is certainly exploiting the eagerness of states for auto jobs--and escaping increasing labor problems in the heavily industrialized Sao Paulo area--it is also taking a risk in going to Bahia, just like Nissan and BMW did in Tennessee and South Carolina. Among other things, Ford faces a smaller pool of skilled labor in Bahia and will have to train new hires for four months. So Ford is justified in seeking compensation for taking those risks, industry analysts say.

Martin Inglis, head of Ford’s South American operations, says the auto maker is simply locking in the “incentives to cover the cost of incremental logistics for having our plant outside the major areas of sales,” which is the Sao Paulo-Rio de Janeiro axis about 1,000 miles south of here.

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But observers such as George Freund of A.T. Kearney consultants in Sao Paulo, among others, see the $300-million incentive package as part of an “escalating war that in the end does not benefit the country so much.” To pay Ford, governments are forced to divert funds from social programs, such as education, public works and health, critics say.

“It started when the cost of getting Honda to go to Marysville, Ohio, was a 10-mile four-lane highway,” said James Rubenstein, a Miami (Ohio) University professor who studies the auto industry. “Now the incentives are in the hundreds of millions of dollars. It’s an inescapable part of the industry now.

“It’s the same argument for public financing of athletic stadiums. What are the economic spinoffs of these things?” he said.

Brazilian governors want the auto plants for the same reasons their U.S. counterparts do: They can sell voters on the notion that auto jobs ripple profitably through an entire economy while enhancing the state’s image. One auto plant job creates five or six more among suppliers and service firms, what economists describe as the vaunted “multiplier effect.”

In addition to the 5,000 workers that Ford will employ by the time it reaches peak production, Bahia could see 40,000 to 50,000 more automotive jobs over the next decade as affiliated firms move to the area, Bahia’s Gov. Borges said.

“If Bahia is like Alabama, then yes, it could be worth it. They need some logo on that economy that says they are connected to the world,” said University of Michigan labor economist Sean McAlinden.

Brazil’s federal government is also making Ford a low-interest $480-million loan to help build the ultramodern plant. It is also giving Ford a 40% discount off its federal excise taxes during the plant’s start-up period. It’s a package of incentives open to all manufacturers moving to Brazil’s northeast, its poorest region, officials say.

Bahia Gov. Borges denies that Ford got special treatment, saying that the auto maker decided on Bahia because of the “political uncertainty” created by Rio Grande do Sul’s Gov. Olivio Dutra.

Shortly after taking office on Jan. 1, Dutra announced he would try to renegotiate and reduce the incentive package offered to Ford by his predecessor. Dutra wanted to bring Ford’s incentives more in line with those the state was giving to General Motors to build its plant, due to open next year. Then in April, Ford broke off talks.

One month later, Ford had decided not only to build the new plant in Bahia, but also to erect a much larger facility, with a capacity of 250,000 vehicles a year, instead of the 150,000-unit a year plant envisioned in southern Brazil. The new factory’s output will be greater than the three existing Brazilian Ford plants combined, and its largest single South American factory.

It was a major coup for Bahia--but one that came at a cost.

In justifying the low-interest loan, officials at the National Economic and Social Development Bank (or BNDES) said the value of an auto factory to an underdeveloped state was proven when Italy’s Fiat moved to Brazil’s Minas Gerais state in the early 1970s. During the last three decades, Minas Gerais has converted from mining and agriculture dependency to become the second-most-industrialized state in the country.

After Dutra demanded to renegotiate with Ford, BNDES officials worried that Ford would never build another Brazilian plant and it would lose an economic dynamo to another South American country.

“The automobile investment cycle in South America is finishing. This may the last major auto plant built for many years,” said Oscar Lopes Quental, a BNDES department head in Rio de Janeiro.

And yet, consultant Freund in Sao Paulo said that government subsidies are only helping to create an auto market glut and that Brazil had too much manufacturing capacity even before Ford announced the new factory.

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Including the new Ford factory and the GM plant set to open next year in Rio Grande do Sul, Brazil’s car industry will reach capacity of 3 million units a year, more than double the 1.3 million vehicles that will be sold in Brazil in 1999, Freund said.

Acknowledging that Brazil’s auto market has “caught a touch of the flu” from the economic virus spawned by the Asian crisis, Ford’s Inglis said all car makers in Brazil, including Ford, are losing money. Nevertheless, the Bahia factory is geared for the 2005 market and beyond, when Inglis says Brazilian sales could reach 4 million units a year if the economy stays on its recovery track.

Time will tell whether Ford delivers the so-called intangible benefit of image enhancement for Bahia, a state many Brazilians view as backward. Alabama, before the arrival of Mercedes, was behind a similar eight-ball, trying to live down a negative public perception based on a history of racism and violence, said Carl Ferguson, associate dean of Culverhouse College of Commerce at the University of Alabama.

“Alabama figured it had to send out a wake-up call, to get people to come and look at the state, and that’s what it did with Mercedes,” Ferguson said.

Although Alabama’s luster has been dimmed somewhat by quality problems at the Mercedes plant, where sports-utility vehicles have been produced since 1996, Ferguson said Mercedes has paved the way for other corporate coups. Last May, Honda announced it will build a $400-million minivan factory in Lincoln, Ala.

Ford’s Bahia factory will be a huge, state-of-the-art modular facility adjacent to the Camacari petrochemical complex 50 miles north of here. Ford will be joined by 17 of its suppliers, all sharing the cost and floor space of the mammoth 1.5-million-square-foot plant. Cars will be shipped to market from the Aratu port north of Salvador. One-quarter of the cars will be exported to other South American markets.

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Is Bahia getting a good deal? Economists here are split. Armando Avena of the Federal University of Bahia says Ford will trigger “the entire economy.” Sergio Gabrielli, who is on the same faculty, says the plant will hardly make a dent in Bahia’s unemployment rate, which he pegged at 28%, including the underemployed.

Their disagreement mirrors that among U.S. academics who have studied the impact of car factories built in the United States over the last two decades.

For every economist like the University of Alabama’s Ferguson who believes the car factories are worth the cost, there’s a William Fox, director of the University of Tennessee’s Center for Business and Economic Research, who says they aren’t.

Fox studied 110 “big business locations,” including the moves of Nissan and Saturn to his state. He found “essentially no evidence that the new factories raised economic growth in the counties and metropolitan areas where they located.”

For every Sean McAlinden, the Michigan labor economist who describes auto factories as “aircraft carriers of manufacturing” that can transport a region into the “world bazaar,” there is a James Rubenstein, the Ohio professor who contends there is no clear answer.

“People who argue in favor of the incentives say it’s not just the assembly-line jobs, but the X-number of add-on jobs in parts and services that count,” Rubenstein says. “Experts have argued bitterly for decades what that X is.”

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Fighting for Factories in Brazil

The rural state of Bahia in Brazil offered Ford Motor Co. a $300-million incentive package so the auto maker would build its new assembly plant there. In the process, Bahia outbid a rival Brazilian state to land the new factory. The deal has become part of an international debate by economists over whether there is any long-term benefit when governments lure big companies with extravagant economic packages.

Bahia state: Ford will construct a 1.5-million-square-foot, $1.2-billion plant in Camacari, near Salvador

Minas Gerais state: Mercedes-Benz and Fiat plants

Parana state: Chrysler, Renault and Volkwagen/Audi plants

Sao Paulo state: Ford, GM, Honda, Toyota and Volkswagen plants

Rio de Janeiro state: Volkswagen plant

Rio Grande do Sul state: GM plant

Brazil’s Vehicle Production

Output slipped dramatically last year because of the recession and devaluation.

(In thousands of cars and trucks)

1998: 1.59 million vehicles

Sources: Times research, National Assn. of Automotive Manufacturers of Brazil