The Cars That Could

Herbert Demel, the Austrian who runs Volkswagen’s Brazilian subsidiary, is an affable man with a more than a glint of steel behind his eyes. He has headed VW in Brazil since 1997, the last good year for the country’s auto industry. During that time he has taken on the company’s labor unions, rebuilt VW’s 50 year-old São Paulo plant and, surprisingly, made VW one of Brazil’s biggest exporters. Brazil’s auto industry attracted billions of dollars because companies were sure that the successes of the mid-1990s, when inflation dropped and Brazilians began buying cars by the million, would continue. They have not, and demand is half the industry’s capacity of 3.2 million units a year. So it only makes sense for a company to get away from the price wars and depressed market by trying to export more.

A few years ago, the idea of exporting Brazilian-made cars to the US seemed ludicrous. Brazil has never exported many cars to the US before, and the small, boxy cars made there did not look like the kind of thing American consumers would want. In any case, they did not meet US safety or emission standards.

Yet VW, using its new state-of-the-art factory in Southern Brazil has found a niche in the US market. Exports – to the rest of Latin America as well as the US – are growing by 5% a year. Says Demel, “We are exporting more of the expensive VW Golf models than the cheaper Gols, which shows the mix is richer and from the point of view of revenues, growth is greater.” Volkswagen is the fourth-largest exporter in Brazil. More than 25% of revenues come from exports.

Reaching Its Goal
Demel says the company developed an export strategy in 1997, at the peak of the market when VW’s Brazilian factories were old and its models needed renewing. The goal is to export a third of output and so far, VW has raised exports to 25% of output. Five years ago, VW exported only 16,000-17,000 units. It now has annual exports of $1.2 billion and a “surplus” of $500,000 on its foreign trade. VW does not disclose how much money it actually earns on its exports. Demel merely comments that, “Exports were better than the domestic market in terms of margin.”

How could VW break into the toughest market in the world at a time when most Brazilian companies struggle to sell far more basic products in less demanding markets? Obviously it helps to be a large international company with a sizeable sales and distribution network in place, as well as owning one of the world’s best-known car brands.

Yet VW is clearly doing a lot of things right by adapting its products to the market’s requirements and delivering on time. So why can’t more Brazilian companies sell more overseas? Demel says this is due to a “lack of conviction and strategic vision. You can export. It is a question of wanting to and then doing it.” Brazilian companies are notoriously fickle, viewing foreign trade as no more than a safety valve to use when their domestic markets turn sour.

Demel takes a more sophisticated view. Exports allow him to finance his imports and hedge production more easily. Brazilian cars now contain a large number of imported parts so it is important for VW to avoid a “deficit” on this trade that would expose it even more to volatile currency risk. Furthermore, financing is more readily available in hard currency than in reais and it is always good to have a reliable stream of dollar revenues available to make servicing payments as painless as possible.