In Brazil, A High Stakes Game Of Chicken With Detroit

It's Ford and GM vs. a Brazilian governor over subsidy pledges

The fight pits a rebel Brazilian governor against two global industrial giants. In Rio Grande do Sul, Brazil's southernmost state, the newly elected leftist Governor Olivio Dutra is taking on General Motors Corp. and Ford Motor Co. Dutra is refusing to honor some $400 million in tax breaks, financing, and infrastructure investment pledged to the carmakers by his pro-business predecessor to lure them to build plants costing a total of $1.6 billion in the state. Now, both auto makers are delaying their projects.

The dispute highlights just how fragile Brazil's outlook still is, even though its fiscal health is improving. Dutra argues that Rio Grande can't afford to subsidize two of the world's largest auto companies because the state has annual revenues of only $3.7 billion, lacks funds to cover basic social services, and already owes the federal government more than $5 billion. Yet if Dutra sticks to his refusal to pay the pledged subsidies, other foreign corporations could rethink their investment plans--especially if they think other states could follow Rio Grande and cancel agreements. "Auto companies need years to plan investments," says Paulo Butori, head of Brazil's auto-parts manufacturers' association. "We can't be subject to the mood of politicians."

WAITING GAME. Certainly, Ford and GM aren't happy with the situation. Both companies planned innovative, low-cost plants in Rio Grande that would serve as models for factories in the U.S. and elsewhere. GM's $600 million complex--code-named Blue Macaw--was to begin production late this year. The plant, a crucial pilot for GM, is designed to employ modular assembly, which relies on outside suppliers to pre-assemble cars. It requires about one-third the number of assembly workers as a conventional factory and less than half the capital investment. GM is hoping to build American clones of Blue Macaw to reverse U.S. small-car losses that are estimated at $1,000 to $1,500 per vehicle.

Since GM's Blue Macaw plant is close to completion, the project will probably go ahead--even if Dutra refuses to pay subsidies due the U.S. company for unfinished infrastructure around the plant site in the city of Gravatai. But because of the dispute, the opening of the Blue Macaw plant will likely be delayed by six months, officials say.

Ford's plans are more precarious. The company has received only a small portion of more than $200 million pledged by the previous state government, which left office on Jan. 1. Ford has prepared its site in Guaiba, but construction has not yet started. On Apr. 18, the company announced it was putting its $1 billion factory, which had been expected to open in 2001, on hold. "There's no timetable, but we can't wait forever," says James J. Padilla, Ford's group vice-president for manufacturing. Padilla acknowledges that Ford would consider moving its factory to another Brazilian state if the auto maker can't come to an agreement with Dutra.

INVITATIONS. Meanwhile, in Brasilia, President Fernando Henrique Cardoso's government is watching closely, because it needs investment to spark the economy. Gross domestic product is expected to decline by at least 2% to 3% this year. An estimated $26 billion of foreign direct investment came in last year, thanks largely to the $19 billion privatization of phone company Telebras. With fewer state companies on the block, only about $16 billion is expected to enter the country in 1999.

The stakes are also high for Rio Grande, which is located between the Southern Cone population centers of Sao Paulo and Buenos Aires. The two plants would employ more than 8,000 people and create work for nearby suppliers. It could also pave the way for other auto makers and parts suppliers to invest in the state. But Dutra's government is more interested in helping small and midsize businesses, which it says produce more jobs.

While Dutra tussles with GM and Ford, other states aren't hesitating to jump into the fray. The northeastern state of Bahia has invited GM and Ford to relocate. And Santa Catarina, just north of Rio Grande do Sul, has approached Ford about moving there. With jobs and investment scarce in Brazil, Ford could probably cut a deal easily somewhere else--if it can't reach a compromise with Rio Grande. From now on, though, Ford and other industrial giants are bound to be more careful about where they choose to invest.

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