Chinese auto-parts firm building first LatAm plant in Brazil

Updated: 2014-12-19 02:12

By JACK FREIFELDER in New York(China Daily Latin America)

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China Automotive System's (CAAS) decision to locate its first Latin American facility in Brazil is a bold move that could pay dividends down the road, according to a group of automotive analysts.

"As the Chinese original equipment manufacturers (OEMs) start showing that they have good cars that don't break, are reliable, that have good fuel efficiency, that will make the Brazilian customers more comfortable buying Chinese brands," Augusto Amorim, a senior analyst covering South America for IHS Automotive, said in a phone interview with China Daily.

"Any company opening a plant outside of its country is leaving your comfort zone. There's an opportunity and potential to grow, but it will be a challenge," he added.

"This is a very strategic location, close to Jacareí, Sao Paulo, where the Chery Automobile Co plant is located," he said. "That's the main production state in Brazil, so it's a wise decision to move with someone they're already supplying in China who they'll continue to supply in Brazil."

Camile Janz, South American Forecast Manager for LMC Automotive, said it will take some time before China Automotive fully familiarizes itself with the Brazilian market, but the presence of Chinese automobile manufacturer Chery could help ease the transition.

"This is actually a very bold move and strategy for China Automotive, and it actually shows their dedication to the market," Janz said. "They already have customers and this will probably strengthen their relationships with suppliers in Brazil and with vehicle manufacturers as well."

"It's not easy for a company to establish itself in Brazil, but the move shows that China Automotive sees potential and they're willing to really stick it out," she said.

On Dec 1, CAAS announced the beginning stages of production for the Brazilian facility. The plant is the company's first and only location in Latin America.

CAAS began exporting to customers in Brazil in 2012.

Jie Li, CAAS' chief financial officer, said the first stage of production for the facility is expected to be operational in April 2015. At that time, capacity will stand at 100,000 steering units and the plant could create as many as 50 new jobs.

Production will near 500,000 units in 2016 with a potential to exceed 700,000 units as the company further penetrates the Brazilian and South American automotive markets.

"The Brazilian auto market is the fourth largest auto market in the world," Li said. "More Chinese OEMs set up or are planning to set up operations there. With a growing Chinese OEM presence in Brazil, we expect Chinese-branded vehicles and auto parts trade between China and Brazil to rapidly expand."

"CAAS' new facility will provide a foundation in South America," he said. "As the operation scales up in capacity, more than 200 positions are anticipated."

Hanlin Chen, chairman of CAAS, said in a statement that the facility in Brazil would help the company keep up with South America's growing interest in high-quality Chinese automotive parts.

Chen also said a physical presence in the Brazilian market provides an avenue to "strengthen customer relationships".

CAAS, based in Hubei province, is a leading provider of power steering systems and automotive components. The Nasdaq-listed company operates through nine subsidiaries, one of which is located in Troy, Michigan, in the US.

The company has more than 60 vehicle manufacturing partners worldwide, a group that includes the Chrysler Group LLC, FAW Group Corp, Dongfeng Motor Corp and Chery Automobile Co.

CAAS exports steering products to the Brazilian operations of China-based Chery Auto and a global tier-1 vehicle manufacturer, in addition to supplying the Brazilian automotive aftermarket.

"The intention is not just to serve Chinese OEMs who are selling into the market, but also to Brazilian and other regional OEMs," William Gregozeski, president of Chicago-based equity research firm Greenridge Global, wrote in an e-mail to China Daily. "However, putting a plant outside of China is not a prerequisite for expansion into other regions. The company has been quite successful in the US with its sales to Chrysler without having a need to build a plant there."

"CAAS followed one of its customers into the market, so the plant being built is as much a function of its relationship with Chery as it is the orders CAAS has in Brazil," he said.

Peter Halesworth, a portfolio manager with Heng Ren Investments, a Boston-based firm that invests in Chinese companies, said: "For China Automotive Systems, Brazil is a good long-term opportunity. They can start by investing in new production with a dedicated customer and partner like Chery in a Brazilian automobile market with huge long-term potential."

"In order to win significant and sustainable market share in big countries, staking your claim by investing in local production is important," Halesworth wrote in an email to China Daily. "Once the business in Brazil is established, maybe the Chinese automakers and parts suppliers start investing in production in Mexico. Production in Mexico is a strategic hub not only regionally for South America, but it is also a big bridge into the US automobile market."