Case Analysis: Gm’S Plant X-Brazil
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Economic and political reform resulted for a great deal of growth a relative stability for the Brazilian economy. A large component of that economy and a substantial benefactor of that growth was the Brazilian car market. With a rise in production in 1996 over the previous year of 6% to 1.7 million cars Brazil was now the seventh largest car market in the world. Brazilian authorities predict the market will nearly double by 2000 and in doing so become the fifth largest car market. For this rapid growth to become a reality a massive amount of capital investment the majority foreign to meet the production forecasts. Local governments in brazil are competing with one another to entice various car manufacturers to set up shop in their region. To do this loans with lower than market rates and other various discounts. The booming market and governmental incentives have lead to foreign manufacturers investing over $10 billion over the next few years.
As of 1995 the Brazil produced 1.6 million vehicles and the manufacturer which had the greatest share was Volkswagen with 700,000 produced. Looking to claim a portion of Brazil’s rapid car market GM is investing planning on building a $600 million plant which will focus on the production of the “popular car” which is a variety defined by efficiency and low cost. The Blue Macaw is the model name of the automobile which this plan is focused around. Not only is GM delving in to new markets, but it is also planning to test out new production methods. The new production strategy is called Co-Production which contracts the vast majority of the production save for the design and engineering portion. The strategy consists of organizing suppliers to build and provide the capital for their given component to be manufactured. There are two tiers of suppliers the first both manufacture and assemble on-site while the second only produce. GM estimates 30% to 35% savings in manufacturing costs by implementing this strategy over traditional ones.
In addition to Brazil’s two other major car markets in South America will be targeted. Argentina and Chile with a new car market projected for 1997 of 350,000 and 150,000 respectively. A drastic difference between the North American Business atmosphere and that of South America is that credit terms tend to be in the range of 150 to 180 days compared to the 60 day norm in the north. Profits resulting from Plant X will be funneled GM the parent company through licensing fees of 3% of net profit and a to be determined dividend rate.
A major obstacle in forecasting the financial future of Plant X is the extremely volatile exchange