Sustained growth requires firm foundations. Automobile giant Volkswagen understands this basic principle quite well. In 1980, within three months after it purchased Chrysler Motors Brasil, Volkswagen Trucks Brasil not only revolutionized Brazil’s heavy vehicle segment with the launch of the country’s first-ever truck to run on ethanol, but it also placed the first – and most fundamental – of “five pillars” that form the company’s base.
THE “RIGHT” PRODUCTS
“The first two pillars were placed the moment Volkswagen arrived in Brazil,” recalls Roberto Cortes, president of MAN Latin America, whose mother company, MAN Ag, acquired Volkswagen in 2008. The first, he says, involved providing the “right” products for the Brazilian market from the outset.
“True, many of our competitors have good products,” he continues. “Some are worse, some are better – but no one else offers products as specifically customized to the market’s particularities.”
He adds: “Unlike many of our competitors, we’ve never had a foreign engineering center in charge of making all of the product decisions. We’ve always been based in Brazil and our trucks and buses have always been developed and produced here. Add to that the second ‘pillar’ – a very strong and extensive distribution network throughout the country that is able to keep up with our increasing production volumes – and you can see how we are primed for growth.”
During its first decade and a half, Volkswagen’s growth was slow and steady. It launched cutting-edge products (introducing Brazil’s first heavyweight vehicle fueled by methane/bio-fuels) and it expanded in new directions (producing chassis for buses and initiating global exports). It also consolidated its hold on the Brazilian trucking segment. However, major growth – as well as total domination of the domestic market – only came in the late 1990s and early 2000s, with the placement of the three remaining “pillars.”
A major breakthrough came when Volkswagen decided to build a 120,000-square-meter, state-of-the-art plant in Resende. Located in the state of Rio de Janeiro (and on a one million square meter-site sitting equidistant between Brazil’s two biggest cities – Rio and São Paulo) this new plant proved revolutionary on many levels. When it became operational in 1997, it was the first major auto plant in its segment located outside of the greater São Paulo area. As such, Volkswagen could draw upon a local pool of qualified workers, and it reduced its labor costs, as such costs in Resende City are much lower than in some industrial areas in Brazil. The Resende MAN plant also broke an industry mold: It invited all eight of its suppliers to come and assemble their parts at the plant.
Aside from reducing costs, maximizing logistics, and allowing for more agility and customization, this arrangement allowed Volkswagen to transform its suppliers into partners. “We all work together as a team and share the costs and investments,” says Cortes. “None of our employees actually produces our trucks. Our partners do. Volkswagen employees are only directly involved in the two extreme ends of the production process: engineering and then sales and post-sales. Our job is to understand the client’s needs and come up with solutions for them. Our partners do the rest.”
In 2000, the company got an added boost (and was able to place a new pillar) when the truck division (which up until then had been a unit of Volkswagen Brasil) became an independent business. Under the name of Volkswagen Trucks and Buses, it became an affiliate of Germany’s exclusively commercial vehicle unit. “After that, we were able to solely focus on commercial vehicles 24 hours a day,” reports Cortes. “That made a big difference.”
FAVORABLE ECONOMIC CLIMATE
The fifth and final pillar that propelled Volkswagen to a new level of success involved the favorable economic climate that has taken hold in Brazil since Luiz Inácio “Lula” da Silva came to power in 2002. “It was at this point that Brazil became the “B” in BRIC and an important member of the global economy,” remarks Cortes. “Under Lula’s [two four-year terms], there was a much better distribution of income, and interest rates diminished. This helped pave the way for unprecedented growth and we had the structure to accompany it.”
Indeed, 10 years ago, shortly after inaugurating the Resende plant, Volkswagen was manufacturing 10,000 units a year; in 2010, it produced 68,000 vehicles (10,500 were buses while the rest were trucks). During the past decade, the plant has gone from using a single shift with an output of 70 units a day to three shifts that churn out 300. During this time, annual growth rates have averaged 16 percent annually. In 2003, Volkswagen became the number one manufacturer of trucks in Brazil, a title it has yet to relinquish (in terms of buses, it ranks second with 29 percent of the market).
With all five pillars now firmly in place, Cortes is as enthusiastic about the future as he is about the present. “Currently 60 percent of all goods in Brazil are transported by truck,” he points out. “Meanwhile, 90 percent of Brazilians that don’t own cars rely on buses.”
For this reason, Cortes believes the company could possibly enjoy two-digit annual growth rates over the next 10 years. “The coming decade will be one of infrastructure in Brazil with massive civil construction and hydroelectric projects taking place.”
Faced with these challenges, Brazil’s truck fleet, which currently numbers around 2.5 million, will have to be renovated to be economically viable. While fleets in the United States and Europe are renovated every three to five years, their Brazilian counterparts generally are renovated every seven to eight years. Traditionally, the difficulty in obtaining credit prevented many transporters and truckers from upgrading their vehicles. As a result, there are more than 300,000 with 30 years on the road. Not only do they use a lot of gas and oil, but they also cause a lot of accidents and create pollution. Now however, thanks to easier credit, rising salaries and government incentive programs such as Procaminhoneiro (in which truckers can apply for loans whose interest rates are only a third of market rates), this situation is changing and demand is rising.
A similar situation is occurring with the bus segment. While, due to safety standards, buses are renovated with greater frequency, demand is also rising as the poorest members of Brazil’s so-called D and E socio-economic classes – roughly 35 million people who basically “never left home” unless they could walk – suddenly have enough income to consider taking a bus. Indeed, after China and India, Brazil is the third largest producer of urban buses in the world.
The most recent milestone in Volkswagen’s breakout decade has been its acquisition by the Munich-based MAN Group, whose largest company, MAN Commercial Vehicles, is a leading international supplier of commercial vehicles and transport solutions. As part of its integration into what is now known as MAN Latin America, Volkswagen Trucks and Buses will get some much needed leverage in its bid to seriously take on the export market, a process the company began in earnest in when it opened plants in Mexico (2003) and South Africa (2005).
“Until 2002, our export business was limited to sales of between 1,000 and 2,000 units in South America, but the opening of the overseas facilities was part of a globalization strategy that has seen exports increase to 10,000 units,” says Cortes. “Meanwhile, now that MAN has purchased us, we’ve merged our plants with MAN’s in both Mexico and South Africa, which will bring us major gains in efficiency in these countries. Already, we’re manufacturing our products together.”
As part of the same integration process, back in Brazil, the company is gearing up to launch the MAN brand domestically later this year. Already, the assembly lines in Resende are being overhauled to produce MAN products. Unlike Volkswagen trucks, which are capable of carrying between five and 57 tons of cargo, MAN’s extra heavyweight vehicles can haul between 57 and 74 tons. As such, MAN’s trucks will not only complement Volkswagen’s offerings, but meet the requirements of an entirely different, but rapidly growing, segment whose demand is being spurred by the increase in civil construction projects.
“We’ll have a dual brand approach,” says Cortes, discussing the strategy by which Volkswagen, boasting 30 years in the Brazilian marketplace, will launch MAN. Just as Volkswagen will benefit from MAN’s strong presence in emerging markets such as Africa and the Middle East, MAN will also benefit from Volkswagen’s important distribution and technical assistance networks in Brazil.
“In the end, it all comes down to partnerships,” declares Cortes. “We treat our workers as partners and have excellent relationships with both our employees and their unions. As I’ve already mentioned, our suppliers are our partners as are our 134 exclusive resellers. Of course, last but not least, are our clients; they are much more to us than consumers to whom we sell trucks. Whenever our clients need maintenance, technical assistance, or need to upgrade, we want to be there for them. In this sense, we see them as partners, too, with whom we seek to create a ‘marriage’ – hopefully one that will last forever.”