March 26, 2010 World of Possibilities

Volume 13 | Issue 2

Specializing in turbocharging and thermal systems for the automotive industry, Borgwarner Brasil is one of the bright stars in Borgwarner’s

Although headquartered in Auburn Hills, Mich., the BorgWarner group is nothing less than global, with 59 plants in 18 countries distributed throughout Europe, Asia and the Americas. While all plants manufacture engine and transmissions systems and components for the auto industry – among its best known products are turbochargers, viscous fan drives and Visctronic Systems, transfer cases, AWD controls and systems, Dual-Tronic Clutch modules, emissions controls and actuators, variable cam timing, engine valve timing systems, and spark plugs – few have shown as much recent (and future) promise as BorgWarner Brasil.

ACQUISITIONS, MERGERS, RESTRUCTURING
BorgWarner’s presence in Brazil dates back to 1999, but the company’s Brazilian origins can be traced to 1975, when the Brazilian Lacom family joined forces with U.S.-based Schwitzer company. At their plant in Campinas, São Paulo, the partners specialized in the manufacture of turbochargers for diesel engines used in commercial vehicles such as buses, trucks, and tractors. Almost immediately, they scored an important coup when they signed a contract with Mercedes Benz, which became—and would remain—the company’s major client.

However, everything changed in the late 1990s when BorgWarner U.S. decided to go shopping and purchased German giant 3K (in 1997) and Schwitzer World, two major manufacturers of turbochargers for the passenger cars and commercial vehicles industry. As a result of the acquisitions, 3K-Warner and Lacom Schwitzer merged and became BorgWarner Brasil. Major transformations soon took place; the new company quickly restructured and prepared to become BorgWarner’s sole South American plant. Staff were hired and trained, and capital was mobilized to purchase new equipment that would allow the Brazilian company to launch the cutting-edge products in BorgWarners’ extensive catalog. Along with new investments and products came new and important clients including Iveco, MWM, John Deere, Cummins, and MAN Latin America. Along with Mercedes Benz, these companies became major customers.

The company continued growing and expanding ever since. In 1999, BorgWarner also purchased the U.S.-based Kuhlman Corporation and the Fluid Power division of the U.S.-based Eaton Corporation. Their subsequent merger became BorgWarner’s Cooling Systems division. In Brazil, Eaton had a plant in the town of São José dos Campos, São Paulo. Following its acquisition by BorgWarner, in 2003, the Cooling Systems division moved to BorgWarner Brasil’s Campinas plant. From then on, BorgWarner Brazil had two divisions: the original TurboSystems division (which specializes in turbochargers) and the ThermalSystems division (whose main products are fan drives, specifically air-sensing viscous drives). To date, turbochargers continue to produce the bulk of the company’s revenues, about 80 percent of sales. Fan drives represent the remaining 20 percent.

FLEXING ITS MUSCLES
The year 2003 also marked BorgWarner Brasil’s first forays into exports. Apart from supplying components to the Latin American aftermarket (which today accounts for roughly 20 percent of business), the company began supplying turbocompressors to other BorgWarner units in the United States and Europe.

“Starting off with inter-company sales allowed us to flex our muscles,” recalls Plant Manager Arnaldo Iezzi Jr. “But within a year, we had our first external contract with U.S.-based Navistar Engines. We supplied them with ITEC R2S turbochargers, which made use of much more advanced technology than the products we produced for the Brazilian market. In 2007, we hadanother important breakthrough when we won a contract to produce turbochargers for Daimler’s DDC diesel engines division in the United States.”

By 2007, exports comprised an impressive 30 percent of BorgWarner Brasil’s business. However, despite a very promising start, apart from the South American aftermarket segment, international trade has all but dried up. The industry, as a whole, has lost global competitiveness, due to a combination of factors: the strong valorization of the Brazilian real against the U.S. dollar as well as the so-called custo Brasil (“Brazil cost”), heavy taxes, rising wages, and flaws in infrastructure that drive up logistics costs.

However, this short and sweet global phase was not at all in vain. Supplying foreign clients forced BorgWarner Brasil to invest in state-of-the-art technology so that it could produce advanced products that met customers’ stringent demands. Consequently, the company proved itself to the market – as well as to BorgWarner headquarters.

THE CHANGING DOMESTIC MARKET
“While our future in exports is a big question mark, our future in Brazil is looking very promising, which is why we’re now focusing on the domestic market,” says Iezzi. To wit, BorgWarner is investing R$20 million in its Brazilian affiliate, most of which will go toward the development and testing of new products. “U.S. headquarters has a lot of confidence in us and in Brazil’s growth,” declares Iezzi, pointing out that, since 2000, BorgWarner Brasil has experienced growth rates of 15 to 20 percent (with the exception of 2009, when sales were affected by the global financial crisis). Now employing 360 people, the company’s current annual production capacity is 350,000 turbo compressors and 215,000 fan drives. Revenues for 2010 are expected to be R$ 220 million (roughly US$ 125 million).

A market leader, the company boasts a robust 45-percent market share. Its short-term goal is to reach the 50-percent level by 2012. To meet this goal, it plans to introduce some of BorgWarner’s more advanced items to the rapidly changing Brazilian market. “Technology that’s already available in U.S. and German engineering centers is going to be brought here to Brazil,” explains Iezzi. “This technology transfer actually began in 2007 when we started supplying products to the those two countries, where emissions standards are much more advanced than Brazil’s. There’s now a new and much stricter emissions law which is going to be effective by 2012 in Brazil, the Euro 5 or Conama P7 that is bringing us a lot of new business.”

A major legislative change could significantly impact the automotive market and, in turn, BorgWarner Brasil’s fortunes. This is the growing pressure for Brazil and Latin America to adopt diesel as a fuel in addition to gasoline and ethanol. “For the first time since the government prohibited diesel cars in the 1970s, there is the possibility that this law could be revoked,” states Iezzi, adding that at present only vehicles with cargoes of over one ton (such as pickups) are permitted to use diesel. “In the ‘70s, the law made sense, as it provided an incentive for consumers to use ethanol. However, such economic or environmental justifications no longer remain valid. Currently, diesel uses 35 percent less fuel consumption than gasoline and 58 percent less than ethanol or flex fuel. Moreover, it emits less CO2. Brazil is now self-sufficient in terms of fuel, and the technology fordiesel engines and components is available.”

According to Iezzi, it’s only a matter of time before the diesel trend migrates to Brazil from Europe, where 50 percent of cars produced have diesel engines and turbochargers. When it does, the company expects production volumes to soar, resulting in growth rates that far surpass current predictions of 15 percent.

In the meantime, BorgWarner Brasil is preparing for the impact of other industry trends. For example, manufacturers such as Volkswagen and Ford have introduced semi-automatic gearboxes in small volumes, which has BorgWarner Brasil contemplating the addition of transmission components (currently produced abroad) to its Brazilian line. It’s also hoping to produce transfer boxes for 4×4 vehicles, also currently imported. Although 4x4s comprise only five percent of the light vehicles segment currently manufactured in Brazil, this figure is expected to rise to 15 percent in upcoming years. As for the ThermalSystems division, the company is seeking permission to upgrade its plant to begin local production of Visctronic, which will be the first fan drive system with electronic controls produced in Brazil.

ACCESS, AGILITY & DISCIPLINE
Having access to the engineering and research of BorgWarner centers in the U.S., Europe, and Asia has been key in the Brazilian company’s success. “Depending on the project we’re working on, we’ll call upon any of them and receive strong and immediate support,” declares Iezzi. “For instance, if we’re doing a product for GM, we’ll consult with BorgWarner in the United States. For Volkswagen, we’ll consult with Germany. For Hyundai, we’ll seek support from Asian engineers. Clients reallyappreciate this because we can take advantage of cultural proximities between the foreign BW specialists and the foreign corporations installed in Brazil.”

Another important factor in BorgWarner’s domination of the Brazilian market is its great agility. The company’s time to market is extremely rapid. Upon receiving a client’s specifications, its engineers are able to produce a prototype in three months, an excellent turnaround for the automobile industry. Of course, another trump card is BorgWarner’s 100 years of experience making turbochargers. Aside from the brand name’s built-in reputation, BorgWarner Brasil can draw on a great deal of practice and know-how.

Meanwhile, when pressed to reveal the company’s guiding strategy, Iezzi says that it all comes down to financial discipline. “We place an enormous emphasis on cost control, inventory management and increased productivity. This is why we were able to confront last year’s terrible crisis and emerge unscathed. Proof of this is that, despite the loss in sales, not one investment was canceled, and these investments comprise the base for our future growth,” he explains. “BorgWarner has a philosophy: We don’t want to be the biggest company in terms of sales, but in terms of profitable sales. After all, it’s not enough to sell a lot if you’re losing money.”

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