Pirelli FDI in Brazil
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Pirelli invested $120 million to expand its existing tire factory in Feira de Santana, Brazil in 2003. The expansion added 360 new jobs and doubled production capacity to 13,000 tires per day. The investment allowed Pirelli to better serve the growing South American market and contributed to increased group sales. The factory emphasized social responsibility by providing education, health programs, and jobs for local residents.
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Pirelli FDI in Brazil
- 1. Exporting success in manufacturing: THE 2003 INVESTMENT IN FEIRA DE SANTANA (STATE OF BAHIA) in BRAZIL GROUP 1 BELLARDINI Luca GHIZZONI Valerio Flavio MOCHI Matteo STABILE Marion LUISS Guido Carli International Trade & Commercial Policies Prof. MANZOCCHI – IANNACCONE – CARLI
- 2. 1872 2003 2016 Founded by Giovanni Battista Pirelli in Milan for the production of India rubber articles Focus exclusively on its core industrial activities in the tyres sector 1900 1901 2010 First FDI in Spain First time car tyres production Pirelli History
- 3. We change the driving experience by constantly challenging the boundaries of technology, style and sustainability, setting trends in communities across the world. «Power is nothing without control» is the essence of Pirelli’s products and actions: high performances, research and innovation combined with responsability, safety, respect for the environment and sustainability. Vision & Mission
- 4. Feira de Santana Campinas Santo André Gravataí 1929, power cables; 1940 tyres for truck 1940, tyres for automobiles Tyres for motorcycles Santo André Campinas Gravataí Manufacturing in Brazil
- 5. Horizontal • Market seeking • Replicating the whole value chain M&A • Cross country acquisition of Cia Pneus Tropical S.p.a Conventional tyres Trucks Light trucks Bus Cars Pirelli in Feira de Santana (1986)
- 6. Horizontal • Market seeking • Whole value chain Greenfield • Capital extension of the investment undertaken in 1986 Radial Tyres Light trucks Cars Premium Inaugurated on 12th of September 2003 by Brazil’s President Mr. Lula Da Silva and Pirelli’s Chairman Marco Tronchetti Provera Pirelli in Feira de Santana (2003)
- 7. Latin America NAFTA 1/3 2/3 Initial investment of 120,000,000 US$ Factory width of 32,000 squared meters Seasoned equity offering from Pirelli Italia and BNDES financing Automated process control 360 new employees besides the 300 existing ones in the old plant Production capacity End markets 2,500 7,500 13,000 0 5,000 10,000 15,000 1 Daily units 2015 2005 2003 New Plant Description
- 8. Gradual Trade Liberalisation after 1990 • Greater ease of investing from abroad • More inward FDIs from MNEs Plano Real (1994) Cardoso’s Pillars (2000) • Floating exchange rate • Inflation targeting • Fiscal responsibility Macroeconomic Overview • Cruzeiro replaced by Real • Restrictive monetary policy • Privatisations • Trade liberalisation • Balanced budget
- 9. GDP and Exchange Rate 5500 6000 6500 7000 7500 8000 8500 9000 9500 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 GDP (billion LCU, constant prices) 0.50 1.00 1.50 2.00 2.50 3.00 3.50 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Exchange rate (BRL per $1) • Notice that a rise in the chart plotting the exchange rate corresponds to a depreciation in the Brazilian Real, and a fall corresponds to an appreciation. • During years of sustained economic growth (2004-2011), the GDP has steadily increased, whereas the Brazilian currency has strengthened against the dollar.
- 10. Inflation & Unemployment -100.00% -50.00% 0.00% 50.00% 100.00% 150.00% 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Inflation (CPI variation) • Apart from Plano Real years (1994-99), inflation has always fluctuated a lot. • Thanks to Plano Real, the CPI dropped by nearly 97% between 1994 and 1995. • Nevertheless, by considering 1980 as 100, in 2003 the CPI had already dropped to less than 15. In 2015, it was just above 9. • In the PR years, the tight monetary policy yielded a rise in the unemployment rate. 2 3 4 5 6 7 8 9 10 1981 1983 1985 1987 1989 1992 1995 1997 1999 2002 2004 2006 2008 2011 2013 Unemployment rate (% of labour force)
- 11. Foreign Direct Investment • 1994 Plano Real jumpstarts the FDI directed towards Brazil • 1999 The attractiveness of Brazil is hurt by a sovereign debt crisis • 2003 A new wave of inward FDI reignites the Brazilian boom (15.00) 5.00 25.00 45.00 65.00 85.00 105.00 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 FDI, net inflows (billion LCU, current prices)
- 12. GDP (Focus: Trade Balance) 0 50 100 150 200 250 300 350 400 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Exports vs. imports (billion LCU, constant prices) EXPORT IMPORT • Plano Real had positive effects on both imports and exports, at least until 1997. • The trade balance has been positive in the Eighties and 2000s, negative in the Nineties and in most recent years. • Notice that the graph is at constant prices, regardless of the PR monetary effects
- 13. 0 20 40 60 80 100 120 140 Population (1980-2004): Brazil (:=100) vs. Italy, South America Average Population (1980-2004) Annualised Growth Rate of Population (1980-2004) 0 10 20 30 40 50 60 70 80 90 100 Demographic Potential of the Market: Brazil (:=100) vs. Italy, South America The Demographic Potential This index has been computed by mixing the Average Population and the Annualised Growth Rate of Population indexes, each one with a 50% weight.
- 14. The Demographic Potential 57 58 59 60 61 62 63 64 65 66 67 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Brazilian Population Aged 15-64 (% of the Total)
- 17. Revealed Comparative Advantage Strategic Position FDI Determinants Brazil’s North-East market was uncovered Proximity to NAFTA market Situated in an industrial area Balassa Index – there is comparative advantage 𝐵𝑡𝑦𝑟𝑒𝑠 𝐵𝑡𝑜𝑡 𝑊𝑡𝑦𝑟𝑒𝑠 𝑊𝑡𝑜𝑡 𝐼𝑡𝑦𝑟𝑒𝑠 𝐼𝑡𝑜𝑡 𝐵𝑡𝑦𝑟𝑒𝑠 𝐵𝑡𝑜𝑡 = 1,356 = 1,314
- 18. FDI Determinants Import Barriers Fiscal Incentives 16% TEC 4% TEC Import tax on tyres Import tax on natural rubber -80% -75% Federal fiscal incentive on net income, applied to al the Nordest area Federal fiscal incentive on ICMS, applied to the Bahia state
- 20. • 250 children are granted school and sporting activities, basic health and hygiene education • After-school programme of 15 activities for 150 children and entertainment for employees’ sons Social Commitment • Sustainable development of the impoverished communities of Acre • Production of a new tyre made 100% of «seringueiros» rubber Xapuri Project Host Effects
- 21. Source: Pirelli's Annual Report 2003 • Capital extension on the existing factory produced 360 additional jobs • All collaborators recruited in the region Employment Growth • Priority given to technical training for new employees provided by CETEB • 20,000 training hours for professional improvement Skilled Labour • Environmentally-friendly plant • Substitute oil burning by natural gas • New liquid effluent treatment to recover households water waste Sustainability Benchmark Host Effects
- 22. 13% 43% 8% 23% 13% Net Sales 2004 14% 45%7% 21% 13% Net Sales 2003 Italy Other European Countries North America South America Africa/Asia/Oceania Total Sales 2004: 3,255,000Total Sales 2003: 2,970,000 o No other significant investment in South America o Net group sales increased thanks to a relevant contribution of our investment Home Effects
- 23. Home Effects
- 24. Sources www.pirelli.com World Bank Database Carlo Bellavite Pellegrini, Pirelli: Innovazione e Passione, Il Mulino, 2015 ANFAVEA International Trade Center www.tradingeconomics.com IMF Database We would like to greatly thank Prof. Federico Carli and Prof. Roberto Iannaccone, together with Dr. Graziano Messana and Dr. Marco Cortinovis, for their kind availability in providing us data, advice and information.