Within the scope of the 5th National Meeting of Industrial Economy and Innovation (V ENEI), on May 10, 2021, the IEDI held the section “Future of the Industry in Brazil: impacts of multinational companies’ restructuring and global chains’ dynamics,” whose discussion we summarize in this Letter. 

Organized by CEDEPLAR/UFMG, the event featured a presentation by professors Afonso Fleury, from Poli-USP, and Maria Thereza Fleury, from EAESP-FGV, and comments by João Emílio Gonçalves (CNI), João Furtado (USP) and Pedro Wongtschowski, vice president of the IEDI. The complete material is available on the IEDI website [in Portuguese] and the video can be accessed here.

Recently, news on foreign multinationals ending or reducing their activities in Brazil has become more and more frequent, across several industrial sectors (Ford, Mercedes-Benz, Sony, LG, Roche, LafargeHolcim, etc.). Many of these decisions were certainly influenced by the effects of the COVID-19 pandemic and reflect the specifics of each company, but they may also have deeper roots.

The negative role of the piling up of distortions in the Brazilian economy—which compromise competitiveness and the future evolution of these companies' businesses—cannot be ignored; nor can the reconfiguration of global value chains in light of the advancement of digital technologies and of industrial development strategies adopted in recent years by developed and emerging countries with vigorous economies, such as China.

Therefore, the studies by Professors Fleury are very timely, as they help us to understand the structural changes behind some multinational companies' disinterest in Brazil and subsidize the debate about what will be our place in the “industrial world” of tomorrow. They are important contributions to the definition of a Brazilian industrial strategy, capable of making the sector “more 4.0” and more sustainable.

The work of professors Fleury starts from an analysis with three axes: foreign multinationals' and their subsidiaries' presence and performance in the country, Brazil's position in global value chains (GVC), and the presence of Brazilian multinationals in these chains. From there, it points out challenges and opportunities, that is, our room for maneuver in the global industrial system.

According to Afonso Fleury, the advance of digitalization, greatly stimulated by the governments of developed countries, opens a new stage in the reorganization of multinational companies. This is because it has important consequences for the integration of the activities of these firms, allowing them to control virtually anything from anywhere in the world (digital twin), and for their relocation (re-shoring or back-shoring), making it possible to produce close to really relevant consumer markets, without necessarily facing major logistical challenges.

When studying branches of multinationals in Brazil, they find that the digital transformation leads to the fragmentation of these companies, with each function being located in a network node wherever it is most convenient. There are examples where production in Brazil and other countries in the region is carried out in real time by a control and planning center installed in Colombia. Therefore, the attractiveness of a country is increasingly based not only on the size of its market, but also on its technological capability and risk. 

Professors Fleury believe that the presence of multinationals in traditional sectors in Brazil will be reduced to the minimum level necessary to serve local markets, or else they will simply be closed. In sectors where the country has or may have an international prominence (agribusiness, bio-economy, oil and gas, energy, extraction of rare metals, etc.), subsidiaries will be maintained, with intelligence, adding more value.

As for the GVCs, according to the professors there was a process of total and general disruption in 2020, due to the COVID-19 pandemic. Currently, the leading companies in these chains are assessing how they will reorganize. The researchers believe that the important element to be considered is the existence of a clear government interference in this process. It is worth remembering, for example, that, since the National Strategic Plan for Advanced Manufacturing (Letter IEDI n. 820) of 2012 and now again with the Biden Plan (Letter IEDI n. 1083), the USA has been considering the development of its industry as a matter of national security.

The trend, according to Afonso Fleury, is for the GVCs to be reorganized in order to become shorter and increasingly nationalized. Brazil, in turn, has no relevant role in these chains. We are limited to the presence of subsidiaries of multinationals in technology-intensive sectors, producing for the domestic market, with great dependence on imported parts and components with high technological content, and innovation based in OECD countries. Therefore, he argues that our progress in GVCs must take into account the role of Brazilian multinationals.

Maria Thereza Fleury emphasizes the existence of Brazilian multinational enterprises, often in a leading position in GVCs and innovation ecosystems, in different sectors: in the extractive sector, such as Vale and Votorantim, in basic inputs, such as Oxiteno and Braskem, in manufacturing, such as Iochpe-Maxion, Natura and Coteminas, in the integration of complex products, such as Embraer and WEG, in the operation of services, such as Algas, etc. 

These are companies with several partnerships: with other multinational firms, with their suppliers and, increasingly, with startups. According to the professor, this brings some optimism to our productive structure, as it is important in terms of innovation. There are examples of partnerships with startups in agribusiness (AgTechs), services (FinTechs) and manufacturing, as is the case of Gerdau which, together with Brasil Cubo, is entering the modular construction market. 

Some Brazilian multinationals, from their presence in developed countries, carry out what can be called a “knowledge springboard.” That is, they take advantage of mature innovation systems to accumulate and transfer technological skills from the subsidiary to the country of origin, producing a positive cycle of learning and innovation. 

With these elements in mind, professors Fleury point out aspects for a Brazilian industrial strategy. First, in traditional sectors, multinationals have already defined their focus (NAFTA, European Union and Asia) and Latin America, for the time being, is not considered. This directs their Latin American operations to serve local markets only, with little investment in technology skills. There is little chance that they will integrate Brazil into GVCs.

Second, in sectors where Brazil is an international protagonist, there are conditions for national companies to assume a command position in the management of chains and for foreign multinationals to promote technological spillovers. For the professors, a successful model is the structure that Petrobras created on Ilha do Fundão to explore deep waters. 

Thirdly, in the case of Brazilian multinational enterprises, they can explore opportunities in production chains by upgrading, moving increasingly towards downstream positions (where value adding is greater), through the internalization of technological advances obtained via partnerships with startups or accumulated in their foreign branches. 

Since foreign multinationals have not shown interest in Latin America, there is an opportunity for Brazilian multinationals to expand their operations in the region and try to better understand the dynamics of global value chains.

The full text is available in Portuguese.