Letter IEDI n. 855–Structural changes in the Brazilian industry between 2007 and 2015
The IEDI has been gathering a set of principles and suggestions that will integrate its proposal for an industrial strategy to be announced soon. Our objective is to contribute to a debate that will gain momentum with the proximity of the presidential elections, creating the opportunity to reach consensus on an agenda for the country’s sustainable economic growth and development.
Today's Letter IEDI inaugurates a series of fifteen studies with diagnoses and propositions that have subsidized the Institute's reflection on the theme and, consequently, the preparation of its proposed strategy. This involves issues of major importance for Brazil, such as the dysfunctional nature of our tax system; the infrastructure bottleneck; the deficiencies of investment financing channels; the narrow international integration of our economy; the challenges imposed on the competitiveness of national production by the emergence of the new technologies of the Fourth Industrial Revolution, among many other topics.
This first work —published in full on the IEDI website— analyzes the changes in the industrial structure between 2007 and 2015, a period that left deep marks in the sector due to episodes such as the global crisis of 2008/2009, the fast recovery that followed it —with the support of countercyclical policies— and the beginning of one of the worst phases Brazilian industry has ever faced, in 2014 and especially 2015.
The objective of this study is to evaluate different indicators that express the effects of this macroeconomic environment on the industry, based on information from the IBGE Annual Industrial Survey (PIA) for the year 2015, the most recent edition available at the time of the study. In particular, the work sought to monitor changes in the sectoral composition of industrial value added and employment, changes in the production cost structure and the evolution of investments, as well as to assess the financial fragility of companies in the sector.
As it is known, for many years the industry has seen its relative participation in the Brazilian economy fall, a tendency that was intensified in the period under analysis. In addition, another change deserves to be emphasized: the PIA data show that, from 2007 to 2015, the greatest increase in participation —both in value added (from 40.9% to 46.2%) and industrial employment (from 36.2% to 40.5%)— was registered in the grouping of sectors intensive in natural resources (the food branch in particular).
Given the comparative advantages of the country and its continental dimensions, industries intensive in natural resources have always been the most important in the industrial structure. However, the deepening of this specialization during the period of analysis was also a consequence of Brazilian economy’s difficulties to establish the adequate conditions to promote a structural change toward products with greater technological content.
The worst loss in participation in the industrial structure was recorded by scale intensive sectors, notably metallurgy and vehicles. The group saw its share in value added reduced from 31.1% to 24.7% between 2007 and 2015 and, in industrial employment, from 19.9% to 19.0%. This was also the group facing the greatest difficulties from the point of view of production costs.
The assessment of operational costs in relation to total industrial production value reveals a significant reduction in the initial years of the period in question and a rapid increase since 2011, a pattern followed by all groups of industrial sectors studied. In the industry in general, operations costs, which represented 55.1% of production value, fell to 51.5% in 2011, but rose to 53.2% in 2015.
As for labor costs, there was an increase in wages as a proportion of output throughout the period and in all industrial groups. On average, this cost item, which represented 8.9% of production value in 2007, increased to 10.1% in 2011 and reached 10.8% in 2015.
It is important to highlight the widespread rise in costs since 2011 because from this year economies such as China intensified their advance on the Brazilian domestic market. Losing competitiveness due to cost increases at a time like this — during which, in addition, the currency was overvalued— would inevitably lead to market share losses in favor of imported goods. It is no accident that since that year Brazilian industry began to alternate periods of growth with others of contraction, culminating with a strong recession in 2015/2016. The increase in costs is a crucial part of this scenario.
The study also sought to show that the evolution of industrial investment was relevant to the changes in the investment rate of the Brazilian economy as a whole, both in the phase of expansion between 2007 and 2013, when the rate rose from 18% to 20.9% of GDP, and in the years of crisis, when it shrank to 15.6% of GDP.
The rate of industrial investment (calculated by the proportion of acquisitions minus the write-downs of tangible assets declared by the PIA-IBGE subjects in relation to the general industry's value added) was 24.1% in 2007, fell during the 2008/2009 crisis, but rose again in subsequent years, returning to the 2007 level in 2013. From then on, the industrial crisis determined a new stage of decline, to 23.5% in 2014 and 22.2% in 2015, symbolizing the end of a cycle of investment expansion that began in the mid-2000s.
With the economic and industrial recession, defensive corporate stances have gained in importance; an example is the allocation of resources to assets with greater liquidity and faster returns. In this sense, the share of financial revenue in relation to total revenue rose from 4.2% in 2013 to 7.3% in 2015, a level relatively close to that of 2009 (8.2%), when the Brazilian economy suffered the impact of the international financial crisis. Regarding industrial groupings, in all of them the share of financial revenues in total revenue was higher in 2015 than in 2007.
The study also found that, as of 2014, the balance sheets of industrial companies weakened, for a greater share of current revenue became committed to the payment of contractual expenses, such as taxes and financial obligations. The evolution of this indicator, which is a proxy for financial fragility, shows that, from 2010, industrial gross surplus declined in relation to contractual expenses. By 2015, this indicator would be less than 1, that is, the gross surplus generated in the industry would not be enough to cover contractual commitments. As a result, the industrial investment rate declined sharply, a trend that may have lasted until 2016 or even 2017.
In summary, the 2007-2015 period brought little benefit to the industry in terms of raising its value-adding potential. The industrial structure has become more concentrated in resource-intensive sectors. On the other hand, wage growth was not accompanied by corresponding reductions in other costs nor by productivity increases. This resulted in a significant loss of competitiveness in sectors other than natural resources intensive ones. The study also found that industrial companies became financially fragile and, as a consequence, lost the capacity to finance their investments with their own resources. In this environment, the supply-side stimulus policies implemented since 2011 have had little effectiveness in boosting productive investment and directing it to sectors with greater value added.