Sustainability in Latin America

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The Impact and Role of Multinationals in Achieving Sustainability in Latin America

“Those who cannot remember the past are condemned to repeat it.”
— George Santayana

MIT Sloan School of ManagementThe Impact and Role of Multinationals in Achieving Sustainability in Latin America - Cover

Environmental Impacts

Pollution Reduction

There have been few efforts made by the automotive manufacturers in the three countries under study to reduce pollution beyond what may be required by national, state, and local regulations. In fact, the pursuits of localities that are more amenable to the automotive factories have been a driving force behind the locations of new factories. For instance, the increasingly stringency of environmental policy governing automotive plants inthe region around Mexico City has led to the establishment of new production plants away from major municipalities.

There have been some efforts made to reduce pollution emissions from manufacturing plants. Ford, in all three countries, has made some of the most notable strides in pollution reduction from the installation of water treatment plants in Mexico, to waste composting to aid in rainforest restoration in Brazil. The construction of new production plants place pressures on the environment in Brazil. However, some automotive MNCs have applied genuine efforts in attempting to both achieve a level of industrial development while trying to restore the surrounding environment to its natural state. An example of this balance between industrial and sustainable development can be seen in Ford’s plant in Camaçari, Brazil. This plant is currently using the plant’s composted waste to restore the soil of the surrounding rainforest, long ago cleared away for cultivation, so that it may be restored to its pristine state.

General Motors, on the other hand, has earned a reputation of negotiation of the temporary lowering of environmental standards and eventually not complying with these reduced standards or meeting the later deadline for full compliance.

There has been in neither country a fundamental change of the nature of production to reduce pollution. There is still a relentless maximization of production quantity, regardless of the environmental costs. Revolutionary efforts in Eco-design, while promising to create an automotive-based supporting “green” economy for reclaiming recyclable materials, will only help to partially mitigate resource depletion in the supply chain.

Climate Change Prevention

The automotive MNCs, besides development projects on hybrid/electric vehicles, are not involved in any projects that address the very long-term issue of climate change. Their logic is very product-focused. They are concentrated on the concept that if the combustion of fuels based on petrochemicals is a cause of climate change, they will design products that use alternate sources of energy.

Minimal thought has been given to the improvement of their actual processes towards the prevention of climate change. The classic business model of maximization of production of new vehicles still remains unaltered, continuing to foster a consumerist society. Continuing with this framework, the additional production that globalization offers the industry combined with ineffective climate protection clauses intrade agreements and the lack of local governance introduces additional possibilities for long-term contributions to climate change.

Ecosystem Disruption Prevention

There is little evidence that automotive MNCs have mitigated disruptions to the natural ecosystems that surround their factories. It must be noted that most Latin American countries have held environmental preservation as a secondary or tertiary priority behind economic and industrial advancement. ISI policies of the 1950s and 1960s reflected the prevailing views of development policy, focused on economic advancement through industrial production and did not address environmental protection.

Resource Preservation

The level of resource depletion due to the automotive industry is closely related to the nature of industrial activity and associated supply chain dynamics. Early automotive MNC activity in all three nations focused on final assembly of the motor vehicles from prefabricated components shipped from other countries, minimizing the domestic use of raw materials. Local resource depletion from domestic production could not occur since these countries initially lacked the proper technological infrastructure and trade knowledge to be able to produce automobile components of sufficient quality. Sufficient domestic technologies and skills had developed by the later Import Substitution Industrialization (ISI) period when automotive MNCs produced a significant percentage of the motor vehicles domestically, taxing the local resources in the process.

The increasing supply chain interdependencies that characterize globalized manufacturing and distribution leave the current automotive industries in Argentina, Brazil, and Mexico at a crossroads. On one hand, the increasing production volume in these countries, combined with the tightly integrated supplier network requires that raw materials be extracted either domestically or through regional trading blocs, accelerating resource depletion. On the other hand, the increasing concern for maximizing vehicle recyclability in the automotive MNC home nations and regions have led some to adopt innovative eco-design policies which consider the total life of their products, from raw material through recycling and re-use in new products.


Economy and Environment Linkages

Industrial Development and Environment

A key question that the entire automotive industry needs to face, but continues to avoid is: “How can the automotive industry continue to expand without creating additional harm to the environment?” There have been some efforts to mitigate a number of the effects on the environment from industrial expansion, focusing primarily on:

  • Removal of pollutants from plant emissions.
  • Design and manufacture of alternative fuel vehicles that reduce atmospheric emissions.
  • Consolidation of supplier manufacturing activities intro macro factories.
  • Implementation of lean manufacturing initiatives, which themselves focus on the reduction of manufacturing waste.

These actions fail to address the impacts of industrial development throughout the entire automotive industry supply chain. Industrial expansion creates demand on commodity products and raw materials whose producers are not under close supervision or tight regulation, leading to the adoption or expansion of inherently unsustainable activity.

Trade and Environment

The advent of expanded trade, especially do to membership in MERCOSUR or NAFTA, has introduced another challenge for the automotive MNCs: “How can trade, which itself represents an increase in industrial production and competition, be used to foster environmentally sustainable practices?”

Membership in globalized free trade imposes pressures and presents economic opportunities for a “race to the bottom”, focusing production in nations that do not yet have well-established environmental regulations. Regional trade agreements, such as NAFTA, only require that signatory nations enforce their own environmental regulations. There are no stipulations for harmonization of these actual regulations across nations. A constant leveraging of these “loopholes” in policy can be observed in the relocation of plants into Mexico from the United States and from industrial centers of Brazil and Argentina to more economically-depressed rural areas in different provinces.

While the above activity provides the potential for great harm to the environment, increased international trade does present the opportunity for enhanced technology transfer from the home nations of automotive MNCs. The introduction of lean manufacturing in new factories, eco-design of vehicles that integrate recyclability concepts, and the use of alternate fuels, are all due to this enhanced global trade. Michael Robinet, CSM Worldwide Vice President of Global Vehicle Forecasts sees South America as a “… kind of global sandbox for a lot of automakers to try out new methods.”. While promising, more substantial activity in technology transfer of environmentally sustainable production practices is required to establish a reasonable balance in this measure.

Economic Investment and the Environment

The admittance of the studied countries into free trade agreements has also served to create venues for economic investment. However, the focus on investments in production has served to increase traditional business models of production, not in finding new, creative ways of using the unique factor endowments of each developing country.

It must be acknowledged that a minimum level of development in infrastructure and other supporting services is required to permit more advanced investments in knowledge-based activity, which fosters more sustainable activity. The beginnings of this trend can be seen in Brazil, where it has become a partner in research, design, and implementation of innovative products and processes in the automotive industry. These activities break the barrier of simple industrial production and introduce Brazil as the source of knowledge workers in the industry.

However, there is currently a limited need for knowledge workers in the industrial operations of some of these nations. Argentina has limited participation in this venue due to its proximity to Brazil. Mexico also has limited participation due to it proximity to the United States and its continued focus on manpower-intensive operations.

Regulation of Health, Safety, and the Environment

As addressed earlier, the “race to the bottom” phenomenon is also drawn to developing countries due to their lax regulations or enforcement of environmental of environmental policy. Isthis the fault of the MNC? Not in the policy sense, for that is the responsibility of government. However, multinationals have the opportunity to implement processes that have been developed in more environmentally stringent business environments. This has occurred inthe transfer of recyclability practices from European MNCs to their Latin American subsidiaries and throughout Ford plants in the region.

This activity does not impact the broad domestic supply chains. Inorder to properly address these issues, participating countries and trade regimes must implement revisions to environmental policies and enforcement procedures to harmonize requirements and guarantee compliance throughout the chain.


Economic Impacts

Improvement in Competitiveness and Use of Capital

Automotive MNCs, due to the scope of their global operations and supplier networks, are an excellent conduit for transferring best practices inthe effective use of resources towards increasing efficiency, attaining economies of scale in production, and maximizing profit for the enterprise. These achievements, in turn, incentivize additional corporations, typically automotive suppliers, to invest inoperations within the country, which inturn leads to additional business opportunities for the national economy.

One of the most influential events that impacted the automotive industry inthe countries under study was their admission into free market agreements inthe 1990s. Argentina and Brazil, along with Uruguay and Paraguay entered the Mercado Común del Sur (Southern Common Market), known as the MERCOSUR, with the ratification of the Treaty of Asunción in 1991 and the Protocol of Ouro Preto in 1994. Mexico, along with the United States and Canada, entered the North American Free Trade Agreement, NAFTA, in 1994.

The establishment of these regional free markets represented a complete change of market and sourcing dynamics for the automotive industry. ISI protectionist policies, established inthe 1950s and 1960s, used acombination of economic and socio-political incentives to foster industry investment indomestic manufacturing, sourcing, and assembly. Throughout Latin America, individual domestic automotive micro-industries, focused primarily on final assembly, were established by initial MNC investments. The fragmentary nature of the automobile industry resulted in an inability to achieve sufficient economies of scale in manufacturing, leading to an inefficient use of financial capital and an eventual stagnation of the use of new technologies.

The entrance of into regional free markets significantly alters the underlying systems that had nurtured industry growth inthese nations. Free market dynamics allow automotive MNCs to no longer view each national subsidiary as an independent entity, but as a contributor to a regional and global corporate strategy to maximize the addition of value to the corporation. Development, manufacturing, suppliers, and supporting resources are acquired, distributed, consolidated, and divested as needed to support this strategy. Current treaties and associated committees are not structured to assist in establishing homogeneity among participatory nations. In this environment, some countries are “winners” and others are “losers.”

Argentina and Brazil

Argentina has had mixed economic results from its participation in the MERCOSUR. It established a solid automotive production industry during the 1950s and 1960s that had stagnated in the early 1980s as trade liberalization policies started to replace the protectionist policies of ISI. This stagnation was for the domestic industry a period of “catching up” to the levels of quality and technical sophistication required for competition with other regional subsidiaries.

While Argentina is still considered a resource in the global production strategy of several automotive MNCs, its MERCOSUR neighbor, Brazil, eclipses its economic performance. Brazil is consistently viewed as the primary automotive manufacturing center of South America. As indicated inAppendix 3,Brazil currently has 16 different automotive multinationals operating a total of 20 manufacturing plants compared to only 10 multinationals operating atotal of 10 plants inArgentina. While some automotive multinationals produce exclusively in Brazil, none function exclusively within Argentina. The production capacity of the average Brazilian plant is consistently 5 to 10 times
higher than its Argentine partner.

Mexico

The economic activities of automotive MNCs in Mexico and the United Stated has paralleled those observed in Brazil and Argentina. After the passing of the NAFTA trade agreement, there were no trade barriers to prevent corporate strategists in automotive MNCs to transfer manufacturing to Mexico, where they could leverage significantly lower labor costs.

Economic Changes from Changes in the Use of Labor and Capital

The introduction of domestic automobile manufacturing, guided by the policies of Import Substitution Industrialization, led to the industrialization of several Latin American countries, most notably in the nations under study. This industrialization, along with membership in regional trade blocs, has fostered in increased use of domestic resources. This can be seen in these countries’ share of total Latin American GDP, which ranks the three highest in the region.

However, Latin America still represents a very small share of world GDP, leading to the conclusion that even these “giants” in the region are economically small contributors to total domestic development. A possible explanation of this phenomenon is the fact that inthese nations, like much of Latin America, industrialization has been concentrated in a few key regions of each country, which has posed a restriction on economic growth in these nations. The construction of new production plants in the provinces, at the expense of the environment, has served to improve this inequity, at least compared to other Latin American nations.

Additional sources of economic efficiency and its improved use of capital have been seen inthe implementation of lean initiatives. However, there has been a contrast inthe implementation of lean among these countries. Mexico has focused on human capital, leveraging lean procedures to better organize a large labor force that has adopted less automation than neighbors. Brazil and Argentina have expanded their lean initiatives to encompass not only their workers, but also the process by which automation is implemented intheir factories, to include modular assembly among suppliers inthe same physical assembly line. Argentina is at a disadvantage to seeing the maximum benefits of this compared to its direct neighbor, Brazil, since it is currently viewed as a supporter of Brazilian operations.

Financing of Growth and Development

The automotive MNCs are not active contributors to national development. In fact, regional governments have been providing subsidies to MNCs to establish operations in their respective states. These subsidies are being provided for the secondary effect that a production move brings to a region – the establishment of a broad automotive supplier network to support the production plant with its associated contribution to employment. This brings the promise of economic advancement of the region, establishment of production clusters that require additional manufacturing or service industries, and in turn increased interest for future investors.

In reality, the automotive industry does not exist throughout Mexico, Argentina, or Brazil. It exists in a small group of highly industrialized MNC/supplier “communities”. They do not directly interact with the overall national region, but only within their industrial clusters. While some expansion has been made to new sites and new clusters in recent years, the automotive industry is not currently structured to serve as a great contributor to a uniform level of national growth and development.


Economic and Employment Linkages

International Division of Labor

Automotive MNCs, by their global scope and pursuit of maximized efficiency in value- added operations, have allowed developing countries to better leverage the current developmental state of their domestic workforce. The key drivers that initially helped Argentina, Brazil, and Mexico to enter the international division of labor for the automotive industry included:

  • Standardization by the automotive MNC designers of the automobile and the manufacturing of its parts, permitting final assembly, which does not require skilled labor, to occur as a separate process from component manufacturing.
  • The automotive industry’s use of Fordist plant management allowed unskilled or semi-skilled workers to participate in the assembly line of vehicles by performing simple, repetitive tasks. It did not require experienced trades to assemble a vehicle from pre-fabricated components.
  • Alignment to major oceans and shipping routes that facilitated bulk shipment of goods, allowing economies of scale in shipping.
  • The existence of a social class in each country that had the desire and financial resources to purchase vehicles.

In fact, the last two initial factors, shared by many Latin American nations in the early 20th century, helped to establish automotive assembly plants in many additional South American nations, including Peru, Chile, and Colombia. Only Argentina, Brazil, and Mexico were able to successfully establish actual production operations, moving up the automotive value chain, due to the development of additional factors during the ISI era:

  • Development of a domestic automotive parts industry that had reached a level of capacity and quality to be used as a supplier in the automotive global supply chain.
  • Sufficient industrialization and development of supporting industries that serves as afoundation for the manufacture of automobile components, allowing MNCs to achieve economies of scale in domestic production.

The intervening two decades since the creation of regional free markets has increased the global nature of the automotive chain and forced subsidiaries in Latin America to become increasingly competitive in a global, instead of national or regional context. Reflecting the state of the industry and complementary businesses and technologies, distinct paths in the automotive industry division of labor has been observed:\

  • MNCs inMexico continue to focus on leveraging the quantity of available semi-skilled laborers as opposed to the widespread adoption of state-of-the-art technology.
  • MNCs view Brazil as a leader in the Latin American industry. They have begun to expand into new highly automated industrial plants in rural areas. While automation has lowered the number of required operators, the remaining employees are trained more holistically using lean methods, focusing on employment involvement in overall processes, rather than individual tasks.
  • MNC expansion in Argentina has focused primarily on support of operations in Brazil. While it is still considered a significant contributor to automotive production, it does not have significant continuous investments in new facilities, additional employment, or innovative processes.

This need for increased competitiveness in the marketplace has served as a driver for advancement in other processes, such as the nature of work.

Nature of Work

There is a danger in becoming solely focused on economies of scale and productivity when competing in an economically focused global industry. In such a globalized automotive industry, only Brazil and Mexico, as Latin American centers of automotive innovation, have shown signs of crossing the divide between simply being a venue for production capacity/efficiency in assembly and a center for creative design and research into new products.

Brazil

This industry refocus towards a more sustainable and independently empowered workforce has been seen inthe adoption of lean manufacturing processes in their new factories established outside of Sdo Paulo, away from the influence of militant unions. This avoidance of union participation in factory operations would seem to result in a severe loss of worker rights. However, since lean manufacturing empowers individuals within team settings that implement the Japanese concept of kaizen or continuous improvement. The line worker is no longer relegated as an automaton that is designed to solely supplement the factory machinery, but is a member of a small team that seeks out ways to improve each other and the factory processes in which they contribute. When combined with state-of-the-art technology, as in Ford’s new modular plant in Camaçari, Brazil, this has led to an enhancement in the nature of the line worker’s job beyond a machine operator into an independent thinking troubleshooter.

It is very difficult for an automotive MNC, without a firm framework and metrics, to properly monitor the operations of their entire supply chain towards a truly sustainable and empowering nature of work. As can be seen in Figure 5, commodity raw material suppliers, who are most “distant” from the final product inthe supply chain, are also the entities that are least accountable to whatever governance systems that may exist within the MNC. The most notable example of this phenomenon is the continued degrading conditions of charcoal production laborers that pervade the Brazilian steel industry.4 Certainly, the automotive MNCs could more effectively leverage their influence over Brazilian government to effect change in this issue. However, it must still be acknowledged that these broad cross-industry issues require effective government policy and national, regional, and local governance.

Foreign Direct Investment

The establishment of new enterprises or entire industries typically requires a level of capital investment beyond the means of developing countries. The provision of Foreign Direct Investment (FDI) provides the potential for several key benefits towards the recipient nation’s development:

  • Improved regional and international trade linkages through the use of investor’s networks tend to increase both imports and exports.
  • Introduction of improvements in corporate governance, technology, and processes, increasing efficiency.
  • Technology transfer and human capital formation through connections with domestic enterprises.

There are two general classifications of FDI measurement:

  • FDI stocks equate to the financial evaluation of foreign assets that reside in a country or associated with a MNC subsidiary, associated corporations, or branches.
  • FDI flows measure the change in FDI stocks.

Since the mid 1990s, with the exception of 1999, both Brazil and Mexico have commanded superior FDI flows compared to Argentina. A more meaningful comparison might be made between Argentina and Brazil, regional neighbors and co-signatories to the MERCOSUR common market. There is the impression that Brazil presents a more appealing venue for investment since it has consistently commanded a greater FDI than Argentina, especially after the regional economic crisis of the early 2000s.

The relative stagnation of FDI investment in Argentina when compared to Brazil and Mexico becomes even more apparent when examining the FDI stock levels in the past 15 years. As of 2008, FDI stocks evaluation has just reached levels last met in 2000. By comparison, during the same time period, FDl stocks in Brazil increased rapidly. Brazil has become a more appealing location for foreign investments compared to Argentina. Mexico, benefitting in part from NAFTA and its proximity to the United States, has almost consistently possessed the greatest total value of FDI stocks since 2001.

FDI flows and stocks do not necessarily relate to the population of each nation. It can clearly be seen that Argentina has commanded the greatest FDI flows and stocks per capita since the early 1990s until 2001. Brazil, by comparison, Brazil has had mediocre FDI growth per capita. Mexico has seen the most consistent and stable FDI growth per capita throughout the studied period.

These FDI dynamics per capita show that while there is much foreign investment in Brazilian industry as an aggregate, it is still relatively insignificant when viewed on how it impact the single average citizen. By contrast, FDI has a much more significant impact on the average Mexican citizen. The future of FDI for the average Argentinean seems mixed and uncertain.


Employment Impacts

Skills

Traditional Fordist manufacturing had focused on assigning unskilled workers tasks that were focused, repetitive and simple in nature. There was little to no interest in the development of the abilities of the line worker. Itcould be asked “Isthe factory machinery designed to help the worker or is it rather that the worker is to serve the machinery?”. Under ISI policy and Fordist manufacturing, employment inautomobile plants in all three countries grew to their highest amounts yet recorded domestically. However, there was a continual lack of quality and employee development by international standards.

Globalization has helped to “level the playing field”, forcing domestic factories to increase efficiency. While this does result in increased automation and a reduction of total employment of labor, it has also resulted in import of technology transfer in the form of best practices from throughout the global reach of the MNC to their subsidiaries in all three countries.

Industry’s adoption of best practices that actively harness workers’ intellect inthe use of technology is crucial to foster the continued development of their skills. Best practices that involve only the use of technology have tended to only promote automation at the expense of any individual craftsmanship, deskilling the worker into an extension of the industrial machine. On the other hand, the creation of large factories of semi-skilled workers, who are not exposed to new technology, may ensure increased employment, but lead to the commoditization of labor and prevent the skilling of labor to international standards. The balance can only be achieved by a proper leveraging of the workers’ intellect in a modern, technology-driven environment.

Brazil is distinguished in that it does have some fledging signs of these jobs being created. It has also become a center for process development and engineering design for the Latin American region, greatly increasing the development of skills for a niche group of professionals. On the factory floor, Ford’s new plant in Camaçari is an example of how an cutting-edge automated modular manufacturing plant, where multiple trades are working in close proximity, can lead to enhanced job skills when combined with a variety of tasks and processes:

“… a group of Visteon Corp. workers connect the wiring in a dashboard module for a Ford EcoSport. Next to them, Lear Corp. employees are building seats for the same vehicle. A few feet away, Ford’s Diede Silva dos Santos applies trim to a Fiesta subcompact. She’s mastered seven jobs at the plant and is working on an eighth. ‘Ifyou do different jobs, it’s more interesting,’… ‘It gives me a chance to expand my knowledge. (It) makes me a more valuable employee, too, so that I will have a future here.’… ‘It’s a good arrangement,’ said Mauro Ribeiro Leite of Atlas Copco AB, a Swedish company that maintains production at Camaçari. It gives us more flexibility, and we’re better able to understand the customer’s needs.’ “

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