SAO PAULO, Brazil - Inside a small plant surrounded by urban sprawl, rows of workers hunch over tables, sorting through piles of newly manufactured oil seals.
The workers are checking the seals one by one, looking for defects. The plant, owned by the Sabo Group, has not shipped a defective seal in 10 years.
That kind of record earned Sabo recognition as one of General Motors' top 173 suppliers of the year. The award is based on the suppliers' record of quality, service and price. Denso International America - the U.S. subsidiary of a Japanese maker of electrical components was GM's top supplier this year.
Sabo was one of 12 South American suppliers to win this year. But Sabo - a family-owned maker of gaskets, oil seals and hoses - faces a dilemma: To meet the needs of GM and other automakers, Sabo can no longer rely on cheap labor to compensate for a lack of technology. Until recently, Brazilian suppliers were shielded from international competition by Brazil's protectionist import barriers.
Now, those barriers are coming down. Over the past five years, dozens of uncompetitive Brazilian companies have been acquired by multinational competitors.
Sabo has chosen to slug it out. In 1993, Sabo purchased KACO GmbH, Germany's second-largest seal maker. The acquisition gave Sabo access to world-class technology. Equally important, Sabo gained access to GM Opel's product engineering center.
Sabo also expanded into the North American market, lining up customers such as American Axle, Dana Corp., Delphi Automotive Systems and Ford Motor Co.
So far, Sabo has prospered by exporting components to North America. Sabo's next move will not be easy, said Newton Chiaparini, a member of Sabo's board of directors.
Eventually, Sabo will have to build a plant in North America, Chiaparini said. 'When we talk about U.S. sales volumes, we become nervous and afraid,' he said. 'But we believe we will have to build a plant in the U.S. or Mexico.'
The problem is financing. In recent years, Brazilian companies have struggled to obtain credit. When inflation topped 1,000 percent per year, banks would not make loans for longer than 18 months. Even now - with inflation down to 9 percent - loans are hard to get. Sabo has financed its expansion with its internal cash flow. Last year, sales totaled $250 million and Chiaparini expects sales to grow 10 percent this year.
With wages at $3 an hour - plus another $3 in benefits - labor still is cheap. However, if Sabo wants to keep pace with competitors like Federal-Mogul Corp. and Freudenberg-NOK, hiring more quality inspectors would be 'a dangerous solution,' concedes Eurizio Pallavidino, Sabo's director of engineering.
Said Pallavidino: 'We need to automate.'