Brazilian states have been seeking foreign carmaker investments since 1994. At that time, the government decided to beat inflation by linking the Brazilian real to the dollar. The new price stability set off a consumption boom. To attract foreign investment, the government dropped its protectionist policies.
To lure investment by foreign automakers, Brazil's states typically offered deferments on state sales taxes and, occasionally, small amounts of direct financing. The competition among states heated up in 1995, when Volkswagen AG announced plans to build a $250 million assembly plant in Rio de Janeiro state. Rio outbid Sao Paulo state after offering a five-year deferment on 75 percent of its state sales taxes.
In 1997, Parana state escalated the bidding when it offered to underwrite a group of local investors with $300 million. The investors were helping to finance Renault's $750 million assembly plant.
Only Parana's deal rivaled the subsidies promised by Rio Grande do Sul to Ford Motor Co. and General Motors. 'Only Parana state and Rio Grande do Sul state offered carmakers considerable direct financing,' said auto-industry expert Glauco Arbix. 'That's what makes those deals stand out as the sweetest that they have ever received here.'
The bidding wars that led states to offer such good deals were not necessary, said Mario Sergio Salerno, an industry expert and professor of production engineering at the University of Sao Paulo. Brazil is considered to be one of the world's most promising growth markets. Twenty-two assembly plants are located there, with more to come. 'The economic upturn made Brazil so attractive that foreign carmakers would have invested even if the states hadn't started bidding wars for those investments,' Salerno said. 'As it turned out, the only beneficiaries of the battles were the carmakers.'