Exports Sustain Brazilian Iron-Castings Maker Tupy

Brazil’s automotive industry is emerging from a 3-year slump but Tupy, a supplier of cast-iron components, has relied on foreign markets to withstand the country’s economic headwinds.

The 80-year-old company headquartered in Joinville, 250 miles (400 km) south of Sao Paulo, produces engine blocks and heads and cast-iron components for engines, brakes, transmissions, axles and steering and suspension systems. Clients include the Detroit Three automakers, truck manufacturers Scania and MAN, and engine producers Cummins and Detroit Diesel.

Tupy also provides machining services and supplies the railroad, mining, construction, farm-machinery and oil and gas industries.

In 2017, Tupy sold about 550,000 tons of iron products, 13% more than in 2016. With two foundries in Brazil and two in Mexico employing 13,000 people, North America accounted for 63% of the company’s revenues last year, followed by Central and South America, 18%; Europe, 12%; and Asia, Africa and Oceania, 7%.

Tupy claims a 10% share of the global iron-castings market.

First-quarter 2018 revenues grew 23.9% to BR$1.05 billion ($272 million), a record for any quarter. Raw-materials costs increased 22% in the period but CEO Fernando de Rizzo (below, left) has a positive spin, saying in a news release, “This inflation in the cost of raw materials is an indicator of the increase of the economic activity, which signals growth for the company, with increased demand for our products.”

Rizzo provided WardsAuto with e-mailed responses to questions about how Tupy and the Brazilian economy are faring.

WardsAuto: Assess the current business climate in Brazil.

Rizzo: Whilst we have seen improvements on fundamentals and are optimistic for 2018, there are still issues that must be addressed in the midterm, such as structural reforms. In 2017, our margins improved significantly as compared with 2016, led by a strict cost control and discipline on investments (capital expenditure and working capital). Additionally, we developed several initiatives to improve our production system, including the shutdown of one plant located in Brazil. On the other hand, we believe that there is room for gaining additional efficiencies and higher margins.

WardsAuto: What is your opinion of Brazil’s automotive OEMs? Are they healthy, or are some doing better than others?

Rizzo: The Brazilian market is one of the biggest in the world. The entire economy was affected by recession and the auto industry was no exception. However, this industry is very solid, and (Tupy’s) exports helped to mitigate a weaker domestic market. Therefore, we believe that Brazil’s automotive OEMs are healthy and ready to grow.

WardsAuto: Wards Intelligence data shows vehicle production in Brazil fell about 41% from 2013 to 2016. Would you comment?

Rizzo: The weak performance of domestic market arose from the combination of political and economic factors, with negative impacts on employment, credit availability and consumer confidence. For instance, accumulated GDP decreased 3.5% in that period, whilst unemployment reached 12%.

Additionally, it is important to bear in mind that the comparison basis was very strong, as sales in the previous years were driven by pent-up demand, combined with massive credit availability. To give an example, some banks offered auto loans to be paid in up to 60 installments without down payment. Regarding heavy vehicles, truck sales benefited from very aggressive credit lines, with interest rates well below market prices.

WardsAuto: How did this decline affect Tupy?

Rizzo: Declining demand in Brazil was offset by increasing sales in other markets, namely Europe and the U.S. On top of that, we acquired two plants in Mexico in 2012. The domestic market represented approximately 40% of our sales in 2012. Currently this figure is 18%.

Taxes are a key component for pricing and, consequently, for demand. However, this is not the only one. Several bottlenecks must be tackled by the government, such as logistics, infrastructure and bureaucracy, among others.

While we understand that domestic market, including indirect exports (i.e., made by clients located in Brazil) is important for the business, most of our revenue comes either from exports from Brazil or from our plants in Mexico. This reflects our strategy of diversifying our revenue across different countries, clients and products, leading to a steady growth despite the cyclicality inherent to the markets.

WardsAuto: Is your business affected by the Trump Admin.’s imposition of steel and aluminum tariffs on Canada, Mexico and the European Union?

Rizzo: This imposition does not affect us directly, but our main raw material is steel scrap whose markets are mainly affected by the dynamics in the steel industry. Our outlook for the American economy is quite positive, with solid fundamentals for the demand of commercial vehicles, including the heavy-duty pickup truck segment, along with applications for industries such as oil and gas, construction and mining.