New technologies in emerging markets: understanding technology, market and policy constraints to the adoption of advanced automotive technologies

The paper analyses how technology, market and policy issues condition the adoption of aluminum in the manufacturing of auto engine blocks in Brazil. Due to important weight savings, there is a clear tendency in the auto industry to change engine material from iron and steel to aluminum. This tendency has started in the triad market area, mostly because of scale issues, but the increasing global perspective of the industry is now leading to expansion of these practices into emerging areas such as South America. The paper uses a methodology developed at MIT entitled Technical Cost Modeling to explore the key issues conditioning the adoption of this technology in Brazil and assess potential supplier strategies for this market. The analysis identifies scale of production and local policy conditions, in particular the tax structure and the interest rate, to be the key drivers of differences in component sourcing cost. The study concludes that casting engine blocks in Brazil seems viable for production volumes above 65,000 engines per year for foreign investors and 100,000 for local manufacturers. To overcome diseconomies of scale arising from the small volume of engine production in the region, OEMs may need to subcontract the same local supplier, set up investments to the export market or find alternative applications to fill unused capacity in the casting line.