New technologies in Emerging Markets: Understanding Technology, Market and Policy Constraints to the Adoption of Advanced Automotive Technologies Francisco Veloso Materials Systems Laboratory Massachusetts Institute of Technology fveloso@mit.edu Richard Roth Materials Systems Laboratory Massachusetts Institute of Technology rroth@mit.edu Abstract 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. 1. Introduction During the past decade, the automotive sector evolved to become a true global industry. Until the end of the eighties, competition between the major international automakers would be mostly within regional automakers, with American automakers dominating the US market or Japanese the Asian market. During the nineties, growth in the number of transplants changed this picture dramatically. Nowadays, virtually all original equipment manufacturers (OEMs) are present in every corner of the globe, both in developed areas, as well as in emerging regions. Moreover, OEMs are organizing operations at a world scale, planning and deploying identical vehicles in several regions simultaneously, or running supply bids for suppliers around the globe. Global operations and similar vehicles led OEMs to demand that their direct suppliers also have a strong international presence. Suppliers are increasingly expected to have substantial responsibilities in the design and engineering of complex systems and to coordinate the supply chain necessary to manufacture and assemble equivalent products across multiple locations. The paper analyzes technological, market and policy barriers to the adoption of aluminum castings in the manufacturing of automotive engine blocks in Brazil. Due to important weight savings, there is a clear industry tendency to change engine manufacture from cast iron to aluminum. This tendency has started in larger displacement engines and in the triad market area, mostly because of scale issues. Nevertheless, automakers are now interested in expanding this technology into emerging areas such as South America. It uses a methodology developed at MIT entitled Technical Cost Modeling to explore the key issues conditioning the adoption of this technology in Brazil and to assess potential supplier for this market. The paper has four additional sections. The next section highlights the major trends in the automotive industry and the supplier challenges that set the stage for the opportunity of using cast aluminum engine blocks in Brazil. The third section explains the tendency towards the adoption of aluminum in the manufacturing of automotive engines across the world and outlines the current market conditions in Brazil. Section 4 describes the scenarios and methodology used in the analysis. The fifth section presents the results of the analysis and the last section discusses the conclusions.