Competitive Advantage in the Tile Industry

5.2Santa Catarina in the global value chain

Brazilian tile firms are integrated into international value chains, but in a completely different way than, say, footwear or garment manufacturers. Whereas the latter rely on foreign firms in the downstream part, i.e. when it comes to commercialising products, the tile firms rely on foreign firms in upstream activities, i.e. capital goods and crucial inputs.

Dependence on foreign suppliers of capital goods is not a particularly unusual feature for an industry in a newly industrialising country. In fact, in the tile industry apparently everybody depends on Italian capital goods manufacturers, including firms in Spain. Firms in Brazil report that access to latest vintage equipment is not restricted, though machine producers tend to collaborate with some Italian tile producers during the final phase of machine development. A representative of the machine producers' association confirmed that, to the dismay of Italian tile manufacturers, machinery is sold to whoever is able to pay.

Input manufacturers, especially producers of glazing materials, are the other technology drivers in the tile industry. The second half of the 1990s saw a profound change regarding the structure of the colorifício business in Brazil. Until the early 1990s three TNC affiliates were producing glazing materials in Brazil (from Italy, Germany, and the U.S.). With the strengthening of the Spanish tile cluster, and the growing competitiveness of producers of glazing materials, Spanish colorifícios founded affiliates in Brazil, mostly in SC. Today, the cluster counts with 7 companies which are actually producing glazes locally; two of them are local firms. There is a total of 28 glaze companies in Brazil, associated in the recently founded national association ABRACOLOR. Competition between them is intense. In order to create a competitive advantage, they changed their behaviour in a profound way. According to tile manufacturers, in the old days a colorifício would come up with a new glazing variety, drop it at the porter's and leave it to the tile manufacturer to figure out what exactly to do with it. During the last three to four years, the colorifícios have set up development and design teams, offering a full service to tile manufacturers – the design, the glazing material needed to produce it, and technical assistance in mastering new designs and solving problems in the production process. We found no indication that Brazilian tile manufacturers are discriminated. It rather seems to be the other way around, i.e. Spanish colorifícios draw on know-how available at headquarters and at Spanish R&D centres if they cannot solve production problems locally.

Taking these observations together, it becomes obvious that Brazilian tile producers benefit from the fierce rivalry among Italian machinery and Spanish glaze producers. As firms from both groups are constantly seeking for ways of widening their customer base and establishing a competitive advantage, the idea that they might withhold up-to-date technology from Brazilian customers is remote. To phrase it differently, the tile sector in SC benefits from the structure of the upstream part of the international value chain of the tile business.

Exporting

Looking at the downstream part of the international value chain, we see that firms in SC have been increasing their exports over the course of the 1990s (Figure 14), even though some observers claim that they were losing money due to the overvaluation of the Brazilian currency. The Brazilian exports is by far dominated by the companies located in the cluster (Figure 15).

Exporting probably became profitable after the devaluation in January 1999. The term "probably" refers to the fact that ever since international shipping companies, on which Brazilian exporters rely, have been increasing the freight-rates, which grew from about US$ 900 per container to US$ 1,400 to 2,000; the precise rate differs according to the overall volume, with volume exporters getting lower rates. Some firms claim that exports to certain regions, especially the Caribbean that used to be an important market, are no longer viable. The main target markets are the U.S., Mercosul, and other parts of Latin America. Less important foreign markets include South Africa and Australia. Europe is no target market; one of the large firms actually closed the sales office it used to have in Brussels.

Firms are organising exports in different ways:

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  The most frequent pattern is the employment of representatives in key markets.
  
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  The second option is collaboration with trading firms in the target markets.
  
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  Figure 14
  
  

  Figure 15

  
  
  
  One of the large firms has a wholly owned subsidiary in the U.S. which is taking the role of a trading firm.
  

Exports have been growing recently, after fluctuating in the years before. The decrease in 1990/91 reflected the chaotic economic situation in Brazil, the decrease after 1994 the effect of the appreciation of the Brazilian currency. In any case, exports represent no more than 10% of total production, far behind the Italian (69% in 1998) and Spanish (about 50% in 1998) export share. Companies in the SC cluster are working hard to increase their export share, the most successful firm achieving an export share of more than 30 %.

Export medium target prices are about US$ 4 per square meter. This gives a good indication of the position of Brazilian firms in the global tiles value chain. They are positioned at the lower end, selling mostly standard products of consistently good quality. # competing with Spanish?

Regarding support for exports, there is a governmental export promotion program (EXIM), but access to export credits is difficult due to the arrears mentioned above. ANFACER has recently approved an export promotion program with the federal export agency APEX, aiming at the promotion of the Brazilian product at target markets and the joint presence in important international fairs. It is, however, unlikely that Brazilian producers will anytime soon create something similar to the “Tiles of Italy” label. In the markets abroad they are perceived as reliable producers of high-quality, low-price tiles of good quality. There is nothing fancy about Brazilian tiles, and therefore they are competing with other low-price producers, such as Turkey. The single largest risk for the Brazilian export effort would be a strong export thrust of Chinese producers.