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How Ford burned $12 billion in Brazil

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A century ago Henry Ford came to Brazil and established the town of Fordlandia, hoping to become an Amazonian rubber baron, but retreated deep in the red.

Now the automaker he founded is once again licking its Brazilian wounds, having abandoned production in the challenging market after burning through roughly 61 billion reais ($11.6 billion) in the past decade.

Ford Motor Co announced the closure of its manufacturing plants in January, dealing a heavy blow to its more than 5,000 workers in the country and almost 300 dealerships.

Previously unreported corporate filings show the scale of the financial woes that led to the decision. Ford had burned through $7.8 billion, the bulk in accumulated losses but also some cash injections, according to the documents filed in Sao Paulo state, where the automaker is registered in Brazil.

Add to that the $4.1 billion that Ford will shell out to extricate itself from its commitments, and the price tag for the Brazilian operation rises to almost $12 billion.

Almost all the losses and cash injections were in the past eight years, when the company has lost about $2,000 for every car it sold, Reuters calculations based on the filings and sales data indicate.

Ford, which does not separate out Brazil from South America in its financial results, declined to comment on the losses, cash injections and calculations.

The expensive retreat of the U.S. heavyweight underlines the risks for global automakers in Brazil, a country seen not long ago as one of the most promising growth markets in the world, but where tax, labor and logistics costs are high.

The COVID-19 pandemic has strained finances while Ford’s problems also reflect, in part, a strategic misstep that saw it lag rivals in transforming its lineup of unprofitable compact cars into higher-margin SUVs, according to half a dozen sources familiar with the company’s Brazilian operation.

Ford had in fact drafted a plan to shift into SUVs, larger cars with higher profit margins, but was too slow to implement it, they said.

“There were no other viable options,” Lyle Watters, Ford’s head for South America, told Reuters in a statement about the decision to exit the country.

Watters, who will start a new Ford role in China in July, cited an “unfavorable economic environment, lower vehicle demand (and) higher industry idle capacity” for the Brazil retreat.

He declined to comment on the SUV project, saying he would not “speculate on new product plans.”

A Ford spokesman in Brazil said the company was implementing “a lean and asset-light business model in the region, with a truly customer-centric mindset”.

BRAZIL VS MEXICO

Brazil is largely a lossmaker for global car companies, despite the government providing federal subsidies totaling $8 billion over the past decade and a 35% import tariff to shield local production.

Domestic costs are high. Even though local factories can make 5 million cars a year, more than double the number sold in the country, exports are minimal because prices are uncompetitive. And it costs automakers money to keep factories open while operating at low capacity.

Mexico, by contrast, exports more than 80% of the cars it makes, helped by free-trade agreements with the United States and Canada, making it an attractive alternative for the same carmakers that already operate in Brazil.

A 2019 study by consultant PwC found that selling a Mexican-made car in Brazil was 12% cheaper for an automaker than selling a locally-made vehicle, including production, tax and logistics costs.

The study was commissioned by Brazilian auto industry group Anfavea, which is lobbying the government to reduce taxes and labor costs.

The high Brazilian costs mean even carmakers who pivoted earlier than Ford to higher-margin SUVs, like the Brazilian units of players like Volkswagen AG, General Motors Co and Toyota Motors Corp, are struggling to stay in the black.

Volkswagen Brazil has lost $3.7 billion since 2011, according to the corporate filings in Sao Paulo state. GM Brazil has received $2.2 billion in cash injections since 2016, and Toyota Brazil last year required forgiveness on $1 billion of inter-company debt, the documents showed.

Volkswagen and GM and Toyota all declined to comment on the filings figures.

The Brazilian economy ministry did not respond to a request for comment about the Ford exit and problems faced by the auto sector.

PROSPECTS PLUMMET

Ford failed to develop a viable production business in Brazil despite a practice of pursuing tax subsidies, which totaled more than that of its rivals over the past decade.

Since 2011, Ford has reaped about $2.6 billion in tax subsidies, or a third of all federal automotive incentives distributed in that period, according to Reuters calculations based on official tax forfeiture figures.

Ford declined to comment on its tax benefits.

In 2013, however, the business outlook began to change, as commodities prices crashed and dragged the local currency with it, sending Brazil into a deep recession made worse by corruption scandals. At the time, it was the world’s fourth largest auto market. It now ranks seventh.

Weak domestic demand and the uncompetitive exports pushed Ford to quintuple its bulk fleet sales between 2011 and 2019, and deepen the discounts to 30% or more, a person familiar with the pricing said.

Ford headquarters in Dearborn, Michigan, shored up its Brazilian subsidiary with $1.3 billion in cash injections, in nine transfers between March 2018 and January 2021, according to the Sao Paulo corporate filings.

By late 2019, Ford was considering the key strategic shift to manufacture SUVs in Brazil and had three models planned, according to three of the source

Yet many of its competitors had already been revamping their lineup to produce such vehicles for about two years.

“The truth is, Ford failed to modernize its product lineup at the same speed as its rivals,” said Ricardo Bacellar, automotive head at KPMG’s consulting arm in Brazil.

In the end, the SUV plans never came to fruition.

By April 2020, the economic pain wrought by the pandemic forced Ford to reevaluate its plans for Brazil, the automaker has said.

Still, Ford made commitments to the government as late as November last year to invest more in Brazil and told its dealers in December that it expected improved sales in 2021, according to a government announcement and the dealers’ association.

Yet just weeks later, it halted production.

It closed its three plants, the largest one in Camaçari, in the northeastern state of Bahia. It retains only a small operation selling imports, a niche market for high-end cars that the import tariffs make prohibitively expensive for many people.

On Thursday, Ford launched its new Bronco Sport SUV in Brazil. Made in Mexico, it is exported to the U.S. where it starts at $26,820. In Brazil, where per capita income is much lower, Ford said the Mexican-made car will retail for $48,000.

While Ford sold 18,000 cars in Brazil in April 2019, it sold 1,500 cars in the same month this year.

($1 = 5.2821 reais)

(Reporting by Marcelo Rochabrun; Editing by Christian Plumb, Joe White and Pravin Char)

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Lufthansa sets 2024 goal, eyes capital increase

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Germany’s flagship carrier Deutsche Lufthansa said it aims to boost its return on capital employed (ROCE) and laid out plans for a capital increase as it prepares for a business recovery amid an easing coronavirus pandemic.

The largest German airline aims to have an adjusted EBIT margin of at least 8% and an adjusted ROCE of at least 10% in 2024, it said late on Monday.

Adjusted ROCE was –16.7% in 2020 and 6.6% in 2019.

The group added it had mandated banks to prepare a possible capital increase, though size and timing have not yet been determined and the German state, which has bailed out the airline during the pandemic, has not yet given its approval.

 

(Reporting by Ludwig Burger; editing by Jonathan Oatis)

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Virtual Law Firms Are on the Rise in Canada

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Virtual law firms have been on the rise for a while. In a 2019 roundtable discussion conducted by the American Bar Association, several firm leaders met to discuss the growing presence of online legal services. The consensus was clear: virtual is the new reality.

That was 2019. In the intervening two years, the world was gripped by a global pandemic that forced most people to conduct their business indoors. As you might have guessed, demand for contactless, remote legal services has only ballooned since that roundtable discussion.

While the roundtable primarily focused on the legal industry in the US, you can witness similar trends here in Canada. Like the taxi industry and entertainment distribution industry before it, law is increasingly moving toward digital spaces.

This article explores what virtual law firms are, what benefits they present for Canadian clients, and what kind of clients are driving the virtual law boom.

Not a Change but an Addition

At its best, the shift from brick-and-mortar law firms to virtual isn’t an alteration of legal services as much as it is an addition.

The best virtual law firms do not compromise on service – they still offer traditional legal services with the expertise of real lawyers. The only difference is that they have added a new medium: a more accessible, transparent means of communication and billing.

Why Canadians Choose Online Law Firms

For some clients, the traditional brick-and-mortar firm was hard to give up. They viewed their lawyer like they viewed their doctor: a professional whose in-person expertise couldn’t be replicated in a digital space. Then, the pandemic hit. As millions more Canadians acclimatized to working online, they also habituated to the idea of doing business online.

 

Credit: Ketut Subiyanto Via Pexels

The benefits were immediately apparent. Virtual law firms feature streamlined communication, available seven days a week. They eliminate the need to go to a physical office. They offer all the same legal expertise and services as a brick-and-mortar lawyer. And, crucially, they often leverage transparent pricing: flat, predetermined legal fees with no hidden costs. A client looking for affordable legal services in Mississauga or Toronto, for instance, can simply click a few buttons and hire a lawyer on the spot.

Who Is Using These New Services?

You might be wondering: do they wheel a computer into the courtroom when someone avails themselves of a virtual lawyer? No, that isn’t quite the case.

Clients tend to use virtual law firms for everyday legal services – not necessarily courtroom representation. A client looking to create a will or name a power of attorney might choose a virtual lawyer for the sake of simplicity. A homebuyer, looking to keep costs manageable might hire a virtual lawyer for closing since their prices are both more transparent and affordable. A couple seeking to draft a cohabitation agreement may find similar benefits in an online lawyer.

The fact is that virtual legal services are not only here to stay – they are on the rise. Fortunately, the future is friendly; online law firms offer the same legal expertise as their physically housed counterparts, with the added benefits of being accessible and affordable.

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Tourmaline to expand in Montney with C$1.1 billion deal for Black Swan

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Canada‘s Tourmaline Oil Corp said on Friday it would buy privately owned Black Swan Energy Ltd in a C$1.1 billion ($908.79 million) deal, as the oil and gas producer looks to expand in the Montney region, one of North America’s top shale plays.

Canada‘s Montney, which straddles Alberta and British Columbia, has seen a wave of consolidation as companies buckled under collapsing oil prices amid the COVID-19 pandemic.

Tourmaline said the deal represents a key part of its ongoing North Montney consolidation strategy and the company sees the area as a key sub-basin for supplying Canadian liquefied natural gas.

The company in April acquired 50% of Saguaro Resources Ltd’s assets in the Laprise-Conroy North Montney play for $205 million and entered into a joint-venture agreement to develop these assets.

Analysts at brokerage ATB Capital Markets called the Black Swan assets a “hand in glove” fit with its recent acquisitions.

Tourmaline stock rose 4.5% to C$32.1.

The deal value consists of 26 million Tourmaline shares and a net debt of up to $350 million, including deal costs.

Tourmaline will acquire an expected average production capacity of over 50,000 boepd when the deal closes, likely in the second half of July.

The company, which also raised its dividend by 1 Canadian cent per share, expects the Black Swan assets to generate free cash flow of $150 million to $200 million in 2022 and beyond.

The Canadian energy sector has seen a flurry of deals with companies expecting to benefit from the rebound in oil prices as global fuel demand picks up.

ARC Resources Ltd in April bought Seven Generations Energy Ltd for C$2.7 billion to create Montney’s largest oil and gas producer.

($1 = 1.2104 Canadian dollars)

 

(Reporting by Rithika Krishna in Bengaluru; Editing by Vinay Dwivedi)

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