Bygruppe 1 - BNCC New

Bygruppe 1 - BNCC New

Local Content and Collaborative Upgrading in the Brazilian O&G sector Yuri Kasahara (NIBR/HiOA), Antonio Botelho (IUPERJ/UCAM), Marcelo Simas (IUPERJ/UCAM) What are Local Content Requirements? Rules mandating investors or producers to acquire equipment and services from domestic suppliers O & G supply chain Quite diverse: from MEs to SMEs to MNCs What is upgrading? Improvements in management, production processes and design; Catch-up process; Innovation for the company; A company routine in competitive environments. What is collaborative upgrading? When client-companies help their suppliers in the process of upgrading; Secure reliability and quality in the supply chain; Monitor uncertainty in production; Source of continuous learning and benchmarking in global supply-chains; Variety of ways: managerial training, technology-transfering. Is collaboraive upgrading likely in the Brazilian supply chain of the O&G sector?

Local content requirements are assumed to create negative incentives for upgrading: protectionist environment; MNCs would not have incentives to collaborate with suppliers: prioritizing lowcost over quality, no incentives for technology transfer; Why offshore O&G might be structurally favorable to collaborative upgrading? Technology-intensive sector. Technical challenges are frequent; Project-based industry: equipments and infrastructure is customized; Incentives for first-tier suppliers to develop and monitor (local) suppliers. Is collaborative upgrading happening in the Brazilian O&G supply chain in a context of local content requirements? Survey Universe 2.538 companies Selected from a compilation of 5 directories: 3 from industrial associations, Petrobras contracts (19922015), and list of LC certificates submitted to ANP. Sample 564 companies Weighted by group membership, as a proxy to integration in the supply-chain. Sample Universe Petr obra s cont

racts Planned Realized Weighting N % N % U/P N % U/R %R %U LC 712 28 160 27 4,5 91

16 7,8 -12 1,7 LC/ Onip 184 7 80 13 2,3 78 14 2,4 7 0,5 LC/ Navipe as/ Onip 246

10 100 17 2,5 98 17 2,5 7 0,6 Onip 581 23 110 18 5,3 141 25 4,1 2 0,9

Navipe as/ Onip 312 12 90 15 3,5 109 19 2,9 7 0,6 LC 503 20 60 10 8,4 48

8 10,5 -12 2,4 2538 100 600 100 4,2 564 100 4,5 0 1,0 Total %U / %R Collaborative upgrade index commonaliti factor loads es 27a New organizational and managerial practices 0.27 adoption for the O & G clients

0.52 27b O & G clients to help products and services 0.10 improvement 0.32 29a Main suppliers very collaborative relationship 0.24 0.49 29b New organizational and managerial practices 0.48 adoption for the O & G suppliers 0.69 29c Help O & G suppliers to improve products and 0.24 services 0.49 Average: 7.1 Local Content evaluation index commonalitie s factor loads 33a Local Content contributes to the company 0.41 O&G market entrance 0.64 33b Local Content contributes to the company 0.44 increase in R&D effort 33c Local Content contributes to the company 0.73

increase in professional training 0.66 33d Local Content contributes to the company 0.72 increase in products and services quality 0.85 Average result: 3.1 0.86 Models Variables 1 2 What explains upgrading? 3 4 5 Beta Sig. Beta Sig. Beta Sig.

Beta Sig. Beta Sig. Intercept 7.00 0.00 7.14 0.00 6.51 0.00 5.54 0.00 3.67 0.00 Brazilian Control (>50% property) 0.84 0.02 0.83

0.03 0.80 0.03 0.78 0.04 0.90 0.01 O&G Specialist (>50% revenue) 0.61 0.02 0.55 0.03 0.60 0.02 0.60 0.02 0.35 0.18 Large Company (>100 employers) -0.51

0.08 -0.35 0.22 -0.39 0.18 -0.40 0.16 -0.19 0.48 SP Location -0.59 0.03 -0.53 0.05 -0.55 0.04 -0.55 0.04 -0.64

0.01 O&G Supplier 1-13 years (Local Content Second Round) -- -- -- -- -0.50 0.25 -0.50 0.25 -0.95 0.00 O&G Supplier 14-18 years (Local Content First Round) -- -- -- -- -- --

-1.01 0.04 -1.33 0.00 O&G Supplier 19-39 years (Petrobras major oil discovery) -- -- -- -- -- -- -0.81 0.06 -0.99 0.01 O&G Supplier 14-39 years (From major oil discovery to LC first round) -0.55 0.04

-- -- -0.87 0.04 -- -- -- -- O&G Supplier 1-39 years (Since major oil discovery) -- -- -0.73 0.07 -- -- -- -- -- --

O&G Supplier 40+ years (First providers) 0.13 0.67 -- -- -- -- -- -- -- -- Local Content Quality Impact Index (Factor Score, base 10) -- -- -- 0.19 0.00 AIC 1,380.7

1,432.5 1,432.9 1,434.7 1,075.9 N 245 254 254 254 206 --- -- -- -- Results Brazilian-owned companies upgrade more; O&G specialists upgrade more; Companies outside So Paulo upgrade more; Relatively established suppliers (14y-39y)

upgrade less than very established ones (>40y) and new ones (<14 years); Companies that evaluate better LC upgrade more (but beta is very low and results less robust). Mechanisms of upgrading (case studies) After we got the contract to build the module for the shipyard, we had to hire a weld inspector level 3. You know, we had heard about the existence of level 3 inspectors. Apparently, they are common abroad. But then we had to find one of these qualified inspectors in Brazil in order to assure the quality of our work was according to our client standards. Production Manager, CMI Montagem Industrial We have about 120 suppliers for our X-mas tree factory in Brazil. They have been traditionally suppliers to other sectors and we have a special program for developing their production standards in order to supply us. Supplier Manager, Aker Solutions. Conclusions Offshore O&G sector has a configuration that demands sophisticated and technology-intensive products/equipments. Local content can be a policy that help local companies to upgrade and join sophisticated global supply chains such as offshore O&G but it is not a silver bullet. The industrial policy should focus on a strategy to maximize the potential of local content in promoting the upgrading of the Brazilian industry and its participation in global value chains of the O&G sector.

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