Brazil: Vehicle sales decline for second consecutive year due to weak economy
Policies to protect domestic industries lead to continued investments in Brazil
Automotive industry at crossroads
Brazil became the world's fourth largest vehicle market, overtaking Germany in 2010. The country is also ranked 7th worldwide in terms of vehicle production volume in 2013, and has established itself as one of the major countries in the automotive industry in recent years.
In 2013, however, its new vehicle sales fell for the first time in 10 years to 3.77 million units, a fall of 0.9% from a year earlier. In addition, the government has repeatedly extended a policy designed to protect automakers which build vehicles locally. This also affects the country's automotive industry.
Outlook for 2014 sales to decline, influenced by weaker economy, inflation and World Cup soccer
New vehicle sales in Brazil in the first half of 2014 continues to decline, down 7.6% to 1.66 million units year-over-year(y/y). This decline in sales is due to a sluggish economy, high inflation and a credit squeeze as well as more public holidays because of the World Cup soccer.
In response to weak sales, the Brazilian Association of Automotive Vehicle Manufacturers (ANFAVEA) revised downward its estimate for vehicle sales in 2014 to 3.56 million vehicles, down 5.4% y/y. Brazil Automobile Dealers Association (Fenabrave) also revised down its sales forecast to 3.46 million vehicles, a y/y decrease of 8%.
These forecasts were made before the Brazilian national team suffered a defeat and finished in fourth place at the World Cup. It is of interest how this defeat against Brazilian's expectations will affect consumer confidence.
Brazil's domestic industry protection policy and increased investments on local production
In order to protect its domestic industry, the Brazilian government raised the Industrial Production Tax (IPI) rate for imported vehicles by 30 percentage points until the end of 2017. In addition, in its New Automotive Policy for 2013 through 2017, the government states that it will exempt the 30 percentage point increase on IPI on condition of the localization of the manufacturing processes and investments on research & development, thereby urging local production of vehicles. In response, the three German premium brand automakers are building their local plants. Many other automakers are also making efforts to expand their production capacities and increase local procurement in Brazil.
Japanese suppliers in Latin America (Part 2): Trends in Brazil and Mexico (Mar. 2014)
2014 vehicles sales forecast was revised down to 3.46-3.56 million units
Vehicle sales in Brazil have continued to slow down since the latter half of 2013. It took a downward turn for the first time in 10 years, dropping by 0.9% y/y to 3.77 million units. In addition, in the period from January to June 2014, the sales remained sluggish, falling 7.6% y/y to 1.66 million vehicles. Factors influencing the weak sales include a slower economy, almost 7 percent inflation, tighter credit and weaker consumer confidence as well as fewer working days due to the World Cup. The sales of imported vehicles for which Industrial Production Tax (IPI) is raised have continued to drop by 10.3% in 2013 and by 9.7% from January to June in 2014.
In response to weak sales, the Brazilian Association of Automotive Vehicle Manufacturers (ANFAVEA) announced in July 2014 that vehicles sales for the full year 2014 are now predicted to fall by 5.4% y/y to 3.56 million units, down from its January prediction of 3.81 million vehicles. In the same month, Brazil Automobile Dealers Association (Fenabrave) also revised down its sales forecast for the full year to 3.46 million vehicles, a y/y drop of 8%.
Production volume of vehicles in 2013 was 3.71 million units, a 9.1% increase from a year earlier due to strong exports. In 2014, however, this trend turned downward due to sluggish sales in Brazil and constrained exports due to Argentina's import restrictions. From January to June 2014, production volume declined by 16.8% to 1.57 million units whereas exports plummeted by 35.4% to 169,000 units from a year earlier. ANFAVEA announced in July that the production is now expected to decline by 8.7% to 3.39 million vehicles while exports are likely to drop by 29.9% y/y to 401,000 units.
Unit sales for 2014 expected to be 3.46 to 3.56 million units
|Brazilian Association of Automotive Vehicle Manufacturers (ANFAVEA)||3.56 million vehicles, y/y decrease of 5.4%||On July 7 2014, ANFAVEA revised downwards its outlook for vehicles sales in 2014 to 3.56 million, a 5.4 decrease from a year earlier, against a previous prediction of 1.1% increase to 3.81 million vehicles. The association states that the vehicle sales decreased for the first half of 2014 due to the influence of World Cup that exceeded people's expectations, and a credit squeeze.|
|The chairman of the ANFAVEA said, "In the second half of 2014, 127 working days are available, 7% more days than in the first half. A decrease in working days when the Brazilian national team advances to the World Cup final has been factored into the estimate. Even if the Brazilian team is defeated, consumer confidence is expected to be restored after the World Cup (see Note below).The extension of the IPI tax breaks (discussed later in this article) announced on June 30 will further boost this trend."|
|Brazil Automobile Dealers Association (Fenabrave)||3.46 million vehicles, y/y decrease of 8%||Fenabrave announced on July 2, 2014 that the unit sales is projected to reach 3.46 million vehicles in 2014 full year, a 8% y/y decrease. This is a downward revision of Fenabrave's January projection of 3.64 million units. It points out that the factors affecting the weak automobile sales include the slow economy and the credit crunch on automotive loans.|
|However, the association has stated that the following three positive aspects are expected in the second half of 2014: 1．Once the World Cup is over, normal business conditions will return. 2. The tax breaks on industrial products (IPI) have been extended until the end of the year. 3．Unlike in the first half of 2014, many new models and facelifted models will be introduced in the market in the second half of the year.|
(Note) One day after the ANFAVEA's new estimates were announced, the Brazilian team suffered a big defeat to the Germans in the semi-final by a score of 7-1. Furthermore, the following third-place match left Brazil in fourth place. It is of concern what kind of effect these unexpected defeats will have on consumer confidence as well as public sentiment over the presidential election in October.
Light vehicle market shares of top four automakers shrink
In the Brazilian light vehicle market (passenger cars and light trucks), the top four automakers, Fiat (current FCA), VW, GM, and Ford combined previously accounted for high market shares (71.1% in total in 2012). In the face of increasing competition from Japan and Korean automakers, however, the combined four companies' market shares declined to 67.9% in 2013 and then to 66.4% in the first half of 2014.
Particularly, VW sold 773,000 vehicles, and ranked second with a 21.3% market share in 2013. However, the sales of the company declined to 284,000 vehicles (a y/y decrease of 14.3%) in the first half of 2014, which reduced the company's market share to only 17.9%. This decline was due to a decrease in sales of best selling small cars, the Gol and Fox. Also, Ford's market share, which was once over two digits, has been single digit since 2011.
Hyndai / Kia market shares surged from 4.1% in 2012 to 7.6% in the first half of 2014. The Hyndai HB20 compact hatchback, was released in October 2012 and is recording steady sales. The hatchback was developed and manufactured in Brazil. The model sold 158,000 units in 2013 and ranked fifth in unit sales by model. Toyota increased its market share to 5.3% in the first half of 2014 from 2.9% in 2011 by introducing its small car, the Etios. Local production of the model started in September 2012. Meanwhile, the sales of the automakers which are not producing vehicles locally in Brazil have been decreasing (such as Suzuki and Chinese automakers).(Click here for statistics)
Brazilian government extends tax breaks six times
Brazilian government's automotive policies
|Domestic sales promotion: extension of automotive tax breaks||The tax breaks on the Industrial Production Tax (IPI), which had been planned to expire on July 1 2014, was extended until the end of December (announced on June 30, 2014). At present, the tax rate is supposed to return to the basic tax rate in 2015. The tax breaks were initially provisional measures from May to the end of August 2012, but this is the sixth extension of the measure.|
|IPI tax rate:||2013||2014||2015 (planned) Basic tax rate|
|Gasoline-fueled and flex-fueled vehicles with engine displacements of 1,000 cc or less||2.0%||3.0%||7.0%|
|Flex-fueled vehicles with engine displacement of 1,000 to 2,000 cc||7.0%||9.0%||11.0%|
|Gasoline-fueled vehicles with engine displacement of 1,000 to 2,000 cc||8.0%||10.0%||13.0%|
|Protection for domestic production: an increase in IPI tax rate on imported vehicles||The IPI tax rate was increased by 30 percentage points for imported vehicles and locally produced vehicles that are made of less than 65% local content (from December 2011 to the end of 2017). The tax increase is exempted for the vehicles of the companies that produce locally. This is a measure taken in response to a surge in imports of South Korean/Chinese vehicles.|
|Promotion for domestic production: New Automotive Policies INOVAR-AUTO||An automotive policy for 2013 to 2017. the "Program of incentive to innovation and densification of the productive chain in the automobile industry (INOVAR-AUTO)," was announced in 2012. If certain requirements are satisfied, the above mentioned increase in IPI tax rate is exempted. The exemption requirements include localization of the manufacturing process, investments in research & development, investments in production technologies, and certain fuel efficiency levels. The requirements will be tightened annually.|
(Note) The European Union (EU) filed a formal complaint against Brazil with the World Trade Organization (WTO) in December 2013, claiming its increase in the IPI tax rate and tariffs on imported products as unreasonable.
Brazilian government's trade policy
|Automotive pact with Argentina||Brazil and Argentina signed a new bilateral automotive trade pact in June 2014. This pact went into effect on July 1, 2014 and remains effective until June 30, 2015.|
|This pact reintroduces the "Flex clause" that expired a year ago. This clause determines a ratio of exports between the two countries. The export ratio of the new pact is "1.50," set lower than the previous ratio, "1.95," that expired in June 2013. The pact allows, for example, Brazil to export USD 1.5 million worth of vehicles to Argentina without tariffs when Argentina exports USD 1 million worth of vehicles to Brazil.|
|Both countries signed a free trade agreement for one year in June 2013. However, Argentina has imposed tighter controls on the import of vehicles from Brazil since January 2014 in order to limit the outflow of foreign currency. The Argentine government asked for the reintroduction of the "Flex clause," not the extension of free trade agreement, to balance the automotive trade.|
|Automotive pact with Mexico||In order to protect domestic automotive industries, the Brazilian government officially asked Mexico to limit the tariff-free export and to raise local content ratio in Brazil. Both countries agreed in March 2012 as follows:|
|(1) Limit the amount of tariff-free export from Mexico to Brazil for three years from March 2012. The amount of the quota from March 2014 to March 2015 is USD 1.64 billion. After that, the quota will be eliminated. (2) Raise local procurement ratio of auto parts which is required for tariff-free import vehicles from Mexico to Brazil from 30% in March 2012 to 35% by March 2013 and to 40% by March 2016 (the standard ratio of local content required to export vehicles from Brazil to Mexico without tariff is 65%).|
Movements of top automakers: FCA, VW, and Ford
FCA to produce Jeep brand vehicles in Brazil
|Fiat Chrysler Automobiles (FCA) has begun production of the Jeep brand models in Brazil as well. In 2015, production of the SUV Renegade will start at the Goiana plant which is currently under construction. The model is planned to be released in Europe by the end of 2014.|
VW to invest EUR 3.6 billion in Brazil by 2018
|VW will invest EUR 3.6 billion in Brazil by 2018 (reported in March 2014). The company plans to make investments focusing on new models and environmental technologies for Brazil.|
|Sao Jose dos Pinhais plant||The company will start producing the 7th generation new Golf at Sao Jose dos Pinhais plant in 2015. It plans to invest EUR 170 million to expand the production capacity from current 840 units per day to 1,000 units per day.|
|The company also plans to start producing the A3 Sedan and Q3 SUV under the Audi brand, which are built on the same MQB platform as Golf, in the second half of 2015 and in 2016, respectively. It will invest EUR 150 million to add new production lines and expand the annual production capacity for the A3 to 26,000 units within three years.|
|Taubate plant||VW started producing the up!, a small car model that was facelifted for the South American market at Taubate plant in January 2014. The company invested BRL 1.2 billion in the plant to renovate the facilities and equipment for producing the up!. The up! for the South American market has been designed as a 5-seater model, which is larger than the 4-seater European version. This model is also exported to Argentina and other countries.|
Ford operates new engine plant
|New engine plant||In April 2014, Ford started production at its engine plant located within the premises of the Camacari plant in Bahia state in the north-eastern part of Brazil. The investment amount is BRL 400 million and the annual production capacity is 210,000 units. The company produces a 1.0L 3-cylinder flex-fueled engine that uses both gasoline and ethanol. The engine will be mounted on the new "Ka" to be launched for the Brazilian market in August 2014. The new Ka is a model which was developed at the company's plant in Brazil.|
Movements of European automakers: Renault, Daimler, BMW, and JLR
Renault to add BRL 500 million investment in Curitiba plant
|Renault announced in April 2014 that it will invest an additional BRL 500 million in its Curitiba plant. It will be allocated to develop two new models by 2019. The company just expanded the annual production capacity of the plant from 280,000 units to 380,000 units in March 2013. The plant also produces Nissan models.|
Daimler to newly construct passenger car plant in Brazil and produce C-Class and GLA
|To build a new passenger car plant||Daimler announced in October 2013 that it will build a new passenger car plant at Iracemapolis in Sao Paulo state. The company will invest EUR 170 million to assemble and produce the C-Class and GLA beginning in early 2016. It plans to produce 20,000 units annually.|
|Makes additional investment in commercial vehicle division||The company announced in October 2013 that it will invest an additional BRL 1 billion in the commercial vehicle division in Brazil. It will be allocated to develop new models and to renovate the Sao Bernardo do Campo plant and Juiz de For plant. In April 2014, Sao Bernardo do Campo plant introduced a voluntary retirement scheme primarily for 2,000 employees who work in the production lines due to a decrease in the number of exported vehicles.|
BMW to start operating a Brazil plant, its first plant in South America in 2014
|In December 2013, BMW held a ground-breaking ceremony for the new Araquari plant in Santa Catarina state. This marks the first vehicle assembly plant in South America. The company invested approximately EUR 200 million in the plant. The annual production capacity of the plant is about 30,000 units. It will start operations in the autumn of 2014. Models to be built at the plant include the 1 Series, 3 Series, X1, X3, and the MINI Countryman.|
JLR to construct a plant in Brazil
|The Jaguar Land Rover (JLR), which is under Tata's umbrella, announced in December 2013 that it will construct a new plant at the Itatiaia city in Rio de Janeiro state. The plant will start operations in 2016. The company will invest BRL 750 million by 2020. The annual production capacity is planned to be 24,000 units.|
Movements of Japanese automakers: Toyota, Nissan, and Honda
Toyota's new engine plant begins operations in 2016
|Toyota held a ground-breaking ceremony for a new engine plant at Porto Feliz city in Sao Paolo state in February, 2014. The investment amount is BRL 1 billion. The plant starts operations in the first half of 2016. The company will produce 1.3L and 1.5L engines to be mounted on the Etios and 1.8L and 2.0L engines to be mounted on the Corolla. This allows the company's local content ratio to increase from 65% to 85%. The annual production capacity at the plant is approximately 200,000 units, but the company plans to produce 70,000 units in the first year.|
Nissan begins production of March at new plant
|In April 2014, Nissan started operating the new Resende plant, which it constructed in Rio de Janeiro state by investing BRL 2.6 billion. The company will produce its V platform vehicles at this plant, starting with the small hatchback March and then adding the small sedan Versa a year later. The plant has the capacity to produce 200,000 vehicles and 200,000 engines annually.|
Honda's new plant begins operations in 2015
|Honda announced in August 2013 that it will construct a new vehicle assembly plant with an annual production capacity of 120,000 units at Itirapina city in Sao Paolo state. The total investment amount is BRL 1 billion. The plant will start operations in 2015. It will produce Fit-class small cars, including the new Fit. With this new plant, Honda's annual production capacity in Brazil including that of its existing plants will increase to 240,000 units from current 120,000 units.|
Movements of Hyundai and Chinese automakers
Hyundai begins production of the ix35; The HB20 reached the top five in sales by model
|Production of the ix35||Hyundai began producing the ix35 crossover in Brazil in August 2013. Caoa Group produces the model licensed by Hyundai at the Anapolis plant. In addition to the ix35, Caoa Group builds Hyundai's SUV Tucson and commercial vehicles. To produce the ix35, the group invested BRL 600 million to expand its annual capacity to 8.6 million units from 6.2 million units. The annual production capacity for the ix35 alone is 24,000 units with 2 shifts.|
|Production of the HB20 at its own plant||The company invested USD 700 million to construct its first plant in Brazil at Piracicaba in Sao Paolo state. The plant began operations in September 2012. It produces the HB20. The annual production capacity is 150,000 units. HB20 recorded sales of 158,000 units in 2013 and ranked fifth in sales by model in Brazil.|
|Anhui Jianghuai Automobile (JAC)||The company invested USD 600 million to construct a plant at Camacari in Bahia state in the North-Eastern part of Brazil jointly with SNS (wholly owned subsidiary of local import agency, SHC) Construction of the plant started in November 2012. SNS holds a 66% share of the joint venture plant while JAC holds the rest at 34%. They announced in April 2014 that the plant will begin operations in 2015. The annual production capacity is 100,000 units of passenger cars and trucks.|
|Chery Automobile||Chery Automobile announced in February 2014 that it completed construction of the vehicle assembly plant at Jacarei city in Sao Paul state. The investment amounted to USD 400 million. If all goes smoothly, the plant will begin complete knockdown (CKD) production as early as July 2014. The plant's initial production capacity is 50,000 units and will be increased to 150,000 units eventually (in 2016). In December 2013, the company also announced that it will construct an engine plant in the same city. The engine plant will begin operations in 2015.|
|Beiqi Foton Motor||The company and local state government signed an agreement in August 2013 that they would invest BRL 250 million to construct a truck assembly plant in Rio Grande do Su state. The plant will start CKD production of 3.5t to 24t class trucks for 21,000 units per year in the second half of 2015. The location of the plant was initially announced to be in Bahia state in September 2012, and then changed to Rio de Janeiro state in July 2013. This is their second change in location.|
Sales Forecast by LMC Automotive: Brazilian sales to expand to 4.0 million units in 2017
|(LMC Automotive, Quarter 2, 2014)|
According to LMC Automotive's forecast in Q2 2014, Brazilian light vehicle sales in 2014 will decline by 3.7% to 3.44 million units. LMC Automotive has revised, in Q2 2014, its Brazil sales forecast downward through to 2017 due to following reasons: 1) tighter credit conditions and rising household debt leading to constraints on spending, 2) weak industrial sector should leading to slower job and income growth, 3) the government yet demonstrating a strong initiative to implement structural reforms, which are critical for the economy's sustainable growth. Following the expected 4% decline in sales in 2014 to 3.4 million units, the market is forecast to recover somewhat to 4.05 million units by 2017. However, notwithstanding this recovery, it is clear that the sustainable trend rate of market expansion in Brazil will be more modest than previously thought, in light of overall economic uncertainty and moderated outlook.
Brazilian light vehicle sales forecast by make
|Fiat Chrysler Automobiles||759,629||845,722||772,068||733,082||723,862||774,818||899,300|
|General Motors Group||632,131||642,573||649,732||574,461||575,044||582,262||595,986|
|Other Chinese Manufacturers||2,822||1,219||2,262||6,312||10,526||10,747||11,160|
|Changan Automobile Group||20,315||11,292||4,217||2,344||2,541||2,390||2,704|
|Source：LMC Automotive "Global Automotive Sales Forecast (Q2, 2014)|
|(Note) 1.||Data indicate figures of only small-size vehicles, including passenger cars and light commercial vehicles with a gross vehicle weight of under 6 tons.|
|2.||All rights reserved. Reproduction of any data will require permission of LMC Automotive.|
|3.||For more detailed information or inquiries of forecast data, please contact LMC Automotive.|
Brazil: Vehicle production and exports
|2008||2009||2010||2011||2012||2013||2014 (Outlook)||Jan.-Jun. 2013||Jan.-Jun. 2014|
Vehicle sales in Brazil
|2008||2009||2010||2011||2012||2013||2014 (Outlook)||Jan.-Jun. 2013||Jan.-Jun. 2014|
|thereof: imported vehicles||375,150||488,874||660,256||857,883||788,063||706,847||333,522||301,041|
Source: Brazil National Association of Motor Vehicle Manufacturers (ANFAVEA) (Note) Vehicle sales represent the number of vehicle registrations. The figures for 2014 (Outlook) are ANFAVEA's forecasts announced in July 2014.
Vehicle sales by OEM and brand in Brazil
|2011||2012||2013||Jan.-Jun. 2013||Jan.-Jun. 2014|
|Mahindra & Mahindra||5,441||2,465||1,863||843||831|
|Mahindra & Mahindra||457||327||610||259||338|
|Source：Brazilian Automobile Dealership Association (Fenabrave)|
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