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BMW produced its first car in its  $250 million Araquari facility on September 30. (Photo: BMW)
Monday, October 20, 2014
Special Reports

Brazil Autos: Down, But Not Out

Brazil's auto demand is forecast to continue to climb, with the market exceeding 5 million units from the mid-2020s.

BY NEIL KING

Light vehicle sales in Brazil rose every year from 2004 to 2011 but faced with weak economic growth and flagging car sales, the government lowered the tax on industrial products (IPI) on May 24 2012 in order to stimulate demand for new cars. The reduction was originally planned to run until August 31 but was extended and the end result was that sales of light vehicles increased by 6.1 percent in 2012 even though GDP growth for the year was a lackluster 1 percent. This lowered IPI rate was further extended and was actually in effect for the whole of 2013 but with demand already pulled forward into 2012 and GDP growth at an improved but still modest 2.5 percent, the measure was insufficient to prevent light vehicle sales in Brazil falling by 1.5 percent year-on-year. This was the first annual decline the market had endured since 2003 and the outlook for 2014 was not looking any better.

Despite this, the Brazilian government planned to return the IPI rate to the level prior to the reduction that was introduced in May 2012 in two steps. The first hike was in January 2014 and the second was scheduled for July, with the net effect being that, from July onwards, cars would essentially cost 7 percent more than in 2013. Nevertheless, sales started the year off well, increasing by 1 percent and 10.5 percent in January and February respectively as vehicles were still being registered that had taken advantage of the reduced IPI rate. However, the inevitable downturn materialized in March and demand contracted by 7.3 percent in the first half of the year. Given this and the economic weakness in 2014, the government decided on 30 June to postpone the second tax hike until January 2015.

Acting as a further impediment to demand in 2014, Brazil's government also introduced legislation in January which requires that all cars are fitted with air bags and anti-lock brakes as standard. This naturally means that certain models are no longer available and in turn, has a negative impact on sales. Finally, to confuse matters further, IPI is levied at a minimum of 30 percent on cars imported from outside Mexico and the Mercosur region as the government seeks to protect the domestic automotive industry by curtailing the flood of imports. The import tax has certainly had the desired effect, with imports accounting for 18 percent of all registrations thus far in 2014 - compared to 24 percent in 2011 for example. In line with increasing IPI rates for locally-produced vehicles, the rates for imported cars have also increased. The table below provides the IPI rates for both locally-produced and imported vehicles that will now be in effect from January 2015 (instead of from July 2014) and the discounted rates that were in effect (in brackets) between May 2012 and January 2014.


IPI Rates on Vehicles in Brazil

Locally produced

Imports

Cars, <1000cc

7% (0%)

37% (30%)

Cars, 1000-2000cc

11% (5.5%)

41% (35.5%)

(alcohol and flex fuel)

Cars, 1000—2000cc

13% (6.5%)

43% (36.5%)

(petrol)

Light commercial vehicles

4% (1%)

34% (31%)

Source: Euromonitor International




With the increased IPI rate that was intended from July being postponed until January 2015, the second half of 2014 will be stronger than the first half in volume terms but is still expected to be weaker in year-on-year percentage change terms. In fact, sales data released by ANFAVEA for September reveal that demand was 11.7 percent lower in Q3 2014 than in 2013 and sales are projected to be 10.8 percent lower in the second half of 2014 than in the July to December period of 2013. Accordingly, only 3.25 million new light vehicles will be registered in 2014 – 9.1 percent down on 2013 and the lowest annual level since 2009. However, underpinned by a recovering economy and healthy growth in the number of Brazilian households with sufficient disposable income to buy a new car, the outlook is far more positive. Even with the original IPI rate to be reinstated from January 2015, 3 percent more registrations are projected for 2015 and further gains are even expected to take demand to a new record in 2017. In the longer term, demand is forecast to continue to climb, with the Brazilian market exceeding 5 million units from the mid-2020s.

Attracted by the potential, premium carmakers are finally investing in Brazil.

Despite this positive backdrop, the IPI and duties imposed on imports mean premium cars are not competitively priced and hence why their share of the market peaked at just 1.5 percent in 2011 before contracting to 1.1 percent in 2012 following the hike in import taxes in order to protect the domestic industry. Even with the reduced IPI rate for imports in effect since May 2012, premium brands still only accounted for 1.4 percent of light vehicle sales in 2013. This therefore explains why, even at their peak in 2011, premium brand light vehicle sales equated to just 1.2 percent of the number of households with annual disposable income over US$55,000. To put this into perspective, however, premium car sales consistently equate to more than 10 percent of the number of these households in South Africa and China.

Euromonitor International forecasts that there will be over 10 million such homes in Brazil in 2025; twice as many as in 2013 (and about half the number forecast for Germany). This suggests that premium players could be on track to import 100,000 light vehicles into Brazil in 2025 anyway but domestic production would create a more level playing field in terms of car prices, naturally boosting demand for locally-sourced models over imports.

Households with Annual Disposable Income Over US$55,000 (Constant) in Brazil, India and Germany 1990-2030 


Source: Euromonitor International


A noteworthy comparison
is that demand for premium cars grew more than tenfold over the period from 2006 to 2012 in India, underpinned by just a 50 percent expansion of the number of sufficiently affluent households in the country. This is fundamentally because of the investment in local assembly in India by car companies such as BMW, Audi and Mercedes in order to circumvent high import duties and thus serves as a positive indicator for the potential in Brazil. In fact, there have always been twice as many affluent households in Brazil as in India, which begs the question as to why investments by the premium carmakers have been far more forthcoming in India than in Brazil. Nevertheless, BMW, Mercedes, Audi and Jaguar Land Rover are all finally looking to invest in local assembly in Brazil in order to be able to bring their car prices down to competitive levels and thus tap into the long-term market potential. BMW kicked off proceedings by producing its first car in its Araquari facility on September 30, in which the company invested R$600 million (approximately  US$250 million). Production capacity is reported to climb to 32,000 units per annum (about as many vehicles as all premium players combined sold in Brazil in 2010) with a workforce of 1300 employees - some of which will inevitably boost premium demand for cars in Brazil themselves.

Neil King is the Head of Automotive at Euromonitor International.  This article was written for Latinvex.


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