The Brazilian automobile market and industry is growing once again. Growth is finally returning after a steep slump. The local economy is looking better, but carmakers are also utilising spare capacity and Brazil’s low costs for exports. Rogerio Louro reports.
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In September, local automakers produced 202,787 vehicles, the sixth consecutive monthly rise this year and the third strongest month for production performance in the industry’s history (after September and October 1997).
Vehicle production rose 21.7% in the first nine months from a year ago. In the same period home market sales increased 13.2% and exports rose 16.4%.
This recent performance is reminiscent of the early 1990s when the Brazilian market grew vigorously and attracted global makers’ attention. However, a decade ago the market was growing steadily year-by-year, but this year’s growth came after a steep slump. Between 1997, the industry’s best year, and 1999, production nose-dived from 2.06 million vehicles to 1.35 million and sales dropped from 1.94 million to 1.35 million. Since then, the market has grown only slowly, until now.
Lula’s ‘spectacle of growth’
So what happened in recent months? The automotive industry reflects the country’s economic recovery, perhaps the first real results of the “spectacle of growth” that Brazilian president Luiz Inácio Lula da Silva promised in 2003.
Falling interest rates have started to bring buyers back into the market with easier access to credit. Various methods of measure all agree that employment is growing again while Gross Domestic Product increased 4.2% in comparison with 2003.
Exports are key
At the same time, new economic policies are controlling inflation and reducing government deficits. But exports are refuelling the engine of Brazilian economic recovery.
While economic recovery is obviously boosting the automotive sector, there are now too many vehicle manufacturers given the size of the domestic market. Again, recalling the start of the ‘90s, Brazil then had only nine brands of cars and trucks. Today 17 manufacturers have plants. According to Brazil’s National Association of Vehicle Manufacturers (Anfavea) there is local assembly capacity for 3.2 million vehicles yet, last year, the companies used only 57% of that installed capacity.
Buoyed by the good results of recent months, Anfavea expects that 2004 production will be a record 2.2 million or 65% of capacity. This is definitely a recovery but that’s still 35% of capacity left spare after 45% for the local market and 20% for exports.
Reflecting the country’s economy, local vehicle manufacturers are being rescued by higher sales to foreign markets. Revenue from vehicle exports in the first three quarters of 2004 was $US5.85 billion, up 49.5% compared to a year ago.
In 2003, Brazilian automakers for the first time exported more than 500,000 vehicles in one year (534,700 units), earning revenue of $5 billion. This year, Anfavea expects a new record with growth of about 20%.
This export success is a result of local manufacturers’ efforts to compensate for the fall in local market sales with exports, investing in Brazilian ‘know-how’ to specialise in compact car production. About 85% of the local market is held by cars under four metres long, reflecting the low purchasing power of most of the population.
“Brazil is one of the biggest compact car producers in the world and it was natural that we took advantage of this to conquer new markets,” said Fiat Auto Brazil president Cledorvino Belini.
This expertise is important, but Brazil also has the advantage of low labour costs. Years before the current wave of low-cost vehicles for world markets, Brazilian automakers developed and sold entry-level compact cars. Fiat started to think about a low-cost world car in the early 1990s and the resulting Project 178 became the Palio range.
But the Palio was only the beginning of Brazilian development of low-cost cars for world markets. Volkswagen had introduced the locally developed Gol compact in the 1980s expecting this simple, robust car to replace the Beetle as the best-selling vehicle in the country. The Gol hit the spot in Brazil so, when Volkswagen introduced the new generation at the end of the 1990s, it decided to try the same formula in other emerging markets. Now the Gol is sold in more than 20 countries and is also the best-selling car in Mexico, Argentina and Uruguay.
Volkswagen of Brazil expects to export about 100,000 units of the Gol this year. The company has not confirmed it, but the new generation model, to be introduced in the end of 2006, will be sold in the EU as a rival to Renault’s Logan.
Before that, in 2005, VW Brazil will start sending Europe around 100,000 units a year of the Brazilian developed and built Fox compact. Based on the Polo platform, this vehicle will replace the Lupo and will make its European public debut at the Geneva motor show next March. VW of Brazil also plans to export the CrossFox, an SUV style version of the Fox introduced at the São Paulo motor show last October.
Amazon Project
Ford Brazil also has plans to conquer the world with its Amazon Project, a compact range based on the Fiesta platform. So far the project has been confined to the Brazilian version of the Fiesta hatchback, the uniquely local EcoSport compact SUV and a new Fiesta sedan. The automaker ultimately expects to sell the SUV and sedan outside Latin America but great success at home in Brazil has prompted Ford to temporarily throttle back the export plans though shipments abroad will eventually begin.
The Amazon Project will also spawn two more models – a compact pick-up and a minivan to help with Ford of Brazil’s export aspirations. The company is also well advanced with plans to produce another compact model, that suppliers know as the ‘Ka four door’ (it will actually be on the Fiesta platform but have Ka-like looks). It will be a really low-cost car to boost Ford’s sales in Brazil and in other emerging markets.
After conquering its segment of the Brazilian market, the Chevrolet Celta hatchback is also headed in large volume to foreign markets. GM started work in September on doubling capacity at its Gravataí plant from 120,000 to 240,000 units. All production there is dedicated to the Celta, a Brazilian-designed compact car based on the previous generation Opel Corsa.
To meet GM’s export targets, the Celta range will be expanded with a sedan version by the end of 2005. The company is planning to send the model to Europe to compete in low-cost market segments.
At the Paris motor show this year, Renault vice-president Pierre-Alain De Smedt confirmed his company will build the Logan in Brazil by the end of 2006 to supply both the local market and other Latin America countries. He said the Brazilian range would include a sedan version as in Europe and India, supplemented by hatchback and pick-up variants.
Toyota and Peugeot are also studying producing low-cost cars in Brazil.
Having created a global, low cost car line in the 1990s, Fiat has no intention of abandoning the segment. By 2007 it will have developed and begun building a new low-cost car in Brazil to replace the locally made Uno – a new rival for the new generation VW Gol. Before then it will take a fight to GM’s compact Meriva minivan by launching a version of the Idea minivan built on the Palio’s platform (rather than the Punto platform as in Europe).
Then there is DaimlerChrysler, which has bet the future of its $US1 billion car plant in Juiz de Fora on exports of the upcoming Smart Formore small SUV. After failing to meet targets set for the Brazilian-built A-class (mopping up some spare capacity by using the factory to assemble some C-class models for the US from CKD kits shipped from Germany), the automaker has now decided to use Brazil mostly as an export base. It expects to ship to other countries about 80% of the Smart SUV production that begins at the end of 2005 – principally to the United States. That means the Brazilian plant’s future is in the hands of American car buyers.
While plans to increase exports are well in hand, there are some political problems that could affect a rosy future. For a start, Brazil’s government has been slow to expand international free trade agreements to boost exports.
Brazil has only four trade agreements with the Mercosur group of countries, Mexico, Chile and the Andean countries. While the automakers consider the Mercosur deal important for trade between Brazil and Argentina, there are strains in the relationship between the two countries.
Argentinean president Nestor Kirchner has said the country won’t open up the automobile market in 2006 as expected under the Mercosur agreement, citing severe mismatches between the size and strength of the industries. He is instead working on incentive plans and other mechanisms to help Argentine manufacturers of cars and automotive components.
There are also difficulties in the negotiations with the European Union over the Free Trade Agreement of the Americas while deals with India, South Africa and China are not yet completed.
Another problem is international investment. Brazil is competing against China, India, Russia and Central European countries for new money to finance new projects. In these rival countries, local sales performance is given higher priority than exports and, in this respect, Brazil is still catching up.
Internal situation
With a population of 182 million and only 11.1 people per vehicle, Brazil has great potential as an automobile market. But inequality is rife. The richest 10% of the population rake in more than a half of all income, while the poorest 10% earns less than 1%.
Therefore the automakers want the government to take a long term view of the automotive sector, encouraging new buyers into the car market, with low interest rates, easier access to credit and a reduction of vehicle-related taxes. This will be a long and hard road so, short term, a stable economic climate is the next best thing for the vehicles manufacturers.
In any case, consumers are conservative. For the next few years, the carmakers expect only an increase of about 5% a year in local vehicle sales. This performance may not be enough for head offices abroad when deciding where best to invest.
Brazilian vehicle makers have already seen how a reduction of investment can affect their production. In the last few years some local component makers limited investment and focused on export production. When car production for the home market increased again they didn’t have capacity to supply the assembly lines. They are now starting to invest again, but vehicle production has suffered in the interim.
Flex-fuel
Flex-fuel vehicles are a relatively recent development. These run on petrol, alcohol or a mix of the two. Development of tri-fuel vehicles that will also run on natural gas is under way.
Volkswagen and Fiat have offered flex-fuel vehicles for some years and, more recently, Ford and Renault have entered the segment with Peugeot and Citroën following in the first quarter of 2005.
“It’s a market trend with growing sales. It’s the future,” said Anfavea’s Golfarb.
Conclusion
Even the most pessimistic analysts agree that the Brazilian automotive market will grow in the next years. It’s a natural increase for a country with strong emerging potential and probably only an unexpected, deep world economic crisis would affect this trend. But the question for Brazil is how much growth? The key to the future may be summarised with just one word: stability.
For 2005, automakers expect a 10% increase in production (to 2.4 million vehicles) and 5% home market growth (to about 1.7 million units).
Economic stability will make the home market stronger and vehicle sales will grow. Stable governmental policies affecting the automotive industry will encourage the carmakers to make long-term plans. It’s important to remember that, in the last 10 years, the government has changed vehicle tariff rates nine times.
Last month, at a ceremony to mark the start of Peugeot 206 SW production in Brazil, president Luiz Inácio Lula da Silva said that his government expects to negotiate in 2005 an agreement with the automakers to increase home market sales.
Even though the new low-cost cars will boost Brazilian exports in the next few years, vehicle manufacturers need to resume investments to start development of the next generation of cars. Without that, the local automakers will not replace their current models and will not be competitive in export markets by the end of the decade.
Parts makers are again beginning to invest locally. For example, Goodyear and Continental announced construction of new tyre plants in the last few weeks. It’s the first good sign, but parts makers themselves admit that the sector needs about $US1 billion in investments to supply near-term automotive market growth.
Now it’s time for the vehicle manufacturers to decide what to do. The more conservative companies expect that home market vehicle sales will grow about 5% per annum in the next three years. But Golfarb predicts an internal market of about two million vehicles (cars, light commercials, trucks and buses) in 2007, up from 1.7 million next year.
Flex-fuel vehicles are also seen as a good export opportunity. As oil prices rise, the Brazilian government is negotiating agreements with other big emerging markets, such as China and India, to export ethanol produced from sugar cane. Along with the fuel, the government plans to offer its locally made flex-fuel vehicles for export, pitching their more advanced technology than the flex-fuel vehicles that have been made for years in the USA.
But to be, again, a promising player in the global automotive market, Brazil needs to state clearly its “rules” at home and stick to them. The country needs to maintain its economic recovery and the automotive sector needs a stable political climate. Only then will the automakers’ distrust in the government turn to confidence.
Rogerio Louro
