Brazils auto industry is performing well in 2010

Brazil's auto industry is performing well in 2010

Brazil is riding the crest of a wave. The impact of the international recession of last year on Brazil was muted by an effective fiscal stimulus package which benefited the auto sector. Brazil's economy is forecast to grow by 7-8% in 2010, with the vehicle market also projected to show continued growth. Against that background, investment in new capacity is up to. We take a look at this dynamic automotive market and assess prospects.

Brazil is South America's largest economy, with a population of close to 200m and a GDP per capita of US$10,300 on a purchasing power parity basis. The rapid growth of China's economy has dramatically increased export demand for Brazil's raw materials.

Ten years ago Brazil was a less confident place than it is now. Back then it was a country that was vulnerable to economic crisis; there was a history of inflation and political disarray that left deep seated structural problems looking intractable. South America's economic giant seemed destined to remain a country with great unrealised potential.

Now, there is an air of quiet optimism that the country has been set on a more stable path, economically and politically. The country is still not without its problems – high levels of poverty and corruption have not been eradicated – but there is a sense of underlying progress which is also evident in official statistics. Incomes are up, more people have basic services and the gap between Brazil's rich and poor has closed a little.

Locals say that much of the improvement is due to Brazil’s just departing president since 2002, Luiz Inácio Lula da Silva, a hugely popular figure known simply as 'Lula'.

A measure of the improved management of the country's economy is provided by the fact that it was one of the last countries to enter the global economic downturn of 2008 and 2009, and it was one of the first to come out of it on the back of a fiscal stimulus package that did not harm the government's reputation or result in inflation or capital flight. Economic growth this year will be 7-8% with a slowdown to 4-5% expected in 2011.

Light vehicle sales in Brazil in 2009 were just over 3m units - some 12.6% ahead of 2008. The Brazilian market was lifted by tax cuts which stimulated demand for small cars.

Brazil's automotive industry in good shape

Brazil's light vehicle market has survived the global financial crisis in good shape, with consumers responding strongly to tax cuts on small cars and light commercial vehicles and to low interest rates.

Light vehicle production increased to 2.9m units in 2009 as the buoyant domestic market more than compensated for lower exports.

The country is attracting significant new investment both from vehicle manufacturers already present in the country and from new entrants, as they vie to increase their exposure to a substantial and growing automotive market. Further opportunities seen in regional market and industry integration, which Brazil leads through its membership of the Mercosur trade block. Automotive trade between South American countries has increased significantly, mainly through product complementation strategies.

Production forecast to grow

Vehicle production in Brazil this year is up 17.3% in the first three quarters versus 2009. Auto industry trade association Anfavea now expects car and truck output to rise 13.1% this year to 3.6m units. Growth of production is being led by both buoyant domestic demand and export orders. Two-week strikes at a number of manufacturers in September are being seen as a reflection of the industry's strong performance as labour unions pushed for higher wages.

Anfavea has also boosted its forecast for exports and now expects the country to send 750,000 assembled and kit vehicles out of the country, up from a previous estimate of 620,000, and closer to 2008 levels.

Brazil's economy grew at its fastest annual pace in the first quarter in at least 14 years, and barely slowed from that rate in the second quarter. The central bank expects expansion to cool in the second half of the year after a series of rate hikes from April to July.

For the first nine months of the year, sales of light vehicles are up 7.1% on last year at 2.369m units. Forecasters are staying cautious on prospects for the market in 2011, but even a slowing of the economy could support light vehicle market growth of up to 5% if real incomes continue to grow and Brazil continues to benefit from a relatively benign global economic situation – especially growing trade with China. Anfavea forecasts that vehicle sales this year will rise by 8%.

Credit availability is also underpinning vehicle sales in Brazil. Interest rates are low and credit terms very favourable. Some two thirds of car sales in Brazil are on finance, so the credit environment is important.

Given the upward drift of interest rates and a slowing of the economy after a strong 2010, a small contraction of the Brazilian light vehicle market in 2011 cannot be ruled out. Much depends on the performance of the Brazilian economy.

Mercosur poised for further auto investment; Brazil the big beneficiary
 
South America's main trading bloc Mercosur is set to attract significant new investments from global automotive manufacturers keen to benefit from the region's strong economic growth prospects and free trade tariffs, according to market participants.

"There is going to be a substantial flow of cash in that direction, mainly because of rising demand from Brazil," confirms Guido Vildozo, a Latin America automotive analyst with IHS Global Insight.

Indeed, analysts expect the bloc comprising Brazil, Chile, Uruguay and Paraguay will woo some US$4bn a year between 2010-2016. That's significantly more than the $2bn-$2.5bn annually raised during the previous six-year period.

Brazil, which currently leads the bloc's production, will receive 90% of the investment, experts say, as carmakers are keen to profit from impressive sales forecasts driven by booming consumption rates (on the back of easy credit) and a stellar economic performance.

To benefit from Mercosur and achieve economies of scale, industry giants, such as PSA Peugeot Citroen, General Motors and Volkswagen have set up huge manufacturing facilities in recent years, boosting employment and providing a compelling business case for continuing to drive down tariffs and forge ahead with the region’s economic integration.

Spending blitz

And that investment flow is not about to end anytime soon. Volkswagen is set to announce 'huge' investments in the region, one analyst said, followed by Asian manufacturers, which have woken up to the region's growth potential.

In June, GM said it plans to spend US$2.5bn between 2007-2012 to bolster production in Mercosur. Then came Ford, which last autumn said it would plough US$2.26bn to lift production in Brazil as record-low borrowing costs stoke demand in Latin America's largest economy.

Ford said the bulk of the funds will go to enlarge its Camacari factory in Bahia that is said to churn out a vehicle every 80 seconds. The investment will see Ford boost output at Camacari, which makes the EcoSport and Fiesta subcompacts, by 20% to 300,000 units.

Brazil is Mercosur's pumping heart, accounting for 80% of production. It also has the biggest and fastest growing market with car sales expected to grow 9% this year.

Aurelio Santana, technical director at leading automotive federation Anfavea, told just-auto he expects production to grow 5% annually in coming years, matching similar rates in the pre-crunch era.

This year, Brazil will churn out 3.4m cars of which roughly half will be exported to other Mercosur countries. He noted that while exports dipped significantly during the recession, they are expected to improve soon as demand begins to pick up across the region.

Fiat boosts investment

Fiat has said it will invest around USD6bn in Brazil by 2015 in operations that include production of cars, auto parts and agricultural machinery. Some 70% of the total will be invested in cars, with the company expecting in 2011 to unveil 20 new models or upgraded version of current ones.

Fiat's factory in the Brazilian state of Minas Gerais is operating close to the limits of its 800,000 units per annum capacity on strong local demand.

To meet strong demand in Brazil, Fiat expects to triple production in the next two years at its Argentina facility. Fiat's Argentine unit has said it sees output tripling in two years if demand for new vehicles from Brazil continues to rise. The automaker's factory in the central province of Cordoba currently produces 420 vehicles a day, but daily output could easily rise to 1,200 according to an upbeat assessment by local Fiat managers.

The Argentine unit exports about 85% of its output with most going to Brazil and some to Chile, Uruguay and Venezuela.

Brisk economic recovery in regional powerhouse Brazil is stoking demand for vehicles made in Argentina, where carmakers forecast record output this year.

Fiat is planning the return of Alfa Romeo to the Brazilian market in 2012. CEO Sergio Marchionne has also hinted that Chryslers could be made in Brazil or Argentina in the future.

Currency dangers

A concern for the Brazilian economy is the relatively strong Brazilian real currency. The real has appreciated versus the US dollar and euro by around 35% over the past two years. Imports of vehicles from Brazil have risen and the balance of trade deficit in automotive products is widening. The appreciated currency is impacting vehicle manufacturers using Brazil for global sourcing, even if natural hedging and strong demand locally can help to mitigate that. Anfavea is concerned over currency appreciation and cost pressures on the automotive sector – from higher materials prices, for example.

But for now, the manufacturing landscape in Brazil looks upbeat.

One focus is on improving the manufacturing quality in the Mercosur bloc to keep the Mercosur product competitive with imports. Mercosur is opening up to Mexico, which is raising exports to Brazil, while Argentina is receiving a growing number of Korean and other Asian imports.

"There is an influx of cars from Mexico as the Brazilian currency has appreciated significantly," Santana said, adding that governments must act to protect the labour-intensive local industries from this .

"You can't open up Mercosur to [foreign] competition. The product is a generation or two behind global markets so if you do do this it would put production lines in jeopardy," he continues.

Vildozo says manufacturers will be making investments to ensure Mercosur factories are equipped to make their newest models, on par with factories in the rest of the world.

Meanwhile, Santana maintains that Mexican and other imports don't represent an immediate threat to the Mercosur industry. He says the imported cars are generally more "sophisticated" with better equipment and accessories but not of better quality.

"Rather than a threat, I see them as a complement to our existing lines," he says, adding that manufacturer strategies to export certain models from Mercosur while importing others makes up for any losses arising from potential product cannibalization.

Currently, Brazil imports only 20% from Mexico, Santana noted, while 60% comes from Argentina (which produces most cars for sale to Brazil) and other countries.

Magna invests

International Tier 1s are taking more interest in the Mercosur region as output rises. Magna International said it will open two new plants in the Brazilian city of Sao Paulo in order to benefit from the strong growth that the region is experiencing. Body and chassis unit, Cosma International, will open a plant in early 2011 while Magna's seating division will provide seats for a planned General Motors model line at another plant. Magna will employ around 900 people at the two plants.

Risks

The risks are familiar ones: that economic management returns to the bad old days, that the old uncertainties and volatilities return, that an economic downturn could expose vehicle manufacturers with excess capacity. 2011 will be a key year. If the economy can be managed so that slowdown is controlled, underlying progress continuing, the demand environment still positive, then the Brazilian auto industry is well placed. But keep an eye on that Brazilian currency. 


MANUFACTURER/PRODUCT DIGEST
A selection of articles from our Brazilian correspondent looking at the local market and products

BRAZIL: Chevrolet's new Agile-based Montana pickup

BRAZIL: VW refreshes the Gol Rallye

BRAZIL: Daimler to expand Brazilian truck production

BRAZIL: VW, GM, slump in brand ratings

BRAZIL: Toyota starts on second plant

BRAZIL: Citroën bets heavily on Aircross

BRAZIL: Mexican Ford Fiesta sedan goes on sale

BRAZIL: Kia importer assembles truck in Uruguay

BRAZIL: Fiat rethinks the Idea

BRAZIL: Fiat revamps plant for two new engines

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Summary Brazilian auto industry data
Cumulative to end September 2010
(Source: Anfavea)

Vehicle regsJan-Sept 2010Jan-Sept 2009%ch
All vehicles 2501867 2302050 8.7%
All light vehicles 2368744 2211244 7.1%
Car 1879750 1829364 2.8%
LCV 488994 381880 28%
Trucks 112142 74538 50.4%
Buses 20981 16268 29%
 Jan-Sept 2010 Jan-Sept 2009%ch
Light vehicle imports 449891 333615 34.9%
Car 289162 215248 34.3%
LCV 160729 118367 35.8%
Vehicle regs by engine displacementJan-Sept 2010 Jan-Sept 2009%ch
<1000cc 966644 972396 -0.6%
1000-2000cc 890613 833033 6.9%
>2000cc 22493 23935 -6%
Vehicle production (includes CKD)Jan-Sept 2010 Jan-Sept 2009%ch
All vehicles 2723840 2321421 17.3%
All light vehicles 2545847 2211097 15.1%
Car 2120074 1895056 11.9%
LCV 425773 316041 34.7%
Trucks 142156 84375 68.5%
Buses 35837 25949 38.1%
Vehicle exportsJan-Sept 2010 Jan-Sept 2009%ch
All vehicles 569524 323035 76.3%
All light vehicles 542251 306756 76.8%
Car 460969 255205 80.6%
LCV 81282 51551 57.7%
Trucks 16991 9590 77.2%
Buses 10282 6689 53.7%

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