Until 1990, annual vehicle production in Brazil rarely exceeded 1 million units and sales of 800,000 vehicles. Since then, following changes to the method of applying sales tax, the share of the Brazilian automobile market taken by cars equipped with one-litre engines has soared, writes Rogério Louro Alves.

In 1990, to boost car sales, the Brazilian government launched a special industrial product tax ( IPI ) applicable to “popular cars”. Models with a one-litre engine paid just 20 percent IPI tax on top of the ex-factory price. Vehicles with larger engines, however, paid 32 percent, 37 percent or 42 percent tax depending on their size and power output. Following the introduction of the special IPI tax, car prices were reduced, with one-litre models becoming significantly cheaper than other versions.

Since 1990, the special IPI sales tax rate applicable to cars has changed nine times and is currently 10 percent over the production price for one-litre models and 25 percent for others. Over the last decade, this unusual “popular cars” strategy has revolutionised the Brazilian car market and greatly stimulated production and sales.

Ten years on, in 2000, Brazilian automakers produced 1.67 million vehicles – with one-litre models accounting for 70.6 percent of the 1.16 million domestic market sales. By contrast, in 1990 one-litre cars achieved a market share of just 4.3 percent. One-litre models’ rising market share is continuing this year, too. In January, the one-litre models’ market share increased to 73.5 percent.

Rising share of 1-litre cars in Brazilian new car sales

GlobalData Strategic Intelligence

US Tariffs are shifting - will you react or anticipate?

Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis.

By GlobalData

Learn more about Strategic Intelligence

The one-litre models’ domination of the Brazilian market is mostly due to their competitive pricing. A basic car can cost $US4,000 less than the same model with a larger engine. But, when “popular cars” were first launched in 1990 they offered only basic equipment (not even a cigarette lighter) to keep the price as low as possible; nowadays equipment levels are more luxurious.

Uno-based Fiat Mille is unique to Brazil

Now the one-litre market segment is so significant, Brazilian automakers have invested in the local production of a wide variety of models. There are now no fewer that 18 different one-litre cars on sale and each is offered in a wide variety of trim levels from basic through luxury to sports. Basic versions offered for sale in 2001 deliver consumers the same ‘no-frills’ deal as those first ‘popular cars’ of 1990: simple exterior and interior finish, essential equipment only; a small options list and simple eight-valve, single camshaft engines.

Their designs are usually obsolete and no longer sold in ‘developed’ Western markets but they are the cheapest new cars on sale in Brazil and cost between $US6,000 and $US7,000. In this subgroup it’s possible buy the “veteran” Fiat Uno, now called the Mille. There are also locally made versions of previous-generation models like the VW Golf-based Gol Special and Fiat’s Palio. The mid-priced one-litre models sold in Brazil are usually newer designs and have more standard equipment than the basic cars.

Peugeot offers one-litre 106

Though they stick with simple eight-valve engines, for a base price of around $US8,000, there is a wider choice of models including the redesigned Fiat Palio, the unique-to-Brazil one-litre Ford Ka with locally-made engine, Ford Fiesta, Volkswagen Gol, Renault’s Clio and Twingo, Peugeot 106, Hyundai Atos, and (based on the previous-generation GM Europe Opel model) the Chevrolet Corsa and Celta. The Chevrolet Celta is also unique to Brazil and was launched last September. It’s the first car to be sold direct to buyers on the Internet at a reduced price. As a result, 60 percent are sold via the Internet.

The top models in the one-litre segment have the same basic design and a little more equipment than the mid-price versions but add a 16-valve engine offering better performance and cost around $US9,500. Fighting for dominance of this sector sub-group are versions of the new Palio, Gol, Corsa and Seat’s Ibiza. Like the Ka, the one-litre Ibiza model is also unique to Brazil. More top models are on the way. In March, Renault will start selling the Clio with one-litre 16-valve engine and, in June, Peugeot will launch a Brazilian-made 206 with a new 16-valve engine (that will be shared with some Citroen models in other markets).

Updated Palio propelled Fiat to market leadership in January 2001

Seat is also due to release a special Brazilian version of its Cordoba, also with a 16-valve engine. To attract buyers with families, Brazilian automakers offer sedans and station wagons with one-litre engines too. All models in these segments have 16-valve engines and a base price around $US10,000. Models on offer include the Fiat Palio Weekend station wagon and Siena sedan, based on the new Palio hatchback.

Volkswagen has the Parati station wagon, based on the Gol and Chevrolet fields the Brazilian-made Corsa sedan and station wagon. Renault contests this segment with a one-litre, eight-valve version of the Kangoo van and, in March, will launch a Clio sedan with 16-valve engine.

Last June, Volkswagen launched sports versions of the Gol hatch and Parati station wagon. These variants, called 16V Turbo, have a turbocharged 16-valve engine developing 112 bhp and cost about $US11,500.

VW’s Parati is another unique Brazilian model

These flagship models were intended to keep VW and the ageing Gol as the top-selling manufacturer and car range in Brazil but, for the last three months its arch-rival, the new Palio has taken Fiat to the top (for news article, click here).

Until November 2000, the Volkswagen hatch and its various derivatives had been the top-selling model for 14 years and the one-litre versions accounted for 93 percent of sales last year (1.8- and two-litre engines are also available).

The dominance of one-litre cars in Brazil has forced automakers to make large investments to produce modern engines and develop specific models and versions to enjoy the benefits of the special IPI tax.

Most of this investment has been directed exclusively at the Brazil market because cars with one-litre engines have little appeal in other markets, except as cheap, entry-level range-starters.

Because of this, the Brazilian National Automaker’s Association is demanding that the engine size-related tax should be abolished. In its place the association wants a single tax rate, somewhere between the current one-litre rate of 10 percent and 25 percent.

However, Fiat and Fenabrave (Brazil’s national car dealers’ federation ) are opposed to this suggestion. They think that the end of the special tax will increase car prices and reduce sales growth.

Sign up for our daily news round-up!

Give your business an edge with our leading industry insights.

Sign up