MarketLine Blog

Automotive Manufacturing: All eyes on Brazil

According to data published by the OICA, 2,623,704 cars rolled off Brazilian production lines in 2012 making the country the seventh largest producer of cars worldwide. This represented year-on-year volume growth of 4.1%, continuing a trend that has seen production almost double since the year 2000. Brazil is now home to some of the world’s largest automakers and Fiat, Ford, GM, Honda, Hyundai, Nissan, Peugeot, Renault, Toyota, and Volkswagen are all opening new factories or expanding existing ones. Such investment is expected to increase Brazil’s annual production capacity by 1.5 million units by 2016. So why is Brazil THE place to be for automakers? There are in fact several answers to this question.

The first is that of increased domestic demand for new cars. Per capita income has grown by more than half in the last five years to exceed BRL21,000 ($10,750), putting new cars in the reach of more consumers. Sales have more than doubled since 2005 and according to Brazilian industry association ANFAVEA are forecast to grow by 68% to top five million units in 2016. In a country in which less than 20% of all roads are paved, strong growth should be seen beyond that, increasing its attraction further. By way of comparison, sales growth of 30% is projected in the US over the same period.

Secondly, high tariff walls are also playing a role in attracting manufacturers to Brazil. In 2012, the country’s President Dilma Rousseff announced that the government was to raise tax on imported cars from 25% to 55%. This translated to higher prices with the ever-popular Toyota Corolla, selling for the equivalent of $29,000 (it costs around $16,000 in the US). Initially, Mexico was exempt under a regional trade agreement, and so carmakers simply began to ship more vehicles from their Mexican factories. This loophole was soon closed as Rousseff soon added a tax on Mexican imports. Such prices inevitably began to impact sales, increasing the need for production within Brazil and the building of new plants and expansion of existing facilities is, in part, a direct response to this.

The third, and arguably most obvious reason that the likes of Fiat, Ford, GM, Volkswagen etc. are upping production in South America’s largest country, is the higher profit margin it offers. According to data published by IHS Automotive, manufacturers earn a 10% profit on Brazilian-made cars, compared with 3% in the US and a global average of 5%. This has led to accusations of so-called ‘corner-cutting’ in Brazilian factories including claims that the cars are made with weaker welds, very few safety features and inferior materials compared to similar models manufactured in the US and Europe. According to a report published on www.cnbc.com, four of Brazil’s five bestselling cars failed their independent crash tests. Only next year will laws require front air bags and antilock braking systems on all cars, safety features that have been standard in industrial countries for years. Experts however, say these requirements alone are not sufficient to meet basic safety standards.

These issues, coupled with dangerous driving, have led to a passenger car accident death rate that is almost four times greater than that of the US. They do not however, appear to have dampened demand for Brazilian-made cars amongst the country’s consumers or curbed the enthusiasm of carmakers eager to cash in on a burgeoning middle class. In short, the future looks bright for the Brazilian automotive industry.

For a more in-depth look, check out our Brazil – Car Manufacturing Industry Report.

 

Posted in Automotive.

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