This is marketing research on the automobiles - Brazil industry and can include information on the background, market structure, definitions, competitors, trends and developments of automobiles in Brazil and is related to other topics such as cars, trucks, motorcycles, parts and transportation.

Brazil: The Brazilian Automotive Industries Breaking Records

Camilo Barreto, Senior Economic Specialist at the U.S. Consulate General in Sao Paulo is the author of this report.

For the Brazilian automotive industry, 2007 was a record-breaking year. The industry set an all-time high of 2.97 million cars, vans, buses, and trucks manufactured. Comprising 18 percent of the country's industrial production and five percent of GDP, the growth in the auto industry contributed to Brazil's higher than expected GDP growth of 5.4 percent last year. Local automakers predict production in 2008 will top 3.25 million vehicles and are ramping up investments and hiring more workers to increase capacity.

Flex-fuel vehicles, which run on any combination of gasoline and ethanol, also broke records. Today, almost nine out of ten new cars sold in the Brazilian market have flex-fuel engines. Brazil's stable macroeconomic picture, higher household incomes, and readily available credit have stimulated domestic sales. However, Brazil's high tax rate and rising wages for workers, as well as an appreciating currency, are areas of potential concern for the industry.

Other countries, including Argentina, are gaining competitive advantages that could encourage multinational companies to relocate some of their manufacturing facilities. Similarly, the Brazilian Central Bank's interest rate hike this month could cause automakers to reconsider some proposed investments.

AUTOMOTIVE INDUSTRY BACKGROUND

The Brazilian government's five-year plan in 1956 to promote the country's industrialization led to the creation of Brazil's modern auto industry. Fifty years later, Brazil is the world's seventh largest automobile manufacturer and eighth largest consumer base for automobiles. The auto industry comprises approximately 18 percent of Brazil's industrial output and accounts for five percent of GDP. Industry analysts expect Brazil this year to surpass French production and the consumption levels of Great Britain and France.

Today, the Brazilian auto industry is a major driver of economic growth. Brazil is becoming an emerging market leader for technology development because of its highly skilled and qualified engineers and relatively low labor costs compared to developed countries. Brazil has the largest number of car assembly plants in the world, manufacturing more than 30 brands. The auto sector has invested approximately USD 27.5 billion since 1994 to expand plant and component manufacturing capacity and in new technology for developing new models.

Brazilian exports rose in value from USD four billion in 2002 to USD 13.2 billion in 2007. Globalization also has pushed the industry to restructure its supply chain and product design processes. Innovative organizational designs, novel production facility layouts, and efficient supply chain management make Brazil one of the most dynamic automotive industries. General Motors (GM), Ford, Volkswagen, and Fiat all have flex-fuel development and engineering facilities in Brazil. The Ford plant in Bahia and the GM plant in Rio Grande do Sul are considered the most modern assembly plants in the world.

CONSUMER CREDIT BOLSTERS SALES AND EXPORTS IN 2007

An increase in available credit, lower interest rates, and extended car loan maturities up to six years all contributed to the boom in auto sales. Pablo Teruel from the Department of Statistics of the Brazilian Motor Vehicle Manufacturers Association (ANFAVEA) told Economic officer that Brazil's rising employment and income were partly responsible for sales expansion. Teruel also told Economic officer that he did not foresee any changes for the sector from the Central Bank's capital requirements on leasing put in place in January because auto companies finance their own leasing operations and therefore are not subject to the new reserve rules. ANFAVEA is confident that auo sales will continue to grow. A major part of the nearly 86 percent growth in leasing in 2007 went to the auto sector, and traditional financing for vehicles was also up 29 percent.

ANFAVEA reported that motor vehicle production (autos, trucks, and buses) and domestic and international sales all hit record highs in 2007. Last year, the industry assembled 2.97 million cars, up 13.9 percent over 2006. Domestic sales including imported vehicles climbed 27.8 percent, totaling 2.46 million. Imported vehicles accounted for 10.9 percent of total domestic sales. Fiat led Brazilian domestic market sales in 2007 with 523,180 cars, followed by Volkswagen with 491,790, and GM with 444,904. At the end of 2007, the Brazilian automotive industry employed 120,245 people, up 13.1 percent from 2006.

These upward trends have continued in early 2008. According to ANFAVEA's data for the first quarter of 2008, total vehicle production was 783,000 cars, up 19.3 percent from the same period a year ago. Vehicle sales reached 648,000, up 31.4 percent. At the end of March, the industry employed 124,200 people. According to a recent local TV newscast, ANFAVEA President Jackson Schneider said that Brazil's auto industry is estimating an output of approximately 3.2 million cars in 2008, up 8.9 percent from 2007.

FLEX-FUEL TECHNOLOGY A MARKET SUCCESS

Sales of flex-fuel vehicles, which run on any combination of gasoline and ethanol, accounted for 85.6 percent of new cars, or two million cars. In addition to flex-fuel vehicles, the GOB's policy of mandatory blending of gasoline with 20 to 25 percent ethanol is also driving the success of Brazil's ethanol program. GM's Government Relations Manager Pedro Bentancourt told Economic Officer that, as of March, 26 percent of the country's light vehicle fleet is flex-fuel. This figure is expected to reach 50 percent by 2015 as heavy investments from the auto industry have driven down the price of flex-fuel technology enabling manufacturers to offer these models at the same price as gasoline-powered vehicles. Similarly, by mid-2008, the state of Sao Paulo expects to launch approximately 20 flex-fuel buses as an environmentally friendly pilot project.

INCREASED INVESTMENT AND EMPLOYMENT

Skyrocketing auto sales have left automakers unable to meet demand. Between February 2007 and March 2008, auto companies were only able to meet 91.5 percent of demand. Schneider said at a press conference that the wait for a new car is at least three months for some models, and as long as nine months for trucks. As a result, automakers in Brazil have announced plans to invest USD 4.9 billion in 2008, more than double what they invested in 2007 and also the largest amount they have ever allocated in one year. Brazilian subsidiaries of Fiat and Ford have announced investments of USD 2.9 billion and USD 1.5 billion, respectively, through 2011.

Volkswagen's truck manufacturing division also confirmed USD 600 million in investments to expand production. Most investments will be channeled to increase production capacity from 3.5 to 3.85 million cars this year and to four million cars in 2009. Including Brazil's auto parts industry, total investments are expected to reach USD 20 billion by 2010.

The four largest auto manufacturers in Brazil, Fiat, Volkswagen, GM, and Ford, are hiring more workers to try to meet the growing demand for new cars. GM has 22 percent of the Brazilian market and plans to hire 1,500 workers for its biggest plant in Sao Paulo, Brazil. GM Vice President in Brazil Jose Carlos Pinheiro Neto told the press that first quarter sales exceeded expectations, climbing 30 percent to 117,687 cars. He said that the GM plant in the Sao Paulo industrial region now has a total of 11,000 workers, which should help increase production to 250,000 cars.

GM also may invest USD one billion in Brazil and Argentina to introduce a new compact car. Currently, Ford enjoys a stable market share of 12.5 percent and is ranked fourth in Brazilian auto sales. In the first quarter of this year, Ford manufactured 37,854 cars, down 8.5 percent from the same period in 2007. Unlike Ford Motor Company's global operations, Ford's Brazilian operations had registered profits until this year.

Ford invested USD 4 billion in 2001 in its state-of-the-art manufacturing complex in Camacari in the northeastern state of Bahia. Camacari is a unique complex that houses the Ford production line together with their suppliers under one complex. It is one of the most advanced automobile plants in the world, capable of producing five different vehicle platforms atthe same time on the same line. Ford has hired 2,316 workers since December 2007, and the entire operation employs more than 9,500 workers. Despite Ford's state-of-the-art facility, however, it has been unable to increase production to meet retail demand and consumers have turned to other automakers instead.

By the end of 2010, Fiat plans to expand and modernize its production facility in the state of Minas Gerais into one of the largest in the world, at the cost of approximately USD 2.8 billion. Banking on the continued growth of the market, Fiat is hiring an additional 550 workers to bring its total workforce to 16,000. Fiat plans to increase production by 50 cars per day to 3,050.

CONCERNS FOR THE BRAZILIAN AUTO INDUSTRY

Despite the booming domestic market, the appreciation of the Brazilian currency has reduced the auto industry's global competitiveness. While the Brazilian auto industry broke records in 2007, total cars exported were down 6.6 percent from 2006. Pablo Teruel said that ANFAVEA does not anticipate export revenues this year to surpass 2007. Nonetheless, export earnings in the first quarter of this year totaled USD 3.24 billion, up 13.1 percent compared to the same period a year ago.

Although the Brazilian auto market is expected to set new production and sales records this year, industry analysts point to Brazil's high tax burden, inadequate infrastructure, and cumbersome bureaucracy, combined with the appreciation of the Brazilian currency, as making Brazilian vehicles less competitive internationally. Several auto industry interlocutors told Economic Officer that production costs in Argentina are lower and that Argentina is becoming an attractive alternative for auto makers, especially given the duty-free access to the Brazilian market afforded to Mercosul countries.

Despite Argentina's current energy crisis, several automakers have announced investments in Argentina. For example, Honda plans to invest USD 100 million to construct its first assembly plant in Argentina, both for the Argentine market and as a platform to Brazil and Mexico. Fiat also announced plans to reactivate a plant in Argentina that it had shut down in 2002. Renault also is examining the possibility of transferring production of its low-end models to Argentina.

COMMENT

Brazil's auto industry is booming and manufacturers are investing in new technologies to gain competitiveness and expand capacity. Despite the growth in passenger cars in Brazil, only one in three Brazilians owns a car, leaving an untapped consumer market for automakers. Brazil's additional costs of doing business (coined the "Brazil cost"), however, limit the Brazilian auto industry's ability to maintain its competitive edge and prevent multinational companies from relocating production facilities for lower taxes and cheaper labor. The recent 0.5 percentage point interest rate hike and possible mid-term energy concerns are factors that automakers will likely consider when making future investment decisions.

For more information, please visit The U.S. Department of Commerce.