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How the Brazilian Government Plans to Stimulate Growth Across Their Automotive Industry

Over the past few years I have spent some considerable time looking at automotive industry developments in the BRIC countries. China certainly comes top of mind whenever you mention automotive industry and BRIC in the same sentence and over the past ten years there has been considerable investment in China to make it the automotive powerhouse that it is today. In India it is much the same story with global car companies keen to leverage low cost production with a very skilled base of engineers and production workers located in the country.

Consumer wealth in both China and India has grown exponentially over the past few years and more and more consumers in these countries are demanding premium level vehicles such as BMW, Audi and Mercedes cars.  In fact China represents the fastest growing premium market in the world at the moment.  But what about Brazil and Russia, how are these countries fairing at the moment?  For the purpose of this blog entry I will take a quick look at what is going on in Brazil.

The Automotive Market in Brazil

Brazil is unique in the automotive industry as its domestic manufacturers have come and gone over the years and its entire automotive industry, from a car production perspective, is more or less based on foreign owned car manufacturers. The reason for the demise of the domestic automotive industry in Brazil is due to the consumer’s interest for foreign brands which they perceived as being higher quality than those offered by the local car manufacturers. In the past, Brazil’s domestic manufacturers have included Romi, Miura, Puma, Gurgel, TAC Motors and Troller. Troller, a 4×4 SUV manufacturer, was widely regarded as one of the last Brazilian based vehicle manufacturers and they were acquired by Ford in 2007, this gave Ford a valuable foothold into the Brazilian market.

The Brazilian automotive market can be broadly split into three tiers of car manufacturers –

  • Tier 1 – VW, Fiat, GM and Ford with 74% market share
  • Tier 2 – Renault, Honda, Hyundai, Toyota, PSA with 20% market share
  • Tier 3 – Remaining 6% market share across other car brands

In 2011 the market share of the Tier 1 car manufacturers were as follows:- Fiat at 22.56%, VW at 22.13%, GM at 19.97% and Ford at 9.21%.  Toyota and Nissan meanwhile have just over 2% each of the total car market.  I took a quick look through the Top 75 cars sold in Brazil during 2011 and there were no premium cars such as Mercedes, Audi or BMW being sold at all, apart of course from those few which were specially imported.  The best selling cars in Brazil are small/compact size cars and even though these models are basic in design, they are still relatively expensive, even if they do only have engines ranging from 1.0 to 1.4 litres in size.

The Tier 1 car manufacturers were some of the first foreign owned car manufacturers to enter the Brazilian market and this has certainly given these companies significant market share, in fact Brazil represents one of Fiat’s strongest markets outside of Italy. There is always a fine balance of making sure production levels are in line with sales levels and Brazil is no different.

However as with any other country Brazil needs to control the expansion of its automotive industry to try and minimise excess capacity and ensure efficient plant utilisation. The consultancy firm PWC undertakes a number of regional analysis of the automotive industry and last month they released their latest forecast for Brazil which are shown in the graphs below.

Recent Inward Investments Across the Brazilian Automotive Industry

Over the last couple of years Brazil has seen significant interest from many manufacturing companies who want to establish a presence in the country. As there are no domestic manufacturers left in Brazil and unlike in China where the government insists that all western companies looking to setup a plant in China must form a joint venture with a domestic manufacturer, foreign companies entering Brazil are able to establish a wholly owned plant in the country. To encourage the development of the automotive supply chain in Brazil, the government has introduced a new directive which highlights the amount of tax credits that can be obtained by increasing local parts sourcing. I will discuss the new INOVAR AUTO Directive in more detail in my next blog entry. In addition to foreign owned car manufacturers entering Brazil, their key tier 1 suppliers are having to follow them into the country as well, putting added pressure on the supply chain in terms of suppliers being able to support their customers anywhere in the world.

The introduction of the INOVAR AUTO directive is widely seen as being the main reason why there has been a flood of inward investment into the Brazilian automotive market in order to avoid the expensive 30% import tax.  There have been some long established investments in Brazil and in recent months there have been a number of announcements from the major automotive manufacturers.

  • For example BMW and PSA have a joint venture in Brazil to manufacture engines for their respective brands and this partnership has been running successfully for many years.  At the moment BMW does not have their own plant in Brazil but with the market expected to grow significantly over the coming years and consumer wealth likely to increase, BMW is now contemplating building a plant in Brazil. The news that BMW is thinking of establishing a manufacturing a plant in Brazil was announced on 2nd July 2012. Perhaps given BMW and Toyota’s strengthening partnership, announced last week, they should consider building a plant together in Brazil.
  • GM’s recent stake in PSA may well put an end to the BMW/PSA partnership and GM has recently announced that they plan to build a new $1.5billion factory with PSA to build small cars for the domestic market. The plans to build the new plant in Minas Gerais or Rio de Janeiro were announced in May, and the plans are expected to be confirmed shortly. GM also announced in April this year that they would be building a new transmission plant with 50% of production going towards locally built GM cars and the remainder would be exported to support their plants in Europe.
  • Last November the Chinese car manufacturer JAC Motors confirmed their plans to build a new plant in the North East Bahia state of Brazil. JAC Motors is one of the top ten manufacturers in China and assuming JAC can produce at least 65% of JAC models sold in the country then they will be in a position to avoid the 30% import duty once the plant opens in 2014.
  • In October last year Renault-Nissan announced that they would be building a new plant in Resende about 56 miles from Rio de Janeiro.  This new $1.5 billion plant will manufacture Nissan branded vehicles and the group will also expand its main factory in Sao Jose dos Pinhais where Renault branded vehicles have been manufactured since 1998. Renault expects Brazil to become their number two market outside of France.  More interestingly, if BMW moves into the market then Daimler will be able to use their alliance with Renault-Nissan to enter the market as well at a later date.
  • Also last October, VW announced they would be investing in a new $2billion factory in the North East town of Cabo de Santo Agostinho.  The factory will produce more than 200,000 vehicles a year and once again this will help VW to get a stronger position in the Brazilian market and contribute towards their overall goal of becoming the world’s largest car producer.
  • Even the South Korean car manufacturers are entering the market with Hyundai  announcing  that their new plant in Brazil would be operational by September 2012.  Hyundai plan to manufacture compact cars with one litre engines at the new plant in Piracicaba near Sao Paulo. South America is the last big region where Hyundai, the world’s fourth best selling car making group, do not have a plant.

So as you can see from these few announcements the automotive industry in Brazil is at the start of an exciting period of growth. Extending supply chains and B2B platforms to support trading partners and operations in Brazil can be a daunting challenge for many companies.

However partnering with a global provider such as us with a strong footprint in Brazil can certainly remove the complexities of conducting business in this particular market.

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Mark Morley

As Director, Strategic Product Marketing for Business Network, Mark leads the product marketing efforts for B2B Managed Services, drives industry and regional alignment with overall Business Network product strategy and looks at how new disruptive technologies will impact future supply chains. Mark also has over 23 years industry experience across the discrete manufacturing sector.

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