Leading players lose share in Brazil's light-vehicle market as sales, production decline in 2015

The Brazilian auto market has been in steep decline during 2015, and IHS Automotive is not forecasting a return to growth until 2017. The rollercoaster nature of the market over the past decade - reaching sales and production highs in 2012 and 2013, only to see the gains nearly vanish in 2015 - is having an impact on its make-up. Additionally, Brazil's Inovar Auto scheme has had a significant impact on the production base, encouraging localisation of research and development as well as production through a complex programme that reduces taxes based on how much localisation there is in an auto company's operations. This scheme has contributed to increasing production and investment in the country, but it has also coincided with an economic slowdown and plunging consumer confidence, according to an analysis of the market by IHS principal analyst Augusto Amorim.

Among the expected impacts of the sales decline are that production and sales in Brazil will be much more closely aligned, growing or contracting at similar rates. In 2005, Brazil's light-vehicle sales were 1.62 million units, while production was 2.21 million units. Both figures have grown substantially since then. By 2010, production reached 3.15 million units, while sales had jumped to 3.32 million units - so instead of production being higher than sales by 590,000 units as in 2005, sales were greater than production by about 170,000 units in 2010. In 2015, with production being pulled back on low sales and the weak export opportunities for Brazilian vehicles, sales are projected to close out the year at about 2.43 million units and production at 2.32 million units, only about a 100,000-unit gap, on the side of sales. We forecast that, in some years, Brazilian light-vehicle production will outpace sales, although the gap between the two will continues to remain narrow. In Brazil, this will mean production is skewed towards domestic consumption rather than export.

Brazil's light-vehicle exports have been weak, a situation complicated by the country's fiscal deficit. As the current government looks to manage that situation, it is reducing benefits to companies exporting their production. Beginning in December, the government reduced its tax payback scheme to only 0.1% of the tax paid; this will increase again in 2017, moving to 2%, and 3% 2018. According to Amorim, Brazil's efforts to increase its exports have limited potential. Brazil's agreement with Mexico allows free trade up to a total value of USD1.56 billion through 2016, with that limit being increased by 3% each year until the agreement's expiry on 18 March 2019. Brazil has also secured an agreement with Colombia, which allows for 12,000 light vehicles to be exported to that country without any commercial barriers. However, that quota increases to 50,000 units in 2018 and does not expire until 2023. Beginning in January 2016, a free trade agreement comes into effect with Uruguay. However, under that agreement, vehicles exported to Uruguay must contain at least 55% local Brazilian content and Uruguayan models at least 50% local content. Brazil's current agreement with Argentina, its largest trading partner, expires on 30 June 2016, and it allows Brazil to export USD1 worth of goods for every USD1.5 worth of goods that it imports from Argentina. Brazil is also working with Peru on cancelling a 2.8% import tax that country applies, though when that tax will end is not yet known.

Among the changes that the economic conditions have effected on the Brazilian automotive market, Amorim notes, is that the top four automakers have been impacted more adversely in the downturn than the newer entrants in the market. Fiat, Volkswagen (VW), General Motors (GM), and Ford have all seen production fall between 2010 and 2015. Fiat and Ford will need until 2020 to recover to their production levels of 2005, with neither VW's nor GM's production expected to recover at all.

At the same time, there has been an increase in the number of automakers building cars in the country. These new automakers have increased their combined share of Brazil's light-vehicle production from 14% in 2005 to 40% in 2015. By 2020, their output will have grown to 42% of Brazil's production base, according to Amorim. Fiat's share of market production will have slipped from 23% in 2005 to 18% in 2020, VW's from 28% to 17%, Chevrolet's from 22% to 13%, and Ford's from 13% to 10%. The automakers driving the change include Renault, Hyundai, Honda, and Toyota. The Renault/Nissan alliance's production is forecasted to increase to about 350,000 units in 2020, from about 253,000 units in 2014. Hyundai's production will grow from less than 25,000 units in 2005 to more than 230,000 units, while Toyota's will grow from about 55,000 units to about 171,000 units. The traditional automakers will continue to provide the largest volumes, but their dominance in the marketplace is being shaken and will be tested going forward.

In terms of the various body types available, Brazil's market is not immune to consumers' growing appetite globally for small sport utility vehicles (SUVs) and crossover utility vehicles (CUVs) - in fact, entries such as the Honda HR-V are among the drivers of Honda's growth. IHS Automotive forecasts production of utility vehicles will increase from 4.8% of total Brazilian light-vehicle production in 2005 to 20.3% in 2020. Pick-ups and sedans are also seeing some growth, with these gains coming at the expense of hatchbacks, production of which is forecasted to fall from 57.2% of total production in 2005 to 44.3% in 2020. The outlook is worse for multipurpose vehicles (MPVs), with nearly all production ending in Brazil, and wagons, which will no longer be produced in the country after 2017.

Outlook and implications

Brazil's auto market is forecasted to return to a growth trend, although not in the immediate term. The sharp market contraction in 2014 and 2015 will not be recovered completely, with the country not seeing the levels forecasted as recently as late 2014 until 2025. The reasons for expectations of a return to growth are centred on the country's strong macroeconomic fundamentals. Following GDP contractions in 2015 and 2016, Brazil is forecasted to return to GDP growth of around 2% in 2018-20. The country's currently high interest rates are also forecasted to decline and moderate, dropping from the current 14.25% to around 6% by 2019 and staying there through 2022. Inflation is expected to peak in 2015, gradually decreasing through 2022, falling below 4% at that time. Unemployment, however, is forecasted to remain at 8-10% through 2022.

Contributing to the changes in automakers' shares and fortunes in the country is that the new entrants tend to be bringing fresher, more modern products faster. Fiat Chrysler Automobiles (FCA) has added the Jeep Renegade to its production base in Brazil and Honda has added the HR-V, a product well-suited for the times. Ford's EcoSport has not been updated, despite having essentially created that segment in Brazil, and its sales reached only 2,740 units in November, compared with sales of 6,078 Renegades and 5,990 HR-Vs. Hyundai's HB20 has burst into the sales charts, competing against the Chevrolet Onix. According to Amorim, while those two products were launched the same year, the HB20 has received a facelift in 2015, while the Onix has not. Through November 2015, sales of the HB20 were down 7.6%, compared with the Onix's decline of 16.6%. Ford's Ka has been a solid performer for the company in the region, commanding higher pricing and injecting life into the showroom (somewhat tempered by a high proportion of fleet sales, according to Brazil's dealer organisation Fenabrave).

The Brazilian government's mandating of vehicle airbags seemed to have a negative effect on sales in early 2015, as it increased the cost of vehicles. In addition, there is pressure from safety advocates and the Latin New Car Assessment testing organisation to make electronic stability control standard in the coming years, as well as to increase the overall safety of the Brazilian fleet. Although there is resistance to some of these measures, the fact that consumers have reacted positively to all-new vehicles, launched with modern features and amenities and at a higher price point, indicates that there is an appetite within the market for vehicles to be on a par with those in the rest of the world. Automakers that can deliver better content faster and profitably are likely to be rewarded in the market, even in the face of difficult conditions.