The Renault-Nissan alliance has announced major investment in Brazil at a time when newly announced tax laws in the country are expected to have significant implications for foreign automakers.
IHS Global Insight Perspective | |
Significance | Renault-Nissan has announced two separate investments in Brazil, including a new 200,000-unit-per-annum greenfield site for Nissan. |
Implications | Brazil's recently announced temporary tax measures to encourage investment in the auto industry are spurring a number of well-established projects to the formal announcement phase. |
Outlook | The Brazilian market is set to be a tough sales and production battleground for the established "Big Three" (Fiat, Volkswagen, and General Motors) as competition intensifies in the country. |
Nissan has announced that it will invest USD1.5 billion in Brazil to build a new greenfield assembly plant in Resende, Rio de Janeiro, with an initial capacity of 200,000 vehicles annually (see Brazil: 29 September 2011: Nissan to Invest USD1.5 Bil. at Brazilian Facility; May Produce Electric Cars—Report). Production at the new plant is due to begin in 2014, according to Nissan. "Just as Nissan has demonstrated in China, Russia and India, we are investing in the regions with the most potential for growth", said Carlos Ghosn, chairman and chief executive officer of the Renault-Nissan alliance, as quoted in the Detroit News. "Brazil has clearly emerged as the engine of Latin American growth, and we look forward to contributing to Brazil's economic landscape and its automotive manufacturing base in the 21st century." The investment will further Nissan's "Power 88" plan to boost its market share in Brazil to 5% by 2016, up from 1.7% currently. The news was welcomed by Sergio Cabral, governor of Rio de Janiero state. "It is a distinct pleasure to officially welcome Nissan to the state of Rio de Janeiro", Cabral said. "Today's Rio is the embodiment of a growing economy, a skilled workforce and unlimited future potential and companies like Nissan want to be a part of this exciting period in our history."
In a separate announcement, Ghosn declared that Renault will invest 500 million reais (USD200 million) in its Curitiba plant, adding 100,000 units to its existing capacity in 2013, creating 1,000 new jobs in the process (see Brazil: 3 October 2011: Renault-Nissan to Expand, Build New Brazilian Site). The plant's annual capacity—passenger cars and light commercial vehicles (LCVs)—will be increased to more than 380,000 units. Ghosn said in a statement: "In 2011, Brazil is set to become Renault's second-largest market. Brazil is one of the cornerstones of our international growth strategy: more than one-quarter of the growth in volume will come from Brazil. If we are to reach this target, then we must increase our manufacturing capacity, and we have chosen our Curitiba plant to achieve this."
This increase in production capacity is aimed at providing Renault with the means to achieve its lofty ambitions in Brazil. Renault aims to claim a market share of 8% in the country by 2016, compared with around 5% today. Along with India and Russia, Brazil is one of Renault's three priority markets as part of its strategy, "Renault 2016—Drive the Change". Brazil was the group's third largest market for the year up to the end of August, behind France and Germany, and it was the second largest in July and August.
The investments also provide for the creation of a genuine engineering centre close to the production plants. Renault do Brasil is to open a training centre and new centres for logistics in order to make more rational use of storage areas. All of these operations will create 1,000 new jobs, in addition to the 1,000 new hires already made in 2011, resulting in a full 2,000 new jobs by 2015. Renault has three plants at the Ayrton Senna complex in Curitiba: a passenger car plant, an LCV plant, and an engine plant. The Brazilian unit exports vehicles to the other markets in South America.
Outlook and Implications
The announcements by the alliance partners come just a week after Brazil's government sought to strengthen the local auto industry through a new, albeit temporary tax regime (see Brazil: 20 September 2011: Brazil Announces New Measures to Protect Local Industry and Combat Currency Appreciation). Brazil's finance minister, Guido Mantega, announced in mid-September the temporary measure to raise the industrial production tax (IPI) on vehicles that cannot demonstrate that at least 65% of their components were made in Brazil or the Mercosur bloc. The IPI for vehicles that do not comply with this rule will rise by 30 percentage points. The measure will remain in effect until 2012. The IPI rate at present is between 7% and 25%, depending on engine size.
Although the taxation changes are clearly not the driving force behind the moves by Renault-Nissan, they are expected to result in a number of OEMs whose plans are well advanced to move forward and commit to the country. BMW, for instance, now appears certain to confirm its long-standing plans to establish a plant in the country (see Brazil: 6 October 2011: BMW to Locate First Latin American Plant in São Paulo, Brazil—Report).
Currently, the Brazilian authorities are negotiating with various players over potential preferential taxation treatment for those committing to the country. Such preferential tax treatment could potentially enable investors in the country to avoid the recent 30-percentage-point increase in IPI in the years prior to the Brazilian plants becoming operational and local content rising to 65%. Parts from Argentina and Mexico and the Mercosur trade bloc can count as local content, a significant advantage for Nissan, whose operations in Mexico are significant and very well established. Sourcing components from Mexico could be a simple fix to avoid the lengthy process of establishing a supplier park in Brazil for an operation of this size.
Nissan's new plant will supplement existing production at the Renault facility in Curitiba, Paraná state, which has the ability to produce about 59,000 Nissan vehicles annually. That plant will continue to produce the Nissan Livina, Grand Livina, X-Gear, and Frontier, while expanding production of Renault models including the new Logan-based Duster, for which Renault has high hopes. Another component of the company's growth strategy is a plan to launch 10 new models in Brazil by 2016, and to boost the number of dealers from 117 to 239 across the country. Brazil is the fourth largest automotive market in the world, and has been growing considerably of late—but efforts by the Brazilian government to cool down the sales rate in Brazil finally seem to be taking effect. This, combined with protectionist measures undertaken by the country in the face of a deluge of Chinese imports, is still not likely to be enough to keep the market from posting decent growth rates going forward.