Brazilian market due to rebound through 2020

During a recent presentation, IHS senior analyst Victor Silva reviewed the global trends and regional influences pushing the Brazilian sales and production forecast through the rest of this decade. Through 2012 Brazil was among the fastest-growing and most significant emerging markets before cracks in the foundation surfaced in 2013 and led to the first sales decline in a decade. However, the decline from 2012 to 2013 was less dramatic than the plunge the market has taken this year, with sales down 9.6% through August 2014. Declines in production have followed as Argentine market troubles have led to equally difficult declines in Brazilian exports.

After seeing a sales record in 2012, the decline began in 2013 with a tightening of credit as banks became stricter and lending rates increased to 18.5%. A temporary reprieve from the IPI tax helped to soften the blow in 2013, only to hit home in 2014. Reduction in the IPI reprieve – the tax was scheduled to be fully reinstated by July 2014, which has been tabled for the year on market performance – coincided with vehicle prices increasing on higher mandated standard safety content in that from January 2014 all Brazilian new vehicles must be equipped with standard anti-lock braking systems (ABS), and driver and front-passenger airbag systems.

For now, the market is dominated by eight brands, but Silva forecasts the shares of these brands will erode throughout the decade as more players join the market. Also significant is that newer makers, especially of Asian brands, are bringing to market the B-segment vehicles preferred by the Brazilian market. In 1998, the Big Four (Fiat, Ford, General Motors (GM), and Volkswagen (VW)) held a 90% market share in the country, according to Silva. This declined to 67.6% in 2013 and is forecast to fall to 60.9% in 2020. Fiat, the largest maker, will see the most significant fall from 23% of the market in 2010 to 18% in 2020; VW and Chevrolet (the only GM brand in the country) are forecast to slip 4% to 17% and 16% respectively by 2020. Meanwhile, Hyundai, Toyota, and Honda are gaining share. The market is also seeing greater fragmentation as luxury brands make a big push, while Chinese brands see an opportunity to invest in Brazil. The "other manufacturers" category is forecast to grow from about 9% of the market in 2010 to 13% in 2020.

Among the elements not changing in Brazil is the country's appetite for small-segment vehicles, as well as its preference for passenger cars. "The most popular cars in the passenger-car segment are vehicles with engine displacement from 1 to 2 litres, which made up 57.6% of total passenger car sales in 2013," Silva said. Sub-compact, small sedan, and small hatchback remain key vehicles in this market with nearly a 75% share. As is true in markets across the world, SUV sales are increasing, but only forecast to reach 12% of the Brazilian market by 2019, up from 6% in 2010. Pickups, particularly small, car-based versions, are forecast to see comparatively stable sales in the region at 12% in 2020, compared to 11% in 2010. Passenger cars retain the bulk of sales, though do erode from 76% to 71% over the decade, which indicates the region is going into the next decade on a downward trend for that segment, and hints that Brazil will follow the world's preference for the SUV bodytype.

Affecting the preference for smaller cars is the significant portion of sales related to cost. Silva points out that a comparable Ford Fiesta costs consumers 37% more in Brazil than in the United States; a Toyota Corolla costs 60% more; a VW Jetta 66% more; and a smaller Fiat 500 costs consumers 28% more. Brazil has also traditionally been a market in which the vehicles on offer are previous-generation versions of those sold in mature markets, and tend to be lower cost and offer lower content – as an example, the vehicles are only now being mandated to have front airbags and ABS. Top-selling entries in the market for the year to date include the VW Gol, Fiat Palio, Fiat Strada, and Chevrolet Onix. These four have sold a total of about 427,000 units so far in 2014.

On the SUV front, among the reasons the bodytype will gain in market share is increased production capacity. According to Silva, carmakers will continue to invest in passenger-car production, but recent introductions indicate an uptick in SUV and mid-level sedan investment. Production of SUVs in Brazil is forecast to increase from 3% in 2010 to 12% in 2020. Opposite of the sales forecast, the production of pick-ups in the country is forecast to decline a bit, dropping from 12% to 10% over the decade. Passenger-car production will slip in share from 77% in 2010 to 72% in 2020.

Two elements are shaping Brazilian vehicle production, along with consumer demand. One element is Brazil's Inovar Auto programme, which enables automakers to circumvent increasing import costs; the other is being eligible for incentives by producing vehicles in-country and increasing the local content ratios in those vehicles. However, Silva warns that "with a high amount of investments being made in Brazil and the market landing, OEMs will need to deal with overcapacity in the short term". IHS forecasts Brazilian production to reach 3.91 million units in 2020 after a sharp decline from 2013 (3.46 million) to 2014 (3.01 million, estimated).

According to the IHS Automotive light vehicle production forecast, about 674,000 units of capacity will be installed between 2014 and 2016. Most of that will be at Fiat's new Recife factory, which will be online in 2015 with an estimated 250,000 units of capacity – sales are forecast to increase by only 110,000 units over the same timeframe. While Brazil is working to increase exports, it will not be enough to absorb the excess capacity in the near term. By 2020, however, the Brazilian market is forecast to increase by about 630,000 units. The market will accept the new capacity, but our forecasts indicate some lag between installation and market volume.

Looking at which manufacturers are investing in Brazilian production, we see the traditional top eight producers losing share of production, not from reducing output but from new players coming onboard or increasing capacity. VW was responsible for 26% of the country's vehicle production in 2010, but that is forecast to fall to 20% in 2020. Despite investing into Recife, which will become Fiat's second-largest production site, the company's share of production will fall by 4%, landing at 20% in 2020. GM is seeing a much steeper decline in production share, slipping from 20% to 13%. Other manufacturers, including the luxury capacity being installed by BMW, as well as Chinese makers JAC and Chery, will see the "other" grouping increase a few percentage points.

As the industry is undergoing a shift to mega-platforms and modular platform strategies, Brazil is will also see platform commonisation. According to Silva, "platform communisation is a key strategy for productivity gain, components purchasing, and development costs", and will result in more profitable production in 2020. We forecast the number of platforms being produced in Brazil to increase from 44 in 2010 to 54 in 2020 on new models being added to the production portfolio, but also since volume per platform will increase from 71,700 to 79,500 units. Ford is forecast to drop from three platforms to two, resulting in an 84% volume increase per platform. Fiat will shift from six platforms to four with a 69% increase in volume. GM will see the smallest shift, but still a notable 31% increase in volume per platform by dropping from five to four vehicle platforms produced in Brazil.

Outlook and implications

While production, sales, and exports are forecast to recover from the steep decline in 2014, it will take several years. For example, production reached 3.46 million units in 2013, but we forecast it will take until 2017 to regain this ground when we foresee production of about 3.45 million units. Sales are forecast to drop from 3.58 million in 2013 to 3.23 million in 2014. We also forecast the market taking until 2018 to reach 3.58 million units of sales again.

The Brazilian market is expected to continue to be dominated by cars in the small segments, with those of an SUV bodytype helping this sector to gain some ground through 2020. Furthermore, the market is growing more competitive, with increased activity from non-traditional players setting the stage for a more diverse market in the next decade.

Brazil will become a more diverse market. While today's production and sales in the country are dominated by the Big Four, the field is expanding to include Toyota, Honda, and Hyundai. In 2020, Hyundai, Honda and Toyota will have an increased percentage of production, ranging from 3–4% to between 4% and 5%. Also significant is the increased activity and pressure from Chinese makers JAC and Chery, which are exporting to emerging markets first, in part since these markets are more similar in terms of infrastructure and market dynamics (for example, a higher proportion of first-time car-buyers) than mature markets. In 2013, however, Brazil was not among the top 10 Chinese export countries, according to an IHS report, though some Chinese automakers have established relationships in South America for CKD assembly, and JAC and Chery are building full assembly plants in Brazil (see China: 21 April 2014: Chinese vehicle exports 2013 – an in-depth look at destinations).