Brazil's light-vehicle sales and production continue to decline in May

Brazil's light-vehicle (LV) sales and production continued to decline year on year (y/y) in May, with the seasonally adjusted annual rate (SAAR) of sales at its lowest since 2008, when the world economy was suffering from the aftershocks of the Lehman Brothers collapse. With consumer confidence down, difficult economic conditions, credit difficult to obtain, and expectations of an increase in interest rates, Brazil's National Association of Motor Vehicle Manufacturers (Associação Nacional dos Fabricantes de Veículos Automotores: Anfavea) further reduced its 2015 sales forecast, predicting a drop of 20.6% this year, compared with a 13.2% decline in its forecast earlier this year, including medium and heavy commercial trucks and buses. Anfavea has also revised down its full-year production outlook to a drop of 17.8%, compared with a decrease of 10% in its forecast earlier this year. Additionally, the National Federation of Motor Vehicle Distributors (Federacio Nacional da Distribuicao de Veiculos Automotores: Fenabrave) has reduced its forecast for 2015 to 2.77-2.78 million units.

In an April statement, the president of Anfavea said that "confidence of consumers and entrepreneurs is, at the moment, one of the main reasons for the complex scenario that we live in today. For this reason, we believe it is of fundamental importance to achieve the fastest possible fiscal adjustments in the economy. This way, the rules are clear, the planning will be more accurate and activity will resume."

May's sales declined by 26.3% y/y to 205,229 units in Brazil. Passenger-car sales fell 24.4% y/y to 175,671 units and light-commercial (LCV) sales fell 35.8% y/y to 29,558 units. May's results are more consistent with those in April (down 24.4%) than with the appearance of a possible improvement in March, when sales fell only 1.2% y/y. Part of the reason for the stronger y/y sales in March was that the Carnival holiday fell in February in 2015 instead of March, as it usually does, creating a favourable y/y month of comparison. January (18.4% y/y) and February (26.6%y/y) also showed sharp declines, and the market is down 20.0% y/y in the first five months of the year. An uptick in December 2014's sales, driven by consumers looking to get in before the tax discount was eliminated and vehicles became more costly, was not an indication of an improvement in 2015.

According to Anfavea, May's sales were 205,229 units, production was 210,598 units, and exports were 37,962 units. The top four brands - Fiat, Chevrolet, Volkswagen (VW), and Ford - lost 5.8% market share in May, their lowest level on record, according to IHS Automotive sales forecast analyst Guido Vildozo. Established manufacturers in the Brazilian market Fiat, General Motors (GM), and VW are seeing larger y/y declines than automakers with smaller market shares, such as Toyota, Honda, and Hyundai. Fiat Chrysler Automobiles (FCA) held its status as Brazil's top seller in May with 29,677 passenger cars sold, down 26.5% y/y, and 9,480 LCVs sold (down 41.0% y/y). In the year to date (ytd), FCA's passenger-car and LCV sales were down 29.7% y/y. FCA was followed by GM, which sold 24,617 passenger cars (down 40.6% y/y) and 6,019 LCVs (down 19.6% y/y). VW occupied third place with sales of 24,581 passenger cars (down 39.9% y/y) and 5,700 LCVs (down 38.0% y/y). In May, VW's sales were behind GM's by only 355 units, whereas for the ytd, GM has a more comfortable 9,900-unit lead. In the ytd, Ford sold 21,756 passenger cars and 1,591 LCVs to capture fourth place, ahead of Renault-Nissan's 18,051 passenger-car and 1,231 LCV sales. Toyota saw its passenger car sales decline 3.9% y/y in May, but they were up 7.4% y/y in the ytd. Honda's passenger-car sales gained 21.6% y/y, while Hyundai's car sales fell by 9.4%.

Brazilian LV exports have been inconsistent in 2015, and in May they increased y/y and were stronger in the ytd. Exports grew by 16.6% y/y in May, following a decline of 19.5% y/y in April and an increase of 38.5% y/y in March. In the ytd, Brazilian exports were up 3.0% y/y to 138,453 units. During May, 37,962 LVs were exported, consisting of 31,750 passenger cars and 6,212 LCVs. Brazil lacks a strong export base to accommodate excess capacity, causing automakers to cut back on shifts and slow down production, which led to Anfavea revising its production forecast downward for a third time in 2015. Production fell by 24.0% y/y to 210,598 LVs in May. Passenger-car production was down 24.4% y/y, while LCV production dropped by 35.8% y/y. Over the first five months, production declined 20.0% y/y to 1.067 million units.

Outlook and implications

The results through May suggest a more dramatic decline in light-vehicle sales in 2015 than the 6.9% full-year drop in 2014. Following May's results and continued poor economic news, IHS has revised its 2015 forecast downward, as has Anfavea. IHS forecasts Brazilian sales of 2.74 million units in 2015, a nearly 18% decline over 2014, and does not forecast Brazilian sales will return to growth until 2017.

On May's sales results, Vildozo said, "As we look at 2015 we expect the market to continue its downward spiral due to the absence of economic momentum and consumer confidence tagged along with the cautious banks have to lending. We expect that the economy reaches bottom in the third quarter of the year and thus a modest recovery takes place in the second half resulting in volume of 2.74 million. If the mood continues unchanged then we are likely to see momentum of 2.68 million units and if it worsens as the year progresses we would be looking at sales closer to 2.6 million units."

Factors pushing the sales decline include an absence of economic momentum and consumer confidence, continued cautious bank lending, and the discontinuation of tax benefits. In addition, Brazilian LV sales in 2014 were driven down to 3.33 million units by vehicle prices increasing by an average of 4% on mandated safety equipment, high inflation, high interest rates (18.5% in the third quarter of 2014), and tight credit availability. Without a combination of formal job creation, which allows consumers to tap into credit, and credit availability, vehicle demand will be constrained. The end of the industrial products tax (Imposto sobre Produtos Industrializados: IPI) discount on 1 January, weak economic momentum, and banks' cautiousness towards lending are weighing on the market in 2015. Forecasts by Anfavea and IHS have both declined since the year started as a result of these conditions.

Brazilian inflation has increased to 8.22%, well above the central bank's ceiling of 6.5%. With inflationary pressures persisting, the Central Bank of Brazil raised the Selic rate to 13.75% in June, up from an April increase to 13.25%. IHS forecasts another increase in July, as the expectation is that inflation will not return to near the 6.5% target until late in 2016. In late October 2014, the Selic rate was increased to 11.25%; in January 2015, it was increased to 12.25%.

In January, the elimination of the IPI tax breaks increased vehicle prices between 4.5% and 7%. The tax for vehicles with engines up to 1.0 litre increased from 3% to 7%; for 1.0-2.0-litre engines, it increased from 10% to 13%, although if the engines are flexible-fuel engines, the tax is 11%. For vehicles with engines larger than 2.0 litres, IPI is 25% for gasoline (petrol) engines and 18% for flex-fuel engines.

The Brazilian market's main drivers are formal employment creation and improved financing conditions - issues that have been extremely difficult in 2015. The Brazilian economy lost 162,000 (net) jobs in January-April, compared with gaining 408,000 over the first four months of 2014. Unemployment is around 6.4%. However, job creation in 2014 fell to 10,000 new jobs per month, compared with 200,000 per month in 2013. Without the combination of formal job creation and credit availability, and with vehicle prices increasing, sales are not forecast to grow until 2017. When these drivers normalise, the market will return to growth.

IHS forecasts that 2016 will also see a sales decline. However, a more robust and fundamental recovery is expected in 2017, followed by annual growth of 3-5% through the forecast horizon. Investment in the region continues, as Brazil has a low motorisation rate and expectations of improved vehicle sales, though we no longer forecast sales breaking the 4.0-million-unit mark in 2022.