Fiat SpA (F) and Volkswagen AG (VOW) have dominated Brazilian auto sales for years, holding the top two spots. Now, General Motors Co. and Asian rivals are gaining share in a market the European carmakers had been counting on to offset weak demand in their home region.
Brazilian auto production capacity will jump 50 percent by 2014 as South Korea’s Hyundai Motor Co. (005380) and other carmakers ramp up new factories, according to Brazilian supplier organization Sindipecas. The added potential output, which comes as sales growth slows, will put pressure on VW and Fiat profit margins, Barclays predicts.
“We will have growing competition here in Brazil,” Christian Klingler, VW sales chief, said at the Sao Paulo motor show. Fiat’s no longer the “benchmark in Brazil. We also have Kia (000270) and Hyundai expanding here. The best will prevail.”
With demand in Europe down for a fifth straight year, VW and Fiat have relied on Brazil for growth, boosting deliveries there more than 25 percent since 2007. Even so, they’ve lost market share: The two companies together sell two of every five cars in the country, down from about half five years ago.
Those sales are particularly critical for Fiat, which lacks Volkswagen’s scale in China. Latin America accounted for a quarter of Fiat’s first-half profit, compared with about 8 percent of earnings for VW, according to Fiat data and estimates from Bankhaus Metzler.
Fiat’s Brazilian sales are set to shrink 8.3 percent in 2013, while VW is forecast to drop 8.4 percent, according to IHS Automotive. Total light vehicle demand is set to slip 2.2 percent to 3.56 million autos with a government tax cut to boost sales due to end.
“Given the rising competition in the market and the pullback post-incentives, margins are likely to fall,” said Kristina Church, an analyst at Barclays in London. Fiat will probably post operating profit equivalent to 8.7 percent of sales in Latin America this year, more than double the group’s 4.2 percent margin, Barclays estimates.
The European automakers have sought to counter the competition with new offerings presented at the Sao Paulo Motor Show this week. Volkswagen introduced a two-door version of the best-selling Gol subcompact. It also premiered the Taigun sport- utility vehicle concept, one of two new SUVs planned to broaden its lineup beyond the compact Tiguan and larger Touareg.
“Brazil is a strategic growth market for the Volkswagen Group and is therefore a key factor” in the company’s goal of becoming the world’s largest automaker by 2018, Klingler said. The German carmaker plans to invest 3.4 billion euros ($4.4 billion) through 2016 to upgrade its model lineup and factories in the country.
Fiat presented a convertible variant of the 500 subcompact, its first ragtop in the country. It also displayed special editions of Grand Siena and Linea sedans and sporty versions of the Uno and Palio compacts.
“The Brazilian car market will continue growing because the personal income is increasing,” Cledorvino Belini, Fiat’s Latin America chief, said at the show. “It all depends now on the credit offering to support sales.”
The Italian manufacturer, the biggest carmaker in Brazil this year, is investing as much as 2.3 billion euros to build a second factory. The facility, in the eastern state of Pernambuco, will be able to produce as many as 250,000 vehicles a year from 2014. The Turin-based manufacturer posted record sales in August, pushing production at its current factory in Betim to its highest level in 36 years.
GM (GM) presented the Chevrolet Onix subcompact. The Detroit- based automaker is introducing seven new vehicles in the country this year in a bid to reverse South American losses.
“Brazil is a very competitive market,” said Marcelo Cioffi, a partner at PricewaterhouseCoopers in Sao Paulo. “We are now experiencing the arrival of new players that want to participate in the growth.”
Earlier this month, Hyundai began selling the HB20, a hatchback designed specifically for Brazil. The vehicle is made at the Korean carmaker’s new $600 million facility in Piracicaba, which can produce as many as 150,000 cars a year.
China’s Chery Automobile Co. will start assembling cars in Brazil in 2013 at a factory that can build 170,000 vehicles a year. Another Chinese manufacturer, Anhui Jianghuai Automobile Co. Ltd. (600418), has said it plans to make 100,000 cars annually at a new Brazil facility.
Brazilian President Dilma Rousseff helped trigger the building boom with tax changes designed to discourage imports. She raised levies on manufactured goods using imported components by as much as 30 percentage points in December. Companies can reduce the tax rate by using more local parts and labor. The measures were intended to counter a 34 percent surge in imported cars last year after a rise in the value of the Brazilian real against the dollar.
The manufacturing boom means more choice for value- conscious buyers like Irineu Miranda. The 48-year-old taxi driver from Sao Paulo wanted a Kia Soul. When the dealer raised the price four months ago when he was ready to sign the contract, he purchased a Nissan (NISA) Livina instead.
“Carmakers initiating sales in Brazil start with discounts and therefore attractive prices but then quickly raise them,” Miranda said while navigating the bustling streets of South America’s largest city.
Building factories in Brazil isn’t always an obvious choice. Energy costs are about 40 percent higher than Germany, while rules calling for cars to be equipped to run on gasoline as well as ethanol increase complexity.
Securing quality parts from local suppliers is also difficult. VW was only able to source 70 percent of components for the Brazilian production of the Up! city car from local manufacturers, missing a target of 80 percent, the company says. On average, supplies in Brazil cost about 15 percent more than in Mexico, according to VW.
Despite the challenges, Brazil remains an attractive market thanks to growing incomes and a young population. IHS forecasts car sales in the country to rise 24 percent to 4.5 million vehicles over the next five years, while Europe will only recover 16 percent and remain below its 2007 peak.
“Almost 40 percent of Brazilians cannot afford a car yet,” said Thomas Schmall, VW’s Brazil chief. “Brazil is a very young country, making demand grow naturally.”
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