Audi’s Return Shows Bet That Leases Spur Sales: Corporate Brazil

Carmakers in Brazil are anticipating leases will spur demand for new models as a tax incentive expires and companies such as Audi AG (NSU) start local production in Latin America’s biggest economy.

Anfavea, Brazil’s auto-manufacturing trade group, is in talks with the government to adjust rules so banks write more leases, President Luiz Moan Yabiku said. New regulations must make drivers responsible for any fines or taxes for leased vehicles, not banks as the autos’ legal owners, he said.

Leasing as a source of auto financing has withered to about 1 percent of financed vehicles in 2013 from about 40 percent six years ago as local authorities force banks to pay those charges when motorists try to avoid taxes and fees, Moan said. Looser rules may send consumers to lenders once temporary tax waivers and cuts for new cars sales end this year.

“Leasing suffered a very big setback because some states started to charge back taxes and tickets to leasing companies rather than to lessees,” Moan said in a Sept. 20 interview at Bloomberg (BZVLTLVH)’s Sao Paulo office. “We are counting on leases to lessen the impact of the return.”

New Factories

A leasing rebound would help ensure a strong domestic auto market with vehicle production potentially rising to 5.7 million units by 2017 from 4.3 million this year, Anfavea projects, as manufacturers from Audi to Bayerische Motoren Werke AG start making vehicles locally.

Automakers are investing 73.1 billion reais ($32.7 billion) in Brazil, the world’s fourth-largest car market, to expand or build factories through 2017. With one car for every six inhabitants in Brazil, compared with one for every two in the U.S., first-time buyers are a safe bet for manufacturers, which will also see exports double to 1 million vehicles annually, Moan said.

Audi plans to revive production in Brazil next year after ceasing output in 2006 because of poor sales. The Ingolstadt, Germany-based unit of Volkswagen AG (VOW) is investing 500 million reais in Brazil by 2016 and plans to assemble its A3 sedan and Q3 sport-utility vehicle at a plant in Sao Jose dos Pinhais. Daimler AG (DAI) is deciding on a location to build its compact Mercedes-Benz.

Important Stimulus

Brazil auto sales more than doubled to 329,143 last month from 151,626 in August 2005, data compiled by Bloomberg show. Anfavea estimates that 2013 deliveries will reach a record 3.85 million even as economic growth slows. Volumes may slow to 2 percent this year after 2012’s 4.6 percent, Anfavea projected.

President Dilma Rousseff removed or lowered a tax known as IPI on cars and other items several times since 2008 to stimulate consumption and economic growth. That tax incentive won’t be renewed next year, and car sales could drop, making leasing an important compensatory measure, Moan said.

“The government should move quickly on this,” Moan said. “A return to leasing would be an important stimulus.”

The secretary for economic policy in the finance ministry, Marcio Holland, has put leasing on the government’s agenda as a relevant measure to be taken up, according to a Sept. 19 presentation.

‘Legal Uncertainty’

The government is concerned that vehicle leasing has waned and is evaluating private-sector demands, said an official who isn’t authorized to speak publicly and asked not to be identified.

Anfavea’s goal in its discussions with Congress and other officials is to ensure that banks aren’t held responsible for drivers’ debts, Moan said.

“Leasing has played a strong role in the development of the country, of the industry,” said Osmar Roncolato Pinho, president of the leasing association, known as Abel.

The market for leasing reached more than 100 billion reais at its peak about seven years ago, and has now fallen to 35 billion reais, Pinho said in a telephone interview from Sao Paulo.

As leasing became more popular and lessees began to fail to pay a tax known as IPVA, states started sending the bill to lessors, Moan said. Adding to the strain on lessors: Some cities that were home to lessees began charging banks a 2 percent tax known as ISS, which the financial institutions had already paid in their headquarter cities, according to Pinho.

Even after a court sided with the banks last year, cities trying to collect the tax appealed the decision, Pinho said.

“This discussion created very strong legal uncertainty,” Pinho said. “There were other financing options available, so leasing lost its competitive advantage.”

To contact the reporters on this story: Christiana Sciaudone in Sao Paulo at csciaudone@bloomberg.net; Leonardo Lara in Sao Paulo at llara1@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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