What is in this article?:
- Brazil Rolls Through Volatile Market With Record Production
- Rising Production Costs, Lower Growth Rates
- Automakers Remain Bullish
True to its history of rise, fall and rise again, Brazil’s auto industry has no intention of fading away, despite a stagnant economy that remains unaffected by the postponement of the government’s IPI tax increase on vehicles.
GM has been producing and selling vehicles in Brazil under Chevrolet brand for nearly 90 years.
Rising Production Costs, Lower Growth Rates
Brazil is not alone in its economic struggles. An International Monetary Fund forecast released Oct. 9 reveals that although emerging markets reduced their primary budget deficits from 4.2% to 1.2% of gross domestic product between 2009 and 2011, lower-than-expected global growth rates in 2011 and 2012 impacted demand for their imports.
Most strikingly, according to a recent report by The Economist, rising production costs in Brazil and China have lowered competitiveness and growth rates in recent years, noting since 2011 their economies have become increasingly reliant on deficit spending for stability.
“Including quasi-fiscal measures, such as local-government financing and off-budget funds, deficits in 2013 surged to 3% of GDP in Brazil and as high as 10% in China,” the report says.
Observers say Brazil’s stagnant economy and inflationary pressure are beginning to cloud President Dilma Rousseff’s 2014 re-election prospects despite her administration’s aggressive efforts to boost the country’s auto industry, one of the main drivers of the economy.
Last year, the government raised the tax on foreign-made cars by 30 percentage points, requiring manufacturers to produce at least some light vehicles locally to avoid the higher tariff. But that action has backfired, according to the Roland Berger report, which says the new rules requiring increased domestic content have created greater demand by local automakers upon suppliers that are not up to the challenge.
“A lot of factories are old and inefficient, without any automation,” says Stephan Keese, a partner in the firm and head of automotive and industrial goods research in South America.
“We expect a new wave of restructuring in the industry,” he tells The Wall Street Journal. “This is (the parts makers’) chance to get through this and return to profitability, but unfortunately we are seeing few players with plans under way to do that.”
Keese says parts suppliers, both foreign subsidiaries and domestic companies, saw their combined investment drop from about BR4.18 billion ($1.90 billion) in 2012 to an estimated BR3.17 billion ($1.44 billion) this year and predicts it will slip to BR3.04 billion ($1.38 billion) in 2014.
It’s difficult to invest when profits are so low. But there are other factors at work, the Roland Berger study points out. These include aggressive new industry players, consumers’ rising expectations and costly legislative changes.
As well, labor costs in Brazil are notoriously high, especially considering the low level of automation, while materials costs for both raw materials and from Tier 2s are significantly higher than global counterparts, the report says.
Currency-exchange rates are an additional burden, as are high logistics costs due to the predominance of road transportation. As a consequence, Roland Berger expects suppliers’ profitability to decline up to 6% through 2014, “despite internal efficiency gains.”