Special Report

2008 Year in Review

As South America’s largest country, boasting the region’s leading auto industry, Brazil believed it was well-placed to ride out 2008’s global financial storm, whose gale-force winds hit in the year’s fourth quarter.

Indeed, the industry ended the year with sales of 2.8 million light vehicles, marking a 14.5% sales gain over prior-year, and record production of 3.21 million units that was 8% ahead of 2007. Flex-fuel vehicles made up 87.2% of the Brazilian market, according to the National Association of Vehicle Manufacturers (Anfavea).

While sales fell short of the group’s earlier 3.06 million-unit forecast, most auto makers agreed it was a very good year given the conditions.

“We had a record volume year at General Motors Corp. in Brazil,” Maureen Kempston-Darkes, president Latin America, Africa and Middle East operations, tells Ward’s, noting volumes would have been higher if not for the weak fourth quarter. “So I do think that (the market) is sustainable.”

But not all was smooth sailing. Among the world’s leading emerging markets, along with Russia, India and China – dubbed the BRICs – Brazil considered its economy the most solid of developing countries, insisting it was a safe haven that would not be deeply affected by the spreading crisis.

There was good reason for the bold prediction. Although it would not be totally immune to the coming squall, Brazil had healthy foreign reserves and its banks had shied away from the U.S. subprime lending market. It also was reaping the whirlwind of a healthy ethanol industry while also becoming a strong oil power.

The country in recent years had enjoyed double-digit growth in a long-awaited era of political and economic stability, lifting millions of its citizens out of poverty and into the middle class.

Vehicle sales in 2008’s first eight months reflected this new-found prosperity, jumping 26%, compared with year-ago, to 1.94 million units, including 1.84 million cars, vans and light trucks, according to Anfavea.

Domestic deliveries in August, alone, rose 4% to 244,800 units, albeit down 15% from July, a record month when 288,100 vehicles were sold. Even so, it was the best August in the country’s history.

Industry veterans were all too familiar with Brazil’s roller-coaster rides of the past. There were a few exhilarating ups, but mostly severe downs as the country in the late 1990s and early 2000s rode out political chaos, runaway inflation, soaring taxes and the ensuing financial meltdowns.

But through the first three quarters of 2008, domestic consumption was strong, riding a wave of consumer confidence, low inflation and strong exports. Observers believed Brazil had learned the basic fundamentals all emerging markets must develop to withstand global ill winds while attracting world-class companies.

Yet, by October, Brazil’s economy was being hammered along with everyone else. Falling commodity prices, slowing growth not only at home but worldwide, plus fears of heavy losses, sent foreign institutional investors rushing to the exits.

In only a month’s time, Brazil’s currency, the real, plunged from R1.56/$1.00 to R2.50. The country’s benchmark Bovespa share index reportedly lost 60% of its peak reached in May, making it one of the world’s five worse-performing markets. Hurting commercial and private consumers alike, the credit markets quickly dried up.

No stranger to adversity, Brazil’s auto makers and suppliers turned their sheets to the wind, hoping to steer through the storm with the least amount of damage. But the market turned in a flash. One minute the industry was moving ahead full tilt, adding production lines, building new plants and planning a raft of new models in order to keep up with Brazilians’ insatiable demand.

Then came October’s surprise. Almost overnight, investment strategies were put on hold, factory lines were slowed or shut down and workers were sent home on extended holidays.

With the severe credit crunch and the slowing economy keeping car buyers out of showrooms, November sales tumbled 25.7% to 177,800, compared with October, and were down 24% from year-ago, according to Anfavea.

Exports slid 23.1% to $1 billion, compared with prior month, and were 7.8% behind like-2007. Vehicle production plunged 34.4% to 164,900 units, compared with October, sliding 28.6% short of prior-year’s 272,900.

December results were not expected to improve. With the collapse of the credit markets, dealers that previously had offered 6-year financing on new cars with no deposit now were demanding a 50% down payment and offering only two years of credit.

With estimates of a 10%-15% drop in vehicle production by year’s end, parts makers shifted their focus. Where previously they had been worried about eliminating bottlenecks to increase production, they now began determining how best to deal with the sharp drop in OEM orders.

The worry for auto makers and suppliers, alike, was how to temporarily reduce the workforce. Layoffs without pay or outright firings meant running the risk that when good times returned the industry would be squeezed by a labor shortage. Most companies opted for collective vacations and holiday time off.

The sharp downturn in the Brazilian industry also was a blow to struggling U.S. and European auto makers that had been looking to South America to offset major losses at home.

Among those planning plant expansions were GM, Fiat Automobiles SpA, Volkswagen AG and Renault SA. Asian auto makers such as Toyota Motor Corp., Hyundai Motor Co. Ltd. and Honda Motor Co. Ltd. also had expansion plans for the region. But by year’s end, the industry had put thousands of workers on leave and scaled back production.

While some projects, such as Honda’s new plant in Argentina, were put on hold, others were buoyed by a better-than-expected December result that saw sales rise 9.4% over November, to 194,400 units. Anfavea President Jackson Schneider attributed the increase to government tax cuts on vehicles and steps to widen credit availability.

Mark Fields, Ford Motor Co. president-The Americas, agrees. “We saw some tapering off in the fourth quarter, but the actions the government took have had an impact in the last couple weeks,” he tells Ward’s. “We’ll continue to invest in our business in Brazil.”

Michel Bernardet, sales director of Automobiles Citroen in Brazil, also is upbeat, calling the economic crisis “a window of opportunity.” Citroen is looking to grow market share to 3%, from the current 2.5%, with the launch of new models and expansion of its dealer network, he says.

Unlike most years, only a few industry players were willing to predict what 2009 might bring, although most agreed Brazil still would be buffeted by global ill winds. Among the prognosticators, the National Dealers Assn., Fenabrave, is calling for a 19% drop in sales to 2.21 million units.

GM’s Kempston Darkes tells Ward’s the outlook remains unclear and that the Brazilian market in 2009 could decline 15%-20%, with a sluggish first half less than offset by a momentum-building final six months.

But Anfavea’s Schneider says the vehicle-manufacturers’ group has yet to provide a forecast because it needs more time to quantify the impact of government measures on vehicle sales, although recent decisions were highly positive for the sector.

Among other variables he cites for 2009 are the degree to which the international export market will shrink, whether the exchange rate between the real and the dollar will improve and what impact new U.S. President Barack Obama’s policies will have on world markets.

– with Sol Biderman in Sao Paulo