SAO PAULO — Brazil is a key market for European carmakers and is particularly important for volume-leaders Volkswagen AG and Fiat Auto SpA. Along with newcomers Renault SA and PSA Peugeot Citroen, they held one-third of the passenger-car market in the year's first half. Brazil's 14 automakers together last year sold 1.6 million cars.

European makes could do even better if they could offer diesel models — which currently make up about 30% of Western Europe's car market — but they can't. “Diesel cars are not allowed in Brazil, only in Argentina, where they hold a 50% market share (including light commercial vehicles), mostly imports,” says Luiz R. Corrallo, diesel operations manager-South America for Delphi Diesel Systems do Brasil Ltda.

Delphi, whose diesel operation in Brazil (under former LucasVarity) dates back to 1956, makes rotary pumps, injectors and filters. Since its $871 million purchase last year of European-based Lucas Diesel Systems from TRW Inc., Delphi has added components for an advanced common rail direct-injection system, including a high-pressure pump and electronic unit injector.

Its major customers are agricultural and light commercial vehicle makers, with brands including Ford, Fiat, Peugeot, Volvo, John Deere, Mercedes-Benz, Cummins, New Holland, Ursus and Valtra. The agri-business is big in Brazil, which sees two to three harvests per year. Delphi holds a 30% aftermarket share in the tractor segment, with Robert Bosch GmbH its biggest competitor. All the same, Delphi is positioning itself to supply diesel passenger cars here and has high hopes that it soon will.

Brazil ruled out diesel cars in the 1970s due to an energy crisis after the government determined it was not self-sufficient enough in oil production. At the time, 78% of crude oil was imported, compared with 30% to 40% today. Because the country was dependent on commercial road transportation, a strategic decision was made that not only allowed diesel solely for commercial use, but also lowered taxes on diesel, as well.

“We have improved crude oil, reduced its importation, but the rules still prevail,” Mr. Corrallo says. Indeed, Brazilians continue to pay a 30% tax on gasoline. “Brazil is the only country in the world that prohibits diesel by law,” complains Vicente A. Pimenta Jr., account manager at Delphi Diesel. “Most countries are moving to convert to diesel because it's more efficient, reliable, saves energy and is less offensive to the environment; the complete opposite of perceptions of the past.”

“The government won't approve diesel for cars in Brazil because it gets too many taxes on gasoline. And it won't raise the tax on diesel because it doesn't want to hurt commercial transportation.”
— Oscar de Paula Bernardes
Brazilian industrialist

Most here say that it's only a matter of time before diesel cars come to Brazil, noting that neglecting diesel is neglecting a petroleum source. “We are not sitting, waiting for things to happen,” says Mr. Pimenta. “We are joining with VW, Porsche and Fiat to define our concerns, collect evidence and to promote an open discussion.”

Altogether, 10 OEMs and suppliers are putting together their case for diesel to present to the government. There are factors working for and against them: Brazil must meet Europe's Euro III emission standards by 2002 and Euro IV by 2007; the country faces national elections next year and a new president may offer a more sympathetic ear; diesel models could help the economy recover after a paralyzing energy crisis that currently is bringing automobile assembly lines to a screeching halt in a year that promised to set records.

Oscar de Paula Bernardes, a Brazilian industrialist and board member of Delphi Automotive Systems Corp., remains a skeptic. “The government won't approve diesel for cars in Brazil because it gets too many taxes on gasoline,” he says. “And it won't raise the tax on diesel because it doesn't want to hurt commercial transportation.”

But those at Delphi's diesel operation are bullish. Brazil has the capability to make world-class diesel engine components, they say, particularly common rail, and at a lower cost.

“Common rail was a dream in the 1960s,” says Mr. Deak. “Now we have a system.” All that remains for Delphi is to have Brazil's carmakers as diesel customers.