SAO PAULO — Helio Mattar, secretary of industrial policy of the Ministry of Development, says that if a recent tax abatement agreement on entry-level cars had not been signed, car prices would have increased 10% and there would be no job security for workers (see WAI Update — June '99, p.1).

The automotive industry here, including the car-parts sector, employs approximately 540,000 people.

Prices of entry-level cars, which now are responsible for 73% of all domestic sales in Brazil, will not be increased as feared, despite increased import costs, thanks to the agreement recently signed by the automotive industry, labor unions and state and federal governments.

The new agreement, which substitutes for an earlier accord, instead allows manufacturers to increase medium and top-of-the-line car prices 4.5% or more in some cases, while granting a rebate on entry-level cars.

The new tax reduction will be valid for three months, however, only if manufacturers agree not to adjust prices. “Once this period is over, we believe that the level of economic activity will have improved and there will be a greater demand for new cars,” Mattar says.

Governor Mario Covas of Sao Paulo says that the state is not concerned with any possible drop in state taxes. “The main objective of this measure, in my opinion and in the opinion of President Cardoso, is to maintain jobs,” he says. Other states are expected to reduce state taxes for new cars, as well.

Jose Carlos Pinheiro Neto, president of the National Assn. of Vehicle Manufacturers, Anfavea, signed the agreement in the name of all the manufacturers, although Ford Motor Co. has not yet confirmed whether it will give a bonus to its entry-level cars.

But not all automakers are pleased with the new accord.

Honda do Brasil, for example, says the agreement is having a negative effect on its operations. The problem is that 60% of the parts of the only model Honda makes in Brazil, the Civic sedan, are imported from the U.S. or Japan, which cost more due the devaluation of the Brazilian real last January.

Therefore, the company is selling each sedan at a loss, although it is not revealing exactly how much of a loss. “We need to gain market share,” says Kazuo Nozawa, Honda's commercial director, “but we cannot expand our output or we will increase our losses.”

Honda currently is building 80 Civics per day, which is not enough to meet demand of 100 units. Nozawa says that the price of the Civic should increase 11% to become profitable. The price of Civics has been varying between US$15,000 and US$18,000.

Honda do Brasil, which now is seeking parts from local suppliers to help reduce costs, expects to sell 25,000 cars this year, 10,000 more than in 1998 but 5,000 less than projections.

Brazil's Minister of Development Celso Lafer, meanwhile, says that the federal government now is studying the impact of reducing taxes on entry-level cars, as well. A drop in tax rates, Labor Minister Francisco Dornelles says, does not necessarily mean any tax losses for the government, if the new plans stimulate higher sales volume.

The automotive industry, Lafer says, has a very important role in the economy and economic projections.