SAO PAULO – With the Brazilian government actively deterring vehicle imports and working to encourage the construction of assembly plants on local soil, domestic and international auto makers are setting up new factories here at a steady clip.

Brazil already is the world’s seventh-largest vehicle producer, building 3.6 million units in 2012, according to Fenabrave, the national dealer association.

Growth will continue, predicts Ademar Cantero, director-institutional relations for Anfavea, the national association of auto makers. Brazil’s auto market grew 166% from 2004 to 2012, and this has attracted a number of international auto makers, he says.

Anfavea forecasts sales of 3.9 million domestically built vehicles in Brazil this year, and is encouraging more international auto makers to set up plants here. Italy’s Fiat earlier this month said it planned to invest about BR14.2 billion ($7 billion) by 2016 in new and expanded factories that will create 7,700 jobs.

General Motors Brazil recently opened a new engine facility in Joinville do Sul, in the state of Santa Catarina, which was inaugurated Feb. 27. The plant will manufacture 1.0L and 1.4L engines, as well as aluminum heads, that are destined for GM factories in Gravataí, Rio Grande do Sul, and in Rosario, Argentina.

GM says it invested about BR356 million ($175 million) in the engine operation, which includes pioneering energy-efficiency and environmental-protection systems.

Chinese auto makers JAC and Chery both have plants under development. JAC’s facility will open next year in Camaçari, in the northeast state of Bahia, while Chery’s factory will begin production second half 2013 in Jacareí, Sao Paulo state.

Chery’s BR814 million ($400 million) plant will assemble 50,000 cars in 2014 and 150,000 annually from 2015. The Chery Celer will be the first marque to be produced, in sedan and hatchback body styles, with 1.5L engines.

The JAC plant will build 100,000 units annually, rolling out its S5, A20 and A30 sedans, J3 and J5models and T140 SUV. All will be renamed for the Brazilian market. Spokesman Eduardo Pincigher says the auto maker is investing BR1.02 billion ($500 million) in the plant, which will be its first full manufacturing operation outside China.

JAC cannot ignore Brazil, given it is the world’s fourth-largest vehicle market, he says. “JAC Motors already exports to about 100 countries around the world. It is essential to expand the brand in Brazil as well, which has more than 50 brands competing in the market." JAC has 40 dealerships in Brazil and expects that number to rise to 200 by 2014.

The decision to build a plant here was on strategic grounds, before the country implemented its Inovar-Auto policy of encouraging local auto production, Pincigher tells WardsAuto, and the hope now is it will give the Chinese auto maker an added advantage over import competitors.

Inovar-Auto will be in place until the end of 2017 and aims to support technology development, innovation, safety, environmental protection, energy efficiency and quality of vehicles and auto parts throughout the country. It includes industrial product tax (IPI) benefits for OEMs looking to invest and stimulate innovation, research and development within Brazil.

Auto makers and suppliers that ignore the incentive program do so at their own risk, says Ricardo Strunz, chief finance officer of Abeiva, the association of vehicle importers. “In practice, companies that do not adhere to the Inovar-Auto program will have the IPI increased by 30% on their imports. Car makers that qualify for the program, under the specified conditions, may import up to 4,800 vehicles per year without increasing the IPI.”

Importers are taking note, including BMW, which is building a manufacturing plant in the state of Santa Catarina, with the start of production set for late 2014. The German auto maker will build 30,000 cars annually, including the 3-Series sedan, 1-Series hatchback and X1 cross/utility vehicle.

A spokesman for the National Confederation of Metalworkers, an umbrella group that includes auto industry workers, says Inovar-Auto is forcing international manufacturers to rethink their strategies for Brazil.  Up to now, many of the vehicle components for local plants were imported, but soon they likely will be produced here.

Anfavea’s Cantero says another change being brought about by the Inovar-Auto program is that vehicle production is beginning to spread across the country, rather than being concentrated in one region, as regional governments lobby for new plants in their states to boost local employment.

He cautions that manufacturers still will have to consider the varying standards of Brazilian infrastructure and how locations can affect logistics. Until recently, southeast Brazil has dominated auto production because of its established supply chain, availability of skilled labor and other factors.

But auto makers and parts suppliers now can be found in Goiás, Paraná, Bahia and Rio Grande do Sul states, with the new plants coming on line in Pernambuco, Bahia and Santa Catarina.

"The reason for this movement is directly linked to (regional and central government policies), attracting investment to other states, saturation of the ports, as well as issues related to logistics," Cantero says.

The prospect of selling cars near where they are built also is encouraging this diversification, says Strunz of Abeiva, “The location of new plants in Brazil is directly related to the potential sales volume, since the investments are very high and require a significant volume to be repaid.”