Brazil's Auto Industry is Sitting Pretty These Days, and if it seems a bit smug, perhaps it can be excused.

While much of the world's markets have been weakened by October's financial meltdown, Brazil's finance minister insists South America's largest county is a safe haven that has not been deeply affected by the crisis.

“The Brazilian economy is “one of the most solid” among the developing countries,” Guido Mantega is quoted in reports as telling local businessmen in response to a sharp drop in the index recently at the Sao Paulo Stock Exchange.

While Brazil is not totally immune from the tremor, the country has healthy foreign reserves and its banks shied away from the U.S. subprime lending market. It also is reaping the whirlwind of a healthy ethanol industry while also becoming a strong oil power.

Indeed, Brazil in recent years has enjoyed double-digit growth in a long-awaited era of political and economic stability, lifting millions of Brazilians out of poverty and into the middle class.

Vehicle sales in 2008's first eight months jumped 26%, compared with year-ago, to 1.94 million vehicles, including 1.84 million cars, vans and pickups, according to the National Association of Vehicle Manufacturers (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 industry's history.

Veterans of Brazil's auto industry recall all too well the 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.

Today, most observers believe Brazil has learned the basic fundamentals all emerging markets must develop to withstand global ill winds while attracting world-class companies. Where once there were less than a handful of global auto makers, the country no longer can count its major players on a single set of fingers and toes.

Yet, Brazil remains a wallflower when it comes to automotive investment, compared with the competing emerging markets of Russia, India and China.

However, when analyzed alongside its fellow BRICs, none is forecast to approach Brazil's near 100% plant utilization over the long term, says U.K. analyst Calum Macrae in a PricewaterhouseCoopers Automotive Institute September report on Brazil.

Even with announced plant expansions by a host of global auto makers, including Fiat Automobiles SpA, Volkswagen AG, General Motors Corp., Toyota Motors Corp., Renault SA and Hyundai Motor Co. Ltd., Brazil is stretching production capacity to its limit, many analysts say.

Anfavea in June forecast Brazil's total sales to jump 24.2% in 2008 to a record 3.06 million, with output expected to rise 15% to an all-time high of 3.43 million units. Exports of cars and trucks were estimated to grow 7.4% in 2008, reaching $14.5 billion.

Since then, the group has shaved its sales outlook, as Brazil feels a chill from the slowing global economy. Additionally, parts maker Dura Automotive do Brasil Ltda., which supplies GM, Ford Motor Co. and Renault, is predicting a 10% to 15% drop in 2008 output, for a total 3 million to 3.15 million vehicles.

Given the country's volatile history, the question becomes “whether Brazil's market fundamentals warrant additional capacity investment,” writes Macrae.

Many industry leaders believe the country's economy will remain resilient.

Both GM and Ford say their Brazilian operations are helping offset major losses in the U.S. GM recently announced third-quarter sales in Brazil rose 16%.

Ford has pushed up the sales launch of its new Focus in Brazil and says its Brazilian operations now will develop C-segment variants that can be sold anywhere in the world, adding 1,000 additional Brazilian engineers to work on the auto maker's global portfolio.

James Ardila, president of GM Brasil do Ltda., said in August the auto maker expects to produce 800,000 cars in Brazil this year and 1 million annually by the end of 2011. Brazil is GM's third-largest car market, trailing only the U.S. and China, and Ardila predicts the auto maker will capture a 21% share of sales by year's end.

Others believe in Brazil's resilience, as well. “There's been talk about a crisis for a year, and the reality is that we feel the market continues to be active, vigorous,” says Cledorvino Belini, head of Fiat in Brazil, who was quoted by Reuters in early October.

Fiat will maintain its investment plan of about $3 billion between 2008 and 2010, he says, despite liquidity in Brazil's currency and credit market tightening.

“There's no country in the world that can grow 30% on top of 30% on top of 30%,” says Belini, echoing Renault Chairman Carlos Ghosn. “If our sector grows 10%, 15% in the future, that's excellent growth.”

PwC analyst Macrea agrees. “Despite a turbulent past, Brazil likely will attract sizable future investment from incumbent auto makers, as well as rising Chinese and Indian companies,” he writes.

“The scale of predicted future automotive investment will determine how comfortably Brazil will sit at the BRIC table of the future.”

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