Special Report

logo2006 Year in Review

After years of laboring in the shadow of China’s burgeoning automotive industry, Brazil, South America’s largest vehicle market, re-emerged in 2006 with thriving sales and record-setting production.

It also found recognition in the year as an international leader in the development of ethanol, as worldwide interest shifted to alternative fuels in order to lessen dependence on oil-rich countries and lower carbon-dioxide emissions in the face of global warming.

Additionally, Brazil assumed an increasingly important role as both a center for global product development and solid revenue generator for General Motors Corp. and Ford Motor Co.

Ford in South America, which did not break out Brazil’s numbers, reported a pre-tax profit of $551 million, a $152 million increase over 2005. Revenues improved to $5.7 billion from $4.4 billion in the prior-year.

General Motors do Brasil Ltda. set an all-time calendar-year sales record of 409,916 cars and trucks, beating its previous high in 1999, Maureen Kempston Darkes, president of GM’s Latin America, Africa & Middle East (LAAM) division, tells Ward’s. South American sales records also were set in Argentina, Colombia, Ecuador and Venezuela.

GM LAAM posted record 2006 sales of 1,0352,200 vehicles in the division’s region, representing a 17.0% increase over prior-year.

Ray Young, president of GM Brazil, speaking to reporters about the year’s first-half results, said the subsidiary represented 40% of the regional division’s $212 million profit in the first six months, four times the net profit of $56 million in like-2005.

For 2007, GM Brazil forecast sales of 450,000 vehicles in Brazil.

Helped by a stable economy and cheaper credit, Brazil’s industry saw overall domestic sales in 2006 climb to 1.93 million units, marking the second-highest volume in the country’s history after 1997, when 1.94 million units were sold, and 12.5% ahead of 2005’s 1.7 million deliveries.

Enchange Rates Hampered Exports

Lower interest rates, longer payment periods, increased purchasing power and an industry shift away from exports and toward the domestic market all contributed to the record demand.

Export sales of about 850,000 units, hampered by an unfavorable exchange rate, garnered about $12.1 billion in the year, National Association of Vehicle Manufacturers (Anfavea) President Rogelio Golfarb said. The number of vehicles exported was a 5.8% drop compared with 2005.

Anfavea said exports would not be the driving force behind the industry in 2007, as had been the case in recent years, predicting sales would fall 2.4% in the coming year.

Brazil produced 2.61 million vehicles in 2006, a 3.1% increase over 2005’s record of 2.45 million, Anfavea reported.

By the end of the year, Anfavea was forecasting sales of 2.08 million vehicles in 2007, a 7.7% increase that would beat 1997. Production projections were for 3.8% growth, while exports would remain stable, Anfavea said.

Unlike other years, 2006 gave renewed hope of achieving Brazil’s long-term sales goal, particularly after December deliveries spiked 11.5% over prior-year, to 204,800 units. More importantly, the result beat Brazil’s previous monthly-sales record set in October 1997 of 189,000.

Anfavea credited flex-fuel vehicles (FFVs), capable of running on 100% gasoline or sugarcane alcohol (ethanol) – or a blend of the two – for 82% of December’s sales, setting a new record. Total FFV sales for the year hit 161,107 units, up from 120,229 in 2005.

FFVs have continued to serve as a prime motivator for vehicle purchases in Brazil, with 2.6 million units sold since the current advanced technology was launched in 2003, although the country’s vehicles have run on some form of ethanol fuel for more than 30 years.

Auto makers not already in the segment joined the ethanol stampede in 2006, with Japanese auto makers leading the charge. Honda Automoveis Brasil Ltda. launched an FFV Civic and Fit subcompact model late in the year.

Toyota Set to Field FFV

Notable holdout, Toyota do Brasil Ltda., promised at the Sao Paulo auto show in October it would begin selling a Corolla FFV in 2007. The engine was to be built in Japan, with components developed in Brazil.

The new engine was to be the first significant change in the Corolla in more than two years, which successfully competed against the restyled Chevrolet Vectra and Renault Megane, Honda’s eighth-generation Civic 1.8 and Peugeot’s 307.

Mitsubishi Motors Corp. reportedly expected to begin selling an FFV in Brazil in April 2007, followed by a launch in the U.S. in 2009-2010. PSA Peugeot Citroen of France also planned to begin building vehicles with FFV engines in 2007 at its plant in Porto Real, Rio de Janeiro.

Experiencing such a sales feast after years of famine was not easy for Brazil’s auto makers in 2006. With a renewed focus on 1.0L entry-level models to meet growing market demand, many found themselves not only with a dearth of models but also capacity constrained.

Ford Motor Co. Brasil Ltda., for example, said it planned to invest $140 million to produce a new entry-level car at its Sao Bernardo do Campo plant as early as 2008.

The auto maker also said it could not build enough Fiesta small cars for Brazil and Argentina at its Camacari, Bahia, plant, which already was working on three shifts to produce the model. Nor could the factory keep pace with enough EcoSport cross/utility vehicles for both domestic and export consumption.

Despite a strong performance in the year, Ford remained No.4 in passenger car sales with 146,276 deliveries, behind Fiat Automoveis SpA with 402,869, Volkswagen do Brasil Ltda. at 378,237 and GM Brazil with 374,071. Ford predicted its sales would grow in 2007 with the introduction of the new model to supplant the poor-selling Ka.

Other car makers complained of product constraints, as well. GM ran short of Celta Classic models in the year, hurting its standings in the sales race. Fiat experienced long waiting lines at dealerships for some of its models.

Toyota was undecided by year’s end where to build a greenfield plant for a new entry-level model it planned to bring to Brazil, and Honda said in December there was a 3-month wait for its Civic with a manual transmission built at its Sumare, Sao Paulo, plant.

The auto maker said it planned to take advantage of demand by hiking the Civic’s retail price from 11% over list to 15% in January 2007. Honda said it imported 30% of Civic components from Japan, which could not increase the supply due to demand in the U.S. and China.

Industry watchers said that while Brazil had the capacity to Build 3 million vehicles, a lack of production planning on the part of auto makers caused problems when the market exceeded projected growth, as it did in 2006.

GM Chairman and CEO Rick Wagoner, who ran the auto maker’s Brazilian operations during the 1990s and speaks Portuguese, touched a sensitive nerve when he met with Brazilian journalists at the North American International Auto Show in Detroit in January.

Wagoner questioned why Brazil still was unable to beat its benchmark sales of 1.94 million vehicles set 10 years ago, despite the population having grown by 29 million since then to more than 188 million.

“I ask myself why the Brazilian economy doesn’t follow the development of other emerging countries, like India, China and Russia,” Wagoner was quoted as saying, suggesting the government should focus on efficient economic growth “to leverage taxes and generate jobs and income.”

He said growth was the only way to guarantee industry investments in Brazilian operations, noting GM was less focused on Brazil than China due to a surge in sales in the Asian county. Deliveries there rose 32% in 2005, growing from 10,000 units when the auto maker began operations 10 years earlier to 900,000.

However, GM Brazil President Young said in a published report that GM wanted Brazil, its fourth largest market at the time – behind the U.S., China and Canada – to move up to third.

To bolster its Brazilian efforts, Ed Welburn Jr., vice president-global design, said GM was expanding its design center staff by 60% to exploit the region’s expertise in developing global small cars and also to contribute to the development of small trucks for world markets.

GM in 2006 employed 1,040 engineers in Brazil, including 200 of the 400 to be added to the center. By 2009, the auto maker said the subsidiary would have achieved a 40% increase in its engineering presence from 2004.