Accelerated Demand Pushes 2007 Brazilian Sales, Production to New Heights

Special Report

2007 Year in Review

The local saying, “God is Brazilian,” took on new meaning in 2007, as South America’s largest vehicle market drew inspiration from record sales and production.

The country’s National Association of Vehicle Manufacturers (Anfavea), said sales in 2007, including light passenger vehicles, trucks and buses, climbed to 2.46 million units. Neighboring Argentina, in comparison, expected deliveries to reach 600,000 units.

Pushing to meet accelerated demand, Brazil’s production surpassed Spain’s in the year, making it the seventh-largest vehicle maker in the world, with 2.97 million units, a 28% gain over like-2006.

Honda Civic (above) Brazil’s top seller, followed by Toyota Corolla and Chevrolet Vectra.

If production projections of 3.2 million units in 2008 prove true, Brazil would be in position to become the world’s fifth-largest vehicle maker, said Anfavea President Jackson Schneider, noting, “Brazil is playing a relevant role worldwide in the automotive industry.”

Indeed, Brazil’s 2007 performance set a personal best, as access to credit, unprecedented economic and political stability and lowered interest rates continued to spur consumer confidence.

The Honda Civic was the year’s top seller, with 47,000 units, followed by the Toyota Corolla at 34,500 and Chevrolet Vectra with 30,500.

GM do Brazil Ltda. said it sold a record-breaking 499,000 vehicles in the year, making Brazil General Motors Corp.’s third-largest market behind the U.S. and China. The auto maker also set an annual production benchmark of 600,000 vehicles.

“The Brazilian consumer has more money in his pocket and a lower risk of losing his job,” said GM Brazil Vice President Jose Carlos Pinheiro Neto, explaining the sizzling market. Consumers also “can buy cars on a 60-month installment plan or more.”

As a result, GM Brazil planned to boost production at its Sao Caetano do Sol plant 26%, or 50,000 vehicles, in early 2008. Additionally, officials said they would add a third shift and hire 1,500 new workers at the facility.

The plant, in operation 78 years, was one of the auto maker’s most flexible, producing the Chevrolet Classic, Corsa, Astra, Vectra GT, Montana pickup and a number of variants.

Led by sales of the EcoSport, Fiesta and Fusion, Ford Motor Co. delivered 265,600 units in Brazil in 2007, up 20.7% compared with 2006, putting it in fourth place in sales behind Fiat do Brasil Ltda., Volkswagen do Brasil Ltda. and GM.

Ford planned to bring popular Ford Edge to Brazil in 2008.

Ford said it planned to spend $1 billion in fresh investments in Brazil over the coming four years and would bring its popular Ford Edge cross/utility vehicle to Brazil in 2008.

“The investments strengthen our competitiveness with the development of new products and will increase our production capacity,” said Marcos de Oliveria, president of Ford in Brazil and Mercosur countries.

Fiat Automobiles SpA said Brazil was its biggest market outside Italy, responsible for 30% of the group’s worldwide sales. The Italian auto maker built 717,000 vehicles in the country in 2007, with 600,000 sold in the domestic market for a 26% share.

Cledorvino Belini, head of Fiat Latin America, said the Brazilian market still had room to grow. “There is a repressed demand,” he said. “We have an average eight inhabitants per vehicle, which is even less (in vehicles per capita) than Argentina, with five inhabitants per vehicle.”

Fiat said plans to expand its venerable Betim, Minas Gerais, plant would make it the world’s largest vehicle-manufacturing facility, doubling production to 5,200 vehicles every 24 hours.

Volkswagen AG said it would increase investment in Brazil 28% between 2007 and 2011, from $1.3 billion to $1.7 billion. Of that, two-thirds would go toward new product and the remainder in adjusting assembly lines for increased production.

VW’s Taubate, Sao Paulo, factory, which had been running three shifts since May after hiring 711 new workers, already had adapted its assembly line for the coming new products. VW Brazil President Thomas Schmall said 2008 promised to be even more intense than 2007 as VW launched a new family of vehicles in the year’s first half.

Meanwhile, Brazil’s government late in the year entered into talks with Argentina to extend their automotive free-trade agreement that expires every 12 months, while also seeking entry for oil-rich Venezuela into the Mercosur regional trade bloc.

Lengthening the timeframe of the historically contentious FTA would make it possible to increase investments in the automotive sector, said Brazil’s Minister of Development and Industry Ivan Ramalho, who noted passenger cars, buses and commercial trucks were the main export/import items between the two countries.

Although the Mercosur FTA included Argentina, Brazil, Uruguay and Paraguay in 2007, the main automotive trading partners were Brazil and Argentina. Now Brazil wanted to add Venezuela to the mix.

One reason Brazilian auto makers, which represented 35% of the total vehicle and components exported to Venezuela, were anxious to partner with the country was concern over trade restrictions imposed by the President Hugo Chavez’s volatile leftist regime.

Brazil shipped 60,000 vehicles to Venezuela in 2006, compared with 44,000 units in the prior year. And Anfavea expected the country to import $1.5 billion in parts and components from Brazil in 2007. Trade talks were expected to continue into 2008.

Brazil’s good news just got better and better in the year, as more oil than previously thought was discovered beneath deep waters off the country’s coastline, by some counts between 5 billion and 8 billion barrels’ worth. The light crude reportedly was less expensive to refine and, therefore, worth more.

Brazil’s ambition to become a major player in the global auto industry’s quest for alternative fuels also was given a boost by significant agreements with the U.S. and the European Union to promote the development and use of renewable biofuels.

The move was yet another indication of Brazil’s growing status in the global industry for its use and production of ethanol from sugarcane, with flex-fuel vehicles accounting for at least 70% of passenger cars in 2007.

But while the year’s string of successes was like manna from heaven, the industry knew it could not be taken for granted. Given the region’s checkered past, the big question became whether the record growth was sustainable.

It was an important issue for GM and Ford, as they continued to look to South American operations for an increasing chunk of their revenues to offset losses in North America.

GM’s top executive for the region believed Brazil’s success had legs. Unlike past recoveries, when industry executives held their breath waiting for the bottom to fall out, indications in 2007 were that the boom-and-bust era finally may be over.

“A lot of foreign investors are going into Brazil because they see the economy and the political situation having stabilized,” Maureen Kempston Darkes, GM’s president of Latin America, Africa and Middle East operations, told Ward’s.

“So I think there’s a very good opportunity here, and this period of growth has quite a good likelihood to continue for several years.”

To accomplish this, the industry agreed low-cost, entry-level vehicles were key to Brazil’s future, with a number of global auto makers announcing plans to enter new models in the segment for both the domestic and export markets.

GM said it would invest $500 million in Brazil and Argentina to build a new small car for South America, due in 2010, that would be positioned below the Celta in price at the equivalent of $10,000-$12,000. Earlier in the year, the auto maker also gave Brazil the nod as its center for the development of compact pickup trucks.

Ford announced plans to build a new ’10 model at its Sao Bernado do Campo plant. Brazilian parts makers said the auto maker intended the upcoming B-segment car strictly for export to North America, with annual production of 50,000-100,000 units to begin in 2009 or early 2010.

Renault SA launched its low-cost Logan subcompact at its plant in Rio de Janeiro in July and said future cars would be designed especially for the regional market.

PSA Peugeot Citroen planned to invest $500 million in the Mercosur trade region through 2010 to increase its 7% market share, with a goal of 12 new models. The French auto maker in 2006 built 160,000 units and aimed to increase output to 400,000 annually by 2015, for a 15% share.

To do so, PSA said it would hire 1,000 engineers and designers to staff new development centers in Brazil and Argentina and increase local content significantly from the current two-thirds, with an eye on entry-level cars aimed at Brazil and China.

Realizing the country’s potential for unprecedented growth, Miguel Jorge, Brazil’s minister of development and a former director of VW in Germany, said he was working with domestic auto makers to set up a program to make the industry more competitive.

The goal was to increase production capacity to 5.5 million vehicles annually by 2011, compared with its 3.5 million-unit capacity at present, with a focus on strengthening engineering and product development.

Jorge also encouraged auto makers in India and China to consider building vehicles in Brazil for sale in the Mercosur region, noting it cost just $80 million-$100 million to launch a vehicle in Brazil, giving local operations a competitive edge over multinationals’ subsidiaries in other countries.

By year’s end, Anfavea said it expected Brazil to sustain its vehicle sales growth at 10% per annum for the next three years, with the caveat that success depended on the continued availability of credit, political and economic stability and fulfillment of pent-up demand.

True believers now, global players in 2007 were more than willing to take the group’s word on faith.

– with Sol Biderman in Sao Paulo