Brazilian Auto Industry Awaits Word on Incentives

RIO DE JANEIRO – Brazil’s automotive industry is awaiting the final details and presidential sanction of Rota 2030, a 14-year incentives program that will offer up to BR1.5 billion ($467.4 million) in annual tax credits for automakers and auto-parts manufacturers doing business in the country.

These will be offered to companies that reach R&D investment targets, and further tax cuts for meeting fuel-efficiency goals by 2020 also will be available.

Rota 2030 is designed to replace the country’s Inovar-Auto benefit program, which ran from 2012 to 2017. Since drawing criticism from the World Trade Organization (WTO) for unfairly favoring automakers with plants in Brazil, the government has been struggling to finalize the new system.

Officials first promised to release Rota 2030’s details by the end of 2017, then by the end of February 2018, but these deadlines have come and gone, causing uncertainty among some Brazilian auto and parts manufacturers. Audi President Johannes Roscheck, for example, told the Estadão newspaper the automaker has delayed new investments since September while waiting for Rota 2030 to take effect.

Brazil’s Ministry of Industry, Foreign Trade and Services (MDIC) and the office of President Michel Temer declined to comment to WardsAuto on Rota 2030’s announcement timeline.

Ricardo Bastos, government affairs director of Toyota Brazil and vice president of the Brazilian Automobile Manufacturers’ Assn., has participated in the negotiations to shape Rota 2030. He says he believes that if it is not enacted by April, it will come out after the October presidential campaign.

Rota 2030 is a modified version of Inovar-Auto and is designed to ease WTO concerns about how it had taxed imported cars at rates up to 30% above Brazil’s WTO import-tax ceiling of 35%.

Since Inovar-Auto’s expiration in December, no new comprehensive benefits scheme has taken effect, but the government has not been idle in regulating the auto sector. On Nov. 30, Brazil’s National Transit Council set deadlines of between six and 48 months for the introduction of new vehicle-safety requirements such as improved crashworthiness, seatbelt reminders, accident trackers and stronger emergency brakes.

Brazil lifted its 30% added tax on imported cars when Inovar-Auto expired, and the tax will not carry over to Rota 2030. Margarete Gandini, industrial competitiveness director of Brazil’s Ministry of Industry, Foreign Trade and Services, tells WardsAuto this “will avoid any future challenge at the WTO.”

Brazil is appealing its 2017 defeat in a WTO case in which Inovar-Auto was accused of tax and regulatory discrimination, imposing unfair local content requirements and favoritism toward car imports from Brazil’s Mercosur trade-agreement partners Argentina and Uruguay, and also from Mexico.

After Brazil lifted its tariff, imports of passenger cars were 58% higher by value in January than in January 2017, although the government also attributes this to Brazil’s emergence from its 2014-2016 recession. 

World Bank Credits Incentives With Spurring Brazilian Auto Manufacturing

Inovar-Auto incentives contributed to at least eight manufacturers building or expanding Brazilian plants since 2012, according to a World Bank analysis, including factories run by Audi, Volkswagen and Chinese automaker JAC. Brazil’s annual vehicle production rose from 3.4 million units in 2011 to 3.7 million in 2013 before dropping during the prolonged recession, according to statistics from the Anfavea trade group. 

Smaller, more recently established companies have voiced more concern over Rota 2030’s delay than larger manufacturers because they could benefit most from the unresolved element of the program.

Brazil’s MDIC wants a guarantee that federal tax revenue will cover up to $467 million in R&D tax credits it expects to issue through Rota 2030. The Brazilian treasury, which is trying to tighten government spending, wants to set profitability requirements on manufacturers seeking a credit.

Fabrício Biondo, a spokesperson for Peugeot and Citröen in Brazil, tells the Brazilian newspaper Estadão “we’re looking at our Plan B” for 2018 efficiency targets, given Rota 2030’s delay. Also, BMW Brazil President Helder Boavida wrote in a December op-ed that “producing high-technology automobiles in low volumes has been extremely expensive,” and that with no new industrial policy Brazil risks following the path of Australia, “which saw its automotive sector disappear in recent years.”

Bastos says Anfavea, which represents small and large manufacturers, is unified in defense of MDIC’s proposed guaranteed benefits, saying they will “offer structural, long-term support that will inspire confidence.”

However, proponents of a tighter government purse include Samuel Pessoa, an economist at the Fundação Getúlio Vargas university in Rio de Janeiro, who argues Inovar-Auto stymied competitiveness in Brazil’s automotive sector, calling it an “ostrich tactic” of “sticking your head in a hole to avoid the problem.”

Pessoa wrote in an article in the Folha de São Paulo newspaper in November that during the recent recession, many of Brazil’s small, newer auto factories operated around 50% capacity, wasting resources that could have been directed toward larger, more efficient plants. Such plants would better absorb economic shocks and compete globally, not just in the Mercosur trade bloc comprising Brazil, Argentina, Paraguay and Uruguay, he argued.

By 2016, Brazil had dropped to the world’s No.23 auto exporter by value from 17^th in 2005 and 16^th in 1996, according to WTO data.

But Anfavea remains optimistic. The MDIC says auto exports to Mercosur countries between January and November 2017 were 46% higher by value than during the same period in 2016, and Anfavea projects national vehicle production could grow 13.2% in 2018 to 3.06 million units.

The government says Rota 2030 will continue Inovar-Auto payments that caused Brazilian gasoline and ethanol motors to become 15% more efficient from 2012-2017, introducing benefits for diesel efficiency and reducing national industrial taxes on hybrid and electric cars from 25% to 7%. Unlike Inovar-Auto, however, Rota 2030’s R&D credits will be available for parts manufacturers, not just assembly plants. If Rota 2030 continues to be delayed, government officials say they may mandate tax reductions for electric cars via a separate federal decree.