Importers Take Tax Whack in Brazil

SAO PAULO – Former President Luiz Inacio Lula da Silva, who worked in the automotive industry as a labor union head, worked to expand the industry during his 8-year presidency that ended in 2010.

Incumbent President Dilma Rousseff, pressured by the powerful farm lobby, is focusing more on agriculture exports.

Meanwhile, another lobby, the National Assn. of Vehicle Manufacturers, persuaded the government to raise by 35% the industrial-products tax on imported vehicles, excepting those from Argentina and Mexico, which are covered by binational accords.

The focal point of the Brazilian economy changed as the auto industry lost its competitive edge in exports while farm commodities helped bring in record trade surpluses.

Since the import-tax hike went into effect Dec. 16, imported-car sales have plunged, especially during the first three weeks of January.

With most middle-class Brazilians on vacation from the Christmas holidays until the beginning of the school year in February, the month of January traditionally has seen slow sales, especially compared with December’s high levels.

Deliveries in the first 20 days of January tumbled 29% from the previous month to 174,700 cars, pickups and vans, of which 165,800 were sold by auto makers with production units in Brazil.

Deliveries of imports, reeling from the tax boost, tumbled 47% to 8,800 units, compared with 16,700 in December, according to Fenabrave, the national auto dealers’ association.

Overall sales from Jan. 1-20 rose 9% from like-2010, despite a 5% decline in imports sold by auto makers without a manufacturing presence in the country.

For all of 2011, sales of imported cars by auto makers without factories in Brazil totaled 199,300 units, up 87.4% over 2010 and good for a 5.8% share of last year’s record 3.42 million vehicle deliveries.

Including models imported from Argentina and Mexico by auto makers with plants in the country, imported-car sales posted a record 23.6% of share of Brazil deliveries nationwide.

Cledorvino Belini, president of the National Association of Vehicle Manufacturers and head of Fiat Brazil, is particularly concerned about imports from China and Korea, which have kept their currencies low to encourage exports.

He is dismayed that China’s JAC (Jianghuai Automobile Co.) plans to spend only $500 million to build a factory in Bahia.

“I think we must be idiots here,” Belini says. “I spent $666 million to produce one car – the new Palio, and they are going to build both the factory and the car. The difference, of course, is in the percentage of nationalization of the car.”

Nevertheless, most importers have suffered since the tax on their products was raised. Some analysts believe import sales may not pick up until after Brazil’s annual Carnival, when production and markets come to a virtual standstill for at least five days.

The sharp drop in import vehicles began even after auto makers including JAC, Chinese rival Chery, BMW, Mercedes and Land Rover, decided not to pass on all of the 35% tax hike to the consumer. Kia raised prices only 6%, but Brazil’s largest independent importer saw sales fall 50% in January from December and plunge 40% year-over-year.

JAC says it has sufficient inventories until March of vehicles shipped to Brazil prior to the tax increase and will leave its prices unchanged until they are sold. The auto maker is selling its J3 and J3 Turim models with discounts of BR1,200 ($700). Its least-expensive model costs BR34,500 ($20,000).

 “If we were to pass on to the consumer the full 35% increase in the (import) tax, he would have to pay 40% more,” says Marcel Visconde, president of Porsche importer Stuttgart Sportcar. The increase for the least-expensive Porsche, the Boxster 2.7, would amount to BR73,200 ($42,500), while the total price of the car would rise to nearly BR336,000 ($195,000).

The tax on Porsche’s most-expensive model, the Panamera Turbo S, would rise by BR194,000 ($112,500) and bring its total price to BR 1.2 million ($670,000).

Visconde says Stuttgart Sportcar does not plan to review its import strategy but will consider ways to reduce margins, such as seeking extra discounts from Porsche in Germany.

Last year, Porsche sold 1,134 units in Brazil, compared with 911 a year-earlier.

Auto makers with manufacturing operations in the country have begun raising prices for top-of-the-line imports built outside Argentina or Mexico.

For example, the Canada-made Ford Edge now is 5% more expensive in Brazil. Volkswagen increased prices of its imported Passat, Variant, Tiguan and Touareg models an average 14%. General Motors hiked the cost of its Chevrolet Malibu 11% and its Austria-built Opel Omega 25%, but has held the line on its Chevy Camaro model from Canada.

Citroen set up a factory in Porto Real, Rio de Janeiro state, jointly with Peugeot 12 years ago, but has not achieved sales volumes similar to those of Renault, whose products from its metro Curitiba plant ranked fifth in sales in 2011. Citroen now plans to import its premium DS3 from Europe during the first half of this year.

According to Francesco Abbruzzesi, general director-Brazilian Div., 90% of the Citroen vehicles sold in Brazil are produced here or in Argentina. He predicts the DS3 will be competitive in price despite the import-tax hike.

However, the feasibility of importing the larger DS4 and DS5 models needs to be analyzed, he says.