Minimal Near-Term Relief Seen for Brazil

The downturn in the Brazilian market will subside this year, as WardsAuto is forecasting production in the country to hit 3.485 million units in 2015, up from the estimated 2.916 million light vehicles built in 2014.

The uptick in production is due to inflation going from very high to merely high, and the economy showing some slight signs of expansion.

Total vehicle deliveries in the country are estimated to have fallen 6.9% to 3.3 million in 2014, Brazil dealer association Fenabrave reports. Sales through November were down 8.4% to 3.128 million units, with a 1.0% increase in light trucks offsetting a 10.9% drop in car sales, a 12.6% decline in medium- and heavy-duty trucks, and a 9.0% loss in bus deliveries.

“Our expectation for 2015 is very, very small growth, about 2%, which is a little better than (our) market expectation (of) 1% (growth),” Jaime Ardila, president-South America region for General Motors, tells WardsAuto in a phone interview.

The factors that limited vehicle sales in 2014 still are expected to be at work in 2015.

“There will be no job generation coming into place (this) year, and (changes that could be spurred by) key economic appointments in the executive branch (won’t) materialize within the next six to nine months, (and won’t) come in time to save the automotive industry in 2015,” says Guido Vildozo, head of Latin America sales forecasts for IHS.

Credit also isn’t seen loosening for car loans in 2015 in Brazil, a key reason why the industry suffered in 2014.

In 2013 through early 2014, Ardila estimates banks were approving “on average six of every 10 applications they got on vehicle financing. That is probably down to about four approvals for every 10 applications.”

Vildozo says Brazilian banks are more interested in lending for home loans than car loans, a situation he doesn’t see changing anytime soon, especially if jobs aren’t being created.

“It’s not clear to anyone at this point in time whether the banking sector is going to start lending again, and it’s highly unlikely the banking sector’s going to lend if you have unemployment figures going up,” he says.

However, the unemployment rate in Brazil stabilized in third-quarter 2014, giving a glimmer of hope credit could loosen.

Layoffs Hit Local Workforce

One group not going on the unemployment line yet is auto workers.

That’s due to the country’s maximum 5-month layoff period, during which the government supplements salaries.

Some local manufacturers, namely GM and Volkswagen, are petitioning for a longer period through Brazil industry association Anfavea, Roland Berger partner Stephan Keese tells the Financial Times.

“They are trying to avoid (permanent) layoffs because they want to retain quality labor, but they will have no choice but to start sustained layoffs – really fire people – (in 2015) if the regulation is not changed,” Keese says.

Ardila does not see the situation as that dire at GM Brazil, which he says has about 1,000 workers on temporary layoff.

“I think you will have to keep paying them without work, so extended vacation and that sort of thing,” he says, adding production will be slowed to reduce excess inventory. GM Brazil did just that to shrink the two weeks of additional stock it had in late November.

GM would like to see a 1- to 2-year layoff period in Brazil, which would be similar to the length of time more advanced countries allow workers to be idled and brought back.

But, due to the clout labor unions wield with the government, Vildozo says the possibility of that occurring is very slim to none.

“I don’t think the government is going to budge on that. Maybe they throw in an extra month or two here or there, but that’s about it,” he says.

Ardila believes the Brazilian government has done enough to spur vehicle sales at the consumer level, including offering incentives to purchase, but now it must work on improving the overall financial health of the country.

He advocates for better fiscal discipline, a lowering of inflation, accelerating investment in infrastructure, the lowering of the barriers to new-business creation, and a reduction of government interference in business in general, through what he says are “badly needed tax and labor reforms.”

When asked if he says any growing segment for the auto industry in 2015, Ardila is blunt.

“No. Perhaps what has happened here is you see more stable demand for low-end vehicles, but that really has been more substitution effect, as people who were buying more expensive cars are going down to entry-level cars.”

Vildozo sees an opposite scenario.

“The average car-buyer has migrated away from buying a (VW) Gol or (Ford) Fiesta and they’re now able to run out and get a (BMW) 1-Series or a 3-Series.”

Through November, the brands seeing growth largely were luxury marques, with the exception of Hyundai and Toyota.

BMW car sales rose 6.8% through November, while Mercedes-Benz deliveries climbed 23.9% and Audi cars spiked 68.2%, WardsAuto data shows.

Audi also saw a hefty rise in light-truck sales through November, 113.5%.

Many luxury manufacturers, Audi included, have plants in the works for Brazil.

Audi is due to launch assembly of the A3 from CKD kits in September 2015 at Volkswagen’s plant in Sao Josedos Pinhaisin the state of Parana, Brazil. Production of the Q3 CUV there is slated to begin in mid-2016.

BMW in October began assembly of the 1-Series, 3-Series and X1 models at its new plant in Santa Catarina, which has a capacity of 30,000 annual units.

And, while not a luxury make, many industry watchers are pinning hopes on Jeep’s upcoming Renegade, going into production this year at a new plant in Pernambuco plant, to woo financially comfortable middle-class buyers.

Small utility vehicles such as the Renegade are proving as popular in the depressed Brazilian market as they are in a resurgent North American market.

“The process (of CUVs gaining in popularity) has started in Brazil, and I expect it to intensify in the next few years,” Ardila says, adding small SUVs and CUVs already have “taken off,” while midsize CUVs should grow in the next few years, displacing some car sales.

In the small CUV category, GM retails the Chevy Trax in Brazil.

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