Retaking Top Spot in Brazil Tough Nut for VW to Crack

SAO PAULO – Volkswagen Brazil’s €200 million ($219 million) loan from the European Investment Bank may not be enough to help the German automaker reclaim leadership in Latin America’s largest market, an industry expert warns.

VW’s Brazil share dropped from 22% in 2004 to 17% last year, putting the automaker behind market leader Fiat and in a struggle with Chevrolet to keep the second position, according to data from Brazil’s ANFAVEA industry group.

The EIB, Europe’s largest public-sector-backed development bank, states in a memorandum the loan “will help to strengthen its (the EIB’s) position in the region, and contribute to the introduction of more efficient and less polluting small/medium-sized vehicles, producing lower emissions and with enhanced safety features.”

But that is not what VW needs to do in Brazil, according to Mauricio Muramoto, a Sao Paulo-based consultant at Deloitte.

“It is a dramatic situation for VW here,” he tells WardsAuto. “They failed in getting a new product portfolio when Brazil’s economy was growing exponentially. Now they have the general market issue, with stocks and layoffs on the rise, and the issue with their product.

“Their brand is still strong in Brazil, though,” he says of Volkswagen, noting the automaker has been making cars in Brazil since the 1950s. “They are identified with the country, unlike the newcomers. But those are the new kids on the block, they brought bold designs that people want.”

Muramoto contends VW made a miscalculation about the Brazil market: “VW tried to keep their leadership in the market by producing cars that are very safe, since Brazil has some of the deadliest roads in the world. But Brazilians actually want better design. That is where the market is going, and that is why VW is trailing.

“That loan is enough for them to have a facelift in two platforms, which is not bad. But in truth it doesn’t nearly respond to the bigger issue of product portfolio.”

VW refuses to talk openly about its recovery strategy. Not only is it in trouble with its own products and Brazil’s weak economy, but it also faces tough competition from newcomers such as Renault and Hyundai.

“Their bet on safe cars clearly didn’t deliver,” Muramoto says. “That is why they need an urgent facelift to produce (more stylish) vehicles. But Brazil’s economy is in a challenging moment – it could take a while until it actually pays off. The trend now is in used cars.”

So far the most visible element of VW Brazil’s reshaping is the EIB loan. A company source tells WardsAuto privately “2015 will be a year for adjustments, both in the economy and in the company. Forward-thinking design is the main goal.”

The problem is, things could get worse for VW near term.

A long-running dispute between the European Union and Brazil over taxes on imported cars has gone before a World Trade Organization panel. Brazil’s taxes on imported cars are a cumbersome 30%, which has encouraged European automakers to establish local manufacturing. If the WTO body demands an end to the tax regime, less-costly imports will be added into the market mix, and competition will be even tougher for companies already present in Brazil, notably VW.

The loan is a good sign, though. According to Alberto Barragan, the EIB’s Latin America division chief, the bank’s lending strategy involves investing up to €2.3 billion ($2.5 billion) – about 5% of the EU body’s total portfolio – in the region until 2020.

No specific amount is committed to projects in Brazil, however. In VW’s case, the bank is lending from its €4.5 billion ($4.9 billion) budget for investment-grade economies, he says.

Brazil has received about 40% of the credit given by EIB to Latin American countries in the past 20 years. That is roughly the country’s portion of the region’s overall economy. In the past 20 years, the bank has invested €2.8 billion ($3 billion) in 32 Brazilian projects.

“It is intelligent to contribute to the integration of Brazil with Europe,” EIB President Werner Hoyer said during a visit to Sao Paulo in January. Brazil and the EU have long considered establishing a major free-trade agreement.

Other experts and auto-industry insiders have said the devaluation of Brazil’s currency against the dollar could help VW and other automakers in this troublesome 2015. In March 2014 the exchange rate was $1:BR2.4. Since the beginning of 2015 it has soared above $1:BR3 and some financial experts say it could reach $1:BR4.

The Brazilian real’s fall comes as Fiat, VW’s main competitor here, announces plans to export 1 million vehicles from the country in 2017.