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Brazil is in the midst of its worst recession since 1930 with its economic growth in the negative zone and current account and fiscal deficits at 3.6 per cent and six per cent of GDP each. The drop in commodity prices is hurting the economy while its biggest trading partner, China is slowing down. Household spending has fallen for the first time in over a decade while public spending has skyrocketed. Unemployment is up from under five per cent in 2014 to nearly eight per cent in end-2015.
Higher taxes on fuel and utilities have further limited consumer spending. Tourism could be hit thanks to the Zika virus outbreak which dampened Carnival plans and threatens the Olympics this year. All these factors have not spared the automotive industry which is virtually on its knees after peaking in 2012 with over 3.6 million car sales. The Brazilian economy has experienced three consecutive years of contraction and 2015 has been the most severe with light vehicle registrations down 25.3 per cent and production by 21.5 per cent. It looks as if the current calendar will be even more painful.
Tough times ahead
Heavily reliant on state-guided tax subsidies like Inovar-Auto, the auto industry has been badly hit. With government spending curtailed, the traditional levers of tax incentives and subsidies are no longer an option. Most OEMs have either resorted to temporary layoffs or reduced shifts to alleviate inventory bloat. Many others are going slow on expansion plans.
Top-selling brands such as Fiat, Volkswagen and Chevrolet have felt the squeeze more than the industry rate of -25.3 per cent, suffering losses of 37.4, 33.4 and 37.9 per cent respectively. Newer players like Toyota, Honda and Hyundai have, however, been less impacted and are building on their market share.
In the absence of a domestic brand, Brazil has a uniquely disparate sales and assembly landscape which allows Chinese and Indian brands to enter the market. If the recent trend is any indication, competition will continue to intensify as new products come online. Interestingly, premium brands have seen growth and buoyancy in the downturn with German players logging double digit growth.
Despite the bad news, there is still cause for hope in Brazil. Thanks to previous incentives and policies, OEMs will likely stay the course and invest in technology, product development and assembly.
GM announced in mid-2015 that it would double investments in Brazil to $3.8 billion while Nissan has decided to launch its all-new CUV nameplate. Positioned between the Juke and Rogue in size, this global vehicle will be built at the company’s Resende plant at an investment of $200 million investment while creating 600 new jobs.
The one bright spot in the Brazilian market was the 1.1 per cent export growth in 2015 thanks to a sales resurgence with its biggest trading partner, Argentina that has a new administration in place. Since the country is expected to recover in the mid to long term, Brazil-built products will also benefit as a result.
Though the potential has diminished, growth opportunities are still present and 2016 should mark the bottoming out of the market. The mid to long-term forecast is still positive, though tapered.
The writer is Partner, Price Waterhouse
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