Brazil: growth to continue, but in the shadow of 2010

Brazil’s economy experienced an impressive 7.5% GDP growth in 2010, driven mainly by a 10.1% growth in industry and a 6.5% expansion of its agriculture business. Other factors, such as a growing middle class – which took 30 million inhabitants from D to C class between 2003 and 2010 – and credit expansion, have contributed …

Brazil’s economy experienced an impressive 7.5% GDP growth in 2010, driven mainly by a 10.1% growth in industry and a 6.5% expansion of its agriculture business. Other factors, such as a growing middle class – which took 30 million inhabitants from D to C class between 2003 and 2010 – and credit expansion, have contributed to a strong growth in the automotive sector.

Vehicle sales reached 3.52 million units in 2010, up 12% from 2009, and production of complete vehicles reached 3.37 million units, up 9% from 2009. These results made Brazil the 4th largest automotive market in 2010, after China, the US and Japan. In terms of production, Brazil was the 6th largest producer, after China, Japan, the US, Germany and South Korea.

Whilst the vehicle importers have enjoyed impressive growth, the same cannot be said of the exporters. The strong currency makes Brazilian-built vehicles less competitive and in the last five years, exports have dropped 30%.

One of the issues faced by Brazil’s automotive industry is the increase in imports, which will lead to a slowdown in growth. In the last five years, imported vehicle sales grew by 700%, to 660,000 units in 2010. Except for Argentina and Mexico, which benefit from trade agreements and are not taxed, imported vehicles are taxed at 35%. Nonetheless, due to the strong Brazilian currency, vehicles coming from countries like South Korea and China are sold at very competitive prices.

Whilst the vehicle importers have enjoyed impressive growth, the same cannot be said of the exporters. The strong currency makes Brazilian-built vehicles less competitive and in the last five years, exports have dropped 30%, from 724,000 vehicles in 2005 to 502,000 in 2010.

Part of this investment will also be for new plants that are being built by Fiat, Toyota, Hyundai and Chery, which…will increase…the manufacturing capacity of completed vehicles from the current level of 4.0 million to 4.8 million vehicles per year.

But, if growing imports and lower exports present a risk to the industry, a continued expansion of the market – driven by a growth in Brazil’s middle class, credit expansion and the high level of investment required for the 2014 FIFA World Cup and 2016 Olympics – will maintain growth in demand for vehicles. The economy is expected to grow by 4-5% per year from 2011 to 2014. Growth could be higher but will be limited due to tighter control on rising inflation – which is driving interest rates higher – and the need to expand the country’s current infrastructure, including ports, airports and railways.

Other factors will also help the market’s expansion, such as lower unemployment, which dropped from 6.8% in December 2009 to 5.3% in December 2010. From 2003 to 2010, 15 million new jobs were created. Also, the relatively low vehicle density of one vehicle per 6.4 inhabitants (2009 estimate) presents a considerable opportunity for growth in vehicle sales. For 2011, we forecast a growth of 5% in vehicle sales, which should reach 3.7 million units.

We expect continued growth in the Brazilian market in the next four to five years, but at a rate of 5-6% annually. It is difficult to imagine a continuation of the 10%-plus level of growth seen in 2010.

This expected growth in the Brazilian economy led the automotive industry to plan investments of more than US$13bn between now and 2015, in new products and expansion of manufacturing plants. Part of this investment will also be for new plants that are being built by Fiat, Toyota, Hyundai and Chery, which when ready by 2013-2014, will increase the number of plants in Brazil from 26 to 30, raising the manufacturing capacity of completed vehicles from the current level of 4.0 million to 4.8 million vehicles per year.

In summary, we expect continued growth in the Brazilian market in the next four to five years, but at a rate of 5-6% annually. It is difficult to imagine a continuation of the 10%-plus level of growth seen in 2010.

The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.

Julian Semple is a Senior Consultant and Manager at CARCON Automotive in Sao Paulo, Brazil.

Julian Semple’s eight years as an automotive industry consultant were preceded by 27 years in automotive industry management positions, with responsibility for business strategy, cost management, manufacturing and product development at large corporations including Visteon and Ford in South America and North America.

CARCON Automotive specialises in market intelligence, product and business strategy in the Brazilian and Argentinean automotive markets. Clients include major automotive OEMs and Tier 1 suppliers.

Learn more about CARCON Automotive at www.carcon.com.br

Telephone: +55-11-2355-5873           E-mail: jgsemple@carcon.com.br

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