At Brazil auto show, industry wonders if it can get any worse

October 30
9:25 AM 2014

Automakers in Brazil are facing the sharpest slowdown since 1999 and it could be a year or more before things turn the corner.

It is tough to find a sunny 2015 forecast at the Sao Paulo Auto Show this week, where companies accustomed to a market growing by double digits are now considering three straight years of declining sales.

"It looks like the market is in for a difficult time until 2016," said Koji Kondo, Toyota Motor Corp's (7203.T) chief executive in Brazil, citing labor costs, rising taxes and infrastructure bottlenecks as a persistent problem. "It's hard for Brazil's economic conditions to recover in the short term."

Sales of cars and light trucks have fallen 9 percent so far this year compared to the first nine months of 2013, as demand dries up due to tighter credit and shaky consumer confidence. Local units of global carmakers have gone from cash cows to serious headaches, with new factories creating a glut of inventory.

Brazil's slump combined with an erratic Argentine economy could leave as much as 50 percent of the industry's capacity in South America unused next year, said Rogelio Goldfarb, Ford Motor Co's (F.N) head of corporate affairs in the region.

The auto industry, which contributes a quarter of Brazil's industrial production, has become emblematic of the troubles facing re-elected President Dilma Rousseff in her new term.

The country's car market was still booming when Rousseff took office in 2011, doubling in a decade to become the world's fourth largest. But soaring costs and more competitive imports meant trouble for local auto factories and other manufacturers.

Rousseff's reaction was a series of targeted tax breaks, import barriers and credit subsidies for carmakers and other favored industries. The measures boosted sales temporarily but did little for Brazil's competitiveness. Now it is proving tough to wean companies off what were meant as emergency measures.

Executives at the car show on Tuesday argued for yet another extension of an industrial tax break meant to last three months in 2012, which has since drained billions from a strained federal budget. A plan to finish phasing out the so-called IPI tax break was last postponed to the end of December.

"The current IPI is now part of the industry. Consumers are used to it. Whatever the changes, you can't raise (the tax)," said Jaime Ardila, the head of General Motors Co (GM.N) in South America, who said he hopes for a slight sales rebound in 2015.

Losing the tax incentives would scrap a gentlemen's agreement between the government and automakers, which have been trimming payrolls with furloughs and voluntary buyouts but promised to stop short of widespread layoffs for now.

Without the tax break next year, automakers from Ford to Nissan Motor Co (7201.T) forecast sales in line with 2014, which is likely to be the weakest volume in five years.

Others are only slightly more optimistic, such as Thomas Schmall, Volkswagen AG's (VOWG_p.DE) chief executive in Brazil, who said the market could grow as much as 4 percent next year.

Other players, such as luxury brands or individual carmakers unveiling new models, are aiming for even healthier growth, but for now it looks like a zero-sum game.

"Most likely 2016 is when we expect the market will return to growth," said Honda Motor Co's (7267.T) chief executive for South America, Issao Mizoguchi. "2015 is the year to take some tough medicine ... If things are stable, that would be good."

© 2022 VCPOST, All rights reserved. Do not reproduce without permission.


Join the Conversation

Subscribe to VCpost newsletter

Sign up for our Deals of the Day newsletter.
We will not spam you!

Real Time Analytics