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 While domestic sales retreat and exports plunge, Brazilian factories
are adding over a million vehicles of new capacity in just a few
years, battering profitability in the world's fourth biggest auto
market.
By 2017, global carmakers will be set up to build 6 million vehicles
a year in Brazil even as local sales may struggle to pass 4 million,
analysts say. They blame heavy-handed industrial policy and an
excess of emerging-market euphoria.
"Everyone jumped on the bandwagon," said IHS Automotive analyst
Guido Vildozo, citing oversized ambitions in Brazil after sales
averaged 10 percent growth in the past decade. Carmakers are now
investing about $5 billion a year in local assembly lines just as
the market starts to shrink.
Profits have been the first casualty of the oncoming squeeze and
labor relations could be the next, with the specter of layoffs
looming in a presidential election year. A scramble for export
markets also highlights the competitive gulf separating the
industries in Brazil and regional rival Mexico.
"It's going to be a painful process, especially negotiating with the
unions, but we're not expecting anyone to close shop," Vildozo said.
Long the darlings of Brazilian industrial policy, carmakers are in a
bind precisely because of the protections they enjoy.
President Dilma Rousseff and predecessors have kept auto sales
chugging along with tax breaks, cheap credit and import barriers,
which encouraged a host of uncompetitive auto plants.
The result is a crowded and inefficient industry shackled to its
domestic market, with few export options except a crisis-prone
neighbor, Argentina.
Sales and output in Brazil have doubled since 2005 to around 3.8
million vehicles last year, but exports fell 40 percent to about
half a million cars, trucks and buses.
When the going was good, automakers enjoyed fat profit margins on
outdated platforms like a 56-year-old VW van that only went out of
production last year. But the party is over for the biggest brands
in Brazil, after years of depending on cash from local units to
offset meager global growth.
Fiat SpA <FIA.MI>, Volkswagen AG <VOWG_p.DE>, General Motors Co <GM.N>
and Ford Motor Co <F.N> saw profits plunge at their Brazilian units
last quarter due to slipping market share, rising costs and a weaker
currency.
Concerns spread through the industry in late 2013 over growing lines
of new cars backed up at factory patios. Analysts reported that
dealers were offering discounts of as much as 35 percent to clear
expiring models.
Brazil's market may be in the middle of a three-year slump,
according to Stephan Keese of auto consultancy Roland Berger in
Brazil. He warns that the glut of new factories in a weak economy
could lead to more than 30 percent excess capacity in the next few
years, about double the industry's usual slack.
Rosy forecasts from the boom years are only partly to blame, he
added, as Rousseff's policies forced many brands to build local
plants in order to avoid steep taxes on imported content.
"The overcapacity was foreseeable because it was not supported by
the market. It was largely about government intervention," said
Keese.
WORLD CUP DISRUPTION
Rousseff has coaxed along the industry with both carrot and stick,
but the tax breaks she unveiled in 2012 to prop up demand have
provided diminishing returns. Last year sales fell 1 percent despite
the costly stimulus, the first drop in a decade.
The tapering of those incentives, along with tighter credit, shaky
consumer confidence and the disruptions of hosting the soccer World
Cup starting in June, could cut sales in Brazil as much as 3.5
percent this year, according to Keese.
Another government rescue is unlikely, and not just because of a
tight budget target as Rousseff seeks re-election.
Expanding access to new cars has long been an easy crowd pleaser for
Brazil's ascendant middle class and the industrial unions at the
heart of the ruling Workers' Party. However, that political calculus
is starting to change.
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Outrage over a lack of decent public transportation set off a wave
of protests last year, drawing more than a million Brazilians into
the streets. Awful traffic in major cities and a lack of public
investments led many to question why the government was using tax
breaks to put more cars on the road.
The auto industry argues that it provides more than 150,000 jobs and
over a fifth of Brazil's industrial output. Carmakers have announced
about $35 billion of capital spending from 2012 to 2018, helping to
lift the country's dismal investment rate.
Yet even automaker association Anfavea concedes that sales in Brazil
will not absorb more than three quarters of the country's capacity
by 2017, when local plants should be able to produce over 6 million
vehicles per year.
"This is a good problem to have," Luiz Moan, a senior GM executive
currently in charge of Anfavea, told journalists this week. "We know
we need to gain competitiveness so we can export at least a million
units in 2017."
That process has started with policies requiring carmakers to update
their Brazilian assembly lines along global standards rather than
recycling outdated models. Anfavea is asking for more government
measures to help it boost exports, including new tax benefits, trade
deals and preferential financing.
HEAD TO HEAD
To hit Anfavea's goal would mean doubling exports in four years with
a push into regional markets — pitting the industry against its far
more competitive counterpart in Mexico.
Mexican factories have lower labor costs, easy access to U.S.
suppliers and 43 free trade agreements supporting their
export-focused industry, according to Vildozo of IHS.
Brazil has just six bilateral agreements on auto trade, including
four immediate neighbors and South Africa. Bilateral trade with
Mexico has suffered since 2012, when Brazil imposed two-way quotas
to stem a flood of Mexican imports.
The European Union, another potential trade partner that Moan cited,
is pressing a case against Brazil at the World Trade Organization
over its taxation of imported cars.
"From an export standpoint, all of Brazil's eggs were in one basket:
Argentina," said Vildozo. "And that basket has cracked."
Plunging foreign reserves in Buenos Aires have led to severe trade
restrictions, and Brazilian auto exports started the year with a 24
percent drop. Argentina has recently received as many as nine in 10
Brazilian car exports.
The new restrictions hit Argentina-focused automakers such as PSA
Peugeot Citroen <PEUP.PA> especially hard, according to Camile Janz,
who covers Brazil for LMC Automotive.
PSA is one of a few companies that have backed off expansion plans
in Brazil, although many committed years ago to plants that are only
now coming online.
Some companies, such as Hyundai Motor Co <005380.KS>, have even
managed to win a bigger share of Brazil's crowded market with new
models from recently installed factories.
But the shrinking market makes that a zero-sum game. As the number
of players rises the success stories are getting scarcer, according
to Keese, the automotive consultant at Roland Berger.
"There are very few automakers that are actually profitable in
Brazil at the moment," he said. "The old business models really
don't work anymore."
(Editing by Todd Benson and Ross Colvin)
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