Brazil: That’s just… not natural

by SR on August 3, 2012

Brazil light vehicle sales by month and year (thousand units)

  • Conclusion: Japan’s auto and auto parts suppliers have a very weak position in Brazil – and that’s probably a positive. The latest auto sales data for July 2012 from Fenabrave show that incentives are artificially supporting the market. I think there’s a good chance that sales will collapse as soon as subsidies are removed and in that sense the lack of Japanese representation (Toyota, Denso etc) is good rather than bad. One quirk: Honda and Yamaha are the dominant motorcycle suppliers so they could be adversely affected and indeed several of their suppliers have already revised down FY3/13 guidance.

Brazil subsidy effect clear

In this recent post I gave a recent history of subsidies in the auto market by country, presenting in visual form the distortions that subsidies generate. In Brazil in June 2012 passenger car sales shot up in response to various incentives announced by the government. That produced the blip in the chart above, which is clearly counter-seasonal. In July 2012 light vehicle sales in Brazil rose by 22% year-on-year to 351.4 thousand units, rising 3.2% month-on-month. (Passenger cars accounted for 280.2k units of that figure, with SUVs and light trucks taking up the remainder.) The overall light vehicle market rose 3% in the January to July 2012 period compared to the same period in 2011. That’s the red line in the graphic below – click on the chart for a larger image – which has just ticked above 2011 sales (the blue line).

Brazil cumulative light vehicle sales (thousand units)

I mention the market distorting effect of incentives above. Actually the month-on-month increase in July was modest; July is traditionally an “up” month and the 2.1% MoM increase posted by passenger cars was at the low end of the historical range. What concerns me is that the absolute level of sales was very high. The 351.4k units recorded was 97.3% of the peak value of 361.3k units established in December 2010, in a much better economic climate. Note that in cumulative terms, light vehicle sales were down 3.1% YoY for January to April 2012 and that worsened to -4.4% YoY for January to May 2012. With the introduction of subsidies this trend abruptly reversed, going to -0.3% YoY for January to June then +3%, as already noted, for January to July 2012.

Brazil monthly light vehicle sales as a percentage of previous highest level

There’s no doubt that these measures are achieving the short-term aim of lifting sales. What should be worrying you is what happens when subsidies come to an end. Absent incentives, what should light vehicle sales be looking like? Well, commercial vehicle sales presumably reflect the mood of the business sector and sales there fell 16.1% year-on-year in July 2012. Year-to-date sales are down 8% YoY (see graphic below). Now, light vehicles probably shouldn’t be contracting by that much, but I would say that they should be falling by 3% rather than rising by 3% on a year-to-date basis. What this means is that when subsidies are removed, we get a collapse in light vehicle sales that does, in all likelihood, take us down to -3% or -5% for the full calendar year of 2012. So the second half will probably look much worse than the first.

Brazil cumulative commercial vehicle sales (thousand units)

Don’t count on Brazil to save Fiat, GM – or Renault

With a soft market that is probably going to get worse before it gets better, the timing of Renault’s move to add 25% to its capacity in Brazil looks rather unwise. Indeed, even the management seems to think so. Reuters quotes top exec Olivier Murguet as saying that “If we hadn’t yet made these investments, I don’t know if we would be so bold now” and adding that since they were ‘halfway across the river’ they decided to go on rather than turn back. That’s not a confidence-inspiring quote. I suspect that the timing of the announcement may be related to a desire in the Paris headquarters to divert media attention from the struggling European car market. If so, it might have backfired.

Brazil market share of passenger cars by brand in 2011 (%)

Moreover, it’s not as if Renault is a power in the Brazilian auto market. As the chart above shows, Fiat, GM and Volkswagen each have 20% or more of the market and all the other brands get the scraps. Renault’s share of 6.7% is better than the Japanese, but still weak compared to the big three just mentioned.

In light trucks (a category that includes SUVs) the pattern is a little different. For one thing, it’s a more diverse market with ‘Others’ taking up nearly 15% of the market. Here Toyota (with the unstoppable Hilux, the fourth best-selling light truck) has a share of 5.9% and Mitsubishi Motors commands a share of 7%. That latter name may surprise you, but a colleague visiting mines in South America noted that the Mitsubishi trucks and heavy SUVs are very widely used; the L200 and the Pajero being the big models here. In contrast, the top-selling trucks in 2011 were the Fiat Strada and the VW Saveiro, both of which look to be aimed more at the weekend beach crowd rather than the copper mining crowd.

Brazil market share of light trucks by brand in 2011 (%)

As for the Japanese… Well. Best just to move swiftly on to another subject. The triumvirate of Fiat, GM and VW look entrenched to me and if their smaller rivals want to take share, they will have to invest a great deal more. Honda controls 80% of the market for motorcycles in Brazil and it did that through the use of local production. If Toyota and others want to succeed in the 4-wheel market in Brazil, they need to do the same. Is it worth it? The companies I talk to regularly mention India and Brazil as being countries that are “hostile to business” in the sense that they are bureaucratic, have opaque import/export and tax processes and favour protection of local players. This increases costs and reduces the visibility on return on investment.

Mr. Murguet had the following comments in the article mentioned above. “Soon operations will be more costly in Brazil than anywhere else in the world… What worries us is the trend. There’s no sign of it easing, and our company can’t withstand cost increases of that magnitude.”

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