Brazil Autos Report Q3 2009

The industrial tax break on the automobile industry in Brazil has paid off in Q109. As BMI examines in its Q309 Brazil Autos Report, March registrations reached 280,356 units, an increase of 12.6% compared with the period last year, due to the anticipated withdrawal of the break from March 31.

The surge took Q1 registrations to 677,741 units, only marginally down from 680,273 units registered in Q108 despite a less impressive 9.8% year-on-year (y-o-y) fall for 2M09. BMI believes that much of the increase in March came as consumers expected the aforementioned tax break to end. This has now been extended until June 30. The move is aimed at stimulating the autos market in particular, which was otherwise expected to register sales dropping by nearly 30% in the quarter, according to Jackson Schneider, president of Brazil's automakers association, Anfavea. BMI maintains its forecast of a 4% y-oy increase in vehicle sales in 2009, as we expect robust demand in H109 to be followed by a lower demand in H2.

Manufacturers are wary of slowing domestic demand and falling exports, leaving them with little incentive to increase production this year. Vehicle exports in the country are estimated to have declined by nearly 52% y-o-y to 86,000 units in Q1, prompting carmakers to produce 16.5% fewer vehicles; 661,490 units were manufactured in 3M09. In line with this, BMI maintains its forecast of an 8% y-o-y annual fall in autos production to 2.94mn units.

Nevertheless, Brazil, along with its high-growth potential neighbours, such as Argentina and Mexico, will continue to attract foreign carmakers in the long term. The flood of investments from Chinese carmakers has been a testimony to this. In April, Chery Automobile revealed plans to build a flex-fuel manufacturing plant with an investment of BRL1.53bn (close to US$700mn). Such investments will take the country's production capacity to 3.89mn units by end-2013, having more than surpassed the level of 3.22mn units produced in 2008.

The sheer size of the market and its location, coupled with a huge potential for domestic demand, makes Brazil the largest autos market in Latin America. The country takes first place in BMI's Business Environment Ratings for the autos industry in the region. We expect it to maintain its position (once the economy recovers from the ongoing crisis in the next few years) on the back of its strong growth potential.