Brazil's auto industry cruises as economy booms

Fri May 23, 2008 9:59am EDT
By Stephanie Beasley
SAO PAULO, May 23 (Reuters) - The U.S. auto market may be flagging, but some customers in Brazil have to wait up to three months to get a car.
"If they want it, they have to wait," said Ricardo di Pace, a salesman at the Marcas Famosas Volkswagen dealer in Sao Paulo. "People have more money, and lots are using it to buy their first new cars."
Brazil's auto industry is enjoying another banner year, piggy-backing on a booming economy. Car sales and output are surging to one record after another.
Last month, sales in Latin America's largest country jumped to an all-time high of 244,200 vehicles, while output soared 34.4 percent to 300,600, according to Anfavea, the national automakers association.
By contrast, U.S. auto sales are on track to drop as much as 7 percent this year to 15 million vehicles.
Many manufacturers in Brazil are expanding by hiring more employees and opening new factories. Ford Motor Co (F.N: Quote, Profile, Research) was ahead of the curve when it opened a $1.9 billion plant in the northeastern part of the country in 2002. Today, the state-of-the-art facility ensures nearly constant production with three shifts six days a week.
General Motors Corp (GM.N: Quote, Profile, Research) followed suit last month by adding a third shift at its Sao Caetano plant on the outskirts of Sao Paulo, hiring an additional 1,500 employees. It is also investing $200 million to build a new engine and auto components plant in southern Brazil.
The top U.S. automaker continues to struggle with a home market besieged by a housing and credit crisis. But its Brazilian operation returned to profitability in 2006 and is now doing so well that it is sending dividends back home.
"This is the fruit of investment and a lot of creativity from our local staff, our providers and our network of vendors," Fritz Henderson, president of GM's global operations, said at a news conference in Brazil on Monday.
CREDIT EXPANSION
Optimism is high as the country continues to enjoy an economic revival that has helped lift an estimated 20 million Brazilians from poverty. A sharp drop in interest rates in recent years has also led to a credit boom, driving up sales of everything from cars to real estate.
To keep up with red-hot demand, the auto industry is expected to invest $5 billion in 2008, according to Anfavea. That should increase annual production capacity by nearly 9 percent, to 3.8 million vehicles from 3.5 million.
Sales are also surging because of longer finance plans. Five years is the industry norm in Brazil, although Ford in 2007 introduced payment terms of as long as seven years.
"The increase in payment plans allowed companies to reach more buyers," said Joel Leite, director of Auto Informe, a Web site that focuses on the Brazilian auto industry.
These new buyers -- many from the emerging middle-class -- are propelling sales of roomier luxury vehicles once considered too expensive for the average Brazilian.
"Today you can buy a larger car for the same monthly payment as a compact two or three years ago," Leite said.
Even the recent surge in oil prices is unlikely to put the brakes on Brazil's auto market. Almost 90 percent of all new cars sold in the country are equipped with flex-fuel engines, which run on either gasoline or cane-based ethanol.
Some automakers, like Volkswagen (VOWG.DE: Quote, Profile, Research), are even phasing out the production of gasoline-only cars in Brazil, betting that the ethanol craze is here to stay.
"If you don't have flex cars, then you will have a very difficult time selling anything," said salesman Pace.
However, some wonder about future demand as more people become car owners.
Analyst Guido Vildozo of U.S.-based consulting firm Global Insight said he was worried that the current sales pace and production boom would slow in the next two years.
Many of today's sales are "fleet" vehicles that rental agencies and other companies purchase in large numbers at a low price, he said.
"Fleet sales are always very risky," Vildozo said, "because they are robust when the market is strong, but not as robust when the market isn't strong." (Editing by Todd Benson and Lisa Von Ahn)