Global auto industry bets big on red-hot Brazil

Tue Sep 9, 2008 10:44am EDT
By Todd Benson - Analysis
SAO PAULO (Reuters) - Just a few years ago, most car manufacturers in Brazil were losing money and laying off workers in droves as the huge market they anticipated had not materialized.
But these days, business is so good that automakers are adding shifts and spending billions of dollars to increase capacity to keep up with demand in the South American country, which is riding its biggest economic boom in decades.
After three years of torrid growth, Brazil's car market is showing signs of cooling as rising interest rates start to crimp consumer demand. But analysts and industry players say the slowdown is unlikely to snowball into a slump because there is so much pent-up demand for cars in this vast country.
"Brazil is definitely a major part of the global chess game for the automotive industry," said analyst Guido Vildozo of U.S.-based consulting firm Global Insight. "And that's clearly reflected in the amount of investment that Brazil is getting."
With sales lagging in traditional markets like the United States, Europe and Japan, and even once-promising regions like China and India not living up to expectations, car makers are pouring money into Brazil.
The auto industry here is set to attract a whopping $23 billion in investments in the next four years, lifting overall capacity by 2.5 million vehicles to 6 million a year, according to the National Automakers' Association, or Anfavea.
U.S. and European manufacturers, which have long dominated the Brazilian market, are leading the spending spree.
General Motors Corp (GM.N: Quote, Profile, Research, Stock Buzz) expects to invest about $3 billion over the next five years as Brazil has become an important engineering hub for the U.S. automaker as well as its third-largest market.
Ford Motor Co (F.N: Quote, Profile, Research, Stock Buzz), which not long ago considered pulling out of Brazil altogether, plans to spend more than $1.6 billion in the next four years on product development and to double capacity at its engine factory. And Volkswagen AG (VOWG.DE: Quote, Profile, Research, Stock Buzz) will invest about $1.86 billion through 2011 in Brazil, where it now sells more cars than in Germany.
"Today, Brazil ranks second only to China among our most important markets," said Flavio Padovan, vice president for sales and marketing at Volkswagen's Brazilian unit.
Asian automakers are also looking to get in on the action. Toyota Motor Corp (7203.T: Quote, Profile, Research, Stock Buzz)(TM.N: Quote, Profile, Research, Stock Buzz) plans to build a $700 million plant in the state of Sao Paulo to boost its presence in Brazil, where its market share is just 2 percent. Nissan Motor Co (7201.T: Quote, Profile, Research, Stock Buzz) said last month that it would start building passenger cars in the country for the first time. And Suzuki Motor Corp (7269.T: Quote, Profile, Research, Stock Buzz) is set to reenter the Brazilian market in October.
ROADBLOCKS AHEAD?
The rush to invest in Brazil comes just as the market appears to be cooling. Car and truck sales slumped 15.1 percent in August from an all-time high in July, suggesting that a recent spike in interest rates to curb resurgent inflation is starting to hit the economy.
But even with the drop in August, sales are up a hefty 26.4 percent this year and are expected to finish 2008 with growth of 24.2 percent, according to Anfavea. Last year, sales jumped 29 percent, driven by rising wages and a credit boom that allowed many Brazilians to buy cars for the first time.
After such a long run of breakneck growth, automakers say a slowdown is to be expected. Consulting firm Global Insight forecasts sales growth of just 8 percent in 2009 and said it might taper off even further after that.
"Frankly, we don't see it as a big concern," said Jaime Ardila, GM's chief executive in Brazil. "The new rate of growth is much more sustainable long term, so we actually see this as a healthy process."
Still, other roadblocks may lie ahead. Last week, workers at eight auto plants briefly walked off the job to demand a pay raise. And union leaders warn that more strikes are likely if automakers don't agree to share more of their profits.
With interest rates poised to keep climbing and the economy losing some steam, some analysts also worry that automobile financing -- a key ingredient in the industry's revival in Brazil -- may start to shrink. Others fear that those who already financed a car may struggle to make payments.
While default rates on automobile financing have crept higher in recent months, at 3.7 percent they are still much lower than the 7.3 percent average rate for other consumer loans in Brazil, according to central bank data.
Lenders do not seem too worried about a spike in defaults. All the big private-sector banks in Brazil are expanding their auto financing businesses. And state-run Banco do Brasil (BBAS3.SA: Quote, Profile, Research, Stock Buzz) is teaming up with South African financial group FirstRand (FSRJ.J: Quote, Profile, Research, Stock Buzz) in a joint venture to provide car loans.
"The fears about credit are a little overblown," said Rogelio Golfarb, director of corporate affairs for Ford South America. "Banks are realizing that automobile financing in Brazil is a great business to be in."
(Editing by Lisa Von Ahn)