Rushing Into Brazil

With so much happening in Brazil, I thought I try to sum it all up.  The main theme isincreased localization for two reasons.  Capture some of the meteoric rise in the market and avoid recent tariff increases.
  • Renault increasing plant capacity by 130K.
  • Nissan adding 200K plant for launch of V-platform (entry local car)
  • Hyundai will add 150K units capacity by 2012
  • PSA hiring 800 workers to increase output
  • VW mulling plant expansion
  • BMW reported to build a plant near Sao Paolo
  • Chery plans a new plant 50K in Brazil by 2013, making it the first local Chinese brand

Chinese auto brands (Chery, JAC and Hafei) have taken 3.3% of Brazil market in a little over a year.

Brazil increased tariff on import (<65% localized) to take steam out of rapid increase in imports on the high and low end that are scavenging market share on the back of favorable FX rates.  Luxury brands as well as Chinese models have boosted import rate to >20% form the ~15% two years ago; hence the rush to ramp up local plants.

My take:  The new localization law will give temporary relief to the mainstay players today (Fiat, VW, GM) and those like Nissan and Hyundai who can meet the threshold.  However, the key to success in Brazil is a tough, low-cost local “people’s car”.  Fiat and VW which each have 4 of the top 10 selling cars have a grip on the volume markets, and they have strong distribution relationships – something key to breaking into the market.  However, all this new capacity will loosen that grip and inevitably diminish their >10% margins in the coming years.

The biggest takeaway, In another 12-24 months, VW & Fiat won’t be able to rely on today’s steady profits in the double digits to make up for losses in EU and otherexpansions.  Luxury makers (DAI and BMW) will take a big hit this year on SA profits, with MB calling for -ve 50%, but the volumes are not significant in the global mix.

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