Brazil, Mexico and trading cars — FTA’s don’t always work exactly as planned

The Brazilian auto market grew ever so slightly in 2011, but imports share of the market spiked up 480 bps to 23.6%.  So, in a market up a mere 3.4% in 2011, locally produced passenger cars were down 6.6%.  That’s gotta hurt in an industry used to seeing steady double-digit growth for the past decade.  And it’s a concern for the development of the local supply base.

Where they coming from?  One might think cheaper Asia, but also look North with the recently enacted FTA with Mexico.

Imports from Mexico have tripled since 2007, and in 2011 alone, they rose by 40% to $2 billion, while Brazil exported just $372 million worth of vehicles to Mexico.  I’ve commented in the past on the “piling in” of global automakers to Brazil, but at the same time, the list of automakers building or expanding in Mexico is just as large.  On the supplier side, Mexico is already the largest parts supplier to the US, with more than 1,000 Tier 1 and Tier 2 suppliers from the US, China, Japan and Europe already well-established and supplying 8 of the top 10 global automakers in the region.

Exports from Mexico to Brazil require 50% local content, and with Mexico positioned as a perfect supply base for the US to the North, this poses questions for the development of the local Brazilian supply base.  Brazil had a good year in 2011, but despite a strong start to 2012, consensus is that it will even out this year and ion the near future.  Mexico on the other hand moves in hand with the US market and saw auto production rise 13% in 2011, and exports rising 15%.  This adds to the threat of overcapacity in the Latin/South American Free Trade Region.

All this has led to some recent rumblings that as part of it’s new tariff regime, the Rousseff government will need to revisit the terms of Mexican FTA.  The endgame for Brazil is to increase it’s export volume, rather than shutting down international trade.  However, with the Brazilian market holding steady in 2012, the US market poised for strong growth all combined with a strong Mexican market, this task is complicated.

Takeaway:

Impact from the immediate tariffs appear to favor the local established players, VW and GM and to some extent Fiat.  However, the past couple of months have seen some intense competition for market share, sure to eat into the profit margin of OEM’s in Mercosur.  Margins in the region have taken a hit.  Fiat reported 2011 margins less than 10%, surely down from rumored 15-10% heyday levels.  Any change in content could also cause 2012 volumes to pull back for all OEM’s, key as Brazil has been a steady source of profit and cash.

For suppliers, if investment hasn’t picked up at pace with OEM capacity, pressure will continue.  Any hiccup in the NA recover leaves pretty much everyone at risk of overcapacity driven volume push.  Increased cost, and increased demand for CAPEX cash in Brazil could put a further damper on local margins.  

The Mexican supply route however, favors those trying to grow in ALL the America’s.  It gives a leg up to companies like Nissan who aims to feed both US and Brazil from Mexico.  If Brazil tightens the screws to spur exports, look at Nissan’s ability to export components and cars from Brazil to supplement sales in Mexico where they are #1 or 2 at any given moment.  If I look at Nissan’s product plan, timing also bodes well, as they launch small car production in Brazil and Mexico simultaneously while the whole of Americas are looking for a top class small car.

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