The Brazilian government’s decision last month to impose a 30% tax increase on vehicle imports to the country and on vehicles built from imported parts is expected to have a negative impact on overall sales and particularly on foreign imports–which have grown strongly this year–as Brazil attempts to strengthen local production.
The rise in the industrial production tax (IPI), which will raise taxes to between 37% and 55% for carmakers who do not meet localisation targets, is expected to have a negative impact on overall sales both this year and next according to the latest forecast from IHS Automotive. The new rate, which will remain in effect until December 2012, is expected to affect as many as 300,000 vehicles each year and could slow overall growth in the car market, potentially adding to inflation as imported cars rise significantly in price, by as much as 28% according to IHS.
The aim of the tax is to force foreign automakers to build or source key components in Brazil and comes as passenger vehicle imports to the country have risen this year by 43% while light and heavy commercial vehicles saw a 50% rise for the first eight months, according to Anfavea, the Brazilian car manufacturers association. There has also been a rise in global sourcing as carmakers sought after cheaper foreign parts. These rises have been driven in part by the appreciation of the Brazilian real, which reached an all time high this past summer, and threatens to absorb demand for vehicles from local producers while hurting exports, which have dropped by 30%.
The only exception to the new IPI tax rise is on vehicles that source 65% of parts locally or from the Mercosur trade bloc, or from Mexico, which has a free trade agreement with Brazil. Companies have been given two months to demonstrate that their vehicles will meet that regional or domestic content to qualify.
The government said the measure was aimed at "protecting the local industry".
A protectionist move
At the recent Automotive Logistics South America Summit held in Sao Paolo, Brazil, Alexandre Bernardes, the vice president of the national carmaker’s association, Anfavea, said that the local sector was at risk if the industry couldn’t shift to more local manufacturing and sourcing. “The market has a lot to grow on its way to 6m units [by 2020] and we have to make sure that it is not absorbed by imported products.” (Read more here)
The tax is a direct move by the government to protect local industry but critics warn that it will impact growth and pricing in the Brazilian market, which surpassed Germany last year. Brazil is now the fourth largest sales market with nearly 3.5m vehicles sold but government credit restrictions in the first part of the year have moderated that growth to a 5% rise in the first eight months of this year (compared to an overall 12% rise in 2010). While interest rates have recently been lowered the combination of credit restriction and the IPI tax could drop sales growth further.
Furthermore, the tax does little to address the long-term structural problems that the Brazilian car market faces, according to IHS Automotive. These include inflexible working practices, poor quality control and overall low efficiency compared with international rivals. The country also suffers from higher logistics and supply chain costs thanks to higher customs, poor infrastructure and a lack of intermodal transport. Thanks to manufacturing and consumer taxes, Brazil’s total costs for manufacturing is considerably higher than in competitors like China, Mexico or India, according to Bernardes, while vehicle prices are often double those of the US market, for example.
“The main differences in costs for Brazil are logistics, labour and taxes, as well as a high cost of capital and some of the most expensive steel prices in the world,” said Bernardes. “Brazil also has a very high cost of energy.”
Moves by the government to protect manufacturers, particularly if the tax is extended, could prevent carmakers from making the necessary efficiency gains. At the conference, Bernardes said plainly that the sector would suffer if it couldn’t become more efficient and competitive, including in the supply chain. Fiat’s director of logistics for Latin America, Mauricelio Gomes Faria, had a similar message, particularly with the increasing push into South America by Chinese carmakers. “If we don’t become more competitive, than the Chinese will do it,” he warned.
The Chinese aren’t coming–they’re here already
Both established and new carmakers are now looking to expand operations in the country with Renault having already announced plans to expand operations in the southern state of Parana. This week the French carmaker said it plans to make an additional 100,000 vehicles a year at its Curitiba plant in 2013, increasing output to more than 380,000 units per year. BMW has also announced this week that it intends to build a plant in Sao Paolo because of the strength of its supplier base there. Meanwhile, VW is mulling expansion at its existing three plants and may even consider building a fourth. Fiat has announced plans to build its second Brazilian plant in northeastern Pernambuco and will expand activity in Betim.
Brazil has also represented one of the largest markets where Chinese carmakers have made inroads both in vehicle exports and plans for local production. Cars began arriving in Brazil from China in 2007, with Chery and Geely amongst the pioneers. In the first quarter of this year Jianghuai Automobile Company (JAC) moved 10,000 of its vehicles to South America following the signing of an exclusive distributor agreement with Brazilian dealer SHC.
JAC has announced plans to invest BRL1 billion ($530m) in a plant in Brazil but the stipulation on 65% local content could be a problem for startup, and the company has reportedly halted construction at the factory as it disputes the tax. Lifan, Chang’an and Chery all have construction plans underway in the country, which could be affected. Jeifang, Great Wall and BYD are also looking to establish manufacturing plants there.
The Brazilian Auto Importers Association, or Abeiva, has said it would sue the government over the tax increases, while the Chinese brands are now fighting the rise. Chery has been granted a 90-day delay in the tax rise after a federal judge ruled that the immediate implementation was unconstitutional.
BRICs call it their own way
The moves by the Brazilian government, although slated to be short term, also echo moves by other emerging markets to protect and develop their local industry on terms that might not fall in line with those of global OEMs and suppliers. Earlier this year, carmakers in Russia were forced to make deals with the Russian government to meet certain production and local content targets to avoid steep import duties–a protectionist move that comes even as Russia is seeking to gain entry to the World Trade Organisation (read more here: http://www.automotivelogisticsrussia.com). China also continues to impose restrictions and force technology transfers, including a recent move to restrict consumer subsidies for the Chevrolet Volt if GM did not share some of the car’s innovations.
