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Customer LoginsBrazilian market continues to struggle as sales fall 26.4% through May
Brazil's May sales and production figures continued to decline, down 20.9% and 18.0% respectively, although exports increased 17.0%. IHS forecasts that sales will decline 23% for the year.
IHS Automotive Perspective
- Significance: Brazilian light-vehicle sales continue to decline, although May's 20.9% decline was less steep than April's 27.7% fall, after dropping 25.6% in 2015. The market is down by 26.4% for the YTD. Exports, however, are up for the May (up 17.0%). Even with increases in exports over the past several months, production declined by 18.0% in May.
- Implications: As we look at 2015, the market continued its downward spiral for the third year in a row because of the absence of economic momentum and consumer confidence, along with the banks' caution toward lending. The Brazilian central bank Selic's interest rate has held at the 14.25% mark set in July 2015, and was not increased at the bank's most recent meeting.
- Outlook: The auto market was weak in 2015, and 2016 has not been worse than expected, even against low expectations. As conditions worsen, we revised expectations for 2016 to a decline of 23.9%. IHS forecasts the market to drop to 1.88 million in 2016, staying below 2.5 million until 2022. Along with fixing the fiscal deficit and tackling inflation, the country has been hit by corruption scandals and a lack of political co-operation. As the unemployment rate rose to 11.2% for the three months ending April 2016, sales may fall further this year.
Brazil's story has not changed dramatically in May, although the mechanics of impeaching the president are under way and corruption scandals are ongoing. In May 2016, Brazil's sales continued declines of 2015, falling 20.9% in the fifth month of 2016, according to the country's manufacturer's association Anfavea. The decline, however, decelerated compared with the 27.7% decline in April, a 23.4% drop in March, and nearer the 20% drop in February. May light-vehicle production fell 18.0%, a bit less dramatic than in the first quarter. Efforts to expand exports have resulted in that metric improving by 17.0% in May and 23.7% in the year to date (YTD).
With consumer confidence down, difficult economic conditions, increasing unemployment, weak credit availability and increasing interest rates, Brazil's automakers association, Anfavea, holds its forecast that sales will drop by 7.5% in 2016 and production to increase slightly, by 0.5% - both figures reflecting both light and heavy vehicle sales and production - and for exports to increase by 8.1% in 2016. Anfavea earlier forecasted average daily sales of about 9,420 units during 2016 (including light and medium-heavy commercial vehicle sales), similar to the fourth quarter of 2015.
Anfavea reported that May light commercial vehicle (LCV) sales contracted less than did passenger cars, down 12.1% and 22.4% respectively. Passenger car sales fell to 136,372 units and LCV sales fell to 25,976 units.
Established manufacturers Fiat, General Motors (GM) and Volkswagen (VW) are seeing larger y/y declines than those with smaller share, like Toyota, Honda and Hyundai. FCA held its status as Brazil's top seller in May with 19,577 passenger cars sold, down 34.0% y/y, and 8,821 LCVs (down 7.0% y/y). GM kept its lead over VW for second place, with 24,308 passenger cars sold (a 1.23 drop) and 3,446 LCVs sold (a 42.7% drop). VW saw April passenger car sales of 17,237 (down 29.9% y/y) and sales of 4,055 LCVs (down 28.9% y/y). Renault-Nissan sold 13,575 passenger cars and 2,468 LCVs, ahead of Ford, which sold 12,773 passenger cars and 1,132 LCVs. Hyundai's passenger car sales were nearly flat, down only 0.6% to 13,250 units. Toyota's passenger car sales, including Lexus, declined by 15.4% in May, however, to 10,581 units.
Exports have been growing in recent months, with a 17.0% gain in May. Overall, Brazil lacks a strong export base to accommodate excess capacity, causing automakers to cut back on shifts and slow down production in a slow domestic sales environment. Passenger car production is down 25.9% in the YTD, while LCV production dropped by 29.0% y/y.
Outlook and implications
The auto market was weak in 2015, and the first five months of 2016 have not been encouraging, in part hampered by political uncertainty as the process of a presidential impeachment has begun and even against low expectations. As conditions worsen, we revised expectations for 2016 to a decline of 23.9%. IHS forecasts the market to drop to 1.88 million in 2016, staying below 2.5 million until 2021. Brazil's economy is forecast to decline by 3.8% in 2016. Along with fixing the fiscal deficit and tackling inflation, the country is affected by corruption scandals and a lack of political co-operation. As the unemployment rate rose to 11.2% for the three months ending April 2016, sales in 2016 could fall further.
Factors pushing the decline include an absence of economic momentum and consumer confidence, continued cautious bank lending and the discontinuation of tax benefits. Government investment has also been frozen, as it works to bring a growing deficit in check and coping with intensifying repercussions of alleged corruption at Petrobras (including a for a recall vote against the current president). Increasing vehicle prices (with 15.8% on mandated safety equipment), high inflation, high interest rates (23% in January 2016, compared with 18.5% in Q3 2014), and tight credit availability have been driving sales down since 2014 and these factors have grown more severe.
Brazil's inflation remains high, although it fell to just below 10.0% in March, compared with 10.36% in February 2016 and 9% in January. In the 12 months ending mid-May 2016, it came in at 9.6%. It has remained well above the Central Bank's ceiling of 6.5%. With inflationary pressures persisting, the Central Bank of Brazil raised the Selic rate several times the first half of 2015, although it has stayed at the 14.25% rate imposed on 30 July. Rather than increasing the rate in early 2016 as expected, the Central Bank held at 14.25% at its March 2016 meeting, however, there was a possibility for a cut at the next meeting, to be held at the end of April 2016. Ultimately the rates were held the same for now.
The lack of sales momentum experienced in 2015 was not expected, as our model still tells us that vehicle sales should be at 2.7 million units with a 3.7% GDP contraction. The same model is telling us that even if the Brazilian economy shrank by 3.7% in 2016, the market would contract to 2.3 million units. Early in the year, many OEMs believed volumes may stay flat in 2016, when the trajectory will clearly be downward. We have developed a short-term model looking at financing rates, salaries, car payments and unemployment, which indicates that the market should be between 1.85 and 1.90 million units in 2016.
Looking further ahead, we are in for a long recovery. There will be no change in the status quo for the economy - no drivers for light-vehicle sales in the next few years; IHS economists forecast economic growth may not arrive before 2019. As a result, light-vehicle demand will not break 2.5 million units before 2020, after that, we will start to see a recovery. The potential for Brazil is there, but getting there will be a complicated process, more so with the looming political uncertainty.
Brazilian opportunities include a low motorisation rate (a little more than five people per car). The nominal USD10,000 GDP-per-capita milestone was broken in 2010 - this is the point at which a significant portion of the population may be in the right position to be new-car buyers, but not Brazil is closer to a per-capita GDP of just USD7,000. Also, a larger number of brands have brought a wide spectrum of products, sparking excitement in consumers. This combination of elements puts the forecast for the Brazilian market at close to 3 million units by the end of the forecast horizon. Our outlook puts Brazil's motorization rate at roughly 4.0 people per car within five years, and working toward 3.5 people per car in 10 years. This helps to explain why Brazil has become such a critical pillar of growth for OEMs worldwide.
About this article
The above article is from IHS Automotive Same-Day Analysis of automotive news, events and trends, and is a deliverable of the World Markets Automotive Service. The service averages thirty stories per day and also provides competitor and country intelligence. Get a free trial.