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Customer LoginsBrazilian market drops 20.3% in July, exports jump 65.1% y/y
Brazil's July sales and production figures continue to decline, by 20.3% and 15.1% respectively, although exports increased by 65.1%. IHS Automotive forecasts that sales will decline by 23% overall in 2016.
IHS Automotive perspective
- Significance: Brazil light-vehicle sales continue in their downward course, with July sales tumbling 20.3%; this is similar to May and June, but less steep than April's 27.7% decline, after dropping 25.6% for 2015. Year to date (YTD), the market is down by 24.4%. Exports, however, are up in July (65.1%) and YTD (21.5%). Even with increases in exports over the past several months, production declined by 15.1% in July.
- Implications: In 2016 the market has 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 towards lending. The Brazilian central bank Selic 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 saw a weak 2015 and 2016 has not been worse than expected, even against low expectations. IHS Automotive forecasts that the market will drop to 1.88 million in 2016, a decline of 23.9%, staying below 2.5 million until 2022. 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 11.3% for the three-month period ending June 2016, 2016 could fall further.
The situation in Brazil has not changed, despite an impeachment process against the former president Dilma Rousseff. The Olympics begin tomorrow (5 August) and the country may see tourism decline because of the Zika mosquito-borne virus. In July 2016 Brazil's sales dropped by 20.3%, according to the country's automotive manufacturers' association Anfavea. The decline was similar to May and June, but decelerated compared with the 27.7% decline in April, a 23.4% drop in March, and nearer the 20% drop in February. July light-vehicle production fell 15.1%, less dramatic than seen in the first quarter. Efforts to expand exports have resulted in that metric improving by 65.1%% in July and 21.5% year to date.
Although consumer confidence is down amid difficult economic conditions, increasing unemployment, weak credit availability, and increasing interest rates, media reports suggest that some economists think the country is close to bottoming out and conditions may stabilise late in 2016. At the time of writing Anfavea had not adjusted forecasts that sales will drop by 7.5% in 2016 and production will increase slightly by 0.5%, both figures reflecting light- and heavy-vehicle sales and production, and for exports to increase by 8.1% in 2016. Anfavea earlier forecast 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. However, dealer organisation Fenabrave revised its full-year forecast for registrations to decline by 16% for the year, compared with its earlier forecast for a 15% decline. Anfavea reported that July light-commercial vehicle (LCV) sales experienced a smaller contraction than passenger cars, down 10.4% and 22.1% respectively. Passenger car sales fell to 145,614 units and LCV sales fell to 24,409 units.
Established manufacturers Fiat, General Motors (GM), and Volkswagen are experiencing larger year-on-year (y/y) declines than those with smaller share, like Toyota, Honda, and Hyundai. FCA held its status as Brazil's top seller in July with 21,987 passenger cars sold, down 29% y/y, and 11,597 LCVs (up 3.0% y/y). GM kept its lead over VW for second place, with 25,923 passenger cars sold (a 1.1% gain) and 3,665 LCVs sold (a 29.5% drop). VW saw July passenger car sales of 17,099 (down 30.2% y/y) and sales of 4,405 LCVs (down 34.0% y/y). Renault-Nissan sold 16,557 passenger cars and 2,170 LCVs, ahead of Ford, which sold 14,791 passenger cars and 1,961 LCVs. Hyundai's passenger car sales were down 6.8% to 13,501 units. Toyota's passenger car sales, including Lexus, declined by 1.3% in July, however, to 13,249 units.
Exports have been growing in recent months, with July seeing a sharp 65% gain. 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 21.8% through July, while LCV production increased by 40.8% y/y.
Outlook and implications
The automotive market experienced a weak 2015 and 2016 has been worse than expected, even against low expectations. IHS Automotive forecasts that the market will drop to 1.88 million in 2016, a decline of 23.9%, staying below 2.5 million until 2022. Along with fixing the fiscal deficit and tackling inflation, the country is affected by corruption scandals and a lack of political co-operation. The economy declined by 3.8% in 2015. As the unemployment rate rose to 11.3% for the three-month period ending June 2016, we could see 2016 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 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 the third quarter of 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 raised the Selic rate several times in the first half of 2015, although it has remained at the 14.25% rate imposed on 30 July. Rather than increasing the rate in early 2016 as expected, the bank held it at 14.25% at its March 2016 meeting; however, there was the possibility of 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.
Brazil's inflation remains high, with slight easing reported in June and July. In the 12 months through mid-June, the rate fell to 8.98%, the first time below 9.0% in a year, and the number fell to 8.8% in July. This followed a reading just below 10.0% in March, compared with 10.36% in February 2016 and 9% in January. All of this is well above the central bank's ceiling of 6.5%. With inflationary pressures persisting, the bank has held the Selic rate at the 14.25% rate imposed on 30 July 2015. In June 2016 central bank chief Ilan Goldfajn said that it was too early to consider a rate cut, as inflation remains above target and the government has yet to implement budget cuts. Some financial analysts believe it could be raised later in 2016 and Goldfajn has been cited as saying that he expects to pull inflation down to within target in 2017. The Wall Street Journal quotes Golfajn as saying that he expects inflation to weaken relatively rapidly on stricter fiscal policies.
Looking further ahead, the recovery will be long. 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, through 2022 light-vehicle demand will not break 2.5 million units, 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 political uncertainty. IHS Automotive expects vehicle sales in the country to decline by 3.4% in 2017 before returning to positive growth rates in subsequent years.
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 become new-car buyers, but not if 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 among 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 motorisation rate at roughly 4.0 people per car within 5 years and working towards 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.