Production Soars As Government Policy Bears Fruit
Vehicle production in Brazil has increased 18.6% year-on-year (y-o-y) in the first five months of 2013, to 1,535,982 units. Much of this is on the back of a 17.2% y-o-y increase in passenger car production, to 1,440,392 units. BMI forecasts a 15% increase in passenger car production in 2013 as government policy continues to bear fruit.
In 5m13, some 89.5% of cars produced in the country were for the domestic market. BMI has long maintained a bullish outlook on the market, forecasting 5.8% sales growth in 2013; we expect the high growth domestic market to continue to drive production in the country.
|Policy Bearing Fruit|
|Brazil Monthly Passenger Car Production|
Government Policy Driving Investment
BMI maintains a moderately bullish view on vehicle manufacturing in Brazil, predicated chiefly on the government's tax policies.
Under the Inovar Auto programme, import tariffs are designed to stimulate the autos sector by attracting foreign investment, and increasing the level of domestic innovation. Indeed, a number of international auto manufacturers have invested in the country as this policy continues to bear fruit, and we expect this to continue as manufacturers target this high-growth market ( see 'Kia Moves To Restore Competitiveness', April 10). Furthermore, domestically-produced vehicles currently benefit from reduced taxes, which has served to buoy the domestic market ( see 'BMI View Playing Out', June 7).
We believe that much of this investment is the result of the government policies making vehicle imports prohibitively expensive, rather than a reflection of the country's natural competitiveness. Indeed, tax burdens remain high, raw material costs are high, and the country's infrastructure is relatively poor.
Further, we believe that ongoing currency weakness may impact investment decisions. The Brazilian real depreciated significantly in 2012, which reduces the dollar amount international auto companies can send back. We maintain our core view of real weakness over the medium term. In 2013, we believe that this will (at least partially) offset any gains in sales volumes for international auto companies ( see 'Ford Predicts Regional Loss, But BMI Bullish Long Term', March 20).
The weak real does serve to make exports more competitive, however, which may serve to boost export volumes over the year. This constitutes a relatively small proportion of passenger car output, however, and is not a large upside risk to our production 2013 production forecast.