Autos in Brazil: Down But Most Definitely Not Out

Light vehicle sales in Brazil rose every year from 2004 to 2011 but faced with weak economic growth and flagging car sales, the government lowered the tax on industrial products (IPI) on May 24, 2012 in order to stimulate demand for new cars. The reduction was originally planned to run until August 31 but was extended and the end result was that sales of light vehicles increased by 6.1% in 2012 even though GDP growth for the year was a lacklustre 1%. This lowered IPI rate was further extended and was actually in effect for the whole of 2013 but with demand already pulled forward into 2012 and GDP growth at an improved but still modest 2.5%, the measure was insufficient to prevent light vehicle sales in Brazil falling by 1.5% year-on-year. This was the first annual decline the market had endured since 2003 and the outlook for 2014 was not looking any better.

Despite this, the Brazilian government planned to return the IPI rate to the level prior to the reduction that was introduced in May 2012 in two steps. The first hike was in January 2014 and the second was intended for July, with the net effect being that, from July onwards, cars would essentially cost 7% more than in 2013. Nevertheless, sales started the year off well, increasing by 1% and 10.5% in January and February respectively as vehicles were still being registered that had taken advantage of the reduced IPI rate. However, the inevitable downturn materialised in March and demand contracted by 7.3% in the first half of the year. Given this and the economic weakness in 2014, the government decided on 30 June to postpone the second tax hike until January 2015.

Acting as a further impediment to demand in 2014, Brazil’s government also introduced legislation in January which requires that all cars are fitted with air bags and anti-lock brakes as standard. This naturally means that certain models are no longer available and in turn, has a negative impact on sales. Finally, to confuse matters further, IPI is levied at a minimum of 30% on cars imported from outside Mexico and the Mercosur region as the government seeks to protect the domestic automotive industry by curtailing the flood of imports. The import tax has certainly had the desired effect, with imports accounting for 18% of all registrations thus far in 2014 – compared to 24% in 2011 for example. In line with increasing IPI rates for locally-produced vehicles, the rates for imported cars have also increased. The table below provides the IPI rates for both locally-produced and imported vehicles that will now be in effect from January 2015 (instead of from July 2014) and the discounted rates that were in effect (in brackets) between May 2012 and January 2014.

IPI Rates on Vehicles in Brazil

Locally producedImports
Cars, <1000cc7% (0%)37% (30%)
Cars, 1000-2000cc11% (5.5%)41% (35.5%)
(alcohol and flex fuel)
Cars, 1000—2000cc13% (6.5%)43% (36.5%)
Light commercial vehicles4% (1%)34% (31%)

Source: Euromonitor International

Note: Rates from January 2015 (and Reduced Rates from May 2012-December 2013)

With the increased IPI rate that was intended from July being postponed until January 2015, the second half of 2014 will be stronger than the first half in volume terms but are still expected to be weaker in year-on-year percentage change terms. In fact, sales data released by ANFAVEA for September reveal that demand was 11.7% lower in Q3 2014 than in 2013 and sales are projected to be 10.8% lower in the second half of 2014 than in the July to December period of 2013. Accordingly, only 3.25 million new light vehicles will be registered in 2014 – 9.1% down on 2013 and the lowest annual level since 2009. However, underpinned by a recovering economy and healthy growth in the number of Brazilian households with sufficient disposable income to buy a new car, the outlook is far more positive. Even with the original IPI rate to be reinstated from January 2015, 3% more registrations are projected for 2015 and further gains are even expected to take demand to a new record in 2017. In the longer term, demand is forecast to continue to climb, with the Brazilian market exceeding 5 million units from the mid-2020s.