A government scheme to invigorate the Brazilian automotive industry has achieved mixed results so far
For almost two years, Brazil has been operating an auto industry stimulus programme called Inovar-Auto. In the minds of its government creators, this scheme promotes innovation, investment, efficiency and environmentalism in Brazilian car manufacturing; others regard it as protectionism by another name.
Inovar-Auto is both a carrot and a stick, with the twin goals of pushing OEMs to build cars in Brazil and luring consumers to buy more fuel-efficient vehicles. It has introduced large increases in taxation on all cars, especially imports, although manufacturers which conform to a lengthy set of regulations can ensure that their products avoid the charges. As for fuel efficiency, the scheme aims to improve the performance of new cars in Brazil by 12-19% by the end of the programme in 2017, using a formula based on fuel consumption versus mass.
The programme is part of the Plano Brasil Maior (Greater Brazil Plan), which aims to improve the competitiveness of many sectors of the Brazilian industry, not only automotive manufacturing. However, the country’s Ministry of Development, Commerce and Industry views increases in vehicle manufacturing and efficiency as a major component of the national priority to boost industrial competitiveness.
Brazil now has the fourth largest new-car market in the world, despite an 8.3% slump in sales in the first half of this year. But the level of imports has been looking unsustainable in a country with well-documented economic problems; even while the Brazilian car market was expanding at 12% a year at the start of this decade, imports were increasing at 46%, highlighting weaknesses in domestic manufacturing.
Incentives & disincentives
At a stroke, Inovar-Auto added a 30% tax to industrial products (the Imposto sobre Productos Industrializados, or IPI), except to those built in Mexico or the Mercosur countries. Moreover, the IPI increase was in addition to a 30% import tax and state taxes averaging around 18%. The IPI increase means that even a sub-1.0-litre car now attracts tax at 37% compared with 7% previously. Cars with an engine of 2.0 litres or more are taxed at 55%.
After the stick comes the carrot. The 30% tax rises can be negated if a manufacturer hits a series of targets, each of which earns tax credits. These are given for such criteria as meeting corporate fuel economy milestones, investing in R&D and introducing a tagging system. So far, 46 companies have signed up for the Inovar-Auto programme.
There are further credits for manufacturers who locate at least 12 of 14 production steps in Brazil. Among the processes which qualify are: body assembly and painting, powertrain and chassis manufacturing, final assembly and testing completed vehicles. By producing even more fuel-efficient models, manufacturers can gain up to 2% more in IPI tax credits.
Importers which do not have a Brazilian manufacturing base can bring in 4,800 cars a year under the existing tax regime, but every additional vehicle then attracts IPI at 55%. Brazil’s automobile import association, Abeiva, says that with extra duties some foreign-made cars will be taxed at rates as high as 340%. Other critics have labelled Inovar-Auto as just another means of taxing the consumer.
Pushing producers to go local
The effect of the programme has been to push OEMs into manufacturing locally. As Bernd Martens, Audi board member for Procurement, said when the company announced that it would resume manufacturing in Brazil at the Volkswagen (VW) factory in São José dos Pinhais, Paraná State: “Under the new policy it would be impossible to compete in this market without local production.”
Fellow premium manufacturers BMW and Mercedes-Benz are also establishing local production facilities, at Araquari in Santa Catarina State and Iracemápolis in São Paulo State respectively, while Jaguar Land Rover (JLR) is building its third overseas site, at Itatiaia in the Rio de Janeiro area.
Chery Automobiles and JAC are leading the Chinese assault by launching factories at Jacareí (São Paulo) and Camaçari (Rio de Janeiro) respectively, while Japanese OEM Honda has started work on a new factory at Itirapina (São Paulo).
All of these new developments come on top of a number of facility launches in 2012, around the time when Inovar-Auto was announced: Hyundai at Piracicaba (São Paulo), Nissan at Resende (Rio de Janeiro) and Toyota with its third facility in the region, at Sorocaba (São Paulo).[sam_ad id=17 codes='true']
Anfavea, the Brazilian auto manufacturers’ association, has estimated that by the time all these plants are operational, the total investment in new production sites in Brazil could be as high as $35 billion and that vehicle manufacturing capacity will have increased by almost a third. “Today we have an annual capacity of 4.7m and we estimate that by 2018 the automotive industry production capacity will reach 6m vehicles per year,” says a spokesperson.
Yet the intended increase in Brazilian production has not developed as planned. First-half output for 2014 was down 17% on the same period last year, and Anfavea predicts that end-of-year sales will show a dip of 5.4% on 2013. The spokesperson attributes these results to several causes: the interruption of PSI, a government funding programme for trucks, buses and agricultural machinery; economic problems in Argentina, Brazil’s major trade partner; and low consumer and banking confidence.
“But we believe this is already overturned, and the expectation now is that the second half will be better than the first,” says the spokesperson. “Comparing the years, 2014 [sales volumes] will be lower than in 2013, but the second half is the turning point. In the first semester [half] of this year 1.66m products were sold in the Brazilian market and in the same period of 2012 [before Inovar-Auto started] the sales were 1.71m vehicles.
But, tellingly, he adds: “We cannot relate the results with the Inovar-Auto programme yet.”