Production of passenger cars and light commercial vehicles reached 262,703 units and sales 246,139 units. Exports continue to be under pressure, falling 12.5% last month.

With increased y/y sales and lower export volumes, Brazilian vehicle production gained 16.9% y/y to 262,703 units in February; passenger cars were up 20.4% to 213,276 units and LCVs up 5.7% to 49,427 units.

Brazilian light-vehicle sales gained 10.3% year on year (y/y) to 246,139 units in February, according to data published by industry association Anfavea. February's sales results were split into 183,235 passenger cars (up 6.5% y/y) and 62,904 units of light commercial vehicles (LCVs; up 24.2% y/y). Compared with January's figures, however, sales were down 18.0%, indicating the impact of the increase in the industrialised products tax (IPI), which rose in January. Results on passenger-car sales were mixed for automakers in February – compared with January, all brands of passenger cars saw a decline. Fiat held its position as Brazil's top-seller, with sales of 41,000 passenger cars (up 5% y/y) and 16,983 LCVs (up 62.1% y/y) in February. Volkswagen (VW) took second place, with sales of 34,931 passenger cars and 7,640 LCVs during the month; passenger cars were flat, down 0.6% y/y, and LCVs were down 11.2% y/y – in a month when most LCV makers saw gains. General Motors (GM) stayed in third place with sales of 33,550 passenger cars and 9,040 LCVs; the passenger car returns reflected a 4.4% y/y gain and LCVs a 29.3% y/y gain. These top-three players dominate the Brazilian passenger-car market, accounting for a combined 59.7% of sales – up from January's 45.5% and December 2013's 58.5%. Ford came a distant fourth with 14,878 passenger cars and 6,041 LCVs sold; cars from the Blue Oval brand were up 14.9% y/y and LCVs up 29.3% y/y. Renault, with 11,463 passenger cars, completed the list of top-five players as its monthly sales surged 33.3% y/y.

Brazil's exports also lost momentum during February, with volumes of 24,424 units, down 26.3% y/y. A trade dispute with Argentina saw exports plunge in 2012 and it has continued to impact on exports. February's export declines were more dramatic for light commercial vehicles, which were down 37.4% (less than January's 54.5% decline), while passenger cars were down 26.3% (more than January's 22.1% drop).

Outlook and implications

Brazil's light-vehicle sales picked up 10.3% y/y in February despite weak consumer sentiment and high interest rates, probably helped by the government only increasing the IPI tax by 1% in January. The y/y gain, however, was not enough to prevent an 18% decline compared with January, as sales overall continue to slip. The Brazilian light-vehicle market witnessed sharp variations in sales throughout 2013, strongly reacting to government policy on IPI taxation. Earlier in the year, the government attempted to implement a gradual phase-out of incentives, causing vehicle sales to drop sharply. The ensuing measure by the government to keep incentives in place for at least 2013 caused vehicle sales to improve in subsequent months, but the fundamental fatigue started having an impact, with sales falling in each month of the last quarter. Demand contracted 1.7% to 3.572 million units in 2013 and the 10-year streak of continuous growth in Brazilian vehicle sales came to an end.

The weak outcome in 2013 initially carried pessimistic sentiment into 2014, with the country's dealers' association presenting a baseline scenario of 0.5% growth and a pessimistic outlook of 3% contraction. The concern for the state of the industry does not end with trade associations, but has also extended to the government. The weak demand of the last quarter of 2013 resulted in the government increasing the IPI tax only one percentage point, as opposed to the four percentage points it was planned to go up by in January. A total increase of 7% in the IPI tax is due to be phased in by July but this may change depending on how the performance in first half of the year. It is possible that we may not see a fully phased-in IPI of 7% in 2014.

Although it is fairly clear that the Brazilian vehicle market is being driven by tax incentives and not by fundamental demand in the short term, one of the positive effects of the government's taxation policy in 2013 was increased production, aided by export tailwinds. While export growth remained impressive in 2013, the situation is turning around this year as Argentina – an important destination for Brazilian produced vehicles – enacts policies to reduce Brazilian imports. According to the National Federation of Distributors of Automotive Vehicles (Federação Nacional da Distribuição de Veículos Automotores: Fenabrave), the two governments are to meet in March to discuss possible solutions.

Starting in January, cars with engines smaller than 1.0 litres are being taxed at 3%, while for cars with flex-fuel engines of 1.0-2.0L displacement, the tax is 9%. Gasoline (petrol)-fed 1.0-2.0L cars will see a tax of 10%. The tax for vehicles with engines larger than 2.0L, at 18%, remains unchanged. Higher taxation, coupled with firm interest rates, is expected to limit vehicle sales in Brazil this year. With inflationary pressures persisting, the Central Bank of Brazil raised the Selic interest rate by another 50 basis points to 10.5% in mid-January. In January, Anfavea projected growth of 1.1% y/y in Brazilian vehicle sales this year, including medium and heavy trucks, and January's results were consistent with that forecast. Following February's results, Anfavea has not made a revision to the projected growth rates.

IHS Automotive forecasts a limited recovery in credit, a macroeconomic outlook of 2.5-2.9%, and price increases on vehicles will confine growth in Brazilian light-vehicle sales to 1.7% in 2014, roughly 3.638 million units. This is on the assumption that lending begins to resume in the second half of the year; otherwise, demand will probably fall flat compared with 2013's level.