YTD production falls to the lowest level in 10 years

Brazil's light vehicle market's decline continued accelerate in October, with sales falling even more sharply than in the previous month, according to the National Association of Motor Vehicle Manufacturers (Associação Nacional dos Fabricantes de Veículos Automotores: Anfavea). Light vehicle sales and production fell 34.6% year on year (y/y) and 29.2% y/y, respectively, in October, while efforts to expand exports resulted in improvements of 72.2% y/y in October and 17.3% y/y in the year to date (YTD). With consumer confidence down, difficult economic conditions, restricted credit, and increasing interest rates, Anfavea reduced its 2015 sales forecast in June and again in October. As of 6 October, Anfavea forecast a reduction in sales in 2015 of 27.4% to 2.52 million units and revised its full-year production forecast to a decline of 23.2%; with the release of October's sales results, the association has held its projections.

Anfavea president Luiz Moan suggests YTD production has fallen to the lowest level in 10 years, with October's results on a par with those in October 2005, according to media reports. Production increased month on month in October on shutdowns in September, rather than a directional trends. Moan also noted that vehicle inventories remain high, at 340,600 units, or 53 days' supply, according to media reports, including from AutomotiveBusiness.com. On light vehicle sales, Moan indicated the YTD results were the lowest in October since 2007. Anfavea expects average daily sales of between 9,500 and 9,600 units through the rest of 2015, including light commercial vehicles (LCV) and medium and heavy commercial vehicles. Moan said he believes the end of the third quarter and the beginning of fourth quarter in 2016 will bring some market recovery, which is consistent with his remarks in September.

Anfavea reported a y/y decline in light vehicle sales in October to 185,483 units. Passenger car sales fell 33.4% to 161,604 units and LCV sales fell 51.3% to 23,879 units. Compared with September, light vehicle sales dropped 3.8%, with passenger car sales down 2.9% and LCV sales down 9.8%.

Established manufacturers Fiat Chrysler Automobiles (FCA), General Motors (GM), and Volkswagen (VW) are seeing larger y/y sales declines than those automakers with smaller market shares, such as Toyota, Honda, and Hyundai. FCA held its status as Brazil's top seller in October with sales of 27,527 passenger cars, down 36.9% y/y, and 7,728 LCVs, down 54.6% y/y. FCA's YTD passenger car sales were down 29.6% and YTD LCV sales were down 33.8%. GM kept its lead over VW for second place, with 26,254 passenger cars sold (down 38.5% y/y) and 4,095 LCVs sold (down 53.1% y/y). VW sold 21,008 passenger cars (down 46.5% y/y) and 4,650 LCVs (down 52.8% y/y). With its results better than those of some rivals and worse than others in a falling market, it is unclear how much of an effect the VW emissions scandal has had on the brand's sales for the month. In Brazil, only the Amorak pickup truck has been affected directly. Ford sold 15,425 passenger cars and 817 LCVs in Brazil to capture fourth place, ahead of Renault-Nissan's sales of 12,452 passenger cars and 1,325 LCVs. With a decline of 25.8% y/y in October, Toyota's passenger car sales were down 1.5% for the first 10 months of 2015. In January−September, the brand had showed a small sales increase. Honda's sales declined by only 1.2% y/y in October, an achievement in this difficult market. Meanwhile, Hyundai's passenger car sales dropped 12.0% y/y in October and were down 6.4% YTD.

Brazil's vehicle exports have been growing in recent months, and October saw a 72.2% y/y gain, helping lift exports by 17.3% YTD. Overall, Brazil lacks a strong export base to accommodate excess production capacity, causing automakers to cut back on shifts and slow production in a weak domestic sales environment, contributing to Anfavea's cutting its production forecast in October. Brazilian production fell 29.2% y/y in October, with passenger car production down 25.8% y/y and LCV production down 45.2% y/y. During the first 10 months of 2015, production declined 19.7% to 2.02 million units.

Brazilian light-vehicle sales, production, and exports
	October 2015	October 2014	Y/Y change	YTD 2015	YTD 2014	Y/Y change
Sales
Total light vehicle	185,483	291,813	-36.4%	2,070,133	2,699,295	-23.3%
Passenger car	161,604	242,741	-33.4%	2,070,133	2,256,896	-21.9%
LCV	23,879	49,072	-51.3%	306,417	442,399	-30.7%
Production
Total light vehicle	196,989	278,239	-29.2%	2,025,389	2,522,555	-19.7%
Passenger car	170,486	229,861	-25.8%	1,751,239	2,122,648	-17.5%
LCV	26,503	48,378	-45.2%	274,150	399,907	-31.4%
Exports (excluding CKDs)
Total light vehicle	37,060	21,523	72.2%	309,708	264,007	17.3%
Passenger car	29,303	19,137	53.1%	253,570	224,040	13.2%
LCV	7,757	2,386	225.1%	56,138	39,967	40.5%
Source: Anfavea

Outlook and implications

The Brazilian light vehicle market is much weaker in 2015 than initially expected. IHS has cut its 2015 forecast again, to 2.43 million units, a decline of 27.1%. For 2016, we forecast another 7.3% decline. After September's seasonally adjusted annual rate (SAAR) of sales fell to 2.27 million units, IHS expects the market to drop to 2.1 million units in 2016, staying below 2.5 million units until 2019. Brazil's economy is forecast to decline 2.7% in 2015, followed by a further contraction of 0.8% in 2016. Because fixing the fiscal deficit and tackling inflation will take time, a recovery is unlikely in the next four to six quarters.

In 2016, we expect the negative trend to continue, with a current sales outlook of 2.1 million units. If the mood worsens in 2016 – due to Brazil losing its investment grade status, for example – we would be looking at further revisions for 2016, with sales dropping below 2 million units. 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. Increasing vehicle prices (up an average of 4% on mandated safety equipment), high inflation, high interest rates (21% in February 2015, compared with 18.5% in the third quarter of 2014), and tight credit availability drove Brazilian sales down to 3.33 million units in 2014. These factors are continuing in 2015.

Brazil's inflation continues to increase, reaching 9.93% in October after climbing to 9.53% in August, well above the central bank's target ceiling of 6.5%. With inflationary pressures persisting, the Central Bank of Brazil raised the benchmark Selic rate several times in the first half of 2015, although it has stayed at the 14.25% rate imposed on 30 July. IHS forecasts inflation will not return to near the 6.5% target until late in 2016.

The sales momentum experienced in 2015 was not expected, as our forecast model still tells us vehicle sales should be at 2.9 million units with a 2% contraction in GDP. The same model is telling us that, even if the Brazilian economy continues shrinking, the market will not be drastically changed. This is a reason for concern, as many OEMs believe volumes may stay flat in 2016 when the trajectory will clearly be downwards. We have developed a short-term model looking at financing rates, salaries, car payments, and unemployment, which indicates market sales will be 2.07−2.13 million units in 2016.

Looking further ahead, we are in for a long recovery. There will be no change for the economy − no drivers of light vehicle sales in the next few years. As a result, demand will not break 2.5 million units during the next two years before we start to see a recovery. Eventually, the potential for growth in Brazil is there, but reaching that growth will be a complicated process.

Brazilian opportunities include a low motorisation rate (a little more than five people per car). Brazil broke through the nominal USD10,000 GDP-per-capita milestone in 2010 − this is the point at which a significant portion of the population may be in the right position to buy new cars. Additionally, a larger number of brands have brought a wide spectrum of products to the market, sparking consumer excitement. This combination of elements puts the forecast for Brazilian market sales at close to 3.4 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 explain why Brazil has become such a critical growth pillar for OEMs worldwide.