YTD production falls to the lowest level in 10 years

Brazil's light vehicle market decline continued to accelerate in October, with sales and production falling even more sharply than in the previous month. The country is suffering thanks to a series of pressures including declining consumer confidence, difficult economic conditions, tightening credit and increasing interest rates, which is in turn affecting the automotive industry there.

Production	October 2015	October 2014	Y/Y change	YTD 2015	YTD 2014	Y/Y change
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%

Source: Anfavea

Declining production figures and difficult economic conditions have also had a knock-on effect for OEMs delaying new vehicle production there. Last week saw Honda delay the start of production at its new Brazilian plant in Itirapina, São Paulo. The facility is Honda’s second plant in Brazil, which was expected to become operational this year, with an annual production capacity of 120,000 units. In addition to this, Chinese automaker Chery has delayed production of the QQ in Brazil to January 2016. Chery had planned to start Brazilian production of the QQ in the second half of 2015, following a BRL400 million (USD105 million) investment in a third assembly line.

In contrast to this, Mexico’s light vehicle production growth continues at record levels, with a 7.8% gain YTD in October. Nissan continues to lead Mexico in production, with YTD production up 2.3% to 700,090 units. GM's YTD output total of 587,680 units was a 1.4% gain. Investments by automakers and component suppliers continue, most recently with Pioneer announcing investment in a facility in Bajío, Mexico, in 2017 to produce car electronics products. The new facility will have an annual production capacity of two million units by 2019.

In fact, some reports are suggesting that supply in Mexico is failing to keep up with demand from OEMs. Reports last week suggested that Toyota is running into potential supplier issues in its efforts to increase production of both Tacoma and Tundra pickups with 15 suppliers said to be unable to fully support Toyota's plans to increase production.

Mexico has become a perfect opportunity for OEMs in recent years, offering a low-cost location close to the United States. A report in Automotive News even suggests that Ford and Fiat Chrysler are adopting a strategy of shifting production of compact or midsize cars to Mexico, so they can dedicate US plants to higher-margin pickups and SUVs. Unions are said to be amenable to the plans because it expects a net increase in jobs.

Augusto Amorim, senior analyst, South American light vehicle production forecast, IHS Automotive, suggests that weak local demand is forcing Brazil to look abroad, with IHS Automotive forecasting that Brazil will almost break even this year, as more vehicles are localized. “With sales and production falling at a fast pace, Brazil has been making an effort to increase exports. However, developing export markets is never an easy and fast task, and the government has been trying to sign more FTAs (free trade agreements) to help the industry. In a way, that is a paradox for a country that has closed its borders and that has always seen its local demand reason enough to attract OEMs.”

Signs are suggesting that the recovery for automotive in the region will take some time. 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 recovery will be seen. Eventually, the potential for growth in Brazil is there, but reaching that growth will be a complicated process – despite the issues at the moment, Brazilian opportunities include a low motorisation rate (a little more than five people per car).