Exports in December up 100.7% y/y, but production continues to slow, falling 30.0% y/y.

Brazil's light-vehicle sales fell at an accelerated pace in December compared with November 2015, according to the country's National Association of Motor Vehicle Manufacturers (Associação Nacional dos Fabricantes de Veículos Automotores: Anfavea). December's light-vehicle sales and production fell 38.4% year on year (y/y) and 30% respectively. Efforts to expand light-vehicle exports have resulted in that metric improving by 100.7% y/y in December and 25.5% for full-year 2015. With consumer confidence down, difficult economic conditions, weak credit availability, and increasing interest rates, Anfavea is forecasting sales will drop by 7.5% in 2016 and production will increase slightly, by 0.5% – both figures for both light and heavy vehicles − and exports will increase by 8.5% in 2016, reports local business news source Valor.

Anfavea president Luiz Moan suggests that the declines in the first quarter of 2016 will be sharper than the 7.5% decline projected for the full year. The declining production pulled inventories down to 271,000 units on hand, or 30 days' supply, reports news website Parana. Moan states that 2015's results were the lowest since 2007. Anfavea expects average daily sales of about 9,420 units during 2016 (including light and medium-heavy commercial vehicles), similar to sales in the fourth quarter of 2015.

Anfavea reports December's light-vehicle sales declined to 220,845 units, a 38.4% y/y decline. Passenger car sales fell 36.2% y/y to 193,240 units and light-commercial vehicle (LCV) sales fell 45.9% y/y to 27,605 units in December.

Established manufacturers Fiat, General Motors (GM), and Volkswagen (VW) are seeing larger y/y declines than automakers with smaller market shares, such as Toyota, Honda, and Hyundai. Fiat Chrysler Automobiles (FCA) held its status as Brazil's top seller in December with 35,260 passenger cars sold, down 30.6% y/y, and 8,855 LCVs sold, down 48.5% y/y. For the year, FCA's car sales dropped 29.7% and LCV sales decreased 36.3%. GM kept its lead over VW for second place, with 33,761 passenger cars sold (a 34% drop) and 4,190 LCVs sold (a 41% drop). VW saw passenger car sales of 21,736 units in December (down 56.2% y/y) and LCV sales of 4,020 units (down 65% y/y). Renault-Nissan sold 21,162 passenger cars and 2,968 LCVs, pulling ahead of Ford, which sold 16,089 passenger cars and 1,263 LCVs. With a decline of 23% y/y in December, Toyota's passenger car sales were down 5.8% in 2015. Through September, the brand had been showing a small year-to-date (YTD) increase in sales. Hyundai's car sales dropped 19.3% y/y in December and were down 8.9% for full-year 2015.

Brazil's light-vehicle exports have been growing in recent months, with December seeing a 100.7% gain, helping to bring exports in the YTD up by 25.5% y/y. Overall, Brazil lacks a strong export base to accommodate excess capacity, causing automakers to cut back on shifts and slow down production in a slow domestic sales environment. Production fell by 30% y/y in December and 25.6% for the full year. Passenger car production was down 36.2% y/y, while LCV production dropped by 45.9% y/y. The country closed out 2015 with production of 2.48 million units.

Brazilian light-vehicle sales, production, and exports
	Dec 2015	Dec 2014	Y/Y % change	YTD 2015	YTD 2014	Y/Y % change
Sales
Total light vehicle	220,845	354,024	-38.4	2,480,529	3,333,479	-25.6
Passenger car	193,240	302,999	-36.2	2,122,956	2,784,687	-24.0
LCV	27,605	51,025	-45.9	357,573	538,792	-33.6
Production
Total light vehicle	139,757	199,721	-30.0	2,333,903	2,973,484	-21.5
Passenger car	126,064	168,742	-25.3	2,018,954	2502,293	-19.3
LCV	13,693	30,979	-55.8	314,949	471,191	-33.2
Exports (excluding CKDs)
Total light vehicle	44,399	22,118	100.7	388,761	309,874	25.5
Passenger car	33,143	18,749	79.4	316,531	263,604	20.1
LCV	11,256	3,639	209.3	72,230	46,270	56.1
Source: Anfavea

Outlook and implications

The Brazilian auto market saw a much weaker 2015 than initially expected, and the year has reportedly closed at a sales decline of 25.6%, according to Anfavea. As market conditions worsen, we have revised our expectations for 2016 to a decline of 13.7%. IHS forecasts market sales to drop to 2.1 million units in 2016, staying below 2.5 million units until 2019. Brazil's economy is forecasted to decline by 2.4-2.8% in 2016, after falling 3.6% in 2015. Because fixing the fiscal deficit and tackling inflation will take more time than previously expected, a recovery is unlikely in the next four to six quarters. If the mood worsens in 2016, due to the Brazilian sovereign losing its investment grade status, for example, we would be looking at light-vehicle sales dropping below two 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 and to cope with the repercussions of alleged corruption at Petrobras and the potential for a recall vote against the president. 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 grew more severe in 2015.

Brazil's inflation continues to increase, reaching 10.5% in November, after being at 9.93% in October and 9.53% in August, well above the Central Bank's ceiling of 6.5%. With inflationary pressures persisting, the Central Bank of Brazil raised the Selic interest rate several times in the first half of 2015, though it has stayed at the 14.25% imposed on 30 July; in early 2016, the Central Bank is expected to deliver another rate increase at a late-January meeting. IHS forecasts inflation will not return to near the 6.5% target until late in 2016.

The vehicle sales momentum experienced in 2015 was not expected, as our model still says vehicle sales should be at 2.9 million units and GDP contract 2%. The same model is telling us that even if the Brazilian economy continued to shrink, the auto market would 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 downward. We have developed a short-term model looking at financing rates, salaries, car payments, and unemployment, which indicates that market sales should be 2.07-2.13 million units in 2016.

Looking further ahead, the recovery is expected to take a long time; there will be no immediate change in the status quo for the economy, no drivers of light-vehicle sales in the next few years. As a result, sales will not break 2.5 million units during the next three years before we start to see a recovery. Eventually, the potential for Brazil is there, but getting there will be a complicated process.

Brazilian market opportunities include a low motorisation rate (a little more than five people per car). The nominal USD10,000 GDP-per-capita milestone was broken in 2010 − this is the point at which a significant portion of the population may be in the right position to be new-car buyers. Additionally, a larger number of brands have brought a wide spectrum of products, sparking excitement in consumers. This combination of elements puts the sales forecast for the Brazilian market at close to 3.4 million units by the end of the forecast horizon. Our outlook puts Brazil's motorisation rate at roughly four people per car within five years, and working towards 3.5 people per car in 10 years. This helps to explain why Brazil has become such a critical pillar of growth for OEMs worldwide.