Auto industry having the best year ever -- in Brazil

Honda's Brazilian factory has recently increased production by 50 percent to churn out more Fit (above) and Civic units.

While North American automakers are struggling to get through "one of the deepest auto industry crises in Detroitâ''s history," their Brazilian counterparts are having the best year ever.

Brazilians never bought so many vehicles, according to a report in Exame, Brazil's leading business and economy magazine. (Full disclosure: I worked as a reporter for that magazine years ago.) Sales reached an all-time record of 1.2 million vehicles in the first half of this year. At that pace, assuming it will continue, sales are expected to reach 2.35 million vehicles before the year is over. That means one car sold every 14 seconds, making 2007 the best year in the history of Brazil's auto industry.

Whatâ''s going on in the country of Carnival?

First, to put things into perspective, auto sales in Brazil are one order of magnitude smaller than in the United States. Second, we must emphasize that not all auto makers in North America are having a bad time. You know who we're talking about.

(A summary based on New York Times reports: Ford does not expect to make a profit in North America until 2009; the Chrysler Group reported a loss for this summer of $1.5 billion; and G.M. cut 30,000 jobs and closed nearly a dozen plants. Sales of vehicles in the United States this year could end up below last year's 16.55 million, meaning they would be the lowest since 1998. And the biggest blow, at least symbolically: "Detroit auto companiesâ'' grip on the American automobile market ended in July, when dismal auto sales gave foreign nameplates the lead for the first time ever...")

Now, back to Brazil.

To keep up with demand, Brazilian auto factories shifted into high gear. Factories like Honda's, in the outskirts of São Paulo, which increased daily production in 50 percent.

Marcelo Onaga and Carolina Meyer report in their Exame cover story (read the story in Portuguese or see an OK translation courtesy of Google) that Honda "invested 200 million reais [US $109 million] late last year, introduced a third work shift in April, and recently reduced in 20 minutes the workers' lunchtime." (A decision taken in agreement with the workers union.) The cars produced there, the Honda Fit [photo above] and Civic, don't stay for a minute at the factory lot -- they're immediately trucked to the dealers.

The Brazilian auto makers are also churning out new models (more than 30 this year, or double that of 2006), Exame reports.

But thatâ''s not to say things have always been good for automakers in Brazil. In fact, for the past ten years, the industry has been stuck in second gear, if not reverse.

Back in 1997, the future looked bright and the industry went through a great period of expansion. Eleven new factories were built, at an estimated cost of $16 billion, and seven new auto makers came to Brazil, according to Exame. The industryâ''s production capacity grew to an estimated 3 million cars per year.

But then a series of economic crisis hit the country, sending interest rates through the roof. Sales went south, plummeting 40 percent in the subsequent years. Losses were estimated in $7 billion, Exame reports, making for turbulent times for auto workers and executives. The four largest automakers in Brazil (Fiat, Ford, GM, and Volkswagen) had 15 presidents during the past decade. Chrysler left the country.

Whatâ''s different now? Exame explains that the current scenario resulted from an unprecedented combination of factors. The most important is the economic stability. Lower interest rates help consumers finance their purchases. Brazilians buy their cars by paying for them in as many as 84 monthly installments! As one auto executive told Exame, for consumers, the car's price tag doesn't matter as much as the amount to be paid each month.

Another factor helping the industry is that consumers began looking for more sophisticated cars. Back in 2000, only 38 percent of new cars sold had air conditioning; now 63 percent have. Exame reports that Brazilians are buying larger and more powerful cars as well. Sales of compact sedans with 1-liter-plus engines grew 44.5 percent in the first half of this year. Sales of more sophisticated vehicles means higher profit margins for makers.

(It's all good news for auto makers, but to put things into perspective again, consider that most Brazilians replace their cars every three years or longer; in the United States, where 56 percent of vehicles are leased, consumers switch cars after one year on average.)

And although things look good now that doesnâ''t mean theyâ''ll remain good, of course. For one thing, Exame reports that even though internal sales are going up, exports are plummeting. In fact, Brazil's cars are among the world's most expensive (mostly due to a cascade of taxes). And while investments pour into Chinaâ''s and Indiaâ''s auto industry, the next great markets, Brazilâ''s doesnâ''t seem to occupy a place of relevance in the global scenario.

Still, if youâ''re an auto exec, youâ''d probably rather be in Brazil than in Detroit these days. In Brazil, thereâ''s reason to party, and they know how to party there.


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