Despite Declining Overall Auto Sales In Brazil, Luxury Volumes Are On The Rise

June 27th, 2014 by Trefis Team
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DAIMLER AG

Global passenger vehicle sales grew 5.6% through May, bolstered by strengthening North American and stabilizing European automotive markets. [1] However, South America volumes fell by 4.9% during this period, dragged down by slow sales in Brazil, Argentina, and Venezuela. Vehicle demand in Brazil, the fourth largest vehicle industry in the world, has taken a hit this year due to tighter credit availability, lay-offs resulting in unemployment and lower consumer spending. However, despite the decline in overall auto volumes, the luxury segment of the Brazilian vehicle market is growing at a steady pace. Growing premium vehicle demand in Brazil has also prompted automakers around the world to pour investments into the country and expand local production capacity. In the next five years, the luxury vehicle market in Brazil could grow at a rapid pace, fueled by growing wealth of the riches and low current penetration levels.

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Brazil’s Auto Industry Slows Down

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Brazil’s economy is slowing owing to higher interest rates put in place to control inflation. These measures have impacted consumer spending, which slightly slowed down this year, as compared to the last quarter of 2013. [2] Lower demand for vehicles prompted some of the leading automotive manufacturers to undertake measures such as shift reductions and layoffs, consequently decreasing production levels. The unemployment rate went up to 7.1% in Q1 2014 in Brazil, up from 6.2% in the previous quarter. In fact, employment in the automotive sector in the country through May is 2.8% below 2013 levels. [3] Lower customer demand has also raised vehicle inventory for automakers, with days sales of inventory increasing to 48 from the normal average of 23-32. [4] Rising unemployment, higher inventory levels, and lower demand have resulted in 5.5% year-over-year decline in vehicle sales in Brazil in the first five months of this year, with volumes falling 7.2% in May. Brazil’s automobile industry has also suffered due to a fall in exports, primarily because of import restrictions in Argentina. [5]

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Luxury Segment Posts Strong Growth

Despite the slowdown in the overall Brazilian automotive market, luxury vehicle sales have been on a rise in the country this year. While each of the top four automakers in the country (Fiat, Chevrolet, Volkswagen, Ford) saw negative volume-growth year-over-year through May, leading luxury companies BMW, Mercedes, and Audi, each witnessed large volume rises. Below we take a look at reasons why the luxury segment in Brazil has grown so far this year and could continue to rise, seemingly unrelated to the fall in demand for the much larger non-luxury segment of the country’s vehicle market.

  • Impact Of Interest Rate Rises Circumvents The Affluent Customers

A decade of steady economic growth in Brazil has significantly increased the middle-class population in the country, now constituting half the country’s population, up from just over 37% in 2003. [6] Stricter bank lending policies, rising interest rates, and layoffs, have mainly affected the middle-class in Brazil, which is primarily why the demand for non-luxury or relatively cheaper vehicles has declined. However, interest rate hikes are expected to benefit the more affluent customers, who would generate larger returns from their investments. This is expected to boost luxury vehicle sales as affluent customers are the potential premium vehicle owners.

  • Potential Premium Vehicle Owners And Collective Fortune To Grow

Brazil is one of the most unequal countries in the world. Despite having a small proportion of high net worth individuals (HNWI), which form the target base for luxury vehicles, Brazil’s combined HNWI wealth of around $4 trillion is the third largest for any country. [7] The population of “rich” Brazilians, with a family income higher than 5,329 reais (nearly $2,374) per month, has also grown to 29 million this year, up from 13 million in 2002. The HNWI population in the country is expected to further rise by 138% between 2012-2022, increasing the target consumer base for premium vehicles. [8]

  • Low Current Penetration Levels For The Luxury Vehicle Segment

Brazil luxury car sales represent a very small portion of the overall vehicle industry presently, and are estimated to constitute only around 1.7% of the net sales by the end of this year. In comparison, the luxury vehicle segment in the U.S., the largest premium car industry in the world, constitutes 10-11% of the country’s overall auto market. In Russia and China as well, the figure stands at around 10% and 7% respectively. [7] Low current penetration levels of the luxury vehicle segment in Brazil, along with the growing population of affluent customers and increasing wealth, present huge growth opportunities for luxury automakers.

  • Tax Breaks And Reductions In Import Tariffs To Lower Prices

In 2011, the government had imposed a 30% tax hike on imported cars manufactured by companies that didn’t have factories in Brazil. High import tariffs, in addition to the cumulative tax of around 37% on all cars in the country, have kept vehicle prices high. However, as automakers such as Daimler AG‘s Mercedes-Benz and BMW have vowed to begin local production within the next couple of years, the government has offered tax breaks on imported cars from these manufacturers. Tax incentives contributed to the impressive 24.5% year-over-year rise in BMW’s volumes through May. BMW is presently the market leader in Brazil’s luxury car industry, and will start local production in the country this year. Production within the country will also help automakers evade import tariffs, thereby lowering vehicle prices.

Low current penetration levels, increasing disposable incomes, and widening local production network resulting in reduced vehicle prices, are expected to bolster growth in Brazil’s luxury vehicle segment going forward, despite declining sales in the country’s overall automotive market.  

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Notes:
  1. Global passenger vehicle market monthly forecast [↩]
  2. Consumer spending in Brazil [↩]
  3. Brazil unemployment rate up, June 2014, latinnews.com [↩]
  4. Brazil auto production down 18 pct in May, June 2014, latino.foxnews.com [↩]
  5. Brazil vehicle sales down 7.2% in May, June 2014, wardsauto.com [↩]
  6. Brazil middle-class grows to nearly 50% of population, laht.com [↩]
  7. Sales of luxury cars boom in Brazil, June 2014, ft.com [↩] [↩]
  8. The wealth report 2013 [↩]