Brazilians Heart Imports. For How Long?

In the 80s, there were just 4 car brands in Brazil, all domesticated animals, carrying familiar names such as Volkswagen, Fiat, Chevrolet, and Ford. The luxury car at that time, for which we had the privilege of paying over US$50,000, was the (modernized, but nonetheless a 1960s Opel Rekord) Chevy Opala. Then, the 90s came along and bang, the market was blown wide open.

Three things happened: The so-called “domestic” makers were forced to modernize and sell here the same cars they did abroad. Before, they just had shipped outdated and slightly banged-up tooling. The so-called “newcomers” (mainly the French and the Japanese) set up shop, and imports exploded. So despite the best efforts of the domestic industry to ward off the foreign hordes, they had to cower behind the Brazilian government and convinced them for some deliverance. This came in the form of a 35 percent trade barrier on all imported cars.

Over time, market forces and unintended consequences of official trade policy have all been slowly, but surely, chipping away at the effectiveness of that 35 percent hurdle. Mercosur came into being, making cars imported from Argentina officially national cars, i.e., they receive the same tax treatment of Brazilian cars. A free trade agreement (in cars) was signed with Mexico. This provides that cars imported from there don’t have to pay 35 percent import tax. Lastly, but most importantly, the value of the dollar has been eroding. From those heady days when Brazil slew the hyperinflation dragon (largely based on a policy of parity between dollar and real), to the dark days before Lula became president (and the dollar went over R$4=US$1), to the present when the dollar was down at the beginning of the week to just R$1.60. All of this renders the 35 percent hurdle a small bump for Brazilians who dream of driving foreign metal.

According to the Brazilian news site g1.com, the general market grew around 10 or 11 percent (take your pick, see here). At the same time, whoa: Imported cars more than doubled in 2010.

According to Abeiva (the Brazilian association of car importing makers), their numbers exploded by 144 percent. In 2010, imported cars reached a grand total of 118,873. Great, right? Coincidence or not, that number is very close to the one reached in 1995 (119,543 cars), the best ever for imports. That number caused the Brazilian government to slap the import industry with the punishing 35 percent import tariff. Will history repeat itself?

Luiz Gandini, the president of Abeiva, defensively (?) declared to the g1 news portal that this number is not a threat to Brazilian industry. “Although we almost reached that same mark [in absolute numbers], in 1995 the market was just 1.7 million units”, he said. “Now, the market is 3.3 million, so our share has dropped.” Mr. Gandini emphasized, “We are not a threat.”

To back this up, Abeiva provided the following numbers: 80 percent of the cars sold in Brazil in 2010 were built here. 16.5 percent were imported and sold by the “domestic” makers. So only 3.5 percent of the total of cars sold here was sold by Abeiva members (those who don’t build anything locally). See? We are harmless!

Anfavea (the association of car makers that produce in Brazil) said they are not yet “frightened” by imports (according to g1.com), but they emphasized that imports have grown from 13.3 percent of sales two years ago to 18.8 percent in 2010. They also said that this is beginning to affect the profitability of the “locals”.

Forecasts also guarantee that imports will remain in the news (and in Brasilia’s sight). While the forecast for the general market is a growth of only 5 percent (according Anfavea’s President Cledorvino Belini’s declaration to Brazilian website UOL), imports will probably rise by 57 percent in 2011.

Though there is some evidence to the contrary, Brazil largely remains a Catholic country. This means, of course, that guilt is very big here. In a way. Akin to the American “sin taxes” on alcohol and cigarettes, conspicuous consumption is a behavior that is politically expedient to slap high taxes on. Fairly or not, imported cars smack of conspicuous consumption to the average Brazilian. If I were a member of Abeiva, I’d surely keep that in mind.

Coincidentally or not, I talked to some bigwigs in the Brazilian car industry last week. Their biggest complaint? Imports. Steel. Mexico agreement. Weirdly, my source had some thoughts very similar to the conclusions I reached after visiting the São Paulo car show. He said that the biggest attractions there were the Koreans and Chinese because the Brazilians just can’t compete.

And what are the locals doing about it? They are in talks with the government. Again. And they are very happy to report that the new government seems more sympathetic (read tax breaks or tariffs to protect the “national” industry so that it has time to become more competitive on a world stage)to the national industry’s plight. Hummm. At the same time, some of the more lucid minds in the industry wonder just how long can Brazil keep up the 35 percent barrier. After all, this country belongs to the WTO.

Taxes are a stifling reality in Brazil. And not only for the car biz. However, the government just can’t seem to get enough. It clouds their judgment. Though it’s become quite clear, everyone in Brazil needs some relief; the government just can’t seem to control itself.

If nothing is done however, this number of imported cars shows a clear sign of weakness in the Brazilian car industry. In another report at g1.com news site, they mention how exports are down. They also say they’ll go down even more in 2011. If the government just slaps a higher import tariff, we will go back to the bad old days of the 50s, 60s, 70s and 80s when time stopped in the Brazilian carscape. If however something is not done, there is a very real risk of deindustrialization.

The challenge is set. Can Brazil rise to the occasion?