Brazil & Southern Cone - February 2012 (ISSN 1741-4431)

President Dilma Rousseff’s new industrial policy, dubbed import substitution industrialisation 2.0 (ISI 2.0), is forcing multinationals that want a slice of Brazil’s dynamic domestic market to set up shop locally. As one commentator put it, the main tenor of ISI 2.0 is, “We like imports made in Brazil”.

Brazilians consumed a staggering 185m tins of the energy drink Red Bull in 2011, representing growth of 20% year-on-year. Red Bull was the first energy drink to arrive on the local market back in 1999 and it has consolidated a firm hold on the sector, with a 48% share of the R$500m (US$290m) market in December 2011, according to Nielsen data. Its main rival locally is Burn (distributed by Coca-Cola), with an 18% market share. Cheaper alternatives have around a quarter (25%) of the market. The local drinks giant Ambev got in on the action in early 2011, launching its Fusion Energy Drink.

Brazil represented 4% of Red Bull’s global market sales of 4.6bn tins in 2011.  Red Bull is now returning the favour, announcing that it is in talks to open its third manufacturing facility – and its first outside of  Europe (Austria and Sweden)  – in the Brazilian city of Manaus (the capital of Amazonas state), with a R$509m (US$296.5m) investment over three years.  The factory, to be sited within the Manaus free zone to avail of its attractive tax incentives (import taxes for companies based in the zone are slashed by up to 88%), will have an annual production capacity of 64m litres, or 206m tins.

The move is well-timed, ahead of the 2014 FIFA World Cup and the 2016 Olympics in Brazil. Red Bull has a long association with sports, sponsoring two Formula One motor racing teams. In Brazil itself, the company owns a football club, Red Bull Brasil, based in Campinas (São Paulo), which won a local league title in 2010. It also sponsors some 10 Brazilian surf and skating professionals. Burn is a keen sponsor of extreme sports like snowboarding, skiing and skateboarding.

Yuppie farmers drive up Jaguar-Land Rover sales

Elsewhere, Jaguar-Land Rover, since 2008 owned by the Indian firm Tata, has also confirmed its plans to build a factory in Brazil. Ralph Speth, the company’s CEO, told Dow Jones in early February, “Brazil and the rest of South America is a very interesting market. It is also an emerging market, growing very aggressively. We are thinking of a kind of a copy-paste facility of the Indian plant in Brazil.”

That is exactly what the Rousseff government wants to hear, underlining that the decision in September 2011 to aggressively raise taxes on imported inputs has had the desired effect – pushing international manufacturers to set up shop locally, creating jobs.

In October 2011, Renault-Nissan also announced a second manufacturing facility in Rio, as well as the extension of its plant in Paraná. Aside from the usual wealthy urban markets of São Paulo and Rio, Jaguar-Land Rover is also enjoying a surge in sales up north, not least in the country’s booming agri states. Brazil and China are the leading growth markets for the car industry, offsetting the massive slump in Europe and the US. According to Speth, the company is seeking a joint-venture partner in China to build an assembly plant there for an estimated US$158m.

Mexican tempers rise over auto pact ‘review’

It’s not all happy camping, however. On 2 February Brazil’s external trade secretary, Tatiana Lacerda Prazeres, confirmed that the Rousseff government was “reviewing” its decade-old auto trade pact (Economic Complementarity Agreement) with Mexico, amid a surge in imports from its northern neighbour.

Brazil’s imports of Mexican cars and car parts rose 40% year-on-year in 2011 to over US$2.0bn, while its auto exports to Mexico came to just US$372m. The 2002 bilateral auto pact liberalised the trade in vehicles and parts made in Brazil and Mexico. In September 2011, Brazil announced that it would lift its tax on industrial products (IPI) by 30 percentage points (to a maximum 55%, depending on engine size) on vehicles failing to meet stricter local content rules. The new measure, effective as of December 2011, stipulated that locally-based manufacturers must source at least 65% of contents from Mercosur or Mexico. Effectively, it is a barrier to imports.

The upshot, however, was that many locally-based manufactures like Fiat simply switched their supply chains from places like Poland to Mexico.  The depreciation of the Mexican peso last year also means that labour and other costs in Mexico are now cheaper than in Brazil, making the Mexican auto sector ever more competitive. Given this turn of events, Brazil now proposes scrapping the accord with Mexico altogether, a radical move that would likely provoke a strong Mexican reaction.

A high-profile Mexican delegation ended two days of negotiations with the Brazilian government and motor industry officials on 9 February, but failed to clinch a deal. Mexico is refusing Brazil’s demands to renegotiate, pointing out that for the first six years of the accord. Brazil ran large surpluses with Mexico. The Mexican delegation also pointed out that thanks to the pact the bilateral auto trade has more than doubled from US$1.1bn in 2003 to US$2.5bn in 2011. It noted that between 2003 and 2011, Mexico’s cumulative trade deficit with Brazil in vehicles was about US$10bn.The two sides agreed to hold another round of meetings in Mexico on 28-29 February.

Playing by the rules

On 31 January the external trade ministry published a list of locally-based auto manufacturers that avoided the increase in their IPI tax bills under the new local content rules. These are: Agrale, Caoa (Hyundai), Fiat, Ford, General Motors, Honda, International Indústria Automotiva da América do Sul, Iveco, MAN Latin America, Mercedes-Benz, MMC Automotores do Brasil, Nissan, Peugeot, Renault, Scania, Toyota, Volkswagen and Volvo. Notably absent is Toyota.

WTO complaints

In late January seven governments came together at the World Trade Organisation (WTO) in Geneva to allege protectionism in Brazil’s domestic automotive industry. Australia, Colombia, the European Union, Hong Kong, Japan, South Korea and the US said that Brazil’s move as of December 2011 to hold stable the tax on industrial products for automotive manufacturers using (65%+) local components was “inconsistent” with international trade regulations. However, the complainants admitted that a formal case was unlikely, as it would probably not be taken up before the end of the temporary measures, which were implemented for a 12-month period.

Auto Sales

According to Brazil’s national association of automotive manufacturers (Anfavea), new vehicle registrations (cars, semi-light vehicles and buses) rose 9.6% year-on-year in January 2012 to 268,273 units. Sales fell 23.2% month-on-month over December 2011, amidst an adjustment in sales of buses and lorries to take account of new environmental regulations.

Breaking down the figures, sales of locally produced vehicles rose 73.0% year-on-year (but fell 21.2% month-on-month); sales of imported units rose 17.9% (but fell 27.9% month-on-month).  Imported vehicles accounted for 25.3% of total new registrations in January.

Despite weaker domestic conditions, Anfavea still expects overall growth of up to 3% in 2012, to reach 3.475m units. A recent report by ScotiaBank forecast total car sales in Brazil of 2.83m units in 2012.

• Top three

GM (23.6%), Volkswagen (21.6%) and Fiat (21.5%) had 66.7% of the domestic Brazilian market between them in January 2012, according to the latest Anfavea figures for new registrations.