Can Exports Save the South American Auto Industry?

Size: px

Start display at page:

Download "Can Exports Save the South American Auto Industry?"

Philomena Norris
5 years ago
Views:

1 Automotive Can Exports Save the South American Auto Industry? Diego Portillo Mazal Senior Market Analyst, Latin America Automotive Group Detroit, 30 September 2004

2 Latin American Markets are a Rollercoaster Regional Vehicle Sales and Production (millions of units) Sales Production 2

3 Brazil Is Recovering, But Slowly The devaluation of the real was felt immediately in the passenger car sector Brazilian light-vehicle sales fell from 1.87 million units to 1.2 million units in two years. Sales recovered in 00 and 01, then dipped again in the first part of 02 as a result of election jitters, and again in 03 as a result of high interest rates. Millions of units BRA: Total Vehicle Sales Brazil seems poised to recover, but in a start-and-stop pattern. The market only returns to the 97 level of sales in 09, representing a twelve year delay in the growth path of the market. Stops can occur with any change in the economic outlook or minute changes in the tax structure here are shown expected dips in election years. 3

4 Argentina, a Shadow of Itself Thousands of units ARG: Vehicle Sales Argentina has finally begun to show recovery The market grew more than 40% in 2003, albeit from an extremely low level (about a fifth of the sales level in 1998). Sales year-to-date have been very strong, and we now expect the recovery in Argentina to be fairly robust. The situation in Argentina is still very delicate, and anything could derail the progress of the market. Our more conservative scenarios push recovery in the Argentine market on a much lower recovery path, with more bumps, and delaying the rebound to the 1998 level of sales until after

5 Venezuela: Vehicle Forecast VEN serves as the perfect example of the swings in the vehicle market. 97 and 98 sales show the effect of a strong economy Vehiculo Familiar and taxi programs boosts car sales in 01 and early 02. The political and social crisis sharply contracts the size of the market in 03 and 04. Thousands of units VEN: Total Vehicle Sales The recovery in the market is largely dependent on the resolution of the Chavez political crisis. An additional concern is the mass emigration of the middle and upper classes in response to the Chavez administration. The economy can always surprise on the upside if oil revenues increase at any time in the forecast period. 5

6 Autos Sales Affect The Economy The crisis in Brazil, Argentina and Venezuela showed that the Automotive sector is seen as key by voters. Drops and rises in car sales are frequently reported in the news, and can affect consumer confidence (which in turn affect consumption, in what can be a downward or a virtuous spiral). Layoffs at car plants make for large news, much more than in other sectors being a car producer nation seems to have a certain amount of cache. As a result, governments in the region have always been willing to try to boost auto sales and keep up employment Dips in the market have been responded to with all kinds of programs The Plan Canje in Argentina was the most extreme case. Emergency Agreements between government, car manufacturers and unions have lowered taxes, frozen prices and maintained employment for short periods. Restructuring tax rates or lowering them temporarily has also served to boost market in times of need. 6

7 Domestic Markets Will Struggle to Grow We expect to see continued call from the industry for government plans to boost the domestic market. Contrary to logic, we also expect to see a continued effort to bring out new products to market, in order to keep market share in a very competitive environment. Simultaneously, we will see a scrambling to keep inexpensive models in the market, fighting for the volume of buyers that can just afford to get into the new car market. Creating new models for emerging markets (Chevrolet Celta) Keeping around obsolete models (Fiat Uno) Simultaneous sales of two platforms (Chevrolet Corsa 4200 and 4300) 7

8 South American Automotive Production Millions of Units BRA ARG COL VEN ECU CHL PER URY 8

9 The Top Three Players Battle for the Lead Latin American Vehicle Prod (Millions of units) VW GROUP GM FIAT GROUP FORD RENAULT OTHER VW, GM and Fiat play musical chairs in the top three spots as new models come to market. Ford dropped dramatically since the dissolution of the JV with VW, and is only beginning to recover as a result of the success of the Fiesta line-up. French manufacturers are up and coming, but remain small. More than half the vehicles produced in the region are B segment cars (the figure rises to 75% if we include A and C1 segment cars). 9

South America Did Not Live Up to Potential, Now Underutilized Capacity is a Problem South American production capacity is estimated to be about 4.5 million units per year.

10 South America Did Not Live Up to Potential, Now Underutilized Capacity is a Problem South American production capacity is estimated to be about 4.5 million units per year. Brazilian capacity is reported as 3.2 million units Argentina has capacity for another 900,000 units The Andean countries have capacity to output another 400,000 units. With current levels of production, utilization in the region was around 45% last year. Brazil is ahead with utilization rates of around 53% Argentina is struggling to stay alive with utilization at 19% (up significantly, to almost 30%, this year) 10

11 Argentina s Industry Has The Highest Risk Production is largely dependent on the foreign demand, especially from Brazil. Argentina exported 45% of total vehicle production to Brazil (just over 200,000 units in 97). Argentina will seek new markets, like Mexico, but few can take the volume that Brazil used to. Currently, the industry has been kept alive by hope and a technicality To be considered a Mercosur producer, OEMs must have operations in both countries. There is a hope that the situation in Argentina will stabilize and that now cheap production can be used for export. The outlook for the domestic market alone does not justify the existence of a local industry. If Mercosur collapses, OEMs will individually decide if they wish to keep production in both Argentina and Brazil, based on new import taxes, costs of production, ability to export and size of sunk investment. 11

12 Outward Bound Current expectations are that the road to recovery is going to be long, so depending solely on domestic markets will not suffice. The crisis showed that the interdependence of traditional trade partners worked in times of plenty, but was a danger in times of slowdown. Thus, an industry focused on serving an expanding domestic regional market has started to look for trade extra-zone. Brazil was the first to move, and has been doing a great job of finding new partners. Mexico is the most important partner so far, but Europe and China could also bring in some good volume. Brazil also happy to start looking for all the overlooked volume, like South Africa, Central America and even New Zealand. Argentina so far not capitalizing on this trend. Still largely focused on Brazil, though that will likely change, starting with the Toyota IMV. 12

13 Re-Inventing One s Image South America is no longer the new frontier or the land of milk and honey, and it is also no longer an ultra-low-cost producer. China has taken that spot away from all competitors. Brazil, in particular, has started to sell itself to headquarters as a designer of vehicles for the emerging markets. The diversity of a market that needs inexpensive cars, yet demands fresh and innovative product on a constant basis places in a unique position. Local pride took a while to build but now serves as an important tool. Brazilian subsidiaries hope that designing the model will help to keep at least some of the production in the country, or at least to be able to provide CKD kits to whomever wins the project. 13

14 Finding Models to Export Mercosur producing a series of models that should find high acceptance in other markets. Toyota IMV Chevrolet Montana Chevrolet Corsa (CKD) Chevrolet Celta Ford Ecosport Smart ForMore VW Lupo (Tupi Europa) VW Lupo (Tupi Europa) Possible VW China Car (rumours refuse to die) 14

15 South America Feeds Mexico and Mexico Feeds U.S. SA supplies Mexico with many low end models while Mexico supplies the U.S. with highmargin vehicles 15

16 Mexico Becoming a Market of Imports Mexico seems content to open the market of small entry vehicles to other providers and focus on building for U.S. Import sales increased from 33% of total sales in 1998 to 60% last year. Imports are expected to take almost 75% of the market by 2010 Millions of units Mexico Vehicle Imports South America would love to see increasing share of the Mexico import market as that increases Import sales increased 7% last year. Forecast calls for an 8% per annum rate of growth through

17 Traffic Towards the South Mostly Symbolic Some models are imported by South Americans from Mexico, but volume so far is low just about 15,000 units per year. 17

18 China s Growth Makes it Attractive 5.1 million in million in million in Sales (Millions of Units) Car LCV Trucks and Buses (>6 t gvw) 18

19 China Car Demand Vs Capacity Evolution Production/Capacity (Thousand units) Local Players (New) Local Players (Current) Foreign JV Optimistic Hard Landing Semi-Hard Landing Base As long as demand is outpacing capacity installation, China could easily be a market for imports Sheer size of the market means that even a small share of the market could be very attractive. The problem starts as early as next year, and gets worse in 2009, as capacity far outweighs local demand Unless, of course, China pulls a Mexico and starts to become an export producer 19

12.6 Central American and Caribbean Have Largely Been Ignored by Everyone 2003 sales (thousands of units) 12.8 122.5 13.0 55.8 17.9 22.

20 12.6 Central American and Caribbean Have Largely Been Ignored by Everyone 2003 sales (thousands of units) PUERTO RICO GUATEMALA COSTA RICA PANAMA EL SALVADOR OTHER CENTRAL AM CARIBBEAN Puerto Rico represents almost the same volume of sales as all the other countries put together.. For this reason, and others, Puerto Rico deserves to be analyzed alone. In addition, tastes in Puerto Rico are different (closer to USA) Only five markets in the region have sales of over 10,000 units. Some twenty islands in the Caribbean make up those 56,000 units shown. Without Puerto Rico, the region sells roughly the same as Chile. 20

21 16% 14% 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% Puerto Rico Moves More Like the US, so Not a Market for South America Light Vehicle Growth USA PRI By and large, Puerto Rico sales exhibit the same trend behavior as the US light vehicle market Exceptions, of course, can be found when extreme weather hits the island, which affects demand also in the following year. This pattern would probably also be found at the regional level inside the US. The forecast for Puerto Rico is positive but very cautious. Most, if not all, the economic hiccups that affect the US will also show up in Puerto Rico. 21

22 America s Backyard Served from Afar Central American and Caribbean* Sales by Source Market Share Japan 40.4% 60.0% Korea 16.7% 13.6% NAFTA 13.3% 8.7% France 17.6% 3.8% Germany 2.5% 3.4% Brazil 1.7% 2.2% Other 7.8% 8.3% *Excludes Puerto Rico The Big Three have by and large ignored this region that they should by all rights be able to easily supply. Big Three have failed to capitalize on the growth of the SUV and PUP segments, that should be their strength. The Japanese have traditionally sold wherever there is even small volume to be found. Japanese brands are seen as a good combination of quality and price. Koreans have come in strong in the 1990 s, taking a lot of volume on the strength of price. South America has done nothing to export to Central America or the Caribbean. Market share is minimal but could increase significantly as Brazil and Argentina start to push product. 22

23 Central American and Caribbean Small Volume Remains Overshadowed We expect some growth in the region as their economies continue to grow, and as the countries seek further exports through trade accords. These very open markets would have to fight very hard to have a voice at the table of any trade negotiation with important producers (not just consumers) like the USA, Canada, Mexico and Brazil. We expect growth to be uneven from year to year as different effects hit each of the 27 nations (and two territories) in our forecast. We do not foresee sales in the region of over 260,000 units until after As a result, we see the relatively small region being overshadowed by its Southern and Northern neighbors. Despite this, Brazil s new focus as a producer of cars for Emerging Markets is making it look at Central America and the Caribbean as a future market to develop. 23

24 South America CAN Become an Export Base The technical capabilities, desire, trade agreements, product and output capacity are there We expect to see South American producers, particularly those in Brazil, continue to emphasize their ability to design and produce cars for Emerging Markets better than home office. Money will continue to be spent in fostering the development of local design centers and the education of new generations of car designers. The search for markets will be continuous Right now, South America looks to Mexico, China and the overlooked Emerging Markets, but search for new markets should not stop. The entry into the European market will like occur more on a model-by-model basis (mostly on models solely sourced out of SA), as most models produced in South America have European counterparts. 24

25 Automotive Thank you! Diego Portillo Mazal Senior Market Analyst, Latin America Automotive Forecasting Automotive Group Tel:

Central America and Caribbean Volume Source in the Shadow

Automotive Central America and Caribbean Volume Source in the Shadow Diego Portillo Mazal Senior Market Analyst, Latin America Detroit, October 8, 2003 Central American and Caribbean Have Largely Been