Brazilian market growing rapidly – Excellent opportunities for international automakers and suppliers

• Think:act CONTENT "Is Brazil a car paradise?" shows: Automobile sales in Brazil will double by 2020, reaching 6.6 million units p.a.
• Brazilian car market could become the world's third largest by 2015, after China and the US
• Utility vehicle sector set to see 8% yearly growth until 2015
• Competitors from China and India pushing strongly into the low-price segment – and could capture 10% of market by 2020
• Major manufacturing costs, expensive financing and high taxation combine with low automation levels in production to blunt Brazil's competitive edge

With rising affluence in sections of its population, Brazil's flourishing economy has impacted positively on the Brazilian automotive sector. As a result, the number of car sales is set to grow to 6.6. million units per year by 2020. And the supply structure is shifting. Rising expectations among car buyers aregenerating stronger demand in the premium segment. In 2014, the number of premium vehicles sold in Brazil may reach one million per year. International OEMs and automotive suppliers can take advantage of this trend. Players in the Brazilian market can, however, only match the global competition if they are prepared to invest significantly in many parts of the value chain. Relatively low automation levels and poor productivity are currently pushing up production costs. The situation is analyzed in the latest edition of Roland Berger Strategy Consultants' think:act CONTENT magazine, entitled "Is Brazil a car paradise?".

"Brazil is currently developing into a highly attractive location for national and international automakers," says Stephan Keese, Partner at Roland Berger Strategy Consultants. "Thanks to strong economic growth and rising affluence among Brazilians, the car is gaining a completely new status." This is reflected in the experts' forecasts for the period ahead. They find that annual car sales in Brazil could reach around 6.6 million units by 2020. "That's twice as many as in 2010. Assuming growth continues, Brazil could already become the world's third largest car market in 2015," says Keese. At the same time, Brazilian car owners have rising expectations. "Brazilian consumers used to be quite happy with outmoded technology. But they now demand cars that are both good value and state-of-the-art." The Brazilian market has seen particularly rapid growth in the premium segment: Whereas just 150,000 vehicles were sold in 2006, sales reached around 670,000 in 2010. And for 2014, the experts expect premium car sales to stand at more or less a million.

Suppliers and truck makers cash in on growth

A surging Brazilian market also offers excellent opportunities for automotive suppliers and utility vehicle OEMs. "Over the last ten years, suppliers have been able to boost their sales by a factor of four," notes Keese. And the experts expect to see revenues experience an additional EUR 13 billion hike by 2020. This trend is not only down to the growing demand, explains Keese: "Modern vehicle platforms require new technologies, and these generate new sales." There are similarly positive forecasts for the OEMs in the utility vehicle segment. This market is likely to see sustained annual growth of around 8% through 2020.

Strong competition from China and India

Yet established companies on the Brazilian market are having to face a new wave of competitors – especially from China and India. "It is above all the market leaders from Europe and the US who will be feeling the heat. In 2007, their share of output still stood at 84%. We expect it to have fallen to 70% by 2015," says Keese. Setting their prices at 30% below average market levels, Chinese and Indian automakers are making life harder for their competitors in the low-price segment. They could capture a 10% share of the Brazilian market by 2020.

Potential for improvements in production

Notwithstanding the positive outlook, Brazil's automotive market has a lot of room for improvement on the production side. High manufacturing costs and financing costs of up to 20% represent a significant obstacle for OEMs. The international comparison shows that Brazil is not yet competitive. High wages, low productivity and a lack of automation have driven up production costs. "However, if they invest in efficiency improvement and automation, the manufacturers could soon hold their own against international competitors," says Stephan Keese. Measured against other economies, Brazil's innovative capacity remains weak. "Globally, automotive suppliers invest around 5% of their revenue into research and development, but the figure for Brazilian suppliers stands at just 3%," Keese points out. Nevertheless, he sees a major potential in the Brazilian automobile market: "Companies that are aware of their weaknesses, and willing to realign their strategies, can take full advantage of this burgeoning market in Brazil." Success requires investment in modern production facilities. Indeed, international car makers are already planning to invest some EUR 12 billion in modernizing their factories by 2014.