Local car producers looking to Brazil for growth

Domestic auto Haima attracts visitors at the 27th St Paul International Auto Show in Brazil. South America will become a new growth market for China's domestic brands in the near future, analysts say. [Yang Limin / Xinhua]

As competition in the domestic automobile market intensifies, China's local brands are shifting their focus overseas.

Rapidly developing markets in South America, led by Brazil, are shaping up to be the new focus of investment in the future.

Most recently, Chery Automobile launched a research and development project to support local production in Brazil, the world's fourth-largest auto market.

As a follow-up to the engine plant it completed in November, the automaker from Anhui province is considering housing an R&D center there, said Luis Curi, CEO of Chery Brazil.

The center will help Chery localize its products assembled in the new $400 million plant in Brazil, which will begin operation this year.

Curi said the plant has a planned production capacity of 100,000 to 150,000 units a year. In the initial stage, it will manufacture three models, including the Chery A1 and the Fulwin 2.

Zhejiang Geely Holding Group also plans to form a joint venture in Brazil, aiming to grab a greater share in the country through locally produced vehicles.

Geely, parent of the Swedish luxury carmaker Volvo, will begin to sell its Emgrand EC7 and Gleagle GC2 models in Brazil starting this January to test the waters before going ahead with localized production, according to Grupo Gandini, the authorized dealer for Volvo in Brazil.

At present, Geely vehicles sold in Brazil are assembled at its plant in Uruguay using parts and components shipped from China.

Geely's only manufacturing facility in South America, the plant produces 20,000 vehicles a year to meet demand in its home country as well as Brazil and Argentina.

Grupo Gandini Chairman Jose Luiz Gandini said that Geely will join hands with the Brazilian auto group in a 60-40 joint venture in the near future. The models produced by and production capacity of the venture will be decided later according to the reception received by the Emgrand EC7 and Gleagle GC2.

Brazilian media reported in 2012 that Geely plans to locate the plant in the state of Santa Catarina, with an estimated investment of about 650 million reais ($276 million) and an annual output of 100,000 units.

Strict tariff system

According to Geely management, it is still waiting to see the effects of strict tariffs set by the Brazilian government aimed at protecting and encouraging local vehicle production.

"Chinese automakers want to gain volume sales in Brazil," said Namrita Chow, a senior analyst with consulting firm IHS Automotive.

"The high tariff on imported vehicles has led to the erosion of the low-price advantage that China-built vehicles had."

In September 2012, Brazil's government raised taxes by 30 percentage points on imported cars and trucks, and those produced in Brazil and other Mercosur countries that fail to meet the 65 percent localization rate, to protect and grow its own automobile industry.

The measure is expected to increase taxes on cars by between 7 and 25 percent, depending on engine size, to as much as 55 percent.

"Chinese automakers need local production, if they are serious about winning market share from existing and new players," said Chow.

To save sales costs and avoid the high taxes, a number of Chinese automakers have also announced plans to build factories in Brazil, including Anhui-based Jianghuai Automobile Co Ltd, known as JAC, and Chongqing-based Lifan.

IHS Automotive reports that total light vehicle sales in Brazil are currently at around 3.6 million units a year.

By 2015, the analysts predict this number will rise to 3.9 million units and by 2020, to 4.8 million units.

In the first half of 2013, Chery's sales in Brazil dropped 72.5 percent from a year earlier to 2,504 units.

The leading Chinese exporter has only a 0.15 percent market share, ranking 20th in a market dominated by Fiat and Volkswagen.

Chery hopes that local production can help increase its market share to 3 percent.

Affected by the strict tax policy, JAC's monthly sales also dropped sharply from 3,000 units to 1,800 units.

The measure also put on hold JAC's original plan to set up a $450 million wholly owned facility in Brazil, its first in South America. Originally, the company planned to produce 100,000 units there by the end of 2013.

However, JAC in February said that it will restart the local production project by adding investment to its existing sales joint venture with Brazil's SNS Automoveis Ltd, with capital totaling $250 million.

Other initiatives

Beiqi Foton, one of China's leading commercial vehicle makers, signed an agreement with the Bahia state government to build a $300 million plant in Camaari.

To be operational this year, the facility will have annual capacity of 30,000 light-duty trucks and minivans by 2017.

By then, it will set up 130 dealers around the nation.

In July, officials from the State of Rio de Janeiro said that Beiqi Foton will set up its second factory in the state along with the company's Brazil headquarters. With an investment of 250 million reais, the facility will produce 20,000 heavy-duty trucks annually by 2018.

For the two factories, in the initial phase, Beiqi Foton will assemble vehicles in Brazil out of parts shipped from other countries.

It will gradually increase the use of locally made components to 65 percent by 2017 to avoid high taxes.

The move follows a similar action by Lifan, which is planning with Brazil's Effa Group to build a 300,000-unit assembly plant in three years.

The company expects its sales in Brazil to reach 15,000 units in 2014.

Chang'an Automobile, China's fourth-largest automaker, also has plans for production facilities in Brazil and elsewhere.

In the first 10 months in 2013, Chang'an's overseas sales surged by 129 percent year on year, greatly driven by its sales in South America, which for the first time overtook the Asian market.

The company's Vice-President Zhu Huarong said Chang'an will invest $820 million in 10 major global markets with the aim of selling 400,000 vehicles by 2020.

To this end, Chang'an will establish three major overseas manufacturing bases in Russia, Brazil and Iran, with combined investment of about $700 million.