Brazil’s high import duties, low-cost supplier countries create challenges for the U.S. aftermarket
In 2001, Goldman Sachs, the U.S. multinational investment banking firm, coined the acronym “BRIC” to describe the four countries of Brazil, Russia, India and China who, it predicted, would rank in the world’s top six economies by 2032. As if to confirm this prediction it was announced in early 2012 that Brazil had overtaken the UK to become the world’s sixth largest economy.
Despite its relentless economic growth, Brazil’s average per capita income of 11,000 dollars per annum still remains less than one third that of the UK’s. However, even this disparity is gradually being eroded by an ever-increasing middle class with greater spending power. As of November 2012 the Brazilian middle class was estimated at 52 percent of the total population.
With the largest economy in South America, Brazil looked set to cement its high status on the world stage with its hosting of the football world cup in 2014 and the Olympics in 2016. However, this good news for the country’s economy has been marred in recent months by widespread riots, which resulted in an 11.1 percent drop in the sales of new vehicles compared to the same time last year.
While a major percentage of Brazil’s output is focused on agriculture and the processing of foodstuffs, its most important manufactured items are automobiles. Some of the world’s major automobile manufacturers including VW, Ford, Fiat, Honda and Toyota now have large manufacturing plants in Brazil.
In July 2013 the top four selling brands of cars in Brazil were 1- Fiat, 2- Chevrolet, 3- Volkswagen, 4- Ford. Luxury car sales have grown rapidly with the southeast of the country dominating in terms of automobile fleet and new vehicle registrations. Sao Paulo is the leading state in the region and has the greatest number of vehicles.
The most popular types of vehicles are those with flex fuel systems with their multi choice of refuelling options. This popularity is encouraged by the Brazilian government’s support for biofuel usage.
In 2011 Brazil overtook Germany to become the fourth largest vehicle market in the world with sales of some 3.6 million cars and light trucks. Aftermarket sales, however, have not grown in proportion.
Brazil has the fifth largest population in the world with an expanding wealthier middle class with increased spending power and a growing passion for classic cars, off road racing and hot rods. This interest in vehicle customization is offset by Brazil’s various vague restrictive laws governing vehicle modification. Despite the many restrictions in force, vehicle customization continues to grow in popularity in Brazil with aftermarket products most in demand being, tires, wheels, audio systems, suspension parts, performance items, turbochargers, high flow air filters, ECU reprogramming and exhaust systems.
Car ownership in Brazil stands at 297 vehicles per 1,000 people compared to 797 per 1,000 in the US. With new car prices up to a third more expensive in Brazil compared to a similar model in Europe, most of the car owning public has to resort to the used car market. Even though many of the second hand cars are in a poor condition they are still a source of great pride for their owners.
Music is a very important part of Brazilian culture. Taken to the extreme, motorcycles often can be seen that have been retrofitted with stereo systems complete with large speakers strapped to the vehicle, the ultimate mobile ghetto blaster! Despite this love of music, in 2011 70 percent of new vehicles were sold without a factory fitted in-car entertainment system.
Brazil’s main world trading partners are the U.S., Colombia, Germany, Japan, Argentina, China, Canada and the UK. In terms of trading position, China ranks at number one, accounting for some 14 percent of Brazil’s trade flows. While Brazil’s main exports to China are iron ore, soybeans and crude oil, manufactured items are China’s main imports into Brazil. This has led to Brazil’s local manufacturing industry struggling to compete with China’s low production costs advantage. With China’s advantage of cheaper production costs it can offset the Brazilian import taxes and tariffs, which make U.S. auto parts expensive and practically unaffordable for the average Brazilian motorist.
Import tariffs on auto parts can range from 14 percent to 20 percent with a further series of taxes and import fees on top. With its vast, low salaried workforce, China can produce inexpensive quality aftermarket parts, often with whole areas focused on the production of one genre of item.
In order to overcome Brazil’s high import duties, some exporters to the country work around these restrictions by bringing their products into Brazil via the Free Zone in Uruguay as part of the Mercosor economic and political agreement that exists between Brazil, Paraguay, Uruguay and Argentina.
It appears that the US needs to ramp up its game if it wants to tap into the burgeoning motor trade aftermarket in Brazil. Pitted against the US aftermarket industry’s efforts to trade with Brazil is the manufacturing colossus of China and its fellow BRIC countries. With their low production costs these countries can offset Brazil’s punitive tariffs and import taxes enabling them to trade profitably where other countries will struggle to make a profit.
This doesn’t mean that profitable UK and U.S. trading with Brazil is impossible. The strong history and tradition of vehicle customization in the U.S. means that U.S. customization companies are in a good position to tap into the fast growing interest in customization in Brazil.
To this end, interested parties in the U.S. and other exporters to Brazil should do all they possibly can to encourage the efforts of the fledgling Brazilian Association of Automobile Accessories and their efforts to lobby for change in Brazil’s vehicle customization laws. Encouragement could also be given to the growing interest in vehicle customization, especially in key cities like Sao Paulo. Any legal import duty loopholes can also be exploited to make exporting aftermarket items to Brazil more profitable for interested U.S. companies.
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