The football World Cup might be dominating the headlines about Brazil at the moment, but the motor industry is an important element in the country’s economy. Brazil’s motor industry trade organisation is Associação Nacional dos Fabricantes de Veículos Automotores (ANFAVEA) and among its members are Audi, DAF, Fiat, Ford, Honda, Hyundai, Iveco, Mahindra, MAN, Mercedes-Benz, Mitsubishi, Nissan, PSA Peugeot Citroën, Renault, Scania, Toyota, Volkswagen and Volvo, as well as local manufacturers. ANFAVEA may be the only motor industry trade body that also includes agricultural machinery suppliers, which is a good measure of the importance of the agricultural sector to the Brazilian economy.

Brazil’s manufacturing sector accounts for around 28.5% of gross domestic product (GDP) and the motor industry is an important element alongside steel, petrochemicals, computers, aircraft and others. In global terms, the Brazilian economy is the seventh largest by GDP. As Scotiabank points out, vehicle ownership is low in South America generally, averaging 166 cars and trucks per 1,000 people. This compares with 680 per 1,000 people in the developed nations of the G7 and a world average of 180 per 1,000 people.

Brazil is the world’s second largest producer of ethanol fuel, second only to the US. The country is reckoned to be a sustainable biofuel economy, using sugar cane as the feedstock. The US Environmental Protection Agency designated Brazil’s sugar cane ethanol as an advanced biofuel because it offers a large reduction in total life cycle greenhouse gas emissions. Brazilian petrol contains a mandatory blend of 22% ethanol. The sugar cane industry, as well as mining, provides a ready market for pickup trucks.

Largest car market in South America

Scotiabank data suggests that South American car sales have grown by 11.5% per annum in the past decade. Brazil is the largest market in the region and accounts for some 60% of the overall volumes. It is now the sixth largest market in the world. The light vehicle market has cooled in recent months and has gone into decline. As we report elsewhere, LMC Automotive reports that in the January to May period, sales in Brazil and Argentina declined by 9.2% compared with the same period in 2014. Scotiabank attributes the decline to a slowing economy, rising interest rates, high household debt and falling consumer confidence.

According to the Scotiabank report, ‘Auto loan rates in Brazil have jumped 4.0 percentage points over the past year. While the increase is in line with the 3.75 percentage point hike in the central bank’s overnight rate since March 2013, auto loan rates now exceed 23% and have become unaffordable for a typical family. Rising inflation – currently 6.3% – has also dampened household purchasing power this year.’

But Scotiabank expects the economy to improve later this year following the Brazilian presidential elections in October.

‘Despite the decline in Brazilian car sales through April, we expect purchases to begin to improve after the presidential election in October. The Brazilian Real has strengthened by 9% against the U.S. dollar since late January – partially reversing a 20% plunge from last April through early February – suggesting that the monetary tightening cycle, triggered by weakness in the currency may be coming to an end. In addition, despite a slowing labour market, unemployment in Brazil remains below 5% – 3.0 percentage points lower than the average of the past decade.’

Opportunities for fleet growth

What effect is all this having on the Brazilian business car sector? Fleet management companies are well represented in the country. ‘There are some big fleets in Brazil,’ says Pascal Vitantonio, general manager of ALD Brazil, ‘And we are trying to bring the highest standards of fleet management that you would see in other countries. Players like ourselves and a couple of others see our role as contributing to making the market more mature and more professional.’

A lack of official statistics makes it difficult to estimate the size of the business car sector in Brazil. Scotiabank reckons that total new car sales reached 2.76m in 2013 and will probably remain at around that figure this year. Pascal Vitantonio estimates that around 10% of the new car total, so 300,000 vehicles a year are outsourced to leasing companies. He believes this number is growing year-on year. ‘Every company has their own estimate – we compile numbers and we cross-check numbers with competitors and the car makers,’ he says. ‘Everybody has their own definition of the corporate car market. Some include taxis, some include Government fleets, which are very specific.’

Preference for locally built models

Not surprisingly, the fleet sector favours manufacturers who build cars in Brazil. Fiat has produced cars in Brazil for many years and leads both the retail and corporate markets. Volkswagen is the second largest and also has a number of production plants in Brazil. General Motors builds cars in Brazil too and is currently renewing its product range. Ford holds the fourth place in the market – another manufacturer with a long history or manufacturing in Brazil. Behind the top four come Hyundai, Nissan, Honda, Toyota, all holding a market share in the 5% to 7% range.

Business car users in Brazil tend to be like they are anywhere else in the world; ‘Company cars in Brazil can be a tool, can be a benefit and most of the time are both,’ says Pascal. ‘The car is a very significant component of the benefit package and not just for top executives. There’s a large fleet of executive cars, some produced in Brazil, others imported. Then there are special vehicles used in agriculture and mining.’

Trend towards operational leasing

In terms of fleet financing, Pascal identifies a trend to move vehicles off company balance sheets and use operational leasing or other fleet management methods. He believes it is a clear medium term trend in Brazil, particularly as the economy has slowed and companies pay more attention to costs.

‘Finance leasing is still a solution,’ he says, ‘more for individuals, rather than companies. There are no clear tax advantages on finance leasing, compared to a personal lease or long-term renting. Some customers still prefer to buy their own vehicles and when they look for external funding, they will probably use the banking sector rather than manufacturer finance.

‘Because of the size of the retail market, manufacturer finance is very focused on the retail market,’ says Pascal, ‘They don’t dedicate much resource to the corporate sector.’

Looking ahead, Pascal expects slow growth in the business sector, but he expects the balance between owned and outsourced fleets to change a lot. ‘We are optimistic that outsourcing is going to grow in Brazil in years to come.’