A dramatic demonstration of the importance of fleet vehicles to the economy of Brazil occurred May 21 to June 1, 2018, when tens of thousands of self-employed truckers angry at a 10% increase in diesel fuel prices blocked major roads across 19 of Brazil’s 26 states, preventing the delivery of food, fuel, medicines, and other goods that are transported over the road. The 11-day strike choked Brazil’s economy, with Sao Paulo, Brazil’s largest city and financial hub, declaring a state of emergency after many of the city’s petrol stations ran out of fuel.
Brazil’s President Michel Temer intervened to end the 11-day strike, which paralyzed much of the country, and ultimately conceded to the truck drivers’ demands by agreeing to cap diesel prices.
Although less than two weeks in length, the nationwide strike had a major impact on Brazil’s nascent economic recovery. In May 2018, the nation’s economic activity recorded the largest contraction on record, as retail sales plunged and industrial production fell 10.9%. A key reason for the huge impact of the trucker’s strike is because more than 70% of the production goods within Brazil are hauled by truck, while only 21% are transported by rail. For a country the size of Brazil, its rail infrastructure is limited and is primarily used to transport heavy load commodities and raw minerals.
“Indicators showed the extensive impact of the trucker stoppage on economic activity in May 2018, followed by normalization in June,” said Marcelo Tezoto, manager, South America fleet sales for General Motors Corp. Tezoto, who is based in Sao Paulo, Brazil, is responsible for the direct sales team fleet and government in Brazil and is the sales focal point for the entire South America region.
“According to our estimates, broad retail sales fell 3.2%. Confidence indicators declined in June. Going forward, persistent tightening of financial conditions worsens the outlook for growth in the second half of 2018,” said Tezoto.
Brazil Economic Outlook
Brazil is ranked as the eighth-largest economy in the world and the largest in Latin America. The annual gross domestic product (GDP) of Brazil is $2.14 trillion, with the largest segments being agribusiness, petroleum exports, manufacturing, and commodities.
The period from 2010 through 2012 was a time of strong growth in the Brazilian economy, but this growth began to decelerate in 2013 and the country ultimately entered a recession in 2014. Between Q1 2015 and Q4 2016, GDP shrank in eight successive quarters.
In addition to an economic crisis, the country also experienced a political crisis known as the Lava Jato (‘Car Wash’). This political scandal resulted in the indictment of 170 high-profile people and involved 16 of Brazil’s largest companies.
In the first quarter of 2017, the economy slowly emerged from the recession with a 1% growth in GDP. In 2Q 2018, the economy grew 0.3%, and officially ended the recession with two consecutive quarters of growth. However, the current economic recovery remains weak and fragile.
“Uncertainty hampers the recovery of the Brazilian economy. The government has downgraded its GDP growth forecast for 2018 to 1.3% from 1.7% and, similarly, its GDP forecast for 2019 to 2.0% from 2.5% due to the ongoing deterioration of financial conditions in the country,” said Tezoto.
The financial concerns about the Brazilian economy are:
● Brazil’s large federal budget deficit.
● Decreased value of the Brazilian Real (BRL), the country’s currency.
● An uptick in inflation.
One concern is that the federal government’s budget deficit is forecast to be 2.1% of GDP in 2018. “An earlier forecast called for the budget deficit to decrease in 2019 calendar-year, but this was revised upward to 1.6% from 1.4%,” said Tezoto.
The second economic headwind is the exchange rate for the Brazilian Real. “We revised our year-end forecasts for the exchange rate to BRL 3.90 per one U.S. dollar in 2018 and 2019 to reflect greater internal and external risks,” said Tezoto. “Previously, the exchange rate forecast was 3.70 BRL per one U.S. dollar.”
The third economic headwind is inflationary pressures in the Brazilian economy. “We have lifted our inflation estimates to 4.1% in 2018 and 4.2% in 2019 due to the new exchange rate forecasts,” added Tezoto.
Another unknown is the outcome of the upcoming national general election in October 2018 to elect a new president and vice president, the National Congress, state and Federal District governors and vice governors, state legislative assemblies, and Federal District legislative chamber.
2018 Automotive Sales in Brazil
A critical sector in the Brazilian economy is its domestic automotive industry. Brazil is the ninth-largest vehicle market in the world.
As the country emerged from recession, it had automotive sales of more than 2,699,672 vehicles during calendar-year 2017. New-vehicle sales continues to grow in calendar-year 2018. The National Association of Motor Vehicle Manufacturers (known by the Brazilian acronym of ANFAVEA) reported that Brazilian vehicle sales were up 17.7% to 217,509 units in July 2018.
Vehicle sales in July 2018 consisted of 175,856 passenger cars, 33,218 light commercial vehicles, 6,591 trucks, and 1,844 buses.
Broken out by OEMs, General Motors saw an increase of 5.6% to 31,043 units. VW’s sales increased 47.7% to 26,163 units. Fiat Chrysler’s sales increased 10.2% to 24,620 units.
For light commercial vehicles (LCV), FCA’s sales increased 33.5% to 13,086 units. VW’s sales increased 4.4% to 5,265 units. The Fiat Toro took the top spot for LCVs with sales of 6,226 units.
“There was growth in all automotive segments, confirming an ongoing recovery for the whole Brazilian economy,” said Tezoto.
The best-selling vehicle from January-July 2018 was the Chevrolet Onix, a position it has held for the past two years, not only in Brazil but also for all of South America. In addition, Chevrolet announced it will launch 20 new products in the Mercosur region, which includes Brazil and Argentina. Chevrolet has been the market leader in Mercosur for the past two years. Brazil is currently Chevrolet’s third largest global market, behind only the U.S. and China.
Auto production is concentrated in the south and southeastern part of Brazil. In São Paulo, there are 419 auto parts producers. The top five automotive producers for passenger cars are General Motors, Volkswagen, Fiat, Ford, and Renault. Chinese companies, such as BYD, are also investing in the electric vehicle market, which represents a huge potential market in Brazil. It is forecast that by 2020, the annual sale of electric vehicles in Brazil will reach 35,000 units.
Fleet Sales in Brazil
With a population of more than 210 million people, Brazil is the largest fleet market in South America. The fleet market in Brazil continues to be very competitive, and all automotive manufacturers are using a variety of financial incentives to defend and bolster market shares.
As the economy improves, increased government revenues should stimulate increased government fleet sales to replace aging vehicle inventory that has built up in recent years during the decline in government fleet acquisitions. Other factors influencing fleet acquisition are rising inflation, high interest rates, and tight credit availability.
General Motors is Brazil’s top-selling OEM and it is looking to further expand its service offerings to Brazilian fleets and retail buyers. In the fourth quarter of 2017, GM launched the 2018 Chevrolet Equinox in Brazil to supplement its product portfolio that also includes the Tracker and Trailblazer.
“GM has been a sales leader in South America for 17 consecutive years, and in Brazil it has returned to market leadership for the last two years,” said Tezoto.
One positive aspect for future fleet sales in Brazil is that there is much interest from international investors looking for new projects, and Brazil has tremendous infrastructure needs, which indirectly translates into an uptick in truck and equipment purchases among subcontractors. The federal government and Brazilian municipalities are working together to improve the structuring of infrastructure projects that will be offered to the private sector.
Size of the Fleet Market
In 2017, the Brazilian light commercial vehicle fleet market was nearly 5.1 million units, up from 3.5 million in 2009. Approximately half of the corporate vehicles in Brazil operate in the southeast region of the country, which is the country’s key economic center and home to its two largest metro areas – Rio de Janeiro and São Paulo.
The fleet sales focus by OEMs in Brazil is larger corporations, while smaller companies are serviced by the OEMs’ dealer network. There are 3,955 automotive dealers in Brazil.
The largest vocational segments acquiring commercial fleets are pharmaceutical, agribusiness, and food companies. Fueled by record-breaking harvests, the demand for commercial vehicles in agriculture rose in 2017. There is also a big demand for fleet vehicles by rental companies.
But, the majority of fleets in Brazil are smaller with the average fleet size around 100 units.
One challenge facing fleet managers in Brazil is the geographic dispersion of fleets due to the country’s massive size. Most companies with national sales and service organizations throughout Brazil have their fleet vehicles nationally dispersed operating a mix of models suited to the diverse regional conditions. This geographic dispersion is compounded by poor road conditions. For instance, the road infrastructure is not consistent throughout the country, and in northern Brazil many rural roads are not paved, often requiring vehicles with 4x4 capabilities.
Fleet Acquisition Preferences
Most of the corporate vehicles are purchased outright but leasing as a fleet funding method is growing. One of the largest Brazilian fleet leasing companies is Localiza Fleet Solutions, which started operations 40 years ago. Localiza has a portfolio of 195,000 short-term rentals and 45,000 long-term fleet leases. On Dec. 5, 2016, Hertz completed the sale of its Brazil car rental and leasing operations to Localiza.
Among the multinational fleet lessors doing business in Brazil are ALD with a portfolio of 25,000 vehicles, LeasePlan with a portfolio of 10,203 vehicles, and Arval/Relsa with a portfolio of 24,000 vehicles.
In terms of fleet acquisition trends, the compact SUV is one of the fastest growing vehicle segments in the Brazilian market. The compact SUV segment is experiencing large incremental volume compared to last year. The SUV segment has doubled in size in Brazil in the last two years, and currently represents 15% of the market. During the first half of 2018, Chevrolet was the fastest-growing brand in SUV sales in the Brazilian market, with a total of 17,300 units were registered that included the Trailblazer, Equinox, and Tracker models.
One factor impacting fleet acquisition in Brazil is the increase in new-vehicle prices and taxes. Cars in Brazil have one of the highest tax burdens in the world. According to IHS Automotive Consulting, 32% of the costs of a new car in Brazil are directly related to taxes. In Brazil, taxation is a key component of total cost of ownership (TCO) calculations.
Brazil imposes 35% import duties to “incentivize” commercial companies to buy vehicles that are produced locally. Not only does the 35% import duty apply to vehicles, but also to imported replacement parts that will be needed during the course of a vehicle’s service life.
Another factor contributing to increased vehicle prices were a 15.8% increase to provide mandated safety equipment, due to concern about the high number of accidents in Brazil. Up to 40,000 people a year die in traffic accidents, primarily blamed on poor driving conditions, inexperienced motorists, and high levels of drunk driving.
Continuous Fuel Price Hikes
In response to the 1973 oil crisis, the Brazilian government began promoting bioethanol as a fuel. This national initiative has been successful in helping Brazil reduce its dependence on imported petroleum. Historically, imported oil accounted for more than 70% of the country’s oil needs, but Brazil succeeded in becoming self-sufficient in oil in the 2006-2007 time frame.
Despite this, current petroleum fuel prices in Brazil are increasing. Brazil also has among the highest petrol prices in the Americas. Taxation on gasoline in Brazil corresponds to 53% of the liter price. Gasoline prices in Brazil increased to US$1.24 per liter in December 2017. Historically, gasoline prices in Brazil averaged US$1.14 per liter from 1992 until 2017. Contributing to the increased cost of fuel are higher taxes on gasoline and diesel.
Flex-fuel bioethanol vehicles continue to be popular in Brazil. Companies prefer flex-fuel vehicles to mitigate the fluctuations in the price of petroleum fuels.
“Fuel prices in 2017 reached the top of historical prices in Brazil, which caused many fleets to downsize to more fuel-efficient vehicles,” said Tezoto.
Since July 2017, diesel users have been grappling with a 21% price hike. In May 2018 alone, fuel prices rose 12 times, which, along with a weakening in Brazil’s currency, the Real, triggered the nationwide 11-day trucker strike last May. These continual fuel price hikes were a consequence of a new pricing policy set by Petroleo Brasileiro S.A., commonly known as Petrobras, which is Brazil’s state-run integrated energy company headquartered in Rio de Janeiro.
Back in 2016, Petrobras announced it was changing its pricing policy and would adjust its diesel and gas prices relative to the global market. When global crude oil prices increased, consumers were impacted at the pumps.
Since Brazil depends almost entirely on road transportation, more expensive diesel impacts product prices, as suppliers will pass along any extra costs associated with transportation to consumers.
Fleet Maintenance Trends
The third-party vehicle maintenance/service provider network in Brazil is not reliable in some parts of the country. In recent years, many OEM dealers have closed their operations due to financial difficulties. Other struggling dealers tend to maintain low parts inventory, which, depending on the repair, increases the amount of time it takes to get a vehicle back on the road. In addition, the general logistics challenges that OEMs face in Brazil can delay parts distribution to dealers.
While parts availability has been an issue for some Brazilian OEMs, it is not so with General Motors, said Tezoto.
The supply of spare parts for fleet owners and customers in general is good.
There is upward pricing pressure on maintenance cost inflation in Brazil, with an increase of around 8% in 2018.
Also the delivery time to receive spare parts outside of major metro areas in remote regions is different, especially during the rainy season when it may take weeks to deliver replacement parts.
The used-vehicle market in Brazil is very large, representing an estimated $50 billion in annual revenue. The vast majority of sales are made between private and purchases, with lesser involvement by dealers.
While new-vehicle sales volume declined in the 2014-2016 timeframe, the used-vehicle sales activity was robust as Brazilian consumers sought lower-cost transportation. More than 10 million used vehicles are sold annually in Brazil, with the volume of used-vehicle sales closely linked to economic conditions. Vehicle depreciation rates vary and are influenced by engine displacement, size of the vehicle, brand, mileage, vehicle condition, and other variables.
For Brazilian fleet managers, there is an increasing concern about future residual values as consumer confidence decreases and as more Brazilians become less prone to own a car due to the availability and large penetration of ride-sharing services. Also, as in many countries around the world, younger Brazilians are expressing less interest in car ownership. These factors are causing some Brazilian remarketers to believe that reselling a vehicle in the coming years will become a tougher challenge.