Makers of luxury autos from Daimler AG (DAI)’s Mercedes-Benz to Volkswagen AG’s Audi are preparing to build cars again in Brazil in a bet that the country’s market for luxury vehicles may triple by 2017.
Mercedes said yesterday that it will make sedans and sport-utility vehicles in Sao Paulo state in a revival of local output, two weeks after Audi said it will return to Brazil, the world’s fourth-biggest auto market. Those two and Bayerische Motoren Werke AG each have said in the past year that they will invest more than $220 million to assemble models that are now imported and will face higher duties in coming years.
Total car sales will reach a record 4.3 million this year, according to Anfavea, Brazil’s auto-industry trade group. As mature markets such as the U.S. and Europe expand at a slower pace, automakers are counting on places like Brazil.
“The market for luxury cars is still very small, so there is a lot of potential for growth,” said Augusto Amorim, auto analyst for South America at IHS Inc. (IHS:US)’s R.L. Polk unit. “Brazilians still have a lot of need for image, so in this aspect German companies have a lot of advantage.”
Mercedes plans to build its C-Class sedan and the GLA small SUV, and Audi’s factory will make the A3 sedan and Q3 SUV. BMW hasn’t said what its plant will produce. Tata Motors Ltd. (TTMT)’s Jaguar Land Rover has a feasibility study under way to consider Brazil as a possible location for a facility, according to a statement today from the Mumbai-based company.
They’re counting on the nation’s luxury-car demand tripling to about 100,000 a year by 2017, said Philipp Schiemer, head of Daimler’s business in Brazil since June. According to a 2012 McKinsey & Co. report, Brazil’s sales of luxury cars were increasing by 45 percent annually.
The country’s 2010 census showed that the average income for the top 5 percent of the population was about 7,772 reais ($3,493) a month, up from 4,872 reais a decade earlier.
The luxury-auto makers are returning to Brazil as Anfavea creates several programs with the government to support local production, Luiz Moan Yabiku, the trade group’s president, said in a Sept. 20 interview.
One program, Inovar Auto, “puts the Brazilian automobile industry on a technological level to face international competition in 2018,” Moan said. That helped prompt Daimler’s interest.
“We see that there are very clear rules through 2017 in the new policy that lead us to believe that with a Brazilian factory, we can participate in the growth of the market,” Schiemer said.
Sales of cars and light trucks in Brazil rose 5.9 percent in September from a year earlier to 293,961, the nation’s auto-dealers association, Fenabrave, said today.
Companies are looking for lower costs, weaker unions and stronger markets, Bernardo Carneiro, an analyst at Deutsche Bank SA in Sao Paulo, said in a Sept. 9 telephone interview.
“In emerging markets, you have consumers with more disposable income and unemployment at historic lows,” he said. “It’s about Brazilian domestic consumption.”
Production in Brazil, Latin America’s largest economy, is also tempting automakers because it can carry an exemption for vehicles built aboard from an upcoming tax of about 30 percent, said Tony Volpon, head of emerging-markets research for the Americas at Nomura Holdings Inc.
“There are import regimes that if you build cars in Brazil you can import other cars into Brazil at a much lower tariff,” Volpon said in a telephone interview from New York. “So if BMW builds a couple of cars in Brazil they can bring the other BMWs from Germany and not pay the 30 percent tariff.”
Shares of Stuttgart, Germany-based Daimler rose 40 percent in Frankfurt this year through yesterday. BMW gained 11 percent, while Audi climbed 15 percent.
The Mercedes plant, to cost about 170 million euros ($230 million), will be in Iracemapolis, about 170 kilometers (105 miles) northwest of the city of Sao Paulo. Schiemer told reporters in Brazil yesterday that the first phase of production will be 20,000 units a year.
Audi, based in Ingolstadt, Germany, announced plans last month to invest 500 million reais for a factory in Sao Jose dos Pinhais in Parana state in southern Brazil. The company’s sales target is 30,000 vehicles a year by 2018, including imported vehicles.
BMW said in October 2012 that it will spend 200 million euros on a factory in the southern state of Santa Catarina. The plant will produce as many as 30,000 vehicles a year, according to the Munich-based company.
Audi and Mercedes are returning to Brazil after abandoning the market in the 2000s. Both chose strategies that failed, said Amorim, the IHS analyst.
Audi’s locally built model was its A3 hatchback, which competed with the Golf from parent company Volkswagen (VOW), while Mercedes produced the A-Class, which Brazilians found overpriced and small, he said.
With planned annual production of 30,000 vehicles or less, the three automakers “know they won’t start selling a lot overnight,” Amorim said.
“Audi sees Brazil as a very promising market,” Chief Executive Officer Rupert Stadler told reporters last month in Brasilia. “We hope that it will continue growing.”
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