Birth of Brazil's new middle class helps US carmakers in their fight to survive

 

General Motors and Ford are heading for record sales in world’s fifth-largest car market

THE WOES of Detroit’s carmakers have become emblematic of the crisis gripping the US economy.

But while government bailouts, job cuts and divestments have occupied Motown throughout the year, at least they know their subsidiaries in Brazil are booming.

General Motors (GM) and Ford – the third and fourth biggest manufactures in Brazil respectively – are on course for record sales in what is set to finish the year as the world’s fifth-largest car market. In contrast to cutbacks they have had to make elsewhere in the world, both plan to invest a combined €4.45 billion in Brazil to meet growing demand.

In part, this success is due to favourable local conditions that have benefited all manufacturers. There is only one car for every 6.5 inhabitants of Brazil, compared to one for every two in the US and Germany.

As steady economic growth gives birth to a new middle class, more and more auto-mad Brazilians are keen to own one.

“At times, the citizen thinks about having his first car before his first woman,” is how president Lula da Silva put it in a speech earlier this year.

The government has done its part to help them, suspending a tax on new vehicles to help combat the effects of the global credit crisis.

Historic low interest rates have made auto financing widely available. The result has been a strong boost to sales, which the local industry association says will top 3.1 million units this year, up almost 9 per cent on last year’s record. It forecasts an increase of almost 10 per cent in 2010.

GM and Ford share almost 30 per cent of this market between them, managing to do what they have found difficult in their troubled home market – sell cars customers want to buy, particularly smaller cars.

Innovation and intense market focus are crucial in one of the world’s most competitive markets, with 13 firms producing cars locally.

“The small car is key in Brazil, and GM and Ford focus successfully on this segment of the market,” said Fernando Trujillo, an analyst with auto industry consulting firm CSM Worldwide. “Management has sufficient autonomy to be able to do this, and both subsidiaries are strong on innovation. For example, all their cars in Brazil are flex-fuel , which dominates the market here.”

When Washington pressured US manufactures to start providing more small cars for the domestic market, GM turned to its Brazilian subsidiary for help.

This year the company took 500 of its Brazilian engineers to the US to share their knowhow in small-car innovation with colleagues there.

As it looks to bail itself out of the mess that left it a ward of the US government, GM has identified Brazil as key to its future and, as its most profitable unit, did not put it up for sale alongside units in other parts of the world.

Instead, it is spending €1.7 billion on an investment plan through to 2012 that will see the development of a whole new family of vehicles for the South American market and take local production above one million units a year.

Last month, Ford announced that it will invest €2.75 billion in Brazil over the next five years in its largest ever investment in the country, which it says will boost production and create more than 1,000 new jobs.

One problem for the two carmakers is that Brazil’s strong economy has seen the local real currency appreciate strongly against the dollar. This has hit exports from its Brazilian factories.

GM says it will export just 35,000 units from Brazil this year, 50,000 down on last year. But the strong Brazilian real boosts the companies’ bottom line when Brazilian profits are repatriated back to the US, where the cash is desperately needed.