Among the first things those interested in doing business in Brazil should remember are its size and diversity. The country is only slightly smaller than the U.S.’s entire lower 48, and is ranked number five in the world by land mass. It is also the largest and most populous country in South America and, according to the United Nations Department of Economic and Social Affairs, the fifth most populous country in the world after China, India, the United States and Indonesia. Brazil shares common boundaries with every South American country except Chile and Ecuador.
There is tremendous geographic and income disparity in this Portuguese-speaking, emerging nation of 200 million, where 47 percent of the population earns a monthly salary of between $400 and $900, 27 percent earn between $900 and $3,000 and only about 4 percent of the population can afford to buy a new car today.
However, those earning at least $1,000 per month generally can afford to buy a used car, increasing the percentage of vehicle ownership. The majority of Brazil’s population lives in densely populated urban centers like Sao Paulo and Rio de Janeiro. However, distributing products to the remainder of the country, which includes the Amazon rainforest, is challenging as a result of the poor infrastructure.
Brazil, together with Russia, India and China, are often referred to as the ‘BRIC’ nations. They represent the emerging-nation market that multinational car companies hope will offset slumping demand in mature markets. Their hopes appear to be well placed since almost 80 percent of the automobile industry’s growth is currently generated by emerging countries. Between 2005 and 2010, automotive production in China, India and Brazil increased from 10 percent to more than 25 percent of global output, fuelled by robust local demand.
Private car ownership in Brazil began slowly about 50 years ago with imports. Between 1998 and 2003, multinational car companies began local development of models more suited to the Brazilian market. These companies built domestic manufacturing facilities. This helped reduce manufacturing cost and differentiate them from the competition. In 2009, Brazil produced more than 3 million vehicles for both domestic use and export, ranking it as the 6th largest vehicle manufacturing country in the world. Earlier this year, the Brazilian automotive industry decided to invest over $11 billion to improve the local auto industry over the next three years and compete against new market entrants from China and India. Roland Berger Strategy Consultants predicts that by 2020 Brazil could produce between 5 and 6 million vehicles.
According to Sindirepa, the Syndicate for the Vehicle Repair Industry for the state of Sao Paulo, there are 34.3 million mainly flex fuel cars, 14.4 million gasoline motorcycles, close to 5.5 million diesel operated pickups and about ten million diesel fueled busses and trucks on the road today.
Cars in Brazil are about twice as expensive as in the US, making the sub compact, similar in size to the Ford Fiesta, the most popular type of car. Sub compacts represent 79 percent market share of the passenger car fleet. Over the years Volkswagen and Fiat have alternated between first and second place for top sales, with European versions of Chevy coming in a strong third place.
According to Stephan Keese, responsible for Roland Berger’s Brazilian automotive practice, Brazil is a “motorcycle market”. The average price of a new entry level motorcycle ranges between $1,300 - $1,400. Keese explained that many make their living as motorcycle delivery men. In 2008 1.9 million motorcycles were sold versus just over 3 million vehicles. Honda motorcycles dominate, with approximately 70 percent market share.
The vast majority of the Brazilian fleet runs on “flex fuel”, a combination of regular gas and ethanol. Flexible fuel vehicles (FFVs) are designed to run on gasoline or a blend of up to 85 percent ethanol (E85). Electric cars are not likely to make a dent into the FFV market, because Brazil has its own oil reserves and the sugar plantations which provide the raw material for ethanol have a strong lobby. Diesel fuel is not commonly used in passenger cars in Brazil, though buses and trucks rely on this fuel.
Today there are 6.3 people per car in Brazil (compared with more than one car per person in the US) and estimates on the average number of kilometers driven ranges between 12,000 and 15,000. Roland Berger’s March 2010 report entitled The Brazilian Automotive industry at a Crossroads indicates that the cost of vehicle ownership in Brazil is at least 37 percent higher than in other major automotive regions. Key drivers include the higher production cost, significant tax burdens (both sales tax and annual taxes), insurance, etc.
According to Patricia Morschel, Marketing Communications Manager, North America, DuPont Performance Coatings and a native of Brazil, as the country’s economic recovery continues, in spite of the global economic crisis, increasing numbers of people have discretionary income. This combined with government incentives will boost the ability of some Brazilians to enter the car market.
Morschel, a recent Wharton Business School graduate, moved to the U.S. from Brazil three years ago. She says that small cars with small engines are the most popular first four wheel vehicles among Brazilians. And, while the car is an expensive asset, she reports that many cannot afford to maintain their vehicles according to the vehicle manufacturer’s recommendations. Brazilians are very cost conscious and suspicious of the dealers. They prefer reasonably priced aftermarket parts to expensive OEM parts, and less than 10 percent of maintenance and repair is done at the dealership. Therefore, small independent garages seem to be more popular for vehicle repair than dealerships after the first free warranty service.
“Public transportation is generally not good in Brazil. So, every family aspires to owning a car,” Morschel says. Leasing is not common. So once the car has been bought where and when it is maintained and/or repaired is solely the decision of the vehicle owner.
The average age of vehicles on the road is 9.1 years. According to Sindirepa, 57 percent of the more than 34 million passenger vehicles on the road have been driven more than 100,000 kilometers. Brazil currently has no scrappage program in place. Even if it did, the majority of those owning the older, high mileage vehicles could likely not afford to replace them.
Keese reported that only 42 percent of repairs are done at the new car dealership during the first two years even though most OEMs offer a one-year warranty and dealerships generally add a second year. Fifty eight percent of warranty maintenance and repairs are done at the approximately 33,000 gas stations and about 22,000 independent service stations.
According to Keese, while most gas stations are typically franchises of major national or international petro groups, the independent service segment is completely fragmented. He expressed surprise that, to date, no foreign companies such as AutoZone, Meineke, Maaco, Pep Boys, or Jiffy Lube have entered the market. However, it seems as if easily accessible gas stations open 24/7 have mastered the quick oil change model, routinely servicing their customers in ten to fifteen minutes meeting the current needs of the local population.
While not a franchise per se, Bosch, which is predominantly a distribution channel, has done a good job of training and assisting their mechanical and maintenance service shop technical partners with training, sales, a distribution scheme and marketing. Additionally, a number of domestic tire brands have multi shop operations where they also provide service and repair.
Brazil’s transportation infrastructure across its 26 states is one of the worst in the world. The Brazilian government intends to spend approximately $18.3 billion between 2010 and 2013 on improving the road infrastructure plus roughly the same amount on public transportation (rails, subways, etc.). There are also better new car financing terms and interest rates than in the past. These factors will surely pave the way for continued passenger car and light truck growth and the demand for readily available, quality auto repair and specialty equipment opportunities.
Brazilian purchasing attitudes differ from those of Americans. So, a traditional model probably won’t work. Any company looking to enter the Brazilian market would do well to position itself as independent, low cost and service oriented in order to succeed.
Many factors such as more discretionary income leading to a growing new car market; the number of older high mileage vehicles on the road; improved infrastructure; a suspicion of high priced dealerships; a preference for aftermarket parts, better loan terms, and more, would suggest that the auto repair industry in Brazil will change over the next few years. However the nature of that change will depend on a variety of factors requiring in depth research, a keen understanding of population preferences and a variety of market forces.
