Brazil's boom is good news for Fiat and VW

Brazil's boom is good news for Fiat and VW

October 12, 2010 - 11:30 pm ET

The unthinkable has finally happened. Brazil has overtaken Germany as the fourth-largest market for passenger car and light commercial vehicle sales. That's good news for Fiat, Volkswagen and other European volume carmakers.

Fiat and VW have dominated the Brazilian auto market for decades. Their rivals Renault and PSA/Peugeot-Citroen have big growth plans for South America and Brazil, the region's biggest market.

Let's take a look at the numbers: In the first eight months, Brazilian car and LCV sales grew 8.4 percent to 2.08 million while Germany fell 27.3 percent to 2.03 million, according to market researchers JATO Dynamics.

Germany still leads in terms of passenger car sales. German new-car sales fell 28.7 percent to 1.9 million in the first 8 months while sales in Brazil were up 5.5 percent to 1.78 million.

But LCV sales have boomed so far this year in Brazil, up 30.5 percent to 295,737, while in Germany there was only a modest 5.2 percent growth to 120,054. These vehicles are more profitable than cars because they are less complex to build and pricing is usually less aggressive.

Even bigger profits

Brazil is Fiat's biggest source of profit and for VW it is second only to China. Each company earned about 1 billion euros operating profit from Brazil last year.

This year things look even better, not only because of surging sales, but also because Brazil's currency, the real, has strengthened, making profits earned by European automakers even healthier when converted into euros.

Losers in Brazil's boom are German premium automakers Audi, BMW and Mercedes-Benz, which are niche players in a market dominated by bread-and-butter cars.

But Brazil's lack of appetite for premium vehicles is more than made up by China's insatiable desire for luxury cars. German premium automakers are probably already making more than half of their profits in China, according to Max Warburton of Bernstein Research.

So if Europe's automakers -- both volume and luxury brands -- are not having a great year in their depressed home markets, at least their profits are secure if Brazil and China continue to grow.

A recent Goldman Sachs report said European automakers will swing to a combined net profit of 12.3 billion euros this year from a net loss of 6.83 billion euros in 2009.

Things are improving fast -- the new forecast was 38 percent higher than a 7.32 billion-euro combined net profit for European automakers predicted by Goldman Sachs in May.

Read more: http://www.autonews.com/article/20101012/BLOG12/310129973/1131#ixzz12FELSjmk