Impact of Covid-19 on the Brazilian Automotive Industry

Impact of Covid-19 on the Brazilian Automotive Industry

Impact of Covid-19 on the Brazilian Automotive Industry: between a step backwards and the acceleration of existing trends

by Fred Donier and Jean-Philippe Thery

 

In 2012, Brazil was the fourth largest new car market in the world, slightly above 3.6 million units, and forecasters at that time were trying to find out when it would reach 5 million units mark. But Instead, it began to decline slowly the following year before collapsing in 2015 and 2016 to below 2 million, a drop of 45% over the period.

The slow recovery that had started since then, with just over 2.6 million registrations in 2019 hinted at a return to 3 million units in 2020, a perspective brutally interrupted by Covid-19 epidemic crisis.

Not only could the far-reaching effects of current the crisis last for an extended period, but they could also accelerate a number of changes that were already more or less underway, regarding the way people chose, purchase and use their car in Brazil.

A huge impact, and large uncertainties

The crisis triggered by the Covid-19 epidemic has been hitting the Brazilian new car market particularly hard. Registrations dropped by 76% in April and May compared to the same months of last year, to respectively 51.400 and 56.600 units, due to the suspension of activities in dealer networks outside the minimum required for after-sales. In parallel, industrial production was put to a halt, with the closure of the 34 assembly plants located in the country, not to mention numerous suppliers and subcontractors. Furthermore, many related businesses have been impacted, such as short-term car rental whose activity has decreased up to 95% in some areas, or app-based ride-hailing services, of which 7 customers out of 10 have stopped using the service since the beginning of the crisis. This latter activity is particularly important in Brazil, with no less than 600.000 drivers for Uber only, many of whom had to return the car they rent on a weekly basis.

To avoid compulsory redundancies as much as possible, companies in the sector had to adapt and resort to temporary lay-off schemes, liquidation of hour banks, mandatory vacations, and as far as possible, home-office. In total, no less than 370,000 people were thus sent home by the manufacturers and equipment manufacturers since the last week of March.

The cost of the shutdown is particularly challenging to assess in a sector which represents 18% of industrial GDP and in which the 7,000 companies employ 1.2 million people. Pablo de Si, President and CEO of VW Latam, refers to the equivalent of 3 years investment.

At this time, a number of factories (BMW, Fiat, GM, Renault and Pirelli to name a few), have already resumed their activities whilst Ford, Honda, Hyundai and Nissan are preparing to do so, and many dealerships are reopening.  But uncertainty reigns over whether consumers will find their way back to dealerships, while the stock of new vehicles reaches 237,000 units according to the ANFAVEA (National Association of Vehicle Manufacturers). Moreover, the latter does not expect a significant recovery in activity before September, nor does Antonio Filosa, FCA President for America Latina, who mentions internal studies showing a second quarter 70% below its equivalent of the previous year, a third at 50% and the fourth at 20%, for a consolidated result over the year at -40%. According to the ANFAVEA, it this estimated than no less than 1.1 million sales will be lost versus 2019, and 1,3 million compared to forecasts, numbers never seen before, even during previous crises when the market shrank at worse by 20 to 25%. And even at a time when the usual econometric models may be confused by the magnitude of the ongoing crisis, none of the industry players expect the much desired “V-shaped” recovery to occur, or that 2019 volumes are reached again before 2 or 3 years.

New consumer behaviours?

Beyond the numbers, one can wonder to which extent the current crisis may have a lasting impact on consumer’s behaviour, whether it is about the model they will chose or the way they will use cars.

First in terms of demand, it is likely that in the lean times to come, a number of consumers will favour cheaper models from manufacturers with a competitive entry-level offer, namely the four traditional “montadoras” (Chevrolet, Fiat, Ford, VW), as well as Hyundai and Renault, among the most successful “Newcomers” in the market since the 90’s. But this new context could also redirect potential new car buyers to the second-hand market, increasing the current ratio of 4,1 used cars vs one new observed in 2019, as it usually happens in times of crisis (in 2016, this ratio was 5,1). On the supply side, the used-car market could well be fuelled by vehicles from large rental companies aiming at reducing their fleet, as well as individuals in need to sell a car than can’t afford anymore,  and arouse interest from brand dealership seeking to compensate for losses suffered in the new car activity. However, this increase in supply could well translate into a general drop in prices and affect the margins of the many resellers forced to dispose of their stock.

Along the same lines, it is highly probable that the share of imported models will fall below the 11% recorded before the crisis, as those vehicles are subject to a 35% tax, priced according to strong currencies in the context of a weak Real, and usually expensive to maintain. Furthermore, and in times of deep economic crisis, potential buyers may wish to be adopt a more discreet attitude and avoid showing off behind the wheel of ostentatious models. Added to this is the fact

that in a moment of search for savings, the costly processes of homologation and adaptation of vehicles to Brazilian specificities (mainly the engine) will probably not be the priority of the manufacturers, in particular those having a range of locally built models.

The search for more discreet and less expensive models can also affect premium brands with local industrial capacities which have invested in a more promising period and which may have to review their strategy, namely BMW, Mercedes-Benz, and the Jaguar Land-Rover Group. Audi, all models of which are now imported after the cessation of local production of its A3 model, has already taken the plunge, a decision facilitated by its membership in the VW group which produces locally, and therefore able to revise its industrial timeline.

Finally, it should be noted that the growing share of SUVs (Sport Utility Vehicles) in the Brazilian automotive landscape, which has been the main trend in recent years, should not be affected. This category, which now represents 25% of the volumes (vs 12% in 2015) should even keep growing, considering that it occupies smaller share in Brazil than in other countries.

But beyond the choice of models, it is also the use of the car that could be impacted. And from this point of view, the fears linked to contamination, and the new habits adopted by those who practiced confinement could bring a certain number of users back to the car, because of the safety that its enclosed interior provides for its occupants. Admittedly, the impact of this phenomenon will undoubtedly be less significant than in Europe, where some people gave up the automobile because of the traffic restrictions put in place for reasons related to the environment (50% of Parisians don’t have a car). But it may be sufficient to convince some people who don’t have one to consider purchasing a car, to protect themselves from a possible contamination by avoiding public transportation, thereby stimulating the market for entry-level models.

Furthermore, the distances travelled could also evolve, although it is not necessarily easy to understand in which direction. On one hand, people may travel less whether it is to avoid taking risks or because of financial limitations. On the other hand, some people may be tented to drive in the controlled environment of their vehicle rather than to take the risk of flying for short distances. There may also be a trend -to be confirmed- of an increasing number of middle/upper class Brazilians choosing to live outside of metropolitan areas, thereby increasing the use of their car.

Finally, new habits will most likely appear regarding the hygiene on board of cars, especially when this one is entrusted to a third party, such as in workshops or car parks with valet service. These establishments could thus offer disinfection services adapted to cars.

Sales channels likely to be the most affected.

But the most significant long-term impact of the Corona virus crisis on the automobile trade could affect the way in which the cars will be acquired in a close future, whether it is the likely increase of online sales, or the long-term rental market growth.

Internet has been part of the new car customer journey since the noughties, providing more information and opportunity to compare the offer of different manufacturers than the old-fashioned dealership’s tour could ever do. But apart from the specific case of Tesla in the United States (of which 76% of the cars were purchased online in 2018), this has not translated yet into significant full online purchase numbers. As far as Brazil is concerned, where this possibility did not exist until recently, automakers are facing the same challenge as in other parts of the world, as most potential customers wish to touch and feel the model they intend to purchase, and which usually accounts for the 2nd most important item in the family budget after the housing, if not the first. Furthermore, and like everywhere else, nobody considers buying a vehicle without negotiating its price, a process that seems difficult to carry out online.

However, e-commerce has increased significantly since the beginning of the epidemic in Brazil, with staggering numbers for specific products and services (+434% for toys, + 270% for supermarket delivery, + 53% for games online on the second half of March). This context has prompted some manufacturers to adapt and propose new solutions. Renault is the one who has gone the furthest in this direction, taking advantage of the scheme set up in 2018 for the launch its entry model Kwid, and has extended the possibility to fully purchase a car online to its whole range. Renault platform thus integrates online payment and financing as well as more the trade-in process of the current vehicle. In comparison, the scheme implemented by Ford is much more limited as it makes only possible to order a vehicle of the brand online, whilst the transaction needs to be completed in a tradition way by a salesman who gets in touch with the customer. As for Hyundai, the Korean manufacturer offers its prospects interested in a specific model to bring the corresponding vehicle to their home to perform a test-drive, with a disinfection procedure intended to reassure the potential customer.

BMW and Chevrolet choose a different path, by proposing their cars on “Mercado Livre”, a successful generalist online platform operating in 19 countries in Latin America, on which some dealers were already advertising on an individual basis. This proposal is probably an interim measure until these brands develop their own e-commerce site, but it also shows their responsiveness to an event as sudden as it was unexpected.

Although the number of actual transactions is probably still limited (none of the brands mentioned has released figures yet) , these initiatives could foreshadow what will be the world of the automotive sales of tomorrow, with transactions increasingly carried out outside dealerships, in which consumers may not want to return so soon. From this point of view, Brazil could constitute a favourable terrain, with a young population, eager to adopt new technologies, and strongly connected.

Another trend, which has been well underway for several years, could also accelerate in the wake of the epidemic crisis. Indeed, a certain number of companies are increasingly resorting to long-term rental for the management of their vehicle fleet, instead of the traditional purchase. The significant growth of this activity has in fact supported the recent recovery of the new car market, thanks to purchases made by rental companies which have considerably increased their fleet which accounted for 20% of all the cars registered in 2019. Localiza, Unidas and Movida, the 3 leaders of this market have thus increased the size of their fleet by nearly 50% from 2017 to 2018, and it is estimated that around 15% of company vehicles are currently rented. As a matter of fact, the long-term rental solution appears more than ever adapted to the post-Covid-19 reality, considering most companies needing to renew or increase their fleet will face a lack of working capital and credit.

But for the same reasons, it should also attract an increasing number of individual consumers for whom this market was just beginning to open up, according to a formula entitled “car by subscription”, not to mention the fact that this type of service makes it possible to get rid of the numerous administrative burdens linked to the possession of a vehicle in Brazil, thanks to “all inclusive” formulas.

However, the long-term rental sector is itself subject to the availability of capital while it faced a drastic reduction in its activity, particularly on the short-term rental business (up to 95% in some regions). Leader Localiza has thus announced its intention to reduce its fleet in the second and third quarters, with a moderate recovery in the fourth. Moreover, several companies in the sector have seen their credit rating go from positive to negative. Despite an important potential, they could see their growth prospects limited in the coming months.

Conclusion:

If there is one event that perfectly illustrates the theory of the black swan, it is the Covid-19 pandemic that took the world by surprise, including Latin America, although the region was really affected several weeks behind Europe. As far as Brazil is concerned, it goes without saying that its automotive industry, accounting for 4,5% of the GDP, will pay a heavy and durable price albeit difficult to assess while it is slowly resuming its activity. It is expected that the sector will undergo a major restructuring, in particular by reducing the significant production overcapacity, estimated at around 2 million vehicles, while the automakers while probably review their Product Planning strategy, delaying some model launches (as it was announced by FCA for the Fiat Strada, leader of the LCV category), or precipitating the end of life of models below expectations in terms of volumes or profit. Furthermore, the already small share of imported models should shrink even further due to their high price, impacted by heavy taxes and prices indexed to the currency of their country of origin, as should that of locally-built high end models.

In parallel, the ongoing crisis could accelerate previously existing trends, mainly with regard to the modes of acquiring a vehicle. We can therefore expect a development of e-commerce following initiatives put in place to respond to the crisis, in a country whose potential new car buyers are fond of technology and connectivity (Brazil is in the top 5 of countries whose inhabitants spend the most time on the Internet). In addition, the long-term rental sector, which has grown the market over the past three years, should continue to grow with business customers, while it is opening to individuals.

Although severely affected by the Covid-19 crisis, the Brazilian market retains significant growth potential, and should therefore return at some time to the level it experienced in 2019 or beyond, even if it takes several years. It must be said that the desire to own a car is still very strong in Brazil, as demonstrated by a recent study by the ANFAVEA, of which 70% of respondents, including the youngest, stated their wish to acquire one in the future. On the other hand, the changes that will have occurred in the way of acquiring a new vehicle are here to stay.

 

 

Fred Donier is Founder and Ceo of Crescendo

Jean-Philippe Thery is a Crescendo Senior Consultant, expert in mobility / automotive industry

crescendoadmin
crescendo@crescendo-consult.com.br
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