Brazil Lifts Tax to Protect Car Producers From Cheap Imports

Brazil’s government announced tax incentives for local carmakers in a bid to protect jobs from a surge in imports that’s been fueled by a rally in the currency and competition from China.

Finance Minister Guido Mantega raised the so-called industrial products tax on carmakers by 30 percentage points, except for those who source 65 percent of their parts from the Mercosur trade bloc or Mexico. The measure will raise the cost of imported cars by as much as 28 percent, and force foreign automakers to build key components in Brazil, he said.

“These measures are going to stimulate national production and guarantee investment,” Mantega told reporters in Brasilia. “If we don’t do anything, we are going to lose space to imports, and we are not going to permit that.”

Carmakers based in Brazil have been hit by a rally in the real, which has sucked in cheap imports from China and elsewhere. Brazil’s motor industry, the world’s fifth-biggest, is dominated by Volkswagen AG (VOW), Fiat SpA (F) and General Motors Co. who between them have about two thirds of the market.

Chinese automakers’ market share of the market expanded to 3.29 percent in August, from virtually zero in April 2010, according to the national car dealers’ association Fenabrave.
Cheap Imports

Mantega said the government is worried by the rise in car inventories, and the spare capacity in the industry.

The real hit a 12-year high against the dollar in July, and is up 36 percent since the start of 2009, as near-zero interest rates in the U.S. and Europe led investors to seek higher returns elsewhere.

Fiat, General Motors and Ford Motor Co. (F) have all lost market share in Brazil over the last year.

Carmakers must meet six of 11 requirements ranging from building of transmissions to the assembly of cars in Brazil in order to avoid the higher tax, Mantega said. The new rules will apply until December 2012, he said.

JAC Motors, Suzuki Motor Corp. (7269) and Chery Automobile Co. could reconsider their decision to invest in Brazil due to the rise in the tax, the president of the Brazilian Association of Vehicle Importers José Luis Gandini told reporters in Brasilia.
Growth Outlook

Research firm J.D. Power and Associates in July cut its growth forecast for 2011 light vehicle sales in Brazil to 3.4 percent, from 9.8 percent at the start of the year, as inventories rose and the economy showed signs of cooling.

Brazil’s car industry has also been hit by central bank measures to curb credit growth. Auto loans fell to 8.4 billion reais in July, down 24 percent from December when the central bank set capital requirements encouraging higher down payments and fewer installments on car purchases.

Since last year, Chinese carmakers Chery, Chongqing Lifan Auto Co. and Anhui Jianghuai Automobile Co.’s JAC Motors have all announced plans to build plants in Brazil.