VW Bets On Brazil & Latin America’s Auto Industry

Volkswagen has sent shock waves within Latin America’s auto industry with its plans to invest €1 billion ($1.15 billion) over five years in the region, where it projects profitability this year, following years of recovery.

“In Latin America, we have demonstrated that we can be profitable despite a low overall market and challenging conditions. We are now continuing to invest in targeted projects that safeguard Volkswagen’s sustained profitability in future,” said VW CEO Ralf Brandstaetter in a company statement. VW has six assembly plants in the region.

“Robust and profitable regions are a key success factor in our Accelerate strategy. The expected turnaround in Latin America is a very important milestone on the road to sustained competitive profitability,” said VW CFO Alexander Seitz, in the statement.

Regional Paint and Coatings Sales to Recover

The investments in new production will help spur demand for automotive coatings, both for OEM and after-market consumption. Latin America’s overall demand for paint and coatings is expected to recover to the pre-Covid level of $10 billion by 2024, according to a projection by market consultants Rácz, Yamaga & Associates.

In Brazil, where VW will invest in its Taubate, Sao Paulo state plant, all segments of national paint and coatings sales are worth an estimated $8 billion, according to the Associação Brasileira dos Fabricantes de Tintas (Abrafati), the Brazilian coatings manufacturers association. Of that total, automotive paints represent about 5.8%, or more than $550 million, according to an estimate by Statista.

During 2020, automotive OEM coatings sales were down 27% to 28 million liters, while automotive refinish coatings sales were flat at 67 million liters, according to Abrafati.

This year, Abrafati predicts overall paint and coatings growth of as much as 3.5% beyond 2020. “As for automotive OEM coatings, which experienced a significant fall in 2020, we expect sales to recover. There are reasonably good prospects for automotive refinish coatings, as used cars are in high demand due to supply chain issues affecting the production of new vehicles,” said Luiz Cornacchioni, the executive president of Abrafati.

VW Sales, Profitability Back Up in Latin America

In its third-quarter financial report, VW showed high gains for sales in the region, led by Brazilian demand. “Brazil’s economy recorded an increase from January to September 2021 despite high infection rates…the number of new registrations was considerably higher than in the prior-year period,” the report stated.

Over the first nine months of 2021, VW deliveries of automobiles in South America was up 10.6% to 331,422 units, of which 234,417 were delivered in Brazil, the report indicated. The growth is promising since VW was forced to temporarily close four of its factories in Brazil in March, due to Covid.

VW produces vehicles in Brazil for export to the rest of Latin America. Brazilian automotive exports to the Latin America region amounted to 277,000 units during the first nine months of 2021, a rise of almost 34% to 207,000 compared with the same period in 2020.

“Compared with the previous year, the Volkswagen Group delivered 2.8% more vehicles to customers in the first nine months of 2021 in the Brazilian market, which is experiencing significant growth,” the report said. “Along with the Gol and the T-Cross, the new Nivus from Volkswagen Passenger Cars was in especially high demand,” the report stated.

VW will produce the Polo Track in Taubate as its most economic offering in Brazil, while model focus continues to shift to higher-profitability with SUVs.

As part of its retooling in Brazil, Volkswagen Financial Services (VWFS) has established a joint venture in Brazil with LM Frotas, an auto and truck fleet provider.  VFWS will own 60% of the JV and merge its current fleet provider Fleetzil Fleet Solutions with the new venture, which will have a total fleet size of about 40,000 vehicles, according to a company statement.
“We see great growth potential in the Brazilian fleet market and expect the total market volume there to be much higher by 2026,” said VWFS Brazil Managing Director Jörg Pape.

The new VW investment replaces a prior investment cycle begun in 2016 that was worth $1.3 billion. In June, Volkswagen Caminhões e Ônibus (VWCO), the truck and bus division, began producing its e-Delivery distribution truck in Resende, in Rio de Janeiro state, where the company plans to produce up to 3,000 units per year.

Rival Automotive Investments in Brazil

VW is not the only global automotive company that is bullish on Brazil. China’s Great Wall Motors in July announced that it purchased the Mercedes-Benz assembly plant in Iracemápolis, Sao Paulo state, according to a report by O Globo.

This investment will benefit from the uptick in total 2021 Brazilian automotive production, estimated to be as much as 10% compared with 2020, according to the Associação Nacional dos Fabricantes de Veículos Automotores (Anfavea), the national automakers association. Brazilian automotive exports are pegged to rise even faster, as much as 16% this year, the organization predicts.

Part of the pace for such new investment in Brazil’s automotive industry will hinge on regional sales recovery. Brazilian auto production dropped 21.3% to 173,287 units in September, compared with the same month in 2020, according to Anfavea. However, sales of new and used cars in Brazil is surging, while shortages have reduced stocks and lengthened delivery times.

Consumer spending may accelerate with the announced increase in the federal government’s 20% larger spending program this year. Economy Minister Paulo Guedes recently announced that President Jair Bolsonaro’s new social plan, called Auxilio Brasil or Help for Brazil, will carry a price tag of $5.3 billion, including new direct economic stimulus payments for most Brazilians.

The International Monetary Fund in October scaled back its projection for 2021 economic growth in Brazil to 2.4% this year and 1.5% in 2022, short of government predictions of 5.3% this year and 2.2% next year.

“In the case of Brazil, we have a slight downgrade because of the effects that we expect from the rising increase in monetary policy rates, given the high levels of inflation in Brazil and also because of the downward revision for the U.S.; the U.S. is one of Brazil’s main trading partners,” said Gita Gopinath, the IMF’s Chief Economist, in an October presentation.

Still, “higher commodity prices and the return of manufacturing and services activity has been important for the recovery” in Brazil, according to Petya Brooks, IMF’s Deputy Director of the Research Department

Brazil is still the largest economy in Latin America with a Gross Domestic Product value of $1.4 trillion, according to Statista. As such it it’s the largest market in the region for paints and coatings, especially for the 70 million households in the country.