Understand why cars are so expensive in Brazil – 04/20/2023 – Market

A Brazilian worker who earns the minimum wage has to work uninterruptedly for about 50 months, or more than four consecutive years, without spending anything, to buy the cheapest brand new car in Brazil today.

The model in question is the Renault Kwid hatchback, with a 1.0 engine, whose price is around R$ 70 thousand.

To give you an idea, the average price of a new car in Brazil is currently around R$130,000, almost double what was charged in 2017, according to data from consultancy Jato Dynamics.

In this context, some automakers have been having preliminary talks with the government to launch a “popular car” or “green car”, which would be sold between R$50,000 and R$60,000.

The objective is to boost sales in the automotive sector, an important generator of employment and income and which accounts for a significant portion of the GDP (Gross Domestic Product) of the industry, around 22% —and 4% of the total GDP. The GDP is the sum of goods and services produced by a country in its national territory.

The cars, which could only run on ethanol, would have the same 1.0 engines currently used and would have exclusive taxation for their environmental appeal, suited to decarbonization targets, within the new fiscal framework (read more belowO).

Despite this, the proposed amount remains inaccessible to the pockets of the vast majority of Brazilians, especially in the midst of the post-pandemic context, with higher inflation, more expensive credit with high interest rates and widespread loss of income.

Contrary to Brazil, drivers from developed markets, such as the United States and the European Union, and even from emerging countries, such as Mexico, end up paying much less for a zero kilometer model, based on the same basis of comparison that opens this report.

But why are cars in Brazil so expensive?

reasons

A combination of factors, including the so-called Brazil Cost (set of the country’s structural, bureaucratic, fiscal and economic difficulties), is behind these values ​​considered astronomical by many Brazilians.

This is not, however, a new reality — some of them have always been constant in the Brazilian automotive market, but there are other circumstances, such as inflationary pressure and the shortage of semiconductors in the international market, as a result of the recent Covid-19 pandemic.

The list is long. Check out some of them.

High taxes

Brazil’s complex tax system is considered one of the main culprits for the high price of cars.

There are several taxes levied on the sale of cars, such as ICMS (Tax on Circulation of Goods and Services), IPI (Tax on Industrialized Products) and PIS/Cofins (Program for Social Integration and Contribution for Social Security Financing).

To give you an idea, the weight of taxes varies from 30% to 50% of the final value of domestic cars. If the vehicle is imported, this rate is higher and can range from 60% to 80%.

A car that costs US$ 20,000 in the United States can therefore cost up to US$ 35,000 in Brazil.

Protectionism and competition

Imported cars cost more than domestic ones because they are subject to more taxes.

If, on the one hand, the protectionist policy aims to promote local production and employment, on the other hand, it limits competition.

The result is higher prices for consumers.

Despite this, the number of automakers present in Brazil today is nothing compared to that of decades ago, when the market was practically dominated by four large vehicle manufacturers (Volskwagen, Fiat, Ford and Chevrolet).

For that, internationally recognized brands, such as Toyota, Honda and Hyundai, had to produce in Brazil to lower costs.

Higher labor costs

Brazil’s labor charges are among the highest in the world.

Other countries with the highest labor cost index are: Argentina, Ukraine, Uruguay, Turkey, Russia, South Africa, Romania, Egypt and Vietnam, according to data analysis and consulting company GlobalData, headquartered in London, in England.

This increases the cost of producing cars and makes it harder for manufacturers to compete with other countries with lower labor costs.

It is estimated that in the country companies spend two and a half times what they pay the worker.

precarious infrastructure

Despite being a country of continental dimensions, Brazil suffers from precarious infrastructure, with many roads and highways in poor condition.

This ends up representing a challenge for the transport of cars and parts, increasing their cost, which is passed on to the consumer.

Technological incorporation and regulatory requirements

Gone are the days of the “naked” car in the 90s, a time when then-president Fernando Collor de Mello said that cars produced in Brazil were “true wagons” in allusion to the poor quality of the final product compared to a imported vehicle.

In addition to the security systems required by law, consumers are also more demanding with regard to the vehicle’s equipment package.

Since 2013, all new cars have to be equipped with an airbag and ABS brakes (Anti-lock braking system, or anti-lock brakes).

The incorporation of new technologies, be they security systems, comfort or connectivity, has caused prices to rise.

Devalued real, Covid-19 pandemic and semiconductor crisis

There have been significant currency fluctuations in recent years, and the Brazilian real has lost value against the US dollar.

This has made it more expensive for manufacturers to import parts and equipment, which has contributed to the general rise in car prices.

More recently, the Covid-19 pandemic has made raw materials such as steel, iron ore and rubber more expensive and has destabilized industry supply chains, creating logistical challenges that have increased the value of cars around the world. Many components used in the manufacture of vehicles in Brazil are not produced locally.

In this context, the global scarcity of semiconductors stands out, which are present throughout the car, from the gearbox, through the dashboard, multimedia system, mirrors, brake system and even the engine.

Passion for car and profit margin

There’s a cultural factor at play, too: Brazilians’ passion for cars.

“Brazilians have always been passionate about cars and feel different when they have one. Cars are a status symbol. It’s a question of supply and demand. If people continue to buy cars and they are more expensive, why should I lower my price? price?”, asks Milad Kalume Neto, business development manager at Jato Dynamics.

“Obviously, we cannot forget that public transport remains deficient and this ends up encouraging people to buy cars, too, even if they have to pay for it in several installments”, he adds.

As a matter of strategy, automakers do not disclose their profit margins. But, according to Kalume Neto, “profit margins in Brazil are, on average, higher than what we see in the American and European markets”.

In fact, with the exception of 2020, the year of the pandemic, sales in the automotive industry in Brazil have been growing — the average price of a new car went from R$71,000 in 2017 to R$131,000 last year, an increase of 85%. %. In the same period, the official accumulated inflation, measured by the IPCA, was 36%.

It is worth remembering, however, that the market has changed in recent years. In 2022, for the first time, most sales (52.9%) went to legal entities (CNPJs, direct sales to rental companies, people with disabilities, fleet owners, among others).

That is, fewer Brazilians are buying new cars. In 2018, sales to individuals represented 64.4% of total sales. Last year, this proportion dropped to 47.1%, according to data from Jato Dynamics.

Popular car’?

Kalume Neto notes, however, that if the “popular car” proposal goes ahead, this vehicle in no way resembles the “naked car” of the 90s, that is, vehicles without headrests or even right rearview mirrors as standard items. , he recalls.

He notes that the industry has evolved, focusing on vehicles with greater added value, and the consumer has also become more demanding.

Despite this, he believes there is room for a cheaper “entry model”.

“We’ve had stagnant sales of around 2 million for three years. And we have a production capacity of over 4.5 million. The sector needs to sell more. But I don’t share the idea of ​​a “popular car”. , depending on the prices practiced here in Brazil. In addition, this term, “popular car”, refers to that “naked” car from the 90s, and this is no longer part of our reality, even as a matter of legislation” , explains.

“But, in fact, I believe that there is room for a price reduction of around R$ 10,000”, he adds.

However, he says he believes that for the sale value to be reduced to that level, the technological equipment would have to be partially sacrificed.

Kalume Neto also questions the viability of producing a cheaper vehicle powered only by ethanol.

“This implies a significant change in the assembly line, given the predominance of flex-fuel engines. This adaptation (for the manufacture of engines powered only by ethanol) would certainly increase the final cost”, he points out.

Contacted by BBC News Brasil, the MDIC (Ministry of Development, Industry, Commerce and Services) stated that “the proposal was presented by Anfavea (National Association of Motor Vehicle Manufacturers) and has not yet reached the Ministry. to understand the details of what is being proposed and assess its feasibility”.

In turn, Anfavea stated, through a spokesperson, that “these are preliminary dialogues. The formatting of the program will still depend on a lot of internal conversation at Anfavea and later with the competent authorities”.

This text was published here.