Worst seen over for Brazil's auto industry

SAO PAULO/RIO DE JANEIRO (Reuters) - Four months of rising car sales in Brazil suggest that Latin America's biggest auto industry could already be over the worst of the global crisis, even as makers elsewhere face plunging demand.

Resilient consumption, fueled by a tax break that cut showroom prices by about 10 percent, has put the world's fifth-biggest auto market in a small group of countries whose car industries are showing glimmers of recovery amid the economic turmoil.

Although the main industry group expects production to drop 11.2 percent this year to 2.86 million units, much of that fall would be due to crumbling foreign demand.

Brazil's high-potential domestic market, which has become a darling of foreign carmakers such as Italy's Fiat SpA (FIA.MI), Germany's Volkswagen AG (VOWG.DE) and U.S.-based General Motors Corp (GM.N) and Ford Motor Co (F.N), roared back with a 36.2 percent month-on-month rise in sales last month. It was the best March on record, following three months of modest growth.

On a year-on-year basis, auto sales in Brazil rose 16.9 percent in March, compared with a 37 percent plunge in the United States, a 39 percent drop in Spain and a 25 percent fall in Japan.

While the March numbers were inflated as consumers brought forward purchases to take advantage of the tax break, analysts said swift government action and huge pent-up demand for cars appeared to have put the market on the road to recovery.

"The measures taken by the Brazilian government to encourage car sales were certainly more effective in relation to those adopted in the United States and Europe," said Marcelo Cioffi, an auto industry analyst at PricewaterhouseCoopers.

"But the question is for how long this can be efficient, because it is bringing forward purchases. This medicine can only be taken for a short period, after which other measures will be needed to sustain sales."

Car markets in Europe, particularly Germany, Italy and France, have also shown some signs of recovery in recent weeks, helped in part by government tax incentives.

In October, the federal and Sao Paulo state governments ordered state banks to offer 8 billion reais ($3.6 billion) in credit for car sales as the first step in helping automakers, which account for more than 20 percent of Brazil's industrial production.

PENT-UP DEMAND

The federal government announced the break in the IPI industrial tax on auto sales in December and recently extended it until the end of June. A senior government source told Reuters last week that the tax breaks will probably be renewed through the end of the year.

Unlike Mexico, where any bankruptcies among U.S. automakers could further batter the car industry, Brazilian law protects the local units of GM and Ford and analysts say they would be unaffected if their parents sought bankruptcy protection.

Andre Beer, a former executive with GM who has a business consultancy in Sao Paulo, said the worst is likely over for the Brazilian industry, barring further global shocks.

He said strong pent-up demand for cars in Brazil was a key reason for optimism here compared with developed countries. Brazil has about eight people for one car, compared with a ratio of two or less in developed countries.

Mexico and Argentina, Latin America's two other major carmakers, have ratios of 4.7 and 5.2, respectively.

"We still have a demand to be fulfilled. If it wasn't for that, we wouldn't have this recovery," Beer said.

The president of industry body Anfavea, Jackson Schneider, said this week that sales were seen falling 3.9 percent this year, which would be the first sales drop since 2003.

But he said 2010 sales could beat the 2008 level -- a prediction analysts said was realistic given fierce competition among manufacturers, strong demand, and makers' focus on the domestic market. The economy is also expected to help, rebounding to growth of around 3.5 percent in 2010.

The major carmakers operating in Brazil have plans to invest about $20 billion in the coming years to build the new capacity needed to meet demand.

Cioffi of PwC expects Brazil's production to fall 6 percent this year to 2.69 million units but still sees the industry overtaking South Korea's this year to become the world's fifth-biggest producer. He forecasts a 5.9 percent rebound in production in 2010 to 2.85 million units, and a further 6.3 percent rise to 3.03 million units in 2011.

(Writing by Stuart Grudgings; editing by Gerald E. McCormick)