Auto manufacturing and sales rebounded sharply in Brazil last
month. Production increased 8.8% to 297,800 units in July as
Brazil auto manufacturers agreed to postpone
layoffs
in exchange for government tax breaks.
[caption id="attachment_69913" align="alignright" width="300"
caption="Traffic in BrasÃlia"]
[/caption]
Another report, new-car registrations, showed that Brazil auto
sales increased 3.1% for the month and were up 18.9% over last
year. Despite July's strength, however, production is still down
8.5% from 2011 and sales are up less than 2%.
A slowdown in industrial production and an increase in consumer
default rates threatens the Brazil auto sector as other countries,
particularly Mexico, grab global market share. Consumer loan
defaults dropped in June for the first time in three months, but at
7.8% they are still much higher than historical standards.
In exchange for the Brazil auto industry postponing layoffs, the
government has agreed to pay part of each worker's salary, and it
has cut excise taxes. In the case of General Motors (
GM
,
quote
), It has agreed to pay 1,163 reais ($572) for each worker
laid off, while GM will pay the remainder of their salaries.
Both the president and finance minister have publicly reminded
automakers the government will not tolerate job cuts given the
concessions made to support the industry.
Conversely, Mexico has seen a boom in its auto industry as a
result of geographic and competitive advantages. The domestic
manufacturers' association reported that vehicle production
increased 17.7% in July over the same month last year, to a record
238,146 units. Mexico exports 84.6% of the cars it produces, with
most of those destined for the U.S. market.
Mexico's economy has benefited this year from a close
relationship with U.S. manufacturing, and sentiment leading up to
July's presidential election. The country's export market is less
dependent on Europe than other Latin American markets, lending some
stability to growth. Still, valuations at some of the country's ADR
issues and the iShares MSCI Mexico Investable Market Index Fund (
EWW
,
quote
) are relatively pricey at 15 times earnings, and sentiment may
moderate as the new administration
struggles to push through promised reforms
.
Shares of the iShares MSCI Brazil Index Fund (
EWZ
,
quote
) may be relatively cheaper at 11 times trailing earnings, but
growth prospects are significantly lower and political risk is a
major issue. An underweight ranking is still recommended for
Brazil.
