Boston, MA -- (SBWIRE) -- 08/28/2012 -- A 24.1% year-on-year (y-o-y) increase in passenger car sales and 0.3% y-o-y rise in Brazilian passenger car sales in H112 falls in line with BMI's long-held view that despite weakness in domestic demand in the beginning of the year, the market is poised for a 3.4% y-o-y increase in 2012. Further boost to this outlook will come from the stimulus package announced by the government in May 2012, which calls for reductions in taxes on vehicles, improved credit for car purchases and provision of subsidised funding to companies that invest in equipment.

However, our outlook for vehicle production has turned more pessimistic owing to a 9.4% y-o-y drop in production in the first six months of 2012, which came despite the existence of a large suite of government policies designed to boost the sector. We now expect over a 5% drop in vehicle production this year.

German firm Daimler ordered a mandatory nine-day furlough (temporary unpaid leave) in April for workers at its Mercedes-Benz truck factory. Ford Motor and Volkswagen (VW) are slowing their assembly lines, as stockpiles of unsold vehicles mount.

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Over the longer term, however, we maintain our bullish outlook for the sector, predicated on government policy bearing fruit, a resurgence in domestic sales and the potential for Brazil to become a regional production hub.

In July VW announced plans to increase production in Brazil until 2016. It plans to invest BRL1bn (US$500mn) in its Taubate facility near Sao Paulo and in the less developed state of Pernambuco. The investment aims to increase production from 1,000 units to 1,900 units a day by 2014. It comes on top of the planned BRL8.7bn (US$4.3bn) investment for 2012-2016. Meanwhile, British luxury brand Jaguar Land Rover (JLR) is reportedly negotiating with Brazilian authorities to establish a facility that will assemble its Freelander sports utility vehicle, in a move which supports BMI's view of robust growth in premium vehicle demand.

On the downside, the ethanol industry in Brazil is facing a crisis owing government policies to reduce gasoline and diesel prices for domestic consumers. On June 25, Petroleo Brasileiro, Brazil's statecontrolled oil company, raised gasoline prices 7.8% and diesel prices 3.9%. Following this, the government announced it would remove the CIDE tax on fuel to prevent a price increase for consumers.

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