Global Insight Perspective

Significance

Sales of ethanol-fuelled light vehicles surged past those of vehicles powered by petrol and diesel to 70,320 units in May, attaining a 51.5% market share. This represents a massive increase from April, when ethanol-fuelled light vehicles had a 42.1% share. 

Implications

Continuing upward pressure on petrol prices and the increasing availability of ethanol-fuelled vehicles are driving this trend to ever greater heights in 2005. Ethanol fuel in Brazil was recently selling at half the price of petrol in Brazil. With automakers rapidly introducing new, low-priced models in the segment, the Brazilian vehicle market will continue to move towards the bi-fuel alternative.

Outlook

Growth in demand for flex-fuel vehicles looks set to boost passenger car sales in Brazil in 2005 and is likely to allow GM, VW and Fiat to gain market share as they roll out their small, low-priced flex-fuel models, which will be among the most competitively priced B-segment models on offer in the market. Some consumers will accelerate their new vehicle purchase decisions to buy the new low-priced flex-fuel models coming onto the market this year, adding impetus to new passenger car sales growth in 2005.

Explosive Growth in Brazil's Flex-Fuel Vehicle Market 

Key Trends:

· Brazilian consumers have reacted to rising fuel prices by shifting to flex-fuel vehicles, allowing them to fuel their vehicles more cheaply, and offsetting the risk of further petrol (gasoline) price increases. 

· The major automakers in Brazil have been quick to bring out low-cost flex-fuel vehicles, appealing to consumers in the vehicle market, which is heavily focused on 'value' cars, with sales concentrated in the B segment. 

· Growth in flex-fuel sales will continue this year and into 2006, as the major automakers focus on bringing out competitively priced flex-fuel models.

Light Vehicle Sales by Fuel Type

Sales of ethanol-fuelled light vehicles surged past those of vehicles powered by petrol and diesel to 70,320 units in May, attaining a 51.5% market share. This represents a massive increase from April, when ethanol-fuelled light vehicles had a 42.1% share. Continuing upward pressure on petrol prices and the increasing availability of ethanol-fuelled vehicles are driving this trend to ever greater heights in 2005. It's easy to see why: ethanol fuel in Brazil was recently selling at half the price of petrol.

Growth in the segment has taken carmakers by surprise, 'We didn't expect this fever in the demand of flex-fuel cars...We thought consumers would take more time to realise the advantages of this technology', said Paulo Sergio Kakinoff, director of sales and marketing for Volkswagen's (VW) Brazilian unit, as quoted in a Dow Jones newswire. 'Sales of flex-fuel cars have surpassed all of our expectations', said Henry Joseph, head of emission testing at VW. 

Automakers Roll Out New Flex-Fuel Models

The introduction of low-cost flex-fuel models by Brazil's top three automakers will provide further impetus to flex-fuel vehicle sales in 2005. Fiat, VW and General Motors (GM) are rolling out new low-cost flex-fuel B-segment (supermini) models in the country, which can be expected to prove particularly attractive to consumers looking for a low-cost small-car alternative.

The three largest automakers in Brazil are competing to gain share in the rapidly growing flex-fuel vehicle market. The introduction of low-cost flex-fuel models by the top three automakers in Brazil will provide further impetus to the sales of such vehicles in 2005:

· Italian automaker Fiat recently launched three new flex-fuel models with 1.0-litre engines. Among the new flex-fuel models to be launched by Fiat is the Mille Uno, already the least expensive new car available on the Brazilian market. The new flex-fuel Mille Uno will retail for 19,350 Brazilian reais (US$8,038), only 360 reais more than the petrol model. With the introduction of the new models, Fiat expects to boost its flex-fuel sales to 80% of its new car sales by end-2005, up from 33% in December 2004, according to a Dow Jones newswire.

· VW is seeking to compete with Fiat and plans to launch a low-cost flex-fuel Gol in 2005. The Gol is also the automaker's least expensive vehicle. Volkswagen was the first automaker to launch a flex-fuel vehicle in Brazil when it introduced the Gol 1.6 model in March 2003. The first flex-fuel Gol launched by VW in 2003 was a sub-compact car with a 1.6-litre engine and was priced in the mid-range by Brazilian standards. The lower price tag on the upcoming model will make it even more attractive to Brazilian consumers.

· General Motors launched its Corsa 1.8-litre model in a flex-fuel version in mid-2003, and has since launched five other flex-fuel models, namely the Corsa 1.8, Montana 1.8, Meriva 1.8, Zafira 2.0 and Astra 2.0. GM also plans to offer a 1.0-litre flex-fuel version of the Corsa later this year. With the introduction of the new Corsa model, GM expects flex-fuel cars to account for up to 60% of all new car sales by the end of 2005, up from 26.2% in 2004.

Brazil's Alternative-Fuel Experience

Brazil has about 30 years' experience with alternative-fuel vehicles, dating back to the 1970s oil crisis, when the government of the day launched an ethanol fuel programme aimed at reducing the country's dependence on oil imports. Many Brazilian motorists, seeking a cheaper alternative to petrol, switched to ethanol-only vehicles, which by the mid-1980s accounted for 70% of all new car sales.

However, lower oil prices in the 1990s, and a 1989 shortage of ethanol, contributed to ethanol-only vehicles losing their appeal with Brazilian consumers. The government scaled back subsidies to the programme in the 1990s, and demand for the fuel declined dramatically. The infrastructure of filling stations serving ethanol remained intact, however, catering to the small number of consumers still relying on the fuel.

Brazil remains the world's leading ethanol producer and exporter and can produce ethanol so cheaply that it can even export the product to the US, where producers receive a US$0.54 per gallon subsidy, and make a profit. With the recent growth in demand for ethanol in Brazil, domestic demand for the fuel is expected to reach 13.1 billion litres in 2005, up from 12.44 billion litres in 2004, according to local agricultural consultancy group Datagro. In 2004, Brazil also quadrupled its ethanol exports.

Flex-fuel technology allowing cars to run on ethanol or petrol, or a mixture of both, was launched on the Brazilian market in March 2003 and has gained rapidly in importance as successive automakers have rolled out models using it.

Overall Vehicle Sales and Production in May

New vehicle registrations in Brazil rose strongly in May, by 14.1% year-on-year (y/y) to 135,349 units. The month-on-month (m/m) increase was 3.6%. Strong growth in vehicle sales was accounted for by light vehicles, which rose 15.8% y/y, while truck sales were down 0.5% from the year-earlier month. Passenger car sales rose 15.8% y/y to 110,848 units, while light commercial vehicles rose 10.9% y/y to 16,743 units.

Total vehicle production rose 19.2% y/y to 213,400 units in May, and by 4.9% compared to April 2005. Light vehicle production rose 19.6% y/y to 200,066 units, with passenger car production up 18.7% y/y to 169,427 units and light commercial vehicle production up 25.1% y/y to 30,639 units.

Outlook and Implications

Growth in demand for flex-fuel vehicles looks set to boost passenger car sales in Brazil in 2005 and is likely to allow GM, VW and Fiat to gain market share as they roll out their small, low-priced flex-fuel models, which will be among the most competitively priced B-segment models on offer in the market. Some consumers will accelerate their new vehicle purchase decisions to buy the new low-priced flex-fuel models coming onto the market this year, adding impetus to new passenger car sales growth in 2005.

The new low-cost flex-fuel B-segment models being rolled out by the three automakers will prove particularly attractive to consumers looking for a low-cost small-car alternative. Strong sales of the models will be ensured, as the Brazilian market is heavily focused on 'value' cars, with sales concentrated in the B segment. Automakers such as VW are optimistic that Brazil will in the future export flex-fuel cars, and government and private-sector representatives from China, Australia, the UK, France and Taiwan, as well as several Latin American countries, have recently visited Brazil to learn about the technology and the possibility of importing ethanol. The main impediment to flex-fuel vehicle sales taking off in other countries, however, is that they would need to build up extensive networks of filling stations that offer ethanol - a lengthy and expensive task. Only countries able to produce vast quantities of cheap ethanol, or with major ecological considerations, would be likely to go to the expense of putting such an infrastructure in place.