SAO JOSE DOS PINHAIS, Brazil (Reuters) - French automaker Renault SA (RENA.PA) said it plans to expand the capacity of its Brazilian motor plant by 25 percent by 2013, extending a string of recent investments despite concerns about rising costs in Latin America’s largest economy.
Olivier Murguet, the company’s top executive in Brazil, noted that increasing costs were eroding the competitiveness of manufacturing in the country and raising doubts about future investments.
“If we hadn’t yet made these investments, I don’t know if we would be so bold now,” he told reporters on Thursday at the inauguration of a steel cutting line in the southern state of Parana. “But these expansions are midstream. So you go ahead and cross the river.”
Renault’s newfound caution comes as several carmakers in Brazil have postponed new investments and idled some lines after a sales slowdown in the first half. Carmakers are also uncertain whether the government, in its ongoing efforts to stimulate the stalled economy, will extend tax breaks and industry incentives.
Still, Renault is relying on growth in emerging markets such as Brazil to offset sliding sales volumes in Europe, where an ongoing debt crisis is rattling the car industry. Until its recent slump, Brazil’s auto market was averaging nearly 10 percent annual sales growth over the past decade.
Renault is spending 40 million reais ($19.5 million) to increase the capacity of its Brazilian plant to 500,000 motors per year. The complex supplied about 336,000 motors last year for vehicles produced by Renault and partner Nissan Motor Co Ltd (7201.T) throughout Latin America.
The expansion follows on Renault’s announcement last year of a 500 million reais ($244 million) investment to expand vehicle output at the complex.
Heavy investments have more than tripled Renault’s sales in five years, giving it a 6 percent share of the Brazilian car market last year. But Murguet said costs in the country over the same period have climbed from 79 percent to 97 percent of what the company pays in France.
Years of underinvestment in infrastructure and education have left Brazil with cumbersome transportation, energy and labor costs. The costs weigh on industrial output, which fell 5.5 percent in June from a year earlier.
“Soon operations will be more costly in Brazil than anywhere else in the world,” Murguet said. “What worries us is the trend. There’s no sign of it easing, and our company can’t withstand cost increases of that magnitude.”
Taxes, he added, make up more than 30 percent of what Brazilians pay for cars, nearly twice the share of Italy, the second-most tax-heavy market where Renault operates. Murguet said that government efforts to cut electricity and payroll taxes offered some promise of short-term relief.
The double digit annual growth of Brazil’s auto market in recent years was fueled by unprecedented levels of consumer credit. But when the economy stalled and defaults climbed in early 2012, banks cut back lending and the auto market retracted 5 percent in the first five months of the year.
The slide only let up at the end of May, when the government cut an industrial tax on some vehicles and offered banks incentives for new auto loans.
Murguet said Renault was planning to idle production lines for at least a few days until the stimulus restored demand.
Thanks to the tax break, which expires this month, the company expects the Brazilian market to grow 5 percent in 2012 to 3.6 million cars and light trucks sold. That compares to a 9 percent contraction it projected without the tax relief.
Still, Murguet said the company is bracing for the return of normal tax rates.
“Without an extension, obviously the market is going to have a small hangover,” he said. “But on the other hand, the market can’t live by temporary measures.”
($1 = 2.05 Brazilian reais)
Reporting by Brad Haynes; Editing by Andre Grenon, Carol Bishopric and Richard Pullin