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Fiat Bucks The Trend In Brazil, But Pressure Ratchets Up

Huge Profits There Needed To Cover Europe Losses
But New Brazil Entrants Suggests Game Will Soon Be Up

General Motors and Volkswagen admit that profits are slowing in the previously lucrative Brazilian market, but according to Bernstein Research, it is hard to see how Fiat can avoid a similar fate.

Fiat, GM and VW have been the three dominant players in Brazil, each with about 25 per cent market share. This market has been exceptionally profitable, but new entrants like Hyundai, Renault, Peugeot and Nissan are trying to muscle in and are undermining pricing and profits.

Bernstein Research auto analyst Max Warburton said GM has reported that its Latin American margins slumped to 1.3 per cent in the second quarter from eight per cent in early 2010, while VW, which doesn’t break out Latin American profits has formally warned Brazil was getting much tougher.

“We struggle to see how GM and VW can be seeing deteriorating pricing and profitability while Fiat claims it is immune. While Fiat has some specific advantages in Brazil, can it really continue to buck this trend?” said Warburton.

Rising competition
Deutsche Bank analyst Jochen Gehrke agrees.

“We wonder how long Fiat can perform differently in Brazil than VW, which according to the last quarterly conference call anticipates falling margins in Brazil in the coming years due to rising competition,” Gehrke said.

Brazil is critical for Fiat, says Bernstein’s Warburton, because it generates about 150 per cent of its annual EBIT (earnings before interest and tax) there, which subsidises Fiat’s loss-making European operations.

Brazil has been profitable for VW, GM and Fiat because as the only survivors of previous market downturns, they were able to sell old, basic car designs at high prices, generating big profit margins unattainable in most other markets . Profiability is now under pressure.

“In the last couple of years, other manufacturers have accelerated efforts to get into Brazil and 2011-12 marks the period when product launches, capacity adds and market share goals become more serious. Hyundai, Renault, Peugeot and Nissan have all made significant share gains in the last 18 months,” said Warburton.

Warburton said Fiat has insisted profitability remains fine. He said Fiat has achieved better profitability than GM, suggesting it runs a more effective business, may have more efficient factories, and definitely has the best dealer network.

“But none of these factors is new and we can’t see how they would protect Fiat form tougher pricing. We hope Fiat can continue to buck the trend reported by its main competitors, but we remain on alert for a deterioration in Fiat Auto profitability,” Warburton said.

Neil Winton – September 5, 2011

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