Vehicle Production Slide In Brazil Could Impact Lear's Business

Jun 12 2014, 7:50am CDT | by

Shares of Lear Corporation have surged by more than 50% in the last year. The manufacturer and distributor of automotive interiors saw revenues rise 10.4% year-over-year to nearly $4.36 billion in the first quarter, with record sales for the electrical power management system segment. The other segment (i.e. the seating division) also exceeded expectations with 10.7% sales growth through March. Growth in auto parts supplies has been fueled by increasing worldwide vehicle production volumes, which in turn is dependent on vehicle demand. Vehicle production rose by 5% globally to 21.7 million units in the first quarter of this year, fueled by strengthening North American markets and stabilizing European economies. However, production has taken a hit in the low-cost South American countries in 2014, particularly Brazil. Lay-offs resulting in unemployment and lower consumer spending have hurt demand for vehicles in Brazil. This slowdown is expected to hamper sales for automakers such as GM and Ford, which are also the two biggest clients of Lear. Lower vehicle demand will lead to lower production levels and could subsequently contract Lear’s business this year.

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Lower Vehicle Production Volumes In Brazil

Brazil’s economy is slowing owing to higher interest rates put in place to control inflation. These measures have impacted consumer spending, which slightly slowed down this year, as compared to the last quarter of 2013. Lower demand for vehicles prompted some of the leading automotive manufacturers to undertake measures such as shift reductions and layoffs, consequently decreasing production levels. The unemployment rate went up to 7.1% in Q1 2014 in Brazil, up from 6.2% in the previous quarter. In fact, employment in the automotive sector in the country through May is 2.8% below 2013 levels. Lower customer demand has also raised vehicle inventory for automakers, with days sales of inventory increasing to 48 from the normal average of 23-32. Rising unemployment, higher inventory levels, and lower demand have resulted in a 13.3% year-over-year decline in vehicle production in Brazil in the first five months of this year, with production falling 18% in May. Brazil’s automobile industry, the fourth largest in the world, has also suffered due to a fall in exports, primarily because of import restrictions in Argentina.

GM And Ford Sales Decline In Brazil

GM and Ford are Lear’s largest clients, together constituting 44% of the company’s net sales in 2013. Lear’s business depends on the performances of its automaker clients, which in turn depends on consumer demand and vehicle production levels. Brazil is the third largest market for GM behind China and the U.S., constituting roughly 7% of the company’s net retail volumes in 2013. Ford also sold around 6% of its overall wholesale volumes in Brazil last year, and together with GM, commanded 26.7% market share in the country’s vehicle industry at the beginning of 2014 (GM-17.3%, Ford-9.4%). However, unit sales for both the automakers have declined in Brazil this year, owing to the slowdown in vehicle demand. GM witnessed a 2% fall in retail volumes in the country through March, with the company’s market share falling to 16.8%. This means that demand for GM’s vehicles in particular declined at a faster rate than the overall industry. On the other hand, primarily due to the declining sales trend in Brazil, Ford’s South America volumes fell 8% year-over-year in the first quarter. Unfavorable currency translations and volume mix also caused an 18% decrease in Ford’s revenues from the region during this period.
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Vehicle production in Brazil might pick up in the latter half of this year, as the newly formed government, following the general elections in October, might look to provide tax breaks on vehicle buys, and reach an agreement with Argentina to encourage export activities. In 2012, the government had unveiled tax breaks designed to boost automotive investment in the country. However, taxes on vehicles were again increased this year, prompting rises in vehicle prices, and consequently hampering consumer demand. Improving production levels in Brazil will not only increase volumes and business activity for Lear and its clients, but also boost profitability due to lower production and operational costs in the country. Lear operates four seating plants and one electrical facility in Brazil.

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