New Brazilian Automotive Policy and the Increase of Local Auto Parts Content: A Critical Analysis of the Automotive Supply Chain

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The aim of this study is to identify the new framework of “Inovar-Auto,” the Brazilian government’s recent automotive incentive program. Under the program, auto parts suppliers and automakers stand to receive governmental benefits such as tax reductions by increasing local content rates. Approved in October 2012, this incentive program aims at fostering innovation and intensifying the local productive chain in the automotive industry as well as delineating the requirements for automakers and suppliers for entering this program. This new policy is specific to the Brazilian automobile industry and entails a long-term perspective (2013 to 2017) with three main objectives: (1) protection of the industry and domestic market; (2) increased stimulation of investment and innovation; and (3) enhanced energy efficiency of vehicles produced in Brazil. Overall, this program encourages automakers and its suppliers to produce more efficient, safer, and technologically-advanced vehicles and auto parts while investing in the national automotive industry. It provides its incentives in two ways. First, it increases taxes on industrialized products (IPI) by 30% for all light-duty vehicles and commercial vehicles. Second, it imposes a series of requirements for automakers to qualify for up to a 30% discount on IPIs. Making local purchases is one of these incentivized requirements. The larger the local purchase, the greater the discount (up to 30%). One of the major challenges in achieving this goal, however, is that the Brazilian government’s rules for calculating the percentage based on local content rates needs to be more specific. It also needs to provide a more concrete means of ensuring the supply of local parts. Finally, one of the tools from the study is an analysis of the traceability of the origin and usage of raw materials for the final product. This analysis was based on surveys conducted with suppliers in the Brazilian auto parts industry.