Fiat SpA and Volkswagen AG have dominated Brazilian auto sales for years, holding the top two spots. Now, General Motors Co. and Asian rivals are gaining share in a market the European carmakers had been counting on to offset weak demand in their home region.

Brazilian auto production capacity will jump 50 percent by 2014 as South Korea’s Hyundai Motor Co. and other carmakers ramp up new factories, according to Brazilian supplier organization Sindipecas. The added potential output, which comes as sales growth slows, will put pressure on VW and Fiat profit margins, Barclays predicts.

“We will have growing competition here in Brazil,” Christian Klingler, VW sales chief, said at the Sao Paulo motor show. Fiat’s no longer the “benchmark in Brazil. We also have Kia and Hyundai expanding here. The best will prevail.”

With demand in Europe down for a fifth straight year, VW and Fiat have relied on Brazil for growth, boosting deliveries there more than 25 percent since 2007. Even so, they’ve lost market share: The two companies together sell two of every five cars in the country, down from about half five years ago.

Those sales are particularly critical for Fiat, which lacks Volkswagen’s scale in China. Latin America accounted for a quarter of Fiat’s first-half profit, compared with about 8 percent of earnings for VW, according to Fiat data and estimates from Bankhaus Metzler.

Fiat’s Brazilian sales are set to shrink 8.3 percent in 2013, while VW is forecast to drop 8.4 percent, according to IHS Automotive. Total light vehicle demand is set to slip 2.2 percent to 3.56 million autos with a government tax cut to boost sales due to end.

“Given the rising competition in the market and the pullback post-incentives, margins are likely to fall,” said Kristina Church, an analyst at Barclays in London. Fiat will probably post operating profit equivalent to 8.7 percent of sales in Latin America this year, more than double the group’s 4.2 percent margin, Barclays estimates.

The European automakers have sought to counter the competition with new offerings presented at the Sao Paulo Motor Show this week. Volkswagen introduced a two-door version of the best-selling Gol subcompact. It also premiered the Taigun sport- utility vehicle concept, one of two new SUVs planned to broaden its lineup beyond the compact Tiguan and larger Touareg. 

“Brazil is a strategic growth market for the Volkswagen Group and is therefore a key factor” in the company’s goal of becoming the world’s largest automaker by 2018, Klingler said. The German carmaker plans to invest 3.4 billion euros ($4.4 billion) through 2016 to upgrade its model lineup and factories in the country.

Fiat presented a convertible variant of the 500 subcompact, its first ragtop in the country. It also displayed special editions of Grand Siena and Linea sedans and sporty versions of the Uno and Palio compacts. 

(Bloomberg)