Monday, May 17, 2010

Why are cars in Brazil so expensive?

Good article from Exame (in Portuguese) regarding the extremely high price of cars in Brazil. Some points from the article:

- Taxes, labor costs, raw materials and lack of infrastructure force Brazilians to pay double what Mexican consumers pay for the same car

- The basic model of the Honda City is sold in Brazil for the equivalent of US$ 32,000 (according to mid-May exchange rates). Considering the car's category, the price is similar to that of its competitors. Rival sedans like the Volkswagen Polo, Fiat Linea and Ford Focus cost between US$ 28,000 and $33,500. What not everybody knows is that crossing the border into Argentina, the same car with several accessories - such as electric power steering, onboard computer and dual airbags - can be purchased for US$ 20,100.

- The price difference in itself is already strange, but what makes it even harder to swallow is that both the car sold in Argentina and the one sold in Brazil come from the same production line in Sumare, located in the state of Sao Paulo. The import cost is zero for the Mercosur neighbors. The biggest explanation for the price difference is the weight of Brazilian taxes.

- Together the Brazilian taxes IPI, ICMS, PIS and Cofins represent between 27 and 36% of the total value of automobiles. For comparison's sake, in the US, taxes add up to about 6.1% of the vehicle's final price.

- The disparity suggests that vehicle produced abroad could invade Brazil. But it's a mistake to think that the tax burden offers relief to imports. Insurance, freight, and a 35% import duty are added to the price of each imported car. Next, the car collects all taxes paid on its home soil which are not charged in the country of origin. According to Abeiva, the Association of Importing Companies, the math makes it clear: by the time the car reaches the Brazilian consumer, it will cost 2.7 times its original price.

- Not only is the purchase price higher than almost every other country, but financing (avg of 25%/year), ownership, and maintenance costs also make Brazil champion of high prices.

- The government is not keen to change its tax policy because it makes so much money. In 2009, it charged over US$ 15.7 billion in taxes from autos.

- Despite the obstacles, the Brazilian auto industry is having the best times in its history. 3.4 million vehicles are expected to sell in 2010 and investment is at record levels.

- If you read this story and are willing to travel to Argentine to enjoy a delicious wine, a juicy chorizo steak and come back with a Honda city purchased at a US$12,000 discount, forget about it. To cut off this potential tax evasion, the Brazilian government prohibits the importation of any vehicle that doesn't come straight from the factory - except those used in diplomatic missions and cars over 30 years old. And you can only drive a foreign vehicle in Brazil for a maximum of 180 days. The only solution is to accept the high prices charged here.

My takes:

  • Things are even more expensive than they seem. The annual car ownership tax is 4% of the government estimated car value, which is always higher than what you think it's worth. So the owner of a domestically manufactured 2004 Toyota Corolla would pay approximately US$ 780, while the owner of an imported 2010 BMW X6 would pay over US$ 7000 in yearly ownership tax.
  • Gas is more expensive than in the US, currently costing over 5 dollars a gallon in Sao Paulo.
  • Load up at the ATM before heading out on the highway. A quick 5 hour trip from Rio de Janeiro to Sao Paulo will cost you US$ 28 each way in tolls. Credit/debit cards are not accepted.
  • It's amazing to me that Brazilians - 1) Are able to afford to drive given the tremendous associated costs, and 2) Still put up with these outrageous duties and taxes.

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  1. That's why we, here in brazil, have such bad cars comparing them to americans. Because while in America you can buy for US$23,000 a 2011 Ford Mustang, here in samba's country it costs about US$77,500 dollars( as 1 dollar = 2 reais). If you take out the brazilian taxes, which is about 30%avg as you said we got a price of about US$54,250 (more than 2 times the USA price). Cutting off the import tax(35%) . . . US$33,000...which is way ...but way more fair than the US$77,500 . . .

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