1. Economic recession in Brazil

[1] Falling into deficit territory

Automobile sales in Brazil increased for nine consecutive years starting in 2004. This unrelenting trend held steady even in 2009, immediately after the2008 financial crisis, due to cuts in automobile industry taxes by the Brazilian government as an economic boost.
The economy began to decelerate again in the 2010s, however. Inflation accelerated as the government raised public utility charges to remedy its deteriorating financial situation, while the central bank increased interest rates in response. As these rapid interest rate hikes led to an economic slowdown, growth fell to nearly zero in 2014, and entered negative territory in 2015 and 2016.
Automobile sales also decreased year-on-year in 2013. Along with an end to the effectiveness of these tax cuts, a collapse in the real’s exchange rate and rising interest rates emerged as economic headwinds. In addition, sales in 2014 fell below those of the previous year due to worsening business sentiment and future uncertainty ahead of the presidential election. Sales again declined sharply in 2015 as inflation and central bank interest rate hikes accelerated.
Similarly, DENSO’s Brazilian business fell into deficit territory in FY 2015. As mentioned earlier, since the late 2000s DNBR had made a series of large-scale investments, including setting up a new plant in Santa Bárbara, establishing the Technical Center, and spending on equipment for local production in relation to new business [starters, meters, wipers, etc.], all of which gradually increased the burden of its fixed costs.
Moreover, products for which DNBR had newly begun localization were late entrants to the South American market, meaning DNBR struggled in terms of profitability, even as sales increased.
The economic downturn and the sharp contraction in the automobile market directly exacerbated this situation. In addition, part prices denominated in dollars and euros rose due to the resulting depreciation of the Brazilian real, import incentives were discontinued in Paraná, and social security tax rates were raised.
Moreover, the trend in new vehicle development concepts among DNBR’s main customers shifted from the conventional approach of developing vehicles for each region to developing standardized global models, which kicked-off a transition towards uniform product prices throughout the world. Consequently, reflecting the economic disadvantages inherent to South America, namely high customs duties, unstable exchange rates, and high interest rates, for example, in product prices had become increasingly unacceptable.