In Rio, Owning a Car Is for the Wealthy
Why are people still feeding this money-eating metal monster?
My wife constantly asks me why we don’t have a car. I tell her we cannot afford it. She doesn’t believe me. Everybody has a car!
Well, maybe everybody is wrong. Just maybe.
The first fact we have to deal with is:
Brazil has one of the most expensive cars in the World.
You can find many articles online that compare the price of the exact same car model In Brazil, Mexico, Chile, Argentina. Brazil is always on the top. Sometimes it doubles the prices found abroad. It is insane.
There are bizarre cases of cars manufactured in Brazil, exported to Argentina and sold there at a cheaper price!
The same thing happens with Brazilian fuel exported to Argentina and other countries.
I’m not even going to bring into the fold comparisons with the United States or Europe. It is too embarrassing.
Why are cars so expensive in Brazil?
I — “Brazil Cost”
This is a literal translation of an expression used by entrepreneurs in Brazil, the Custo Brasil.
It involves:
- Cascading Tax, with aggressive rates applied at every stage of the supply chain. Taxes add up to 32% of the final vehicle price.
- Industrial Electricity costs around 50% more in Brazil than in Germany, for example.
- An employee costs to a company an additional 50% in tributes and benefits. I am not against it, but it is a fact. The world average is around 20%.
- Precarious infrastructure: Terrible roads, almost no railroads, saturated ports and airports. Releasing a cargo in Galeão, the International Airport in Rio takes 217 hours. In Shanghai, it takes 4 hours.
Check the Wikipedia article on Brazil Cost for other costs that affect the Brazilian industry.
II — “Brazil Profit”
Some studies have shown that the car profit margins in Brazil are one of the highest in the world.
I read a quote once, about car prices in Brazil, attributed to a BMW executive stating:
“If people are paying, why should I lower the prices?”
He’s fully right.
But, why are people still buying cars?
I attribute this behavior to two main reasons:
- Cultural Aspects
- Lack of financial education
Cultural Aspects
I recognize this is much more evident in São Paulo than in Rio de Janeiro, but it still exists here.
People still see a car as a symbol of status, instead of a tool.
If you don’t have a car, people look at you weirdly as if you had some kind of disease.
Common scenario: someone replaces their car for a newer model. The people in their circles (family, friends, co-workers, neighbors) start pushing the limit to replace theirs. They get too competitive when it comes to having a better, more expensive car.
Lack of Financial Education
First, let’s evaluate how much does a car cost and how much it costs to maintain it.
In this example, I am considering a Volkswagen Gol. The simplest model costs R$ 30,000.00, or US$ 10,000.00 as of May/2015.
About Insurance
In Rio, you cannot even dream to take your car out of the store without having a valid insurance. Lack of security in Rio determines that.
For an example on the risks of not having insurance, check this other story.
For that reason, insurance is also quite expensive.
You may have heard of Nelson Piquet. He is a three-time world Formula 1 Champion: 1981, 1983 and 1987.
After he quit the races, he started a prolific career as an entrepreneur. He stated in a recent interview that his businesses have brought him more money than his pilot career.
One of his main businesses in Brazil is Piquet Blindagens Especiais. They bulletproof cars. This is Rio. This is Brazil.
About Taxes and Fees
IPVA, DPVAT and Registration Fees represent that. It costs around US$ 500 yearly just to be allowed to move around.
IPVA is a tax for owning a car.
DPVAT is a compulsory insurance. It covers one scenario: if you injury someone with your car, the person gets some money.
Registration Fees are for car documents, license plate, etc.
About Fuel, Parking and Maintenance
Parking and Maintenance might vary depending on your location and habits. I am considering the monthly rental of a parking space in Downtown Rio.
Maintenance is an estimate for the first year of a new car. Older cards shall suffer more, surely.
Regarding fuel, that is an estimate for:
- Driving 30 kilometers per day.
- R$ 2.70 per ethanol liter (US$ 0.89, as of May/2015)
- Car performing 9 kilometers per ethanol liter. Remember, ethanol is cheaper, but the cars burn them faster than gasoline.
Fuel costs are a big part of the “Brazil Cost” that I mentioned before. There should be an entire separate post on why fuel is so expensive in Brazil.
About Depreciation and Opportunity Cost
Depreciation is a worldwide phenomenon. You take your brand new car out of the store and it is already worth 10% less. Simple as that. Nothing you can do, that is how the market operates.
Opportunity Cost is how much would the original R$ 30.000,00 would produce in interest, if it was put in a Savings Account that produces 6% interest per year.
About the Total
Who, with a sane mind, would spend US$ 5,000.00 a year to have a car? That is half the car price. Is it worth the comfort you get in return?
You may question some of the values. You may argument that if you buy a used car you cut some other values. However, overall, it is a better idea to invest your R$ 30,000.00.
Also, considering that you are willing to spend US$ 400 per month on your car, you should be able to use that difference to move somewhere else where you don’t depend on a car that much.
So, in most cases, it does not make sense to have a car. Invest the money and, when necessary, rent a car for a day, get a taxi or use car sharing services, if they are available in your city.
Even then, people keep on buying and prices keep on increasing.
If Financial Education was given higher priority in schools, the situation could improve.
If the educational system itself was better, overall, the situation could improve.
Other Reasons People Keep on Buying Cars
Easy Credit
It is easy to obtain credit to buy a car. Interest is high, but you can finance a car without any down payment and distribute the installments over 5 years.
This also contributes to the high car prices. People don’t really care how much the car costs, as long as their monthly installment is within their budget at the time.
Tax Incentives
Another reason is the Government’s initiative in the last years to reduce one of the car’s main taxes, the IPI. The IPI is a tax on industrialized products. The Government reduced it temporarily to keep the economy gears spinning. The car industry generates a lot of jobs in all of its supply chain.
As it was “temporary”, people ran to buy new cars even though the price reduction was not that representative. Most of the tax discount was turned into more profit for the factories. Anyway, people fell for it.
Whenever the deadline was approaching, the benevolent Government would extend it, saying that “now it is really temporary”.
And that’s how it went for three years.
Now, in 2015, after President Dilma Rousseff won the elections for her second term, the IPI tax is back to its original levels and Brazil is officially in recession.
The Future
In the United States, there have been a lot of news lately on Millennials and the fact that they are driving less.
The required consciousness is already part of their lifestyle:
- Cars are not a necessity for everyone.
- Cars are a status item, but only if you are very rich.
- Money can be better employed elsewhere.
- Using public transportation, taxis, bike sharing, car sharing and services like Uber or car rentals can supply all transportation needs of a person, for a cheaper price than that of buying and keeping a car.
- Not driving fossil fueled cars is good for the environment as well.
I just hope that these same values develop in Rio and in Brazil.
Only then, prices shall return to acceptable levels.
