ANALYSIS-Red light in Brazil auto market raises risk of a pile-up15
    
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Profits have been the first casualty of the oncoming squeeze and labor relations could be the next, with the specter of layoffs looming in a presidential election year. A scramble for export markets also highlights the competitive gulf separating the industries in Brazil and regional rival Mexico.

Sales and output in Brazil have doubled since 2005 to around 3.8 million vehicles last year, but exports fell 40 percent to about half a million cars, trucks and buses.

Fiat SpA, Volkswagen AG, General Motors Co and Ford Motor Co saw profits plunge at their Brazilian units last quarter due to slipping market share, rising costs and a weaker currency.

Last year sales fell 1 percent despite the costly stimulus, the first drop in a decade.

Expanding access to new cars has long been an easy crowd pleaser for Brazil's ascendant middle class and the industrial unions at the heart of the ruling Workers' Party. However, that political calculus is starting to change.

Awful traffic in major cities and a lack of public investments led many to question why the government was using tax breaks to put more cars on the road.

The auto industry argues that it provides more than 150,000 jobs and over a fifth of Brazil's industrial output. Carmakers have announced about $35 billion of capital spending from 2012 to 2018, helping to lift the country's dismal investment rate.

Brazil will not absorb more than three quarters of the country's capacity by 2017, when local plants should be able to produce over 6 million vehicles per year.

That process has started with policies requiring carmakers to update their Brazilian assembly lines along global standards rather than recycling outdated models. Anfavea is asking for more government measures to help it boost exports, including new tax benefits, trade deals and preferential financing.

Mexican factories have lower labor costs, easy access to U.S. suppliers and 43 free trade agreements supporting their export-focused industry, according to Vildozo of IHS.

Brazil has just six bilateral agreements on auto trade, including four immediate neighbors and South Africa. Bilateral trade with Mexico has suffered since 2012, when Brazil imposed two-way quotas to stem a flood of Mexican imports.

"From an export standpoint, all of Brazil's eggs were in one basket: Argentina," said Vildozo. "And that basket has cracked."Plunging foreign reserves in Buenos Aires have led to severe trade restrictions, and Brazilian auto exports started the year with a 24 percent drop. Argentina has recently received as many as nine in 10 Brazilian car exports
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"There are very few automakers that are actually profitable in Brazil at the moment," he said. "The old business models really don't work anymore."