Brazil to demand more fuel efficient cars -sources

* Brazil to announce rules in coming weeks -gov't sources
* Carmakers need more fuel efficiency to keep tax discount
* New standards should boost investment in engine plants

By Jeferson Ribeiro
BRASILIA, Sept 10 (Reuters) - Brazil will demand that
carmakers improve fuel efficiency by 11 percent next year or
lose a substantial discount on their tax bill, according to two
government sources, in a move expected to bolster a wave of
investments in local engine plants.
The government has been putting finishing touches on fuel
efficiency regulations under a new law that gives a hefty tax
advantage to cars made with a minimum amount of local and
regional content in the world's No. 4 auto market.
Carmakers who do not meet the local content requirements
would see their tax bills rise 30 percentage points.
Taken together the regulations are raising pressure on
carmakers to boost local investments if they want to tap
Brazil's vaunted demand -- the most protectionist shift in the
market since it opened to auto imports two decades ago.
"What we're doing is bringing the Brazilian auto industry in
line with the rest of the world. That will give a new boost to
vehicles exported from Brazil," said one government source,
adding that the new rules should be out within weeks.
Rising costs and rigid labor laws have eroded the
competitiveness of Brazilian auto exports, which slumped 30
percent last year from five years before.

The source added that companies could further reduce a key
industrial tax by two percentage points if they can improve fuel
efficiency by a full 22 percent.
A representative of the auto industry confirmed that
negotiations were "headed in that direction, although there are
several points to work out."
The new standards are likely to expand a wave of investments
in local engine production of the sort recently announced by
Renault and Toyota Motor Corp, said Milad
Kalume Neto, the head of consultancy Jato Dynamics in Brazil.
"I think there's going to be a movement changing over to new
materials and technologies, like the 'engine downsizing' that
Europe went through," said Neto, calling the motors used in
Brazil "extremely outdated."
Government policy has also stimulated the use of 'flex-fuel'
engines in Brazilian vehicles, which can burn gasoline,
sugarcane-based ethanol or both mixed, but with slightly less
efficiency than an engine tuned for either fuel alone.
Most auto production in Brazil comes from Italy's Fiat SpA
, Germany's Volkswagen AG and U.S.-based
General Motors and Ford Motor Co.