Rising demand and government incentives are prompting foreign carmakers to boost their investment in Brazil, which analysts say could become the third largest auto market in the world as early as 2015.
Industry group ANFAVEA forecast that domestic sales of cars and light commercial vehicles may grow by four to five percent this year compared to 2011, with up to 3.81 million vehicles.
Production is slated to reach 3.49 million units, up about two percent from last year, the National Association of Motor Vehicle Manufacturers added.
On Thursday, Japanese giant Toyota inaugurated its third plant in Brazil, in the southeastern town of Sorocaba, with the goal of producing 70,000 new Etios compact models a year.
A modified version of a model already being sold in India and South Africa, the Etios will be available from September, priced at an average of $17,300 to compete with similar models from Volkswagen, Fiat, General Motors and Hyundai.
Toyota, in Brazil since 1958, said it also planned to begin selling the Prius, its popular hybrid electric car, in Brazil later this year and to invest $495 million to build an engine plant near Sorocaba.
With a share of less than three percent of the Brazilian auto market last year, the Japanese carmaker lags behind leading players Fiat, Volkswagen and General Motors.
But the world's biggest carmaker plans to double its sales in Brazil to around 200,000 vehicles in the next two years and become one of market leaders in the next decade.
Industry Minister Fernando Pimentel said the Sorocaba plant, which employs 1,500 workers, amounted to a vote of confidence by Toyota "in the strength of the Brazilian economy and the Brazilian auto market."
Although sales dropped 1.2 percent in the first half of 2012, leading carmakers and analysts are generally upbeat about the future.
"The Brazilian economy is going to post solid growth in the second half of the year. Interest rates (now down to a record low of 8 percent) will continue to decline, and credit will continue to expand," ANFAVEA president Cledorvino Belini said Monday.
Home to 191 million people, Brazil currently ranks as the world's fourth largest car market behind the United States, China and Japan.
The industry, which currently employs 147,000 people, contributes roughly 5 percent of Brazil's GDP.
But rising demand for better quality cars by the country's expanding middle class -- now estimated at 95 million people -- a low motorization rate (333 cars per 1,000 inhabitants), the absence of domestic producers and government incentives offer good prospects for foreign makers, analysts say.
Roland Berger Strategy Consultants estimates that Brazil, the world's sixth largest economy, could displace Japan as the world's third biggest market by 2015 and sales rise to 6.6 million vehicles by 2020.
In April, the government introduced new rules to make the auto industry more competitive.
The rules require carmakers to increase regional content by purchasing more locally-produced spare parts, invest in engineering and innovation, and improve car fuel efficiency, or face higher taxes.
Sao Paulo state, where nearly half of the national auto industry is concentrated, also provides tax breaks to attract foreign makers.
South Korea's Hyundai is also set to begin production at a $600 million plant in the state in September while Nissan, Fiat, Volkswagen and PSA Peugeot Citroen are expanding their plants or building new ones.
But analysts said foreign carmakers face a host of problems such as high production costs due to relatively expensive wages, a lack of automation and low productivity.
General Motors, for example, is facing growing unrest from workers at its plant in the industrial hub of Sao Jose dos Campos over its plans to cut 1,840 jobs at a struggling production line.
The two sides have agreed to delay the cuts until at least November.
The US carmaker told union representatives it intends to shut down the struggling production line, which has already stopped making Zafira, Merica and Corsa models and would not make any new investments in Sao Jose dos Campos due to "structural adjustments."
The workers have appealed to the federal government to intervene to save their jobs.