In September 2012, Brazil's government raised taxes by 30 percentage points on imported cars and trucks, and those produced in Brazil and other Mercosur countries that fail to meet the 65 percent localization rate, to protect and grow its own automobile industry.

The measure is expected to increase taxes on cars by between 7 and 25 percent, depending on engine size, to as much as 55 percent.

"Chinese automakers need local production, if they are serious about winning market share from existing and new players," said Chow.

To save sales costs and avoid the high taxes, a number of Chinese automakers have also announced plans to build factories in Brazil, including Anhui-based Jianghuai Automobile Co Ltd, known as JAC, and Chongqing-based Lifan.

IHS Automotive reports that total light vehicle sales in Brazil are currently at around 3.6 million units a year.

By 2015, the analysts predict this number will rise to 3.9 million units and by 2020, to 4.8 million units.

In the first half of 2013, Chery's sales in Brazil dropped 72.5 percent from a year earlier to 2,504 units.

The leading Chinese exporter has only a 0.15 percent market share, ranking 20th in a market dominated by Fiat and Volkswagen.

Chery hopes that local production can help increase its market share to 3 percent.

Affected by the strict tax policy, JAC's monthly sales also dropped sharply from 3,000 units to 1,800 units.

The measure also put on hold JAC's original plan to set up a $450 million wholly owned facility in Brazil, its first in South America. Originally, the company planned to produce 100,000 units there by the end of 2013.

However, JAC in February said that it will restart the local production project by adding investment to its existing sales joint venture with Brazil's SNS Automoveis Ltd, with capital totaling $250 million.

Other initiatives

Beiqi Foton, one of China's leading commercial vehicle makers, signed an agreement with the Bahia state government to build a $300 million plant in Camaari.

To be operational this year, the facility will have annual capacity of 30,000 light-duty trucks and minivans by 2017.

By then, it will set up 130 dealers around the nation.

In July, officials from the State of Rio de Janeiro said that Beiqi Foton will set up its second factory in the state along with the company's Brazil headquarters. With an investment of 250 million reais, the facility will produce 20,000 heavy-duty trucks annually by 2018.

For the two factories, in the initial phase, Beiqi Foton will assemble vehicles in Brazil out of parts shipped from other countries.

It will gradually increase the use of locally made components to 65 percent by 2017 to avoid high taxes.

The move follows a similar action by Lifan, which is planning with Brazil's Effa Group to build a 300,000-unit assembly plant in three years.

The company expects its sales in Brazil to reach 15,000 units in 2014.

Chang'an Automobile, China's fourth-largest automaker, also has plans for production facilities in Brazil and elsewhere.

In the first 10 months in 2013, Chang'an's overseas sales surged by 129 percent year on year, greatly driven by its sales in South America, which for the first time overtook the Asian market.

The company's Vice-President Zhu Huarong said Chang'an will invest $820 million in 10 major global markets with the aim of selling 400,000 vehicles by 2020.

To this end, Chang'an will establish three major overseas manufacturing bases in Russia, Brazil and Iran, with combined investment of about $700 million.