By Rogerio Jelmayer , Samantha Pearson and Paulo Trevisani

SÃO PAULO -- Brazilian vehicle sales and production slumped last year to a decade low, underlining the decline of the once-booming car industry in Brazil where more than half of auto makers' assembly lines now lie idle.

Anfavea, the national auto makers' group, said Thursday that sales of new cars, light vehicles, trucks and buses dropped 20% from the previous year to 2.05 million units, the lowest level since 2006. Production also fell sharply, declining 11% from 2015 to the lowest since 2004.

Antonio Megale, head of Anfavea, said Brazil's auto industry ended last year operating at just 48% of capacity. He said the country was now likely theworld's 10th or eleventh-biggest producer of vehicles, down from the seventh-largest in 2010.

"Vehicle makers in Brazil had a difficult 2016," said Mr. Megale, adding that he believed the industry had hit bottom. "Brazil has a lot of potential...but it is difficult to say when it will reach that potential, " he said.

While auto makers are cautiously optimistic that vehicle sales and production will grow this year, the industry's recovery is set to be slow and dependent on the ability of Brazil's government to push through economic measures amid the country's political turmoil, they say.

Anfavea said sales of new cars, light vehicles, trucks and buses would likely increase 4% this year to 2.13 million units, with production rising 12% to 2.41 million.

Carlos Zarlenga, the head of General Motors Co.'s Brazil operations, said in an interview with The Wall Street Journal he expected it to take until 2022 or 2023 for the country's vehicle sales to return to 2013 levels -- when Brazil sold 3.8 million vehicles.

Hit by economic downturns in Argentina as well as Brazil, GM's South American operations posted losses of $180 million in 2014, $622 million in 2015 and $309 million in the first nine months of last year.

In 2010, Brazil overtook Germany to become the world's fourth-largest market for vehicle sales as surging Chinese demand for commodities fueled an economic boom in the Latin American country, boosting employment and allowing many Brazilians to buy their first car.

Brazil's Workers' Party, o PT, which governed Brazil from 2003 until last year, doled out huge tax incentives to auto makers as a way to keep the industry's powerful unions on its side, attracting scores of global car makers desperate to offset slumping sales in the U.S. and Europe.

However, in 2015 the country's auto makers were caught off guard when Brazil's economy fell into a deep recession -- a result of plunging commodity prices and a fiscal crisis at home.

Economists expect Brazil's gross domestic product to grow only 0.5% this year after contracting an estimated 3.5% last year and shrinking 3.8% in 2015.

According to the most recent data, Brazil was the ninth-largest market for auto sales in 2015.

Chery Automobile Co., the Chinese auto maker, last month said the factory it built in São Paulo state in 2011 -- its first factory outside China -- is operating at only 10% of capacity.

"We thought we would be producing close to 50,000 vehicles per year at the plant or perhaps even more by 2018 but things are not going according to plan," Luis Curi, head of Chery in Brazil, said in an interview. "Today we are producing around 5,000 vehicles per year," he said.

Brazil's protective labor laws have made it difficult for auto makers to adjust to the downturn by firing workers. Meanwhile, the high cost of doing business in Brazil has prevented companies such as Chery and GM from using their idle assembly lines in the country as a major base for exports.

"We don't want incentives -- we want the government to define clear policies that allow our industry to become competitive," said Mr. Zarlenga.

Write to Rogerio Jelmayer at rogerio.jelmayer@wsj.com and Paulo Trevisani at paulo.trevisani@wsj.com

(END) Dow Jones Newswires

January 05, 2017 13:52 ET (18:52 GMT)

Copyright (c) 2017 Dow Jones & Company, Inc.