Thomas White Global Investing
Brazil
Brazil  Stamp
January 23, 2009
A Postcard from the Americas
Brazil :Brazil’s Own Motown Blues

Brazil auto industry

With a 5% share of GDP, the auto industry is a major provider of industrial jobs in Brazil. 2008 sales volumes were 15% higher than the previous year, despite the decline towards the end of the year.

When demand for cars was still soaring early last year, workers at the large General Motors factory in the Brazilian city, Sao Jose dos Campos, would have never imagined that their jobs would be at risk in less than a year. The rapidly growing middle class in Brazil and other Latin American countries, which import autos made in Brazil, were buying cars like never before. Unprecedented economic opportunities fueled by the commodity price boom and availability of cheap credit drove consumption. Enthused by the rising demand, General Motors even added a third shift early last year. By then, GM’s Brazilian operations had grown to become the company’s second largest outside the U.S., and employed 24,000 workers.

Then the global credit crisis hit and the tide turned abruptly. Brazil’s economic outlook weakened as commodity prices tumbled and credit dried up. Car sales growth started softening by the second half of last year and sales volume actually declined during the last few months of the year. Early this month, General Motors laid-off more than 800 temporary workers at Sao Jose dos Campos. Workers protested and disrupted production for a day, but GM could not afford to reverse its decision.

General Motors is not alone; the entire Brazilian auto industry is grappling with lower demand. Total industry output in December halved from a year ago, which followed an 18% decline in November. Between them, companies including Ford Motor, Volkswagen, Fiat, and Peugeot-Citroen have so far shed more than 4,000 jobs and have introduced mandatory leaves for workers to deal with excess capacity.

Yet, there is still hope. With sales of 2.85 million in 2008, automobiles form a sizeable part of Brazilian industry and the government could not ignore the sizeable decline in demand. As part of its recent economic stimulus program, the Brazilian government has announced a $3.5 billion initiative to cut taxes on automobiles and improve availability of car loans. Following the support from the government, a group of car dealers has forecast a modest growth in sales volumes this year as against its earlier expectation of a volume decline.

Despite their current travails, auto manufacturers are also hopeful of the future. General Motors is planning to invest up to $1 billion in Brazil over the next several years to revamp its product line and modernize its facilities. Other major manufacturers are yet to scale back their ambitious expansion plans announced earlier. If demand holds up this year and growth revives by the next, most of these expansion plans will be implemented and the Brazilian auto industry will regain the optimism which prevailed until last year. Until then, hopefully, the industry and workers can endure the pain and pressures of a demand slowdown.

 

Image Credit: Mark Hillary under a Creative Commons License

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