Brazil, Argentina Brace for Road Ahead

This was to be the year of Brazil's big comeback. Production was set to soar toward the lofty heights of 1997, when domestic automakers built 2.07 million cars, vans and trucks compared with last year's 1.67 million vehicles. The industry pinnacle was reached before the bottom fell out of Asia in 1997, the Russian economy crumpled in 1998 and the drastic free fall of Brazil's currency caused economic chaos and car sales to plunge to 1.3 million in 1999.

But Brazil's auto industry in 2001, while off to a strong start that prompted predictions of 1.9 million vehicles to be produced in the year, soon succumbed to a host of unexpected problems. Hit by the worst energy crisis in decades, stung by a crumbling currency, alarmed by rising inflation and heavily influenced by neighboring Argentina's debt crisis, Brazilian consumers lost confidence and car sales tumbled.

All of this was before the economic shock wave from September's terrorist attacks on the U.S., which quickly stunted trade and halted growth throughout the Americas. Brazil, whose currency in the immediate post-assault period plunged to a record low of 2.835 real to the U.S. dollar, now is holding its breath along with the rest of South America, waiting to assess the collateral damage to the global economy as weary economists head back to the drawing boards.

For Argentina, Brazil's largest trading partner, the latest international calamity has exacerbated a bruising cycle of escalating interest rates and deepening recession. Vehicle sales for the year now are expected to tumble to some 194,000 units, compared with last year's 320,000. Domestic production dropped 37.4% in August from the like year-ago period, while sales to dealers plunged 41.5%. Domestic auto sales last year slid 20% from 1999.

For the first time, PSA Peugeot Citroen will produce fewer vehicles in Argentina than in Brazil, where it opened its factory in January. The automaker says it intends to delay a $50 million investment in Argentina due to economic troubles in the region. The money was aimed at adapting its factory in Buenos Aires to build its 307 model, which is imported from France.

Argentina already was awash in financial woes before the September terrorist event. The country's crisis was sparked last fall, when a senate bribery scandal, combined with a languishing recession, caused investors to panic over whether the government would default on its $130 billion debt.

Economists leapt into the fray, predicting that public fear of an imminent devalue of the Argentine peso, which is pegged to the U.S. dollar, would send people rushing to the bank. This caused the government to freeze deposits to avoid bankrupting the banks. Under the country's fixed exchange-rate policy, the central bank cannot print money to get out of trouble. Although there has been a flood of withdrawals from the banking system, the peso so far has not been allowed to float.

Argentina's ruling alliance, meanwhile, has hurried to implement new economic reforms to meet fiscal goals set by the International Monetary Fund, which led a group of lenders in December for a $40 billion credit package. Political infighting slowed the process, as Peronist party governors argued they were owed $225 million in funds meant for social and welfare programs. Automakers and suppliers, suffering huge losses, began cutting production and, in some cases, bailing out of the country altogether as consumer confidence fell and vehicle sales plunged.

Brazil's auto market — which represents about half of the region's car sales — also was in a slump leading into September. The industry now fears vehicle sales for the year will fall short of the 1.7 million units forecast, bottoming out at around 1.55 million. Leading automakers, which already had been taking measures to prevent inventories from building up, have begun to put the brakes on output as they slash jobs.

Sales leader Volkswagen AG initiated a voluntary layoff program in October; encouraging workers at its Bernardo do Campo plant in Sao Paulo state, which employs 16,000, to give up their jobs. The automaker, which produced 306,040 vehicles in Brazil between January and August — up from 285,771 in the year-ago period — now reportedly says it may fire some 4,000 employees if workers do not accept a deal calling for a shorter four-day work week and cuts in pay.

General Motors Corp. planned to halt production of trucks, pickups and sport/utility vehicles between Oct. 15 and Nov. 4, and production of the Corsa passenger car and Zafira microvan between Oct. 15 and Oct. 28. All are produced at its plant in Sao Jose dos Campos, northeast of Sao Paulo. Additionally, the factory in Sao Caetano Sul was to be shut from Oct. 15 to Oct. 28, halting production of Vectras, Corsas and Astras. The plant earlier was idled from Oct. 1 to Oct. 8. No cuts were planned for the popular Celta subcompact produced in Gravatai.

Fiat Auto SpA said it was laying off 16% of its 9,500 workers between Oct. 15 and Oct. 24 at its main Brazilian factory in Betim, Minas Gerais state. Average daily production was expected to drop to 1,400 units from 1,800 vehicles, for a total cut of 7,500 units. Earlier, the Italian automaker had sent 70% of its Betim workers home.

Ford Motor Co., which inaugurated its new Amazon facility in northeast Bahia state on Oct. 12 that will build small cars and vans, closed its largest plant at Sao Bernardo do Campo for one day, sending home 4,900 workers and halting production of 150 trucks and 650 cars. Renault SA, one of Brazil's newer players, planned to suspend vehicle production for 11 days beginning Oct. 22 in the hope of avoiding layoffs. The country's fifth-largest assembler produces around 320 units per day at its plant in the southern state of Parana, including the Scenic, Clio and Clio Sedan.

Such drastic measures came none too soon. August figures show local production of cars, trucks and buses slid 7.9% to 155,825 units compared with the year-ago period. Auto sales to dealers fell 7.6% in August to 130,814 vehicles from 141,631 in the year-ago period, says the Brazil automakers group Anfavea, marking the largest year-on-year decline since March 2000, when sales plunged 18%.

September was worse. One of VW's largest dealerships in Sao Paulo reported sales of its popular 1.0L cars had dropped 30% compared to year-ago figures. Sales of luxury models slipped 20%. A Fiat dealership reported sales slumped 35% in September from like-month in the year-ago period. Some reports say automakers and dealers have more than 200,000 surplus vehicles — the equivalent of about 50 days worth of sales. Dealers blamed the bloated market on uncertainty stemming from the international tension.

Industry insiders contend the knee-jerk reaction most likely will fade into a November turnaround, but others aren't so sure. Brazil's auto sector has been suffering from falling sales since June, the start of the government's energy rationing program. By August, there were fears that the government's original 4.5% growth estimate would be halved as the country's currency, the real, depreciated 21% against the dollar; consumer prices rose 7% for the first half and interest rates spiked to 19%.

To make matters worse, government-imposed energy rationing, which initially was to last until July, now will stretch into at least December, as the country heads into its warmest months. Millions of dollars continue to be spent by OEMs on infrastructure to bring in natural gas lines and install huge gasoline generators, in hopes of warding off stoppages from the energy-dependent hydroelectric shortage.

Up until September, Brazil's ailing automakers had turned to exports as a way to sustain their troubled market. A global economic slowdown now places the plan in jeopardy. Exports of cars, trucks and buses already had declined 13.7% in August from the year-ago period. Analysts now predict a U.S. recession would practically halt growth in the Latin America region, particularly in Mexico, making it harder for companies and governments to borrow money needed to pay off existing debts and to invest.

Volkswagen, nevertheless, plans to export a projected $1.2 billion worth of vehicles, the bulk of them earmarked for the U.S. and Mexico. In the year's first half, the automaker exported $250 million more cars than it imported. During the second half, it expects to sell 125,000 vehicles to 27 countries, including Syria and Venezuela.

Additionally, the new Polo — introduced at the Frankfurt motor show in September — is being produced at VW's plant in Sao Bernardo do Campo, Sao Paulo state. Sales to Germany begin this month, with the Brazilian market launch set for the second half of 2002. Polo also will be launched in Spain and the Czech Republic, followed by South Africa and China. Both VW and Brazil have a lot riding on the vehicle. Given these uncertain times, they may have to weather more pain before gain.