Risky Business--Automakers patiently wait out Brazil's woes

Brazil still may be suffering from economic hiccups these days, but no one is giving the patient up for dead. In fact, Brazil has had fewer bankruptcies and business closings than predicted, even as it struggles with its deepest recession since the early 1990s.

Insiders will tell you that Brazil's history - and possibly its future - is full of high interest rates and repeated recessions. It does give automakers pause for thought, particularly in the face of sliding sales, escalating prices and striking workers following the fall in the value of the real in January.

Volkswagen AG, Ford Motor Co., Fiat SpA, and General Motors Corp. lost an estimated $776 million in the first quarter, says Brazil's automakers group, Anfavea. So why are most still banking on a recovery?

Going global has a lot to do with risk taking, explains Marcos Munhoz, executive director of worldwide purchasing, production and logistics-GM do Brasil. "Invest or not invest in Brazil? That is the question," he says. Automakers seem to be addressing the question by slowly continuing to step up to the risk.

GM's Blue Macaw plant, for example, is taking wing in Gravatai, with small car production scheduled for 2000. Fiat plans to use $299.7 million in Brazilian loans to build two plants and expand production. Ford will build a $1.3 billion plant in Bahia after cancelling plans in April to build a plant in Rio Grande do Sul. The companies are sticking it out by scaling back, reducing costs and increasing local content.

Additional optimism was seen recently when the Central Bank announced the country's currency had started recovering and was narrowing Brazil's budget deficit. The update means the government will spend fewer Brazilian reals to pay back its U.S. dollar debt - which totals 30% of government debt. Analysts now claim inflation is under control, interest rates are falling and the economy is expected to be better than forecast.

"Light vehicle sales are significantly impacted by changes in the interest rates," says Dede Dankelson, director of global analysis for CSM worldwide, an automotive analyst firm.

Such improvements, coupled with an extended government-approved tax break for car buyers, signals potential promise for automakers. Earlier this year, the government agreed to temporarily cut taxes on new vehicle sales in exchange for automakers agreeing to fix prices and maintain jobs. The move lowered car prices 12% to 25% and helped increase sales 236% in March.

But when the tax cut ended, vehicle sales dropped again and automakers said they would have to raise prices as much as 12% unless the government stepped in to help. Now the government is helping again by extending tax cuts with a few changes. The production tax on economy cars will be 7% compared to the standard 10% but up from the 5% in the earlier program.

Medium-and large-size cars will be taxed 20%, up from 17% but down from the standard 25% to 30%. Automakers again promise to freeze prices for 90 days and keep the current number of employees for 120 days. Additionally, Anfavea members say they will offer a $212 incentive on economy cars.

By the time the program expires on Aug. 26, automakers and government officials hope to have in place a scheme that would give special discounts to customers scrapping cars 15 years old or older. While this may provide only a temporary solution to the problem, it would help jumpstart vehicle sales as the currency continues to rebound.

Even without the car-scrapping plan, analysts still have faith in the region. With 8.4 people per car, Brazil has more persons per car than Eastern Europe (7.2), developed countries of Asia (2.1), Western Europe (2.0) and NAFTA (1.6).

While the country won't see the forecasted 3 million unit sales by 2000, some growth will come from services and quality, GM's Mr. Munhoz says.

Anfavea says unit sales this year will be better than previously expected. Estimates place sales at 1.2 million to 1.4 million, compared to 1.9 million in 1998 and 2.3 million in 1997.

"There is no such thing as a winner or loser. You have to look at it long term," says James Davidson, Dow Automotive commercial director for Latin America. Dow is looking at Brazil and South America in the long term and is working with both clients and competitors in a cooperative industry effort. "What you want to do and how you want to do it is the heart of your strategy," Mr. Davidson says.

Dow has faith in the region and understands that the cyclical market will have its problems but will return to health. GM agrees. "We must be realistic. Brazil is not a rose garden," says Mr. Munhoz, adding that in 2001, things will really start to improve.

"The future," he says, "will have bright moments, moments of euphoria and moments of doom and gloom."