Brazil Rides Out the Storm Interest rates soar and car sales stumble

Ford Motor Co.'s new car factory under construction in Guaiba, Brazil, is expected to build about 170,000 vehicles annually.

Lucky for Ford, the plant doesn't come on line until 2001.

By then, Latin America's economy should be off the brake and back on the accelerator. But at what speed is anyone's guess.

As the international financial crisis continues to cruise through Latin America, fresh from doing a number on the economies of Asia and Russia, Brazilian automakers are being forced to put thousands of workers on forced vacations, suspend production for weeks at a time and, in some cases, eliminate shifts because of depressed demand for their products.

It wasn't supposed to be this way. Less than three years ago, automakers saw Brazil as the place to be. Ford, General Motors Corp., and Honda Motor Co. Ltd., among others, all invested billions of dollars in the region in hopes of getting a piece of a market forecast to grow by at least 4% annually.

Instead, interest rates have doubled to nearly 50% and the government's fiscal belt-tightening has sent auto sales sharply down for the 11th consecutive month. If the government decides to devalue the real, as many analysts believe, currencies in neighboring Argentina and Venezuela could plunge as well. It all sets the stage for a market that will be even more painful for automakers in 1999.

"The outlook (in Brazil) is tough," says John Devine, Ford's chief financial officer. "The industry had been improving, but I don't think we are going to see that for awhile. If anything I think '99 will be tougher than '98."

This could mean even more work stoppages in the coming year, which could send unemployment rates, already running at about 19%, even higher. Ford, GM, Volkswagen AG, Mercedes-Benz and Fiat SpA all have had to idle plants this year. While VW and some other automakers have agreements with unions guaranteeing jobs through December, the New Year presents an entirely different picture.

Union leaders believe the full impact of the crisis hasn't really begun to take its toll. Once auto companies begin laying off workers, employees at supplier companies will follow, as nearly all are dependent on local orders for work. Part sales in 1998 are expected to be down 17% from year-ago, says Nelson Ferreira, acting president of Brazil's National Assn. of Car Part Manufacturers. Add to that the likelihood the Brazilian government will implement some additional fiscal reforms, and the industry likely will take another hit, says Mr. Devine.

Brazilian automakers sold 128,188 vehicles in September, a 31.7% drop from the same period last year, and production drop-ped by an equal amount, Brazil's automobile manufacturers association (An-favea) reports. For the first nine months of the year, sales are already off 19.7%, and exports are down more than 15%.

Automakers and industry groups say vehicle sales for the year likely will be off at least 15% compared to 1997.

While auto executives admit future investments for expansion in the country may significantly slow, they remain upbeat about the region's long-term prospects, particularly now that elections are over and President Fernando Henrique Cardoso squeaked through to another term.

Toyota Motor Corp. earlier this year opened a $150 million Corolla assembly plant in Brazil, while the Rover Group's Land Rover division will begin building Defender sport/utility vehicles at a recently dedicated $10 million plant in Sao Bernardo do Campo.

Toyota executives, however, say they are taking a "wait and see" attitude toward adding additional models in Brazil. Shoji Shimo, director of Toyota's operations in Brazil, says that if the market shows some improvement in 1999 the company would consider adding its all-new Yaris that goes on sale in Europe in March, to the plant sometime down the line. Mr. Shimo says Toyota's goal is to obtain a 10% market share in Brazil by 2005.

"We have to be very careful in relation to the . . . market situation," says Mr. Shimo, who projects vehicle production in Brazil to remain under 2 million units through 2000. "The market will only reach a total of 2.5 million sales per year by the year 2005," he says.

This month, Renault SA will launch its Megane Scenic in Brazil, confident that despite the country's current economic situation its $830-million investment will be a sound one.

"South America is an area where European carmakers are well established, even more so than American ones," says Georges Douin, Renault executive vice president-strategic and product planning and international operations. "The Japanese are not present because it is very far from their homeland. So this was an area where we could profit and compete."

But that was before the economic road got ugly. Auto executives now are holding their breath.

"There are some things to be encouraged about," says J. Michael Losh, General Motors Corp.'s chief financial officer. "The elections are over and Cardoso won. If the government steps forward briskly and deals with the fiscal deficit, I'm optimistic." - with Sol Biderman in Sao Paulo