Venezuela President Plays With Fire as Auto Sales Plunge

South America is never an easy market for global automakers battered by the region’s continuing political and economic instability, with currency fluctuations and high taxes as the main drivers.

While the largest market of Brazil is the usual culprit, followed by Argentina, Venezuela in less than a year has gone from a rocky road to a highway of despair after the death of Socialist President Hugo Chavez last March opened the door for extreme leftist Nicholas Maduro, whose iron fist is polarizing the country.

Economic turmoil resulting from a 50% jump in consumer prices last year, along with escalating inflation and a weakened currency, has alarmed multinational companies doing business in Venezuela, and many are rethinking their 2014 forecast.

Among them are automakers, including General Motors, Ford, Chrysler and Toyota, that saw new-vehicle deliveries tumble 87% in January and 89.9% in February, according to WardsAuto data, marking the lowest level since 2003 when the country was ensnarled in a nationwide strike against Chavez.

In addition to cratering car sales, market-leader GM expects a $400 million pre-tax loss in the first quarter because of the local currency’s ongoing devaluation, which it says in a filing with the U.S. Securities and Exchange Commission is now 10.7 bolivars to the dollar compared with an earlier 6.3.

Ford in its filing says it expects to take a $350 million Q1 pre-tax charge due to currency changes affecting its Venezuelan subsidiary. The automaker first warned in December profits likely would be hurt by the bolivar’s devaluation.

What most of us don’t realize is that Venezuela operates two exchange controls: The official rate is 6.3, but that can only be accessed by companies importing foodstuffs and medicine. It’s 11.3 for other sectors, while the dollar is trading at about 82 on the black market.

However, that’s only part of the problem, as civil unrest continues to roil the country, fanned by protesters demanding political change to end rocketing inflation, up 57.3% in February; shortages of food, medicine and basic goods; and escalating violent crime. Indeed, tens of thousands marched on the capital city of Caracas on Feb. 18.

The government’s response has been brutal, according to The Economist magazine. State secret service officers are firing live rounds, while detainees describe sustained beatings, electric-shock torture and death threats. Scores of journalists have been beaten and detained and their material destroyed.

The government says at least 25 people have died in the turmoil since Feb. 12, the Associated Press reports.

Hardline foes of the Maduro government are demanding he resign. But Maduro claims to be a victim of a “fascist coup plot” financed by the U.S. – ordering the expulsion of three American consular officers in February and in a televised speech in March accusing South Florida politicians of leading the U.S. into an extremist foreign policy against his country for human rights abuse.

Vehicle Black Market

Automakers find themselves squeezed in the middle by the widespread discontent, as the Maduro government keeps looking for more prices to control, including setting limits on the price of cars, to help hold down inflation.

That doesn’t seem to be working, as the value of new vehicles jumps as soon as they leave dealer lots because of decades-old currency controls that reduce the availability of imported cars and parts, leading to months-long waiting lists.

This has spawned a black market where used cars easily fetch twice their original price, attracting dealers who are stocking fewer new cars and making greater profits on used models. No surprise then that Ford and Toyota utilized only about a third of their production capacity in the market last year.

Toyota threw in the towel in February, announcing plans to halt vehicle assembly at its Cumana plant in Sucre state for at least six weeks, despite a rebuke by the Venezuelan government, citing difficulties in importing essential parts.

Chrysler followed in March, telling the AP it had cut production 45%, to 30-35 vehicles per day from 55 at its Valencia plant. A union official said the automaker was unable to get parts for assembly.

Ford and GM also are rolling back production, while Italian truck maker Iveco said April 2 it was suspending manufacturing in the country until market conditions stabilize.

GM, which has been in Venezuela since 1944, abruptly shuttered and later reopened its Valencia plant in 2009, blaming its inability to obtain access to hard currency needed to pay outside suppliers a total $1.2 billion. The factory employed 4,000 workers at the time.

Toyota’s factory employs 1,300 workers and creates 1,500 indirect jobs. It accounts for about half of Sucre’s overall economic output, and built 9,500 vehicles last year.

But Maduro lumps the Japanese automaker in with “unscrupulous” businessmen from many of the nation’s other sectors, whom he accuses of waging an economic war against him and the country’s socialist revolution by exaggerating needs so they can flip dollars on the black market for profit.

“Every time there’s a problem, it’s the same old news, Toyota is leaving,” Maduro is quoted by Reuters as saying. “You don’t have to be very intelligent to discover the political moves behind this.”

And it doesn’t take a rocket scientist to decipher this: Venezuela’s total vehicle output in January was down 85% to 296 units, compared with 1,945 year-ago, according to the national automakers’ group Cavenez that says Toyota built 291 of those units.

What’s more, the industry’s total production in 2013 slid 31.1% to 71,753 units and likely will be far less this year.

Maduro either doesn’t care or doesn’t get that his country needs the auto industry more than automakers need Venezuela in its current state of meltdown, warning that he’ll take harsh measures against those who defy him.

“Don’t underestimate me, bourgeoisie,” he is quoted by USA Today as saying. “If I have to take over the companies, I will.”

Maduro would be better off bringing an end to the crisis his policies have inflicted on fellow Venezuelans and letting the automakers steer their business accordingly.