South America sizzles: Brazil reaches stride, eyes 2.5 million vehicle output

Chrysler Corp.'s announcement this summer that it will build a factory for Dakota pickups in Brazil would have generated big excitement just a few years ago. But Chrysler's bulletin was barely a blip on Brazilian radar.

That's because the auto market in this developing industrial country - once stagnant and mostly ignored - is now so hot that it was only a matter of time before cautious Chrysler would join the gathering.

"After 20 years of expectations, Brazil has finally reached its stride," says Miguel Zweig, whose company, Zweig International, tracks the auto industry.

Indeed, after years of stagnation, a chaotic economy, high tariffs and zigzagging government policies, Brazil has emerged as one of the most coveted car markets, at least for the short term, in the world today.

The Brazilian automakers, association, Anfavea, predicts production will increase to 2.5 million vehicles annually by 2000, fueled by a more stable economy and lower taxes, tariffs and inflation. The numbers are achievable, analysts say, but only if the region remains stable, which is a tough task: Unemployment and the gap between the haves and have-nots continues to widen.

The foundation is being laid for potential serious unrest in the region because of these issues," warns Phil Gott, a consultant for DRI/McGraw-Hill who tracks Latin America.

Still, the risk outweighs the potential gains in this still-fertile Latin American market. There are just over 14 million registered vehicles in Brazil for a population of about 168 million, or about one vehicle for every 12 people. The U.S. has one car for every 1.6 people; Argentina has one car for every six people.

That blooming consumer demand for transportation was demonstrated in 1995 when, for the first time in its history, Brazil vehicle production topped the 1.6 million mark. While that record will not be broken in 1996, it hasn't stemmed the tide of automakers to the region.

For 1997, Brazil and Argentina will continue to be the most lucrative and stable countries for automakers to do business, says Louis R. Hughes, president of General Motors Corp.'s International Operations.

"Colombia is in a state of civil war," says Mr. Hughes. "Ecuador also is in bad shape. Venezuela is coming out of a real recession. Uruguay is very small. Argentina is kind of a mixed bag. It's pretty stable and is growing right now, but everything is so dependent on what these governments will do. So far, they are acting pretty responsibly, especially the big guys, Argentina and Brazil. But they have to continue their process of reform, otherwise they will jeopardize the massive capital that is coming into this region everyday."

In little more than a year, six auto companies have begun building factories, or anannounced plans to locate in Brazil, including Renault SA, which will build a $1-billion plant for its Megane, a new small car that win begin production in 1999, Mercedes-Benz do Brasil, the country's largest producer of trucks and buses, which is spending $400 million for a new plant to manufacture its upcoming A-Class car beginning in 1997, one of just two plants worldwide to build the new model; and Asia Motors Inc., a subsidiary of Kia Motors Corp., which is investing $500 million to build utility vans beginning in 1997.

Audi AG will build its A3 beginning in 1998; Honda Motor Co. Ltd. will begin cranking out 15,000 Civics a year from its $100-million plant by 1997, South Korea's Hyundai Motor Co. Ltd. is scheduled to open a plant sometime in 1997; and Toyota Motor Corp. will begin building Hi Lux pickups later this year in Argentina.

"It is very likely that sales in die integrated Brazil-Argentina market in 2000 will bell 2.5 million vehicles," predicts Mark Hogan, president of GM's operations in Brazil and Argentina. This would make it the fifth largest in the world behind the U.S., Japan, Germany many and South Korea."

GM and the country's three other established players (Ford Motor Co., Fiat SpA and Volkswagen AG), however, are not sitting idle as new automakers locate in Brazil. All are revving up to meet the new challengers.

Ford, which expects to lose about $400 million in Brazil by year's end, is launching a series of new models in Latin America in hopes of rebuilding its image after Autolatina, the failed joint venture with VW, that dissolved last year.

"We're rebuilding our company in Brazil and Argentina, which is very expensive, but it's the right direction," says Ford Chairman Alex Trotman. "It will be a difficult year for us this year and probably next year, too."

Mr. Trotman, however, believes a new lineup of products, such as the Fiesta in Brazil, the latest version of the European Escort in Argentina and the Ranger pickup will help the company's bottom line.

"We're putting in excellent products and capacity into Argentina and Brazil," Mr. Trotman says. "We are building every month and putting Ford back in business in a big way in Brazil and Argentina."

But Brazil and its image of being a marketing gold mine could quickly be tarnished, says DRI's Mr. Gott. The structural reforms in place that everyone thought would be the underpinnings of a solid economic system, helping to ease the country's transition from a controlled economy to a free-market one, have begun to show weaknesses.

The five-year-old Mercosur free-trade pact was recently criticized by one World Bank economist as building an artificial world of economic growth. In other words, Brazil, Argentina, Uruguay and Paraguay, all insulated from outside competition, will not be able to compete after the group's external trade barriers are removed.

Despite die growth of companies in the region, unemployment grew from 4.6% in 1995 to 5.4% this year, partly the result of newer, more efficient factories that need fewer workers to operate.

"How long people remain optimistic will govern how long the market remains fairly strong," says Mr. Gott. "The uncertainty lies in government policy."