Car builders in Brazil, Argentina reduce output as demand falls

Sao Caetano, Brazil: The car builders wistfully recall those heady days.

The General Motors factory plowed ahead at full tilt. Stamped, welded and painted, new Chevrolets flew off the line in greater numbers each month. The company added a third shift in March: 1,600 new employees. The union cheered. Assembly-line painter Jair Nery de Andrade used his 11 per cent employee discount in February to buy himself a new Chevrolet Corsa Classic.

"I wouldn't buy it now," he said. "I wouldn't feel secure about making that kind of commitment."

The situation over the past couple of months at the GM of Brazil plant in Sao Caetano do Sul, as in many parts of Brazil's economy, was not a crash, or a collapse, or even a crisis, but rather a collective whiplash. A sharp lowering of expectations. A sobering up. These past few years have been boom times for Brazil, and the auto industry was no exception. Newfound prosperity driven by high commodity prices has fostered an expanding middle class - a group more than willing to seize easy credit terms and buy up automobiles by thousands.

In a flash

That changed in a flash when the shock waves of the US financial crisis radiated worldwide. As credit dried up in early October and it became more expensive to secure car loans, Brazil's stock market plunged and its currency rapidly lost value. Automobile sales nationwide fell 11 per cent from September to October, the first monthly decline for the industry in five years, according to the Brazilian automakers association, Anfavea.

The government stepped in with a $3.5 billion (Dh12.85 billion) aid package for the auto industry by funding banks to boost the amount of credit available for car loans. The Brazilian auto industry's ability to weather the downturn will test the assertions of those who say the country's burgeoning and diversifying economy is better prepared to fend off a US-generated crisis than in earlier years.

In neighbouring Argentina, the auto sector, which was one of the primary industries that helped the nation rebound from its 2001 financial crisis, has suffered layoffs, reductions in hours and compulsory vacations. Production was down 7.7 per cent in October compared with the same month last year. Unlike Brazil, where most cars produced are sold internally, 60 per cent of auto production in Argentina is exported.

"So when there is a lack of international demand, we have a problem," said Mariano Lamothe, an economist at Abeceb.com, a Buenos Aires consulting firm. "The falling demand from Brazil is what is hitting Argentine carmakers the hardest."

In Brazil in October, interest rates rose from about 1.2 per cent a month to more than 2 per cent. Before the crisis, people were buying cars fully financed, with monthly payments that consumed half their income. Then the rules changed.

With falling sales, a downturn in production followed. At two General Motors plants outside Sao Paulo, in Sao Caetano do Sul and Sao Jose dos Campos, the number of automobiles produced rose steadily this year to a high of 42,783 in July, before dropping to 29,240 in October. As have several auto companies in Brazil, GM has instituted mandatory vacations during which the entire plant stops working to slow output.