Carmakers’ Brazil Pullback Can’t Match Market ‘Dropping So Fast’

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Suzuki Motor Corp. shuttered its first Brazilian plant last week after opening it in late 2012. Volkswagen AG and Ford Motor Co. laid off some workers and put others on leave this year after investing to expand output.

Car manufacturers in Latin America’s largest economy are grappling with a plunge in vehicle sales that may be worse than anyone predicted.

“Every time I give a forecast, we have to revise it downward,” said Stephan Keese, the head of consulting firm Roland Berger’s Latin America industrial and automotive practice. “It’s incredible -- the market is dropping so fast.”

Carmakers committed billions of dollars in investments in the past several years, banking on an expansion of the world’s fourth-largest car market. Some new production came online just as the economy entered a recession and inflation quickened to an 11-year high, prompting the central bank to raise interest rates that are sapping consumers’ appetites. Output capacity is now almost double domestic demand.

The downturn stands in contrast to the rosy forecasts of a few years ago when many of the investment decisions were made. Last year, carmaker association Anfavea forecast light-vehicle sales would rise by 1.1 percent to a record. Instead, sales dropped 8.3 percent to 3.3 million, and Anfavea expects an additional 13 percent plunge this year. Roland Berger predicts the decline could be as much as 22 percent.

Industrial Output

Brazilian annual industrial production has contracted for 13 straight months, with the drop in vehicle manufacturing playing a major role in the decline.

That threatens to further fuel unemployment that reached a three-year high in March. Carmakers already cut their workforce by 8 percent in the 12 months through April, Anfavea said, and Keese sees as many as 10,000 more employees fired this year.

Domestic sales peaked at 3.6 billion in 2012 and won’t rebound to that level until at least 2020, said Guido Vildozo, the Latin America manager for consulting firm IHS Automotive.

There’s a “clear opportunity for numbers to come in a lot worse,” Vildozo said in a telephone interview from Lexington, Massachusetts. “Coming in at a lower number than what we presently have is obviously not in the plans in many of those corporate offices around the world.”

In the first quarter, 250 car dealerships shut down, resulting in the loss of 12,000 jobs, according to Alarico Assumpcao Junior, president of the distributors’ federation, Fenabrave. That figure may reach 40,000 by year-end, he said.

Some carmakers, while making adjustments, are still optimistic.

Ford, VW, Suzuki

“The worst is behind us,” Anfavea President Luiz Moan said in a press conference last week in Sao Paulo. “May and June won’t be good, but they won’t be as bad as the first part of the year.”

Dearborn, Michigan-based Ford confirmed in an e-mail that it temporarily halted production at its Sao Bernardo do Campo factory this month. Germany’s Volkswagen said it put workers on leave at one plant. Japanese carmaker Suzuki also confirmed in an e-mail it suspended one factory and transferred the output to another plant. All three companies cited weaker demand as the reason behind the moves.

Last month, Sergio Marchionne, CEO of Fiat Chrysler Automobiles NV, the biggest carmaker in Brazil, took the stage at its $2.3 billion Jeep facility in Pernambuco state, and recalled when the land was just a sugarcane plantation.

In hindsight, Fiat probably may have been better off leaving the plantation be for a couple more years, said Roland Berger’s Keese. The carmaker’s sales in Brazil dropped 25 percent in April compared with a year earlier.

“This is probably the worst time ever to launch a new vehicle and launch a new factory,” Keese said.

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