Brazil’s Worst Yet to Come as GM Cuts Output on 20% Sales Drop

General Motors Co. is cutting production in Brazil because it expects the bad news about Latin America’s largest economy will get worse.

With industrywide sales in Brazil poised to drop about 20 percent this year, GM will reduce local output by roughly 100,000 vehicles, or 17 percent, and furlough 3,500 employees, according to the automaker’s South America chief executive officer. GM is No. 2 in Brazil passenger-vehicle sales.

“The worst is yet to come,” GM’s Jaime Ardila said Tuesday in an interview at the South America unit’s Sao Paulo headquarters. “We’re going to have some difficult months ahead of us and I see that we’ll hit bottom in the third quarter. In the fourth quarter, things should start to improve.”

Brazil’s sales slump is a reminder of the speedy reversal of fortunes in a market where deliveries grew at an annual pace of about 10 percent from 2002 through 2012, according to data compiled by Bloomberg. Most of the world’s major carmakers have plants in Brazil, including Volkswagen AG, Toyota Motor Corp. and Honda Motor Co., in addition to Detroit-based GM.

The country is heading for the deepest recession since 1990, with inflation quickening, credit tightening and payrolls shrinking. The economy will contract 1.27 percent this year, according to a May 29 central bank survey of about 100 analysts. The government is rushing to shore up public accounts by cutting back on social-welfare benefits and freezing other spending.

‘Fundamental Thing’

“If we do our homework -- and for me the fundamental thing is to complete the fiscal adjustment -- recuperate credibility on the market with investors and consumers, I see a good chance of 2016 being a better year,” Ardila said.

Auto sales plunged 25 percent in April from a year earlier, according to data compiled by Bloomberg from the Brazilian carmaker association, known as Anfavea. Last year, about 2.72 million domestically made cars were sold in Brazil, compared with 2.88 million in 2013, according to Anfavea.

GM’s pullback includes shutting one of its Brazil factories for June. Besides the layoffs, 1,500 workers at a second plant will be sent on vacation with pay this month, Ardila said.

GM has 50,000 cars in stock at local factories and 50,000 at dealerships, representing a 70-day supply. For Brazil, the ideal is 30 days of inventory because of the high borrowing costs, Ardila said.

“Our capacity of production is 30 percent greater than sales,” Ardila said. “This can be solved in two ways. Either the market recuperates, either the local market or exports, or we have to cut production.”

Employment Stability

GM is trying to maintain stability in employment this year, though if the bad news keeps coming, next year may be a different story, Ardila said. Brazil’s unemployment rate through April was 6.4 percent, up from 4.9 percent a year earlier.

Stagnant auto prices are squeezing GM’s margins, Ardila said, because the company hasn’t been able to charge more to keep pace with upgrades to its cars and accelerating inflation.

Bright spots are few and far between. GM will maintain its third factory functioning because the Chevrolet Onix and Prisma models “sell well,” Ardila said. A weaker real also makes the country more competitive in export markets, even with higher costs.

Local politicians are in no position to help. After years of supporting the auto industry, the government has no incentives left to give, and taxes have gone up, Ardila said.

“We all have to make sacrifices in the short-term so things improve in the mid- to long-term and we all need to pay for that,” Ardila said. “This is all part of a Brazilian cycle. The low is lower than we expected, but it’s a cycle. The country will recover and we will continue investing believing that there will be a recuperation.”

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