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Venezuela is back to making headlines in the automotive world, this time because of Ford and Dana. The OEM reported to the US Securities Exchange Commission that it is taking a USD800-million charge in Q4 2014 for changing to the cost method of accounting related to Venezuela operations, faced with a weak bolivar, the local currency, and lack of access to US dollars. The supplier announced that it has completed the sale of its Venezuelan operations to an independent and locally operated company.
The problem with all operations in all industries in Venezuela is the same: lack of dollars. Without that, they cannot import material to make any final products. In the case of auto companies, that means no parts to assemble vehicles – all light vehicles built in Venezuela are made from imported CKD kits as only Brazil, Argentina and Colombia have stamping capabilities in South America. In the case of suppliers, it means no raw materials.
IHS Automotive estimates that vehicle production in Venezuela reached 23,040 units in 2014, plummeting 72.7% from the previous year. I say “estimates” because not all OEMs report actuals: the government has joint ventures with Chinese and Iranian companies, and they do not report their numbers publicly. Ford’s output fared better than the average, dipping 68% - Ford was the only OEM to launch a vehicle last year, the EcoSport. The company assembled 3,939 vehicles and light trucks, down from 12,292 units in 2013.

As the above graph shows, Venezuela allowed OEMs to access enough dollars to keep production around 100,000 units a year, with some increase in 2012, when presidential elections took place. But in 2013, President Hugo Chávez died and his successor, Nicolás Maduro, took power. Without his predecessor’s charisma, President Maduro is facing a record low approval rate (22%) and blames companies about the country’s problems, such as high inflation and recession. He has increased the restriction to foreign currency.
Last year, he announced that OEMs would have USD220 million allocated to light vehicle production, but that did not happen. Instead, he announced that Chery vehicles were being imported from China. China has become a critical financier of Venezuela, with more than USD45 billion lent since 2007. The details of the loans are never clear, but it would make sense to see an increase of imported vehicles from China.
We do not expect the situation to improve much in 2015, although vehicle production increased in the later part of 2014. However, 96% of Venezuela’s revenues come from oil exports, and the commodity low prices are likely to put the government on restrain. President Maduro, in his annual address to Congress on 20 January, refused to state that Venezuela has the cheapest gas in the world, but admitted that the government has a loss with the current prices. However, he decided to keep gasoline prices at their current level because it “can affect the economic stability of the country.”
He also announced a new currency market, the fifth change in 12 years. To boost US dollar supplies, private companies and individuals would be allowed to trade through brokerages. The government would still import food and medicine at a subsidized rate of 6.30 bolívares for a dollar, and theoretically the market would regulate the ratio for other sectors. President Maduro said that his economic team would detail how the new market would work, which has not happened in a week.
With Parliamentary elections scheduled for later in 2015, it is hard to believe that the government will implement structural changes this year. According to the local pollster Datanálisis, 80% of Venezuelans are against the bolivar devaluation and 70% do not approve a gasoline price increase. With a united opposition to gain majority in Congress, President Maduro faces for the first time a real chance of losing the elections. It is very likely that only a major political change would lead to economic changes – and more cars built in Venezuela.
Augusto Amorim is senior analyst, South American light vehicle production forecast, IHS Automotive
Posted January 27, 2015

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