VENEZUELA: GM, FORD AND CHRYSLER ONCE AGAIN HALT

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 001570 SIPDIS HQ SOUTHCOM ALSO FOR POLAD TREASURY FOR MMALLOY COMMERCE FOR 4431/MAC/WH/MCAMERON CA FOR CA/OCS/ACS FOR WILLIAM HURST E.O. 12958: DECL: 01/01/2018 TAGS: ECON PGOV PREL ETRAD PTER VE SUBJECT: VENEZUELA: GM, FORD AND CHRYSLER ONCE AGAIN HALT PRODUCTION REF: A. CARACAS 1177 ¶B. CARACAS 535 Classified By: Economic Counselor Darnall Steuart for reasons 1.4 (b) and (d). ¶1. (C) Summary: GM, Ford and Chrysler, the three U.S. car manufacturers in Venezuela, are once again shut down due to a labor action against a parts supplier. The industry faces on-going, severe labor problems, power outages averaging once every three days, and a dramatically reduced 2008 vehicle import quota. These factors led to a drop of 40.6 percent in total car sales from January to October 2008 in Venezuela. A proposed law that would cap car sale prices and a law requiring natural gas dual use cars further complicate the situation. Many dealers have closed their doors and their waiting lists saying they do not expect to receive any cars until 2009. The industry doubts that high-profile government deals with Iran, Belarus and Russia will ease the car shortage. End Summary. -------------- LABOR ISSUES AND CHRONIC POWER OUTAGES -------------- ¶2. (C) On November 6, the Commercial Counselor met with the president of GM Venezuela Ronaldo Znidarsis who reported that, contrary to media reports of reduced production, GM, Ford and Chrysler have once again stopped producing (ref A). GM stopped production two weeks ago and estimates its most recent closure will cost it 8,500 vehicles in lost production by November 10. The shut downs stem from labor problems at Johnson Controls, one of Venezuela's two seat manufacturers and its only producer of foam, an essential component in all car seats. Znidarsis added that Johnson Controls, a U.S. firm with a 30 percent stake in the seat manufacturing company, is "fed up" with Venezuela and is trying to sell its share of the company. ¶3. (C) The trouble at Johnson started in April 2008 when the Venezuelan Ministry of Labor allowed a group of "radical" workers to form a second union at the plant. Znidarsis said Chavez originally encouraged the formation of such "parallel unions" but seems to have lost control of them. The groups now hamper production across the country, including at government-owned plants (labor issues to be covered septel.) The parallel union at Johnson Controls has refused to accept the collective bargaining agreement the original union signed in April 2008 and has paralyzed plant operations. ¶4. (C) Znidarsis added that in addition to labor issues, which he deems the most serious challenge facing the industry, chronic power outages also hamper production. He said that GM experiences a blackout every three days. Once power returns, all of the paint machinery has to be partially dismantled and cleaned, leading to further production delays. -------------- -------------- REGULATIONS ON IMPORTS, PRICE CAPS, AND NATURAL GAS -------------- -------------- ¶5. (C) On November 3, Econoffs and Commercial Counselor met with William Paz Castillo, President of the Venezuelan Automotive Chamber (Cavenez) who reported the industry is preparing for the government's announcement of 2009 import quotas on November 11. (NOTE: As of November 12, the government had yet to announce the 2009 import quotas. END NOTE.) The Venezuelan government, in an attempt to stimulate domestic production and reduce dollar expenditures on "non-essential" imports, dramatically reduced vehicle import quotas in 2008 (ref B). In light of repeated government statements on "belt tightening" and reducing imports in 2009, car imports will likely be even more restricted next year. Cavenez reports the 2008 quotas led to a drop in imported car sales of 55.8 percent in the first 10 months of 2008, compared with the same period in 2007. Overall car sales for the same period are down 40.6 percent and the industry will only meet 49 percent of the government's 2008 production goal. Toyota told the press on November 1 that "there will be no cars until next year. So many people want a car that we have had to close the waiting list." ¶6. (C) The President of the National Assembly's Subcommission CARACAS 00001570 002 OF 002 on Irregularities with Car Sales disagreed with Toyota's statement saying that "it is not that there are no cars, it is that the car dealers are not acting with good will", suggesting that dealers are hoarding, rather than selling cars to further drive up already sky high prices. The Subcommission is scheduled to propose new regulations in November that will likely cap the sale price of new cars by establishing "a just profit margin" of no more than 20 percent. The new regulation will also reportedly include a heavy tax on private car owners who sell their cars within the first year of ownership, which Cavenez believes would represent an infringement on property rights. Castillo believes high car prices are not due to hoarding or price gouging by either assemblers or dealers, but are rather due to a predictable market reaction to demand exceeding supply. Castillo explained that while the Subcommission has to "do something" this month, any limit the government imposes on profits will simply make the situation worse. He also voiced his doubts that joint ventures such as the one with Iran, VeneIran, and proposed deals with Belarus and Russia would improve matters. GM's Znidarsis believes that VeneIran has only produced 40 cars after opening almost a year ago. Another industry insider put VeneIran's production at 400. ¶7. (C) Castillo also reported that the deadline for the implementation of the dual fuel law, which will require that a certain percentage of all assembled vehicles be equipped with natural gas converter kits, will likely be postponed for a third time as neither government, nor industry has any hope of meeting the April 2009 deadline. He noted that there are hardly any gas stations equipped to supply natural gas. In addition, even if the vehicles could be serviced, the government has not imported nearly enough kits to meet its own quota. The government has also not determined whether it will be the government-owned oil company, PDVSA, or industry that will have to bear the bulk of the cost for the vehicle conversion. Castillo added that there is also the minor detail of the natural gas itself, saying that Venezuela already imports a great deal of its natural gas from Colombia. Five months away from the deadline, Castillo reports the industry is still very uncertain on how the policy will play out. -------------- COMMENT -------------- ¶8. (C) The Venezuelan government's investments in plants with Iran, Belarus and Russia will do little to relieve Venezuela's self-imposed car shortage and will likely represent little more than a further instance of squandered resources. Existing U.S. plants in the industry such as Johnson Controls and GM, (which has been unable to repatriate USD 250 million in 2007 dividends due to currency controls), are increasingly frustrated with Venezuela. In Johnson's case, it appears it will exit the country as soon as it finds a buyer. Issues with radical splinter unions that seem to have government backing, failing electrical infrastructure, and a constantly changing regulatory environment have hamstrung production. While the industry still holds great promise due to strong, unmet demand, as Castillo said "production in 2009 will all depend on the will of the government." GENNATIEMPO