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

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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.

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LABOR ISSUES AND CHRONIC POWER OUTAGES
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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.

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REGULATIONS ON IMPORTS, PRICE CAPS, AND NATURAL GAS
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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.

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COMMENT
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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