GENERAL MOTORS HALTING PRODUCTION IN VENEZUELA

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 000991 SIPDIS TREASURY FOR MMALLOY COMMERCE FOR 4431/MAC/WH/MCAMERON E.O. 12958: DECL: 07/16/2018 TAGS: ECON EINV ETRD EIND PGOV VE SUBJECT: GENERAL MOTORS HALTING PRODUCTION IN VENEZUELA REF: A. CARACAS 535 ¶B. CARACAS 600 ¶C. 2007 CARACAS 2181 Classified By: Economic Counselor Darnall Steuart for reasons 1.4 (b) and (d). 1.(C) SUMMARY: GM has shut down its Venezuelan assembly operations possibly into September. The company took this step largely because its parts suppliers are not receiving enough foreign exchange to pay for imported components. The slowdown in domestic manufacturing, linked to restrictions of vehicle imports, led to a drop in car sales of over 47 percent in June 2008 when compared to June 2007. On July 1 car dealers halted vehicle sales in compliance with the BRV's 2007 Vehicular Natural Gas (GNV) requirement, which the BRV subsequently postponed until April 2009. The BRV is blaming car dealers for sky rocketing car prices and is investigating all dealerships. END SUMMARY. -------------- NO DOLLARS FOR PARTS -------------- 2.(C) On July 9 the Commercial Counselor spoke to General Motor's (GM) Director of Government and External Relations Luis Enrique Cardenas (strictly protect throughout) who confirmed GM would shut down all operations by July 11. Cardenas estimated that production might re-start the first week of September. GM has been unable to purchase inputs for two months, and its inventory of parts is running out (ref A). Cardenas reported that the company's situation with CADIVI, the BRV's Commission for Administering Foreign Exchange, has improved -- GM is only 90 days behind in payments to its affiliates, which is "in the acceptable range." However, a substantial portion of GM's parts come from Korea. Once GM receives the requested CADIVI dollars it takes an additional 55 days for Korean shipments to arrive in Venezuela. 3.(C) Further complicating the situation are BRV local content requirements. GM cannot re-initiate production until the foreign companies that sell to GM's local suppliers are paid. GM is working to get CADIVI to liquidate authorizations to its suppliers so that it can get enough parts locally to meet the 34.6 percent local content requirement. Cardenas is hopeful the local supplier issue will be resolved in a week or two. He stated the BRV seems to understand the gravity of the situation and appears to be committed to expediting the CADIVI process for Venezuelan parts suppliers. Cardenas pointed out that each day CADIVI delays will add another day to the plant closure. 4.(SBU) Chrysler similarly halted production in March 2008 due to issues with CADIVI (ref B). Chrysler has since resumed production. Ford is producing at very low levels also due to difficulties in obtaining dollars. Ford does not discount the possibility of halting production in the coming months. -------------- INDUSTRY IN CRISIS -------------- 5.(SBU) The Venezuelan auto sector informed the press the week of June 30 that the industry is in crisis due to problems with CADIVI, a reduction in import quotas and delays in import licenses, and the uncertainty surrounding the 2007 regulations calling for the conversion of a certain number of cars to natural gas. 6.(C) The Venezuelan Automotive Chamber reported that sales of imported cars fell by 64 percent in June due to reduced import quotas. The BRV cut Colombia's import quota alone from 65,000 vehicles in 2007 to 18,000 in 2008, which significantly reduced export opportunities for U.S. assemblers with Colombian operations. As a sign of the new, and perhaps temporary, goodwill between the two countries, the BRV is reportedly considering an increase in Colombia's vehicle import quota. 7.(SBU) Vehicle shortages and dramatic price increases have the BRV blaming car dealers for "increasing prices in a speculative way." The National Assembly is due to issue a report in August that will likely recommend dealers return "excessive profits." But a popular Venezuelan web site for used car sales primarily utilized by private owners shows prices are up everywhere. A 1999 Toyota 4Runner with 35,000 CARACAS 00000991 002 OF 002 miles is listed in the site for $45,581. The U.S. private party sale price according to Kelly Blue Book is $6,880. A 1999 Blazer with 75,000 miles is selling for $30,697 dollars while the Blue Book price is $4,280. 8.(C) The BRV's Vehicular Natural Gas requirement also shook the industry when it entered into effect on July 1. U.S. assemblers have told the Embassy since the law's passage that it would be impossible to meet the July 2008 deadline (ref C). The BRV has done little to prepare the infrastructure needed for natural gas-powered vehicles and the challenges for assemblers remain daunting. 9.(C) On July 1, car dealers halted sales of vehicles that did not comply with the natural gas requirements until the BRV officially announced the obvious -- that the deadline would have to be extended. The new deadline is April 1, ¶2009. GM's Cardenas stated that with natural gas conversion comes extensive staff training and modifications to vehicle design and assembly. He doubts that any manufacturer will meet the new deadline. 10.(C) COMMENT: The natural gas requirement is yet another example of the BRV's tendency to create laws that are unworkable and cannot be implemented and must be either repeatedly postponed or dropped entirely. Severe import restrictions and currency controls continue to wreak havoc in the automotive industry and will damage U.S. interests in the sector for the foreseeable future. END COMMENT. DUDDY