VENEZUELAN AUTOMOTIVE POLICY HAD "DISASTEROUS"

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 000155 SIPDIS HQ SOUTHCOM ALSO FOR POLAD TREASURY FOR MMALLOY COMMERCE FOR 4431/MAC/WH/JLAO E.O. 12958: DECL: 02/05/2019 TAGS: ECON PGOV PREL ETRD EINV VE SUBJECT: VENEZUELAN AUTOMOTIVE POLICY HAD "DISASTEROUS" RESULTS IN 2008 REF: A. 2008 CARACAS 1570 ¶B. CARACAS 137 ¶C. 2008 CARACAS 991 ¶D. CARACAS 136 Classified By: Economic Counselor Darnall Steuart for reasons 1.4 (b) and (d). ¶1. (C) SUMMARY: The Venezuelan government's automotive policy, in effect since January 1, 2008, fell far short of meeting its goal of increasing domestic car production. Car sales dropped by 45 percent in 2008 while spiraling prices due to lack of supply now have some in the government calling for price controls. The government has also established sharply reduced import quotas in an effort to conserve Venezuela's shrinking store of dollars. Months of delays in issuing the 2009 quotas have led industry sources to suggest there may be no imported cars for sale until the summer of ¶2009. The government continues to refuse to allow foreign companies to repatriate hundreds of millions of dollars in dividends. Nevertheless, there is still a strong demand for US cars in Venezuela that companies are unfortunately unable to meet due to the Venezuelan government's restrictive policies in the sector. END SUMMARY. -------------- -------------- FALLING SUPPLY AND RISING PRICES MAY PROMPT PRICE CONTROLS -------------- -------------- ¶2. (SBU) The Venezuelan government claimed its automotive policy, launched January 1, 2008, would increase domestic production to 200,000 vehicles in 2008. Instead, according to the Automotive Chamber of Venezuela (CAVENEZ),domestic production fell by 23 percent, fulfilling only 67 percent of the government goal. Venezuelan car exports dropped by 91 percent in 2008, with zero car exports reported for December. Overall car sales in Venezuela decreased by 45 percent in ¶2008. Imported vehicle sales fell by 60 percent due to highly restrictive import quotas. General Motors, which produced 41 percent of the vehicles assembled in Venezuela in 2008, experienced a 30 percent drop in production, ending the year with a total of 55,250 units produced. Ford, the second largest assembler in Venezuela, produced 29,234 units in 2008, followed by Toyota with 22,437 units. (NOTE: CAVENEZ statistics compare 2008 with 2007. END NOTE.) ¶3. (C) On January 27, Emboffs spoke to Executive Vice 
President Rafael Carias Reyes of the umbrella association for Venezuelan Car Dealers (FADAM). Carias said the Venezuelan National Assembly, in search of a scapegoat for sky rocketing car prices and waiting lists of over two years, summoned FADAM to testify more than 10 times in 2008. The National Assembly was preparing to force dealers to offer refunds to consumers for the "excessive prices" the dealers charged them in 2008 (ref A). However, Venezuelan tax authority Seniat put a stop to the refund idea when it realized it would have to hand over the millions in tax revenues it generated on the "excess profits". ¶4. (C) Despite this, one National Assembly member announced late in 2008 that he wanted to end "speculation" in vehicles through a bill requiring controls on car prices. Both CAVENEZ and FADAM confirmed that the Ministry of Light Industry and Commerce (MILCO) sent all of their members a request in January for "excruciatingly detailed" information on their cost structures. Although the MILCO letter did not state the purpose behind the request, and no decision will be made until after the February referendum on eliminating presidential term limits, Carias said he "knows the National Assembly is still considering price controls on cars." Another industry source told Econoff that what it comes down to is "the government wants to control both price and supply." -------------- NO IMPORTED CARS UNTIL SUMMER '09 -------------- ¶5. (C) According to what many industry insiders term the "disastrous" new automotive policy, the government was supposed to announce 2009 vehicle import quotas in November ¶2008. Nevertheless, Carias speculated it may not get around CARACAS 00000155 002 OF 003 to issuing the quotas until May 2009. Once the government issues the quotas, it will take approximately five months to get cars from production centers in Asia to Venezuelan dealers. Ford estimates that in its case, once the quotas are issued it will take three to four months for its vehicles to hit the market. Carias reported that if the import quotas are not issued soon, up to a third of dealers may have to close their doors by late summer as 200 of Venezuela's 600 dealers depend exclusively on imported cars. He believes the Venezuelan government "has no idea how many dollars it will have in 2009" so wants to wait as long as it can before authorizing high dollar imports such as cars (ref B). ¶6. (C) The Vice President of Mitsubishi Motor Corporation's (MMC) Corporate Planning Office and acting President of CAVENEZ Antonio Martinez M.D. told Emboffs on January 27 that MMC hopes to assemble 20,000 cars in Venezuela in 2009 and import an additional 20,000. He acknowledged that both goals are unlikely, however, as the 2008 import quotas only allowed MMC to import 30 percent of the cars it requested permission to import in 2008. Additionally, MMC's domestic production ground to a halt in January due to severe labor unrest that has already resulted in several deaths. Martinez is concerned that the labor situation will only get worse after the February referendum (septel). -------------- -------------- GOVERNMENT WILL NOT MEET DEADLINE FOR DUAL USE CARS -------------- -------------- ¶7. (C) Martinez reported that the government now realizes that its latest deadline for requiring that thirty percent of new cars have natural gas kits will be impossible to meet. The government, however, will not officially postpone the deadline for the third time as this would be akin to admitting the natural gas program has failed (ref C). Instead, Martinez noted, the government will say nothing and simply let the deadline pass. Carias believes the April 1 deadline is irrelevant as far as imported cars are concerned, as there will no imported cars to sell in April. ¶8. (C) For domestically assembled vehicles, Martinez said assemblers estimate their natural gas conversion costs will range from USD 1,500 to USD 3,000 per vehicle. As assemblers are not allowed to pass the additional cost on to consumers by increasing prices, they would have to depend entirely on government-owned petroleum company PDVSA to make good on its promise of reimbursement. However, trust is in short supply in part because the Venezuelan government already owes assemblers like Ford millions for dividend repatriation dating back to 2006. PDVSA is also showing clear signs that it is unable to pay its current debts much less make good on new commitments (ref D). Even if the payment issue had been resolved in time, Martinez said the deadline is still "impossible" because PDVSA has not imported enough kits and the few it has are too heavy for smaller vehicles. Additionally, Carias said PDVSA has only prepared 14 gas stations to provide liquefied natural gas (LNG). While PDVSA refutes this claim indicating it has 141 gas stations offering LNG, the government's original plans called for 491 LNG equipped stations by 2009. -------------- COMMENT -------------- ¶9. (C) COMMENT: While a shortage of new cars in 2009 will certainly make life less comfortable for middle to upper class Venezuelans, it will not have a direct impact on Chavez' core supporters. Instead, foreign auto makers are paying the price for Venezuela's policy "freeze" as the government tries to determine how many dollars it can spare for the sector. The Venezuelan government has singled out the automotive sector for especially restrictive treatment in terms of dollar authorizations due in part to Chavez' outspoken public comments against imports of luxury items such as "Hummers." Over the past few years, car imports, production inputs and dividend repatriation in the automotive sector consumed what some claim was a disproportionately large portion of Venezuela's foreign currency. There is considerable speculation that the government will stop CARACAS 00000155 003 OF 003 allowing the automotive industry to use the highly favorable official exchange rate and instead force it to resort entirely to the much more expensive parallel market. Restricting dollar authorizations in the sector, while devastating to private business, is helping delay the difficult choices the government will soon have to make as oil prices remain low. CAULFIELD