VENEZUELAN AUTO INDUSTRY NEARING COLLAPSE

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 000452

SIPDIS

E.O. 12958: DECL: 04/08/2019
TAGS: ECON EFIN PREL EINV PGOV VE
SUBJECT: VENEZUELAN AUTO INDUSTRY NEARING COLLAPSE

CARACAS 00000452 001.2 OF 003


Classified By: Economic Counselor Darnall Steuart for reasons
1.4 (b) and (d).

SUMMARY
--------------


1. (C) Lack of access to controlled dollars is bringing the
Venezuelan automotive sector to the point where it will begin
to shut down at the end of April if the Foreign Exchange
Control Commission (CADIVI) does not quickly make available
large amounts of foreign exchange. The seven assemblers and
their local suppliers are reportedly owed USD 2.2 billion;
their foreign suppliers have cut off shipments until arrears
are cleared. The local industry relies heavily on imported
raw materials, intermediate goods, and components. In
addition, assemblers have not received CADIVI approval to
repatriate dividends since the 2006 fiscal year. In the past
nine months, labor conflicts have closed several of the
assemblers for extended periods, resulting in lost production
and further exacerbating the financial problems of their
local suppliers. Finally, the new auto regime legislated in
2007 became effective on April 1 despite the failure of the
government to fulfill its own commitments to the program,
making it impossible to comply.


2. (C) Commercial Officer Koloditch visited the U.S. "Big
Three" auto assemblers on March 30-31. All told similar
stories and restated dire pronouncements issued at an
industry-wide press conference the week of March 23. All the
local assemblers (GM, Ford, Chrysler, Toyota, MMC
(Mitsubishi, Hyundai, and Fuso Trucks),Fiat's Iveco, and
Mack Trucks) participated in the press conference in
conjunction with the two major auto sector industry
associations, the Venezuelan Automotive Assemblers Chamber
and the Auto Part Manufacturing Chamber. According to the
Big Three, the press conference was intended to elicit action
from the Bolivarian Government of Venezuela (BRV) by
detailing the industry's woes and signaling the progressive
shut-down of the sector beginning at the end of April if more
substantial foreign exchange was not quickly made available.
No government reaction has been forthcoming.

FOREIGN EXCHANGE ISSUES
--------------


3. (C) The government, through CADIVI, owes foreign and
domestic suppliers to Chrysler USD 180 million, to Ford USD
250-300 million, and to GM a whopping USD 800 million for
imports. (Under CADIVI, the foreign suppliers receive
payment directly, with the importers supplying bolivars.)
Chrysler's President Luis Perez de la Cruz (protect) reported
that some CADIVI payments for imports were as much as 200
days late. Ford's President Gabriel Lopez (protect) said
that sporadic payments were delivering USD 1-2 million per
week while their needs averaged USD 10 million per week.
GM's President Ronaldo Znidarsis (protect) said his monthly
foreign exchange requirements totaled USD 120 million, but
that GM had received nothing in December, January, or March,
and just USD 40 million in February. Receipts for some
previous months had been only partial, as well. All said
that payments were unpredictable and seemed to obey no
formula or schedule. They complained that a steady and
predictable payment flow was required to keep their suppliers
shipping product. The result is that their suppliers have
largely cut off shipments, leaving them without materials to
assemble. Chrysler and Ford will begin to reduce production
at the end of April, with closure not far behind. GM, which
began to stockpile inputs last year when payments became
problematic in anticipation of further problems, can hang on
a little longer, but will cut one of three shifts on May 1,
the second in August, and the third not long thereafter.
GM's brand-new truck assembly plant, inaugurated late in
2008, will cut one of two shifts in May and the other during
the summer. The company's foreign suppliers stopped
shipments in the second week of January. The assemblers can
and do resort to the (legal) parallel exchange market, but at
a high cost, currently 6.3 bolivars per USD versus 2.15 in
the official market. All three are resorting in various
degrees to the parallel market for their direct imports and
to replace critical parts unavailable from their regular
local suppliers. Ford uses the parallel market for 30
percent of its imports.


4. (C) Even if the assemblers could manage to keep their
foreign suppliers on board, the situation at local suppliers
could bring production to a halt. Suppliers, many of them
small, are in even worse shape than the assemblers. Few have
the financial wherewithal or working capital financing to pay
their own suppliers through the parallel market. Several

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have already gone out of business due to foreign exchange
shortages or labor conflicts and many will quickly follow,
making it impossible for assemblers to meet local content
requirements. All of the Big Three are subsidizing suppliers
by providing them with foreign exchange purchased in the
parallel market in order to keep the supply of parts coming
and raising prices to compensate.


5. (C) Dividends are another headache for the assemblers.
Ford reported arrears of USD 157 million for calendar years
2006 and 2007. GM said it is owed USD 300 million. Chrysler
had no profits to repatriate during the years for which
payments are delayed. All three are in the process of
preparing filings to obtain 2008 dividends.

NEW AUTO REGIME
--------------


6. (C) The auto regime legislated in 2007 is also having
negative effects. The regime requires major industry
changes, among them a new system of import quotas for
finished vehicles, increased local content requirements
(including local engine assembly by 2010 and 50 percent local
content by 2013),and a requirement that all vehicles sold in
Venezuela by January 1, 2008, be dual fuel (either
gasoline-compressed natural gas or diesel-compressed natural
gas). This was later postponed until April 1, 2009, with only
a 30 percent requirement. Quotas for 2008 were greatly
reduced from prior year imports, but actual imports were even
less because of lack of clarity in the law and discretionary
behavior by customs and other government officials. The BRV
has issued no quotas so far for 2009. It would take three to
five months for cars to become available in the Venezuelan
market following quota issuance, depending on their
provenance. The Big Three do not expect any quotas for 2009
to be issued. This impacts the local assemblers less than
mere importers since their dealers derive most of their
revenue from parts and service. The situation of dealers for
other auto companies (too numerous to name) that merely
import vehicles varies by their length of time in the market.
Recent arrivals (i.e., those without large existing fleets)
will begin to close dealerships this summer.


7. (C) The dual fuel requirement has caused consternation
among the assemblers. All have invested substantial amounts
in altering their assembly lines and designs to accommodate
the conversion kits, USD 15 million in the case of Chrysler,
the smallest of the Big Three in Venezuela. The latest
deadline of April 1, 2009 (two extensions were earlier
granted) cannot be met because the government has not
fulfilled its part of the program. It has not started to
install the necessary compressed gas delivery points at any
assembly plant (this will require about three months) and has
not imported kits the regulation requires it to provide for
free to the assemblers. Originally PDVSA (state oil company)
was to import the conversion kits and install them at a
purpose-built facility. After the assemblers pointed out
that the kits needed to be built into vehicles and not
retro-fitted, PDVSA was to buy the kits and deliver them to
the assemblers. The BRV then proposed that assemblers buy
the kits and wait for reimbursement from PDVSA. Given the
existing CADIVI payment backlog, the assemblers naturally
declined. The assemblers now are negotiating an intermediate
course under which PDVSA or the assemblers will provide a
down-payment for the kits with the balance to be paid later.
It is unclear what will happen now that companies cannot
immediately comply with the 30 percent dual fuel requirement;
the deadline has not been formally extended.

LABOR ISSUES
--------------


8. (C) The Big Three reported varying degrees of labor
difficulties. GM, which was shut down for almost two months
in the summer of 2008 by seizure of its plant by a militant
parallel union that eventually won the right to represent its
workers, reported that it faces almost daily demands for
increases in one or another benefit. Ford has already begun
negotiating its new agreement a full 18 months before the
contract is up and must negotiate with two unions.
Chrysler's contract is up in June; it has begun negotiating.
All face high absenteeism engendered by a non-separation
clause in Venezuelan law that is liberally interpreted by the
courts. This limits capacity utilization and raises costs.


9. (C) These problems are not unique to the American
assemblers. Other assemblers also face parts shortages
caused by a lack of timely foreign exchange payments, as well
as labor problems. MMC was closed for over three months by a

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strike and plant seizure. Toyota just went back to work
after a four-week stoppage.

COMMENT
--------------


10. (C) The BRV faces a severe foreign exchange shortage at
the moment due to low oil prices, and is prioritizing foreign
exchange distribution, with food, medical supplies and
capital equipment being favored for foreign exchange
payments. Auto sector imports do not seem to be a priority
for the government, not surprising given that its core
support comes from poorer Venezuelans who cannot afford cars.
The GBRV is, however, playing with fire. The auto sector
employs about 12,000 workers at the assemblers and many
thousands more at the parts manufacturers and dealers.
Chrysler estimates total sector employment at some 80,000, a
large number in Venezuela. These are typically better-paying
jobs than those available to most Venezuelans. At least 30
percent of the two main industrial parks in Valencia,
Venezuela's most important non-oil industrial center, are
directly related to autos. The problems in the auto sector,
moreover, are symptomatic of a problem looming throughout the
Venezuela economy, which imports a large portion of all
industrial inputs and components. Low oil prices could force
Venezuela to choose between importing food and medicine,
importing industrial goods without which employment will
plummet, and high inflation as more transactions are forced
to move to the parallel market.
CAULFIELD