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Venezuela auto industry struggles amidst regional growth
Ward's Automotive International / November 1, 1995

By Larry Luxner

CARACAS -- Watching the big Fords, Chevy Suburbans and snake along Avenida Libertador, not far from Simon Bolívar's humble birthplace in downtown Caracas, it's hard to believe that this congested city of 5 million -- which boasts South America's most modern subway system, its tallest skyscraper and its cheapest gasoline (only 20 cents a gallon) -- could possibly be in trouble. Yet Caracas is today the capital of the continent's only nation whose economy will not grow this year.

Indeed, while the Mexican economy may be bad, Venezuela's is in far worse shape. Despite its petroleum wealth, Venezuela's 1995 gross domestic product is expected to drop for the third year in a row, and prices are now climbing by 70% a year.

"Under [ex-President] Carlos Andres Pérez, we had a far better climate for businesses, no foreign-exchange or interest controls, and free trade at the borders," laments Donald DeVost, chief financial officer at Cervecería Polar. "Now all these things are gone. I don't see any change of policy until we have another foreign-exchange crisis."

Adds Donald Williams, president of Caracas Wireless Vision: "Doing business in Venezuela is not for the faint of heart. Business is down and everyone projects declining economic growth for the next two to three years."

Foreign investors have already been scared off by tight exchange controls instituted by President Rafael Caldera, a 79-year-old populist who has resisted putting into practice the kinds of reforms that investors like to see. In an ominous sign, two Swiss drug firms that have been doing business in Venezuela for years -- Ciba-Geigy and Sandoz -- have already announced they would pull out of the country by year's end.

Nevertheless, the car market is doing very well -- partly because of the huge market in Colombia, right next door.

MMC Automotriz, which assembles Mitsubishi cars in Barcelona, announced in August that it will invest $10 million to triple the capacity of its factory to 150 cars a day. The move will permit MMC to begin assembling two Hyundai models in mid-1996 for distribution in Venezuela and Colombia. At the same time, says the business magazine VenEconomy Weekly, South Korea's Hyundai is enlarging its dealer network and spare-parts stock in hopes of acquiring a 16% market share.

Hyundai has been able to sell about 4,000 vehicles in Venezuela -- all imported -- since it began offering them earlier this year. By assembling cars in Venezuela, using locally produced parts and components, Hyundai will be able to slash its prices in relation to imported models, which pay 35% duty and 12.5% import tax. Assembly kits are assessed at only 5% duty, and components bought from Colombia may enter Venezuela duty-free. At the moment, Hyundai cars cost about as much as Daewoo -- which is also building a factory in Venezuela -- but a lot less than similar GM and Ford vehicles.

Another company on the move here is Chrysler. A wholly owned subsidiary, Chrysler Motors de Venezuela S.A., assembles, impots and distributes Chryslers in what ranks as the fifth-largest of Venezuela's automakers. The company currently produces Chrysler passenger cars and Jeep (Cherokee, Grand Cherokee and Wrangler) sport utility vehicles for sale in Venezuela and the Andean Pact markets of Colombia and Ecuador.

The company is currently investing $56 million quality improvement programs, new products and environmental control efforts, and plans to begin production of the Chrysler Neon in March 1996.

Michael G. Landry, president of Ivy Management Inc. in Boca Raton, Fla., says the pent-up demand for automobiles in developing nations like Venezuela and Colombia will lead to a surge of sales not seen since the early 1900s.

Throughout Latin America, he says, auto production has grown an average of 12% a year for the past five years, with no let-up in sight. Brazil, which just started its economic reform program, experienced a 10% jump in auto production in 1994 to 1.55 million. Production is expected to accelerate if the economy remains on its current path. Mexico has also enjoyed a healthy production increase of 7% to 1.1 million automobiles in 1994.

"Latin America, as a region, should produce over 3.5 million vehicles in 1995," said Landry in a prepared statement. "As current economic reform continues to take hold, thanks to low inflation and low interest rates -- both long considered to be crucial components to automobile demand -- this should lead the way to a more prosperous region. And as a result, we would expect that auto production will double in five to eight years."

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