The Venezuelan auto sector is currently experiencing one of its worst crises in decades.
IHS perspective | |
Significance | Only three of Venezuela's seven auto assemblers produced vehicles in May 2014. The intensification of foreign currency access problems, combined with increased state intervention, has seriously undermined the sector's production capacity. |
Implications | It is estimated that the government owes USD1.8 billion in foreign currency allocation to the country's auto sector. Difficulties accessing foreign currency are making it almost impossible to import equipment and materials to assemble vehicles in Venezuela. |
Outlook | The operating environment for the country's auto sector is unlikely to significantly improve in the next year. The government is focused on resolving internal differences and managing anti-government discontent, and does not have enough resources to meet the sector's demands. |
The Venezuelan auto sector is facing severe problems including accessing foreign currency, complicated bureaucratic hurdles, potential labour unrest, and price controls. The intensification of these problems, combined with the ongoing political crisis and policy-making paralysis currently affecting the country, has contributed to the sector's recent downfall and reduced the prospect of an improvement in the sector's business environment in the next year.
Nicolas Maduro in Caracas,16 May 2014 |
Production and sales on downward trend
The Venezuelan auto sector peaked in 2007 when production reached a record of 172,418 units and sales totalled 491,499 vehicles. However, production and sales have fallen by more than half since then. Figures from the Venezuelan Automotive Chamber (Cámara Automotriz de Venezuela: CAVENEZ) indicate a total of 71,753 units produced and 98,878 vehicles sold in 2013, a reduction of 58.3% and 101.1% respectively compared to 2007 (the year in which late president Hugo Chávez enhanced regulation in the sector). Figures released by CAVENEZ on 6 June 2014 highlight how, during the first five months of 2014, the seven firms that operate in the country (Chrysler, Ford Motor, General Motors, Toyota, IVECO, Mack and MMC) produced just 5,233 units – 83.2% less than production during the same five-month period in 2013. Vehicle sales have also continued on a downward trend in 2014, with a total of 7,147 units being sold during January-May 2014, down 85.6% year-on-year (y/y). Only Ford Motors, General Motors, and MMC produced vehicles in May 2014, with the remaining four companies that operate in the country not assembling any vehicles, probably due to the fact that they have recurrently suspended operations throughout 2014 citing inability to import equipment and materials because of foreign currency access problems.
Shortages of foreign currency, payment delays, and price controls
The root cause of the decline in the sector's productivity lies in Venezuela's exchange control system and the liquidity crisis that is currently affecting the country. As of 10 June, the country's foreign reserves stood at USD22.8 billion, a 13.6% y/y decrease and 47% less than total foreign reserves at the start of 2009. However, international reserves excluding gold are at much lower levels (independent observers estimate USD3 billion). This makes it difficult for the National Foreign Trade Centre (Centro Nacional de Comercio Exterior: CENCOEX) to discretionarily allocate foreign currency to each economic sector through either of the SICAD foreign currency access systems. CENCOEX allocated USD550 million towards the auto sector, of which 49% went to auto assemblers, during the first five months of 2014. This compares unfavourably to the USD1.2 billion allocated to the sector during the first half of 2011 by the now extinct foreign currency administrator CADIVI.
Economics vice-president Rafael Ramirez confirmed that the government had transferred USD2 billion from external parallel funds towards the country's foreign reserves on 9 June, with the objective of lowering the state's foreign currency debt to all economic sectors. However, the main challenge for the government is that it does not have enough funds to satisfy such debt (estimates of the government's foreign currency debt to the private sector range from USD13 billion to USD25.8 billion). The government therefore is likely to continue prioritising the allocation of foreign currency towards food and medicine imports while postponing, or slowly allocating, funds to pay debt to other sectors, including auto, airlines, constructions, petrochemicals, telecoms, and pharmaceuticals. The foreign currency debt towards the auto assembly sector is estimated at around USD1.8 billion by CAVENEZ, although it is likely to be higher when including auto-parts and auto-importers. Companies operating in the sector have also struggled to obtain import licences, and face lengthy bureaucratic processes to obtain non-domestic production certificates.
The problems accessing foreign currency, combined with lower production and the establishment of import quotas, have intensified vehicle and auto-parts shortages, taking the price of used vehicles to record high levels. Aware that this is generating discontent among the population, the government so far in 2014 has responded with additional regulations. It has set profit margin caps for assemblers and car dealerships. As in the case of the food, basic products, and bottled water sectors, there is a risk of the government failing to revise the profit margins it sets on a periodical basis. There is also a risk of the government not considering production costs when imposing such margins. IHS sources indicate that some auto-assembly companies have expressed their discontent at the current price-caps, as they have failed to reflect luxury taxes, VAT, and foreign exchange rate adjustments.
Outlook and implications
The operating environment for the country's auto sector is unlikely to significantly improve in the next year. Besides enhanced regulation and foreign currency access problems, the sector has also been affected by the current political crisis. President Nicolas Maduro is reliant on the support of key members of the ruling United Socialist Party of Venezuela (PSUV) and the country's military to lead the "Bolivarian revolution", but also notably on National Assembly President Diosdado Cabello and Energy Minister Rafael Ramírez. This has undermined the authority President Maduro must exhibit to make progress on resolving the country's deep macroeconomic problems, including those that affect the country's auto sector.
Divergent demands within the PSUV, the ideological reluctance to reverse the economic model that they call "socialism of the 21st century", and the wave of anti-government protests that have occurred since February, have also contributed towards an environment in which the government rapidly shifts the priorities and government officials who mediate with the sector. This makes it increasingly difficult for companies to negotiate a solution to their problems. The country's deep-rooted political problems also increase the risk of the government politicising the sector's growing difficulties. President Maduro has already done this to some extent. In February, he criticised the local managers of Toyota after the company suspended operations. Maduro criticised the firm's productivity on television and suggested that its local managers had made the decision to halt operations based on "political interests". Public criticism from the government towards the sector increases the risk of the government taking action to prevent firms from halting operations, ensure that the labour force and benefits are maintained, to sanctions, tax charges, or, as a last resort, threatening companies with expropriation.