Piling into Brazil
Augelli, Catia, Shepherd, Bill, Global Finance
With more than $1 trillion in revenues and 10 million employees, automaking still is the world's largest manufacturing industry-and it's becoming a case study in global overcapacity.
As growth has slowed in their main markets in the United States, western Europe, and Japan, all the big carmakers have been rushing abroad to exploit the fast-growth forecast for emerging markets. Southeast Asia, China, India, and the former Soviet bloc are all big targets. But nowhere lately has the rush been bigger than in Brazil, South America's dominant economy and the main attraction in Mercosur, the regional trade zone that includes Argentina, Uruguay, and Paraguay. Says Massimo Cirasino, an economist at Banca d'Italia, Italy's central bank: "The epicenter of the auto industry is shifting from the industrialized to the developing countries-and especially to South America."
The trouble is, as each auto producer presses to gain a dominant market share, the capacity buildup is becoming alarming-especially in subcompacts. Some forecasters predict that by 2000, world production will be able to chum out nearly 80 million vehicles a year, while demand will have risen to no more than 58-60 million vehicles.
Capacity already exceeds demand by more than 500,000 vehicles in North America and by some 3.5 million vehicles in Europe, and car prices in both markets-which are so saturated that they are essentially replacement markets-have been coming down in the past year. In North America, Chrysler recently halted all production of its Neon subcompact, and Ford shut auto production at its factory in Lorain, Ohio. Yet capacity continues to rise, largely because Japanese and Korean automakers keep adding to production-including even South Korea's troubled Kia Motors, which has been desperately seeking $200 million in emergency financing. Meantime, Korea's huge electronics chaebol Samsung has earmarked $10 billion to get into automaking, while both Indonesia and Malaysia are pumping billions into developing national cars of their own. At least one securities analyst calls the auto industry "suicidal."
As for the rosy growth forecasts, they've already come unraveled in Southeast Asia, where economies are slowing dramatically following this summer's currency collapses. Forecasters have slashed their 1998 estimates for Thailand and its regional neighbors by 40% and may have to cut them further in coming months.
Now, Latin America may follow suit. Brazil's currency, the real, came under intense attack in October, sending its financial markets into a tizzy. Even if Brazil and its neighbors manage to avoid a serious recession, interest rate hikes to discourage currency speculators will probably lead to some slowdown next year.
That does not augur well for automakers who are betting on Braziland their bets are big ones.
Unlike Asia or Russia, South America has virtually no auto producers of its own. Gurgel, a tiny Brazilian company, produced fewer than 200 cars last year. Volkswagen, Fiat, Ford, and General Motors have been in Brazil for ages and are upping the ante by pouring billions into new production. Newcomers in recent years include Renault, Toyota, Daimler-Benz, Scania, and Volvo. Now coming into the market are Peugeot, Honda, Chrysler, Asia Motors, Hyundai, Skoda (now owned by VW), BMW, and Mitsubishi. Following a strategy of "integrated" operations in the main Mercosur countries, VW, GM, Ford, Fiat, Renault, Peugeot, Scania, Honda, and Toyota also have plants in Argentina. The only major automakers not (yet) diving into Mercosur are Nissan, Mazda, and Suzuki.
According to a study by Angela Medeiros, an economist at BNDES, Brazil's national development bank, automakers already in Brazil are poised to spend $11.9 billion on new capacity from 1996 to 2000, while the newcomers say they'll plunk down $5.3 billion. And they're spending $4.4 billion to add to Argentine capacity-bringing the total for the Mercosur trade area to a startling $21. …