BMI View Playing Out As VW Suspends Workers
German autos manufacturer Volkswagen (VW) is to temporarily suspend 900 jobs across two production sites in Brazil on the back of weak demand in the market. BMI maintains a cautious view on the Brazilian autos industry as much investment is driven by government policy attempting to outweigh the fundamental uncompetitiveness hampering the sector. As domestic sales wane, we expect these factors to continue to cause automakers to rethink their strategies in the country, and caution that further job cuts could be on the horizon.
Despite these latest layoffs, VW remains committed to its existing investment strategy in the country. However, and BMI cautions the company could face ongoing headwinds in the coming years from overexposure to emerging markets. We maintain that this layoff announcement is commensurate with our bearish view and a sign of over-capacity in the autos sector.
|Growth To Moderate|
|Brazil Passenger Car Production Growth Rates, Units|
Domestic Market Wanes
The layoffs will come from VW's plants in Sao Bernardo do Campo, near Sao Paulo, and in Sao Jose dos Pinhais, in the southern state of Parana, beginning May 8. Under standard contracts in the Brazilian autos industry, carmakers can temporarily suspend workers for up to five months. During this period, their salaries are paid in part by the employer, with the remainder paid by Brazil's unemployment-insurance system. This will allow VW to better align supply with demand in the market. This aligns with our bearish view on the competitiveness of the Brazilian autos sector.
Over the first quarter of 2014, VW's sales in Brazil have declined 12.3% year-on-year (y-o-y), to 111,399 units. Over this period, total passenger car sales in the market dropped 4.9% y-o-y, to 583,264 units. BMI forecasts a 3% drop in passenger car sales in Brazil over the full year as the broader slowdown in consumer spending and higher car sales taxes impact the segment. This weakening picture, combined with high base effects from a strong 2013 performance, are likely to continue to weigh on VW's sales in the market over the coming months.
Government Policy Driving Growth
BMI has become increasingly bearish on the country's domestic sales and export outlook, and believe this will, in turn, weigh on output in 2014. Indeed, we now forecast a 5% drop in passenger car output over the year on the back of our bearish expectation for the domestic market ( see 'Autos Sector Deteriorates In Line With BMI View', April 8).
Despite this bearish outlook, companies continue to invest in the Brazilian autos market. The Brazilian government offers automakers discounts on the industrial product tax (IPI) based on the level of research and development and purchase volume of domestically made components. These measures are designed to stimulate the autos sector by attracting foreign investment, and increase the level of domestic innovation. The policy has led to substantial investments across the supply chain from a number of auto manufacturers in addition to VW, including BMW, Mazda Motor, Renault, Fiat, and Toyota Motor, amongst others.
We believe that much of this investment is the result of the government policies making vehicle imports prohibitively expensive, however, rather than a reflection of the country's natural competitiveness. Without the policy in place, we would expect to see a significant slowdown in investment. Raw material costs are high and the country's infrastructure is relatively poor, although the government is attempting to address these competitiveness issues. Furthermore, the ongoing currency weakness reduces the dollar amount international auto companies can repatriate, eroding their competitiveness.
But VW Remains Committed
Despite these latest layoffs and the poor fundamental outlook, VW remains committed to its existing investment strategy in the country. In March, the company announced that it is to invest USD5bn in new products and technologies in Brazil through to 2018 as part of its ongoing strategy in the country and global expansion plans ( see 'VW Invests For Growth, But BMI Cautious', March 28).
However, as outlined above, BMI maintains a cautious view on the Brazilian autos industry, and believe it remains fundamentally uncompetitive. We expect growth in the Brazilian market to moderate over the coming years, as the country's consumer story wanes. As domestic sales drop, BMI believes that automakers will continue to rethink their strategies in the country, in contrast to VW's investment decisions.
Moreover, we believe VW may become over-exposed in a number of large emerging markets, such as China, Russia and Brazil, as it invests to consolidate market share and build on high-growth rates seen in recent years. BMI maintains that the growth rate in these markets is likely to moderate as they mature, however, and ongoing expansion is unlikely to be sustainable.