Sector Plummets- No Let Up In Sight

Vehicle production in Venezuela declined 84.8% year-on-year (y-o-y) in January, to 296 units, with many autos manufacturers stopping output, as the domestic market drops and the country's business environment deteriorates. BMI forecasts a 95% drop in output over the year, as we believe further declines are likely as carmakers curtail production.

Production Outlook Increasingly Bearish

BMI has long maintained a bearish on vehicle production in Venezuela, as the government continues to intervene in the economy, further restricting access to foreign currency and implementing import restrictions on vehicle components. The ongoing weakness in the currency will serve to make supplier imports more expensive, exacerbating shortages of components. Furthermore, the worsening business environment makes operating profitably in the country increasingly difficult as the government seeks to limit profit margins for companies.

BMI Increasingly Bearish As Imports Dwindle
Venezuela Vehicle Sales, Imported And Domestically Produced, Units

Vehicle production in Venezuela declined 84.8% year-on-year (y-o-y) in January, to 296 units, with many autos manufacturers stopping output, as the domestic market drops and the country's business environment deteriorates. BMI forecasts a 95% drop in output over the year, as we believe further declines are likely as carmakers curtail production.

Production Outlook Increasingly Bearish

BMI has long maintained a bearish on vehicle production in Venezuela, as the government continues to intervene in the economy, further restricting access to foreign currency and implementing import restrictions on vehicle components. The ongoing weakness in the currency will serve to make supplier imports more expensive, exacerbating shortages of components. Furthermore, the worsening business environment makes operating profitably in the country increasingly difficult as the government seeks to limit profit margins for companies.

In January, only two manufacturers produced vehicles- Toyota Motor de Venezuela, with 291 units, and Mack de Venezuela, with five units. Other producers with sites in the country, such as Ford Motor and General Motors Company (GM), have already curtailed production on the back of weak sales, the poor business environment, and shortage of components ( see 'Ford To Cut Production As Risks Mount', January 17). In late January, however, Toyota announced that it is suspending production in the country from February 13 due to a delay in receiving customs clearance for parts. BMI has long highlighted the difficulties for automakers operating in the country, and this is playing out.

Venezuela Vehicle Production By Brand
Jan 2013 Jan 2014
Chrysler 0 0
Ford Motor 254 0
General Motors Company 660 0
Iveco 18 0
Mack 31 5
MMC Automotriz 166 0
Toyota 816 291
Total 1,945 296
Source: Cavenez

We believe that it is worth highlighting that some other vehicle production may exist in the country, and this is not captured by the official figures. The production figures reported by the Automobile Industry Chamber of Venezuela, Cavenez, represent only the total number of cars produced in Venezuela by manufacturers associated to Cavenez ( Daimler, Ford, GM, Iveco, Mack, MMC Automotriz, and Toyota).There is some anecdotal evidence of Russian manufacturer AvtoVAZ, and China's Chery International, among others producing in Venezuela. Output and sales figures for these brands are unavailable, however. We believe that the wider economic malaise is likely affecting these other brands too, with poor domestic sales, and a plethora of manufacturing problems.

Sales To Plummet

Vehicle sales in Venezuela declined 87% y-o-y, to 722 units, in January as the increasingly poor economic outlook impacts the sector.

BMI Increasingly Bearish As Imports Dwindle
Venezuela Vehicle Sales, Imported And Domestically Produced, Units

Inflation is running very high, eroding consumers' purchasing power and appetite for big ticket purchases, such as new cars. High interest rates curtail demand for vehicle loans, and the ongoing weakness in the Venezuelan bolivar (and further weakness in the unofficial exchange rate) increasingly makes vehicle imports more expensive in local currency terms.

In January, sales of domestically-produced vehicles declined 61.4% y-o-y, to 708 units, and sales of imported vehicles dropped 99.6% y-o-y, to 14 units.

Historically, sales of domestically-produced vehicles have dominated the market. However, production in the country has significantly deteriorated in recent months, creating a shortage of vehicle stocks. Indeed, in 2013, sales of imported vehicles increased 3.5%, to 26,189 units, while sales of domestically-produced autos dropped 30.9%, to 72,689 units, despite ongoing currency weakness making imports more expensive in local currency terms. The sharp drop in imports in January is partly due to high base effects, combined with a paucity of dollars, import controls, and currency weakness.

Due to the expected drop-off in production, BMI believes vehicle sales are set to suffer, and for sales in the domestically-produced segment to drop significantly in the coming months. This, combined with the ongoing weakness in the imported segment, has informed our bearish forecast for a 95% drop in 2014. Despite this drastic revision, we believe that risks still remain to the downside, as the sector could dry-up entirely as ongoing government-intervention in the economy causes imports to halt and domestic production to cease. Indeed, operating profitably in the country looks to be increasingly difficult as the government seeks to limit profit margins for companies ( see ''Law Of Fair Prices' To Deal Another Major Blow To Private Businesses', February 4).

We believe that it is worth highlighting, however, that it is likely that private autos imports are still ongoing, and these are not captured by the official statistics. Furthermore, many consumers are probably increasingly willing to enter the black-market to acquire vehicles. Volumes of such imports are probably very small, however, and the sector is very weak.

Government Intervention Unlikely To Boost Sector

In December 2013, as a result of Venezuelan President Nicolás Maduro's 'economic war' against 'usury and economic sabotage', the government issued a 'special order' that will force a drastic reduction in vehicle prices and attempt to 'regulate this market' ( see 'BMI Wary As Government Moves To Regulate Market', December 3 2013). BMI has long maintained a bearish view on the Venezuelan autos sector. Used cars are often bought as a 'store of value' to hedge against inflation. This, combined with the paucity of new vehicles and shortage of dollars to purchase imported cars, has resulted in used vehicles becoming more expensive than new cars. The government is attempting to alleviate this problem by reducing the price of new cars and limiting the price of used vehicles. BMI believes, however, that such measures tackle the result of the problem (expensive used cars), and make no real attempt to resolve the root causes (high inflation and low supply of new cars). We believe that such policies may serve to limit new vehicle sales over the next few years as imports may dry-up. Further, it may cause the price of used cars to rise further as the segment is driven into the black market.

Similarly, in December, in a bid to boost the sector, the government declared that Venezuelan citizens who have legally acquired dollars will be able to open foreign currency accounts in public banks, and they will be able to use such accounts to purchase cars overseas ( see 'BMI Sees Little Upside Potential From Reforms', December 18 2013). We maintain our bearish outlook for the industry, however, as it will still be tempered by bureaucracy, government intervention, a weak currency, declining consumer sentiment, and the moribund wider macroeconomic picture.

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Related sectors of this article: Autos
Geography: Venezuela
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