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Viewing cable 08CARACAS1570, VENEZUELA: GM, FORD AND CHRYSLER ONCE AGAIN HALT

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Reference ID Created Released Classification Origin
08CARACAS1570 2008-11-12 20:29 2011-08-30 01:44 CONFIDENTIAL Embassy Caracas
VZCZCXRO9910
PP RUEHAO RUEHCD RUEHGA RUEHGD RUEHHA RUEHHO RUEHMC RUEHMT RUEHNG
RUEHNL RUEHQU RUEHRD RUEHRG RUEHRS RUEHTM RUEHVC
DE RUEHCV #1570/01 3172029
ZNY CCCCC ZZH
P 122029Z NOV 08 RETRANSMITTING
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC PRIORITY 2132
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RUCPDOC/DEPT OF COMMERCE
RUEATRS/DEPT OF TREASURY
RUMIAAA/HQ USSOUTHCOM MIAMI FL
C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 001570 
 
SIPDIS 
 
HQ SOUTHCOM ALSO FOR POLAD 
TREASURY FOR MMALLOY 
COMMERCE FOR 4431/MAC/WH/MCAMERON 
CA FOR CA/OCS/ACS FOR WILLIAM HURST 
 
E.O. 12958: DECL: 01/01/2018 
TAGS: ECON PGOV PREL ETRAD PTER VE
SUBJECT: VENEZUELA: GM, FORD AND CHRYSLER ONCE AGAIN HALT 
PRODUCTION 
 
REF: A. CARACAS 1177 
     B. CARACAS 535 
 
Classified By: Economic Counselor Darnall Steuart for reasons 1.4 
(b) and (d). 
 
1. (C) Summary:  GM, Ford and Chrysler, the three U.S. car 
manufacturers in Venezuela, are once again shut down due to a 
labor action against a parts supplier.  The industry faces 
on-going, severe labor problems, power outages averaging once 
every three days, and a dramatically reduced 2008 vehicle 
import quota.  These factors led to a drop of 40.6 percent in 
total car sales from January to October 2008 in Venezuela.  A 
proposed law that would cap car sale prices and a law 
requiring natural gas dual use cars further complicate the 
situation.  Many dealers have closed their doors and their 
waiting lists saying they do not expect to receive any cars 
until 2009. The industry doubts that high-profile government 
deals with Iran, Belarus and Russia will ease the car 
shortage.  End Summary. 
 
-------------------------------------- 
LABOR ISSUES AND CHRONIC POWER OUTAGES 
-------------------------------------- 
 
2. (C) On November 6, the Commercial Counselor met with the 
president of GM Venezuela Ronaldo Znidarsis who reported 
that, contrary to media reports of reduced production, GM, 
Ford and Chrysler have once again stopped producing (ref A). 
GM stopped production two weeks ago and estimates its most 
recent closure will cost it 8,500 vehicles in lost production 
by November 10.  The shut downs stem from labor problems at 
Johnson Controls, one of Venezuela's two seat manufacturers 
and its only producer of foam, an essential component in all 
car seats.  Znidarsis added that Johnson Controls, a U.S. 
firm with a 30 percent stake in the seat manufacturing 
company, is "fed up" with Venezuela and is trying to sell its 
share of the company. 
 
3. (C) The trouble at Johnson started in April 2008 when the 
Venezuelan Ministry of Labor allowed a group of "radical" 
workers to form a second union at the plant.  Znidarsis said 
Chavez originally encouraged the formation of such "parallel 
unions" but seems to have lost control of them.  The groups 
now hamper production across the country, including at 
government-owned plants (labor issues to be covered septel.) 
The parallel union at Johnson Controls has refused to accept 
the collective bargaining agreement the original union signed 
in April 2008 and has paralyzed plant operations. 
 
4. (C) Znidarsis added that in addition to labor issues, 
which he deems the most serious challenge facing the 
industry, chronic power outages also hamper production.  He 
said that GM experiences a blackout every three days.  Once 
power returns, all of the paint machinery has to be partially 
dismantled and cleaned, leading to further production delays. 
 
--------------------------------------------- ------ 
REGULATIONS ON IMPORTS, PRICE CAPS, AND NATURAL GAS 
--------------------------------------------- ------ 
 
5. (C) On November 3, Econoffs and Commercial Counselor met 
with William Paz Castillo, President of the Venezuelan 
Automotive Chamber (Cavenez) who reported the industry is 
preparing for the government's announcement of 2009 import 
quotas on November 11.  (NOTE:  As of November 12, the 
government had yet to announce the 2009 import quotas.  END 
NOTE.)   The Venezuelan government, in an attempt to 
stimulate domestic production and reduce dollar expenditures 
on "non-essential" imports, dramatically reduced vehicle 
import quotas in 2008 (ref B).  In light of repeated 
government statements on "belt tightening" and reducing 
imports in 2009, car imports will likely be even more 
restricted next year.  Cavenez reports the 2008 quotas led to 
a drop in imported car sales of 55.8 percent in the first 10 
months of 2008, compared with the same period in 2007. 
Overall car sales for the same period are down 40.6 percent 
and the industry will only meet 49 percent of the 
government's 2008 production goal.  Toyota told the press on 
November 1 that "there will be no cars until next year. So 
many people want a car that we have had to close the waiting 
list." 
 
6. (C) The President of the National Assembly's Subcommission 
 
CARACAS 00001570  002 OF 002 
 
 
on Irregularities with Car Sales disagreed with Toyota's 
statement saying that "it is not that there are no cars, it 
is that the car dealers are not acting with good will", 
suggesting that dealers are hoarding, rather than selling 
cars to further drive up already sky high prices.  The 
Subcommission is scheduled to propose new regulations in 
November that will likely cap the sale price of new cars by 
establishing "a just profit margin" of no more than 20 
percent.  The new regulation will also reportedly include a 
heavy tax on private car owners who sell their cars within 
the first year of ownership, which Cavenez believes would 
represent an infringement on property rights.  Castillo 
believes high car prices are not due to hoarding or price 
gouging by either assemblers or dealers, but are rather due 
to a predictable market reaction to demand exceeding supply. 
Castillo explained that while the Subcommission has to "do 
something" this month, any limit the government imposes on 
profits will simply make the situation worse.  He also voiced 
his doubts that joint ventures such as the one with Iran, 
VeneIran, and proposed deals with Belarus and Russia would 
improve matters.  GM's Znidarsis believes that VeneIran has 
only produced 40 cars after opening almost a year ago. 
Another industry insider put VeneIran's production at 400. 
 
7. (C) Castillo also reported that the deadline for the 
implementation of the dual fuel law, which will require that 
a certain percentage of all assembled vehicles be equipped 
with natural gas converter kits, will likely be postponed for 
a third time as neither government, nor industry has any hope 
of meeting the April 2009 deadline.  He noted that there are 
hardly any gas stations equipped to supply natural gas.  In 
addition, even if the vehicles could be serviced, the 
government has not imported nearly enough kits to meet its 
own quota.  The government has also not determined whether it 
will be the government-owned oil company, PDVSA, or industry 
that will have to bear the bulk of the cost for the vehicle 
conversion.  Castillo added that there is also the minor 
detail of the natural gas itself, saying that Venezuela 
already imports a great deal of its natural gas from 
Colombia.  Five months away from the deadline, Castillo 
reports the industry is still very uncertain on how the 
policy will play out. 
 
------- 
COMMENT 
------- 
 
8. (C) The Venezuelan government's investments in plants with 
Iran, Belarus and Russia will do little to relieve 
Venezuela's self-imposed car shortage and will likely 
represent little more than a further instance of squandered 
resources.  Existing U.S. plants in the industry such as 
Johnson Controls and GM, (which has been unable to repatriate 
USD 250 million in 2007 dividends due to currency controls), 
are increasingly frustrated with Venezuela.  In Johnson's 
case, it appears it will exit the country as soon as it finds 
a buyer.  Issues with radical splinter unions that seem to 
have government backing, failing electrical infrastructure, 
and a constantly changing regulatory environment have 
hamstrung production.  While the industry still holds great 
promise due to strong, unmet demand, as Castillo said 
"production in 2009 will all depend on the will of the 
government." 
GENNATIEMPO