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C O N F I D E N T I A L SECTION 01 OF 03 SAO PAULO 000194 
 
SENSITIVE 
SIPDIS 
 
STATE FOR WHA/BSC, 
NSC FOR ROSSELLO 
 
E.O. 12958: DECL: 03/30/2019 
TAGS: ECON EIND EFIN ELAB BR
SUBJECT: AUTO SECTOR COMMENTS ON STATUS AMID ECONOMIC 
DOWNTURN 
 
REF: A. BRASILIA 141 
     ¶B. SAO PAULO 126 
 
Classified By: Consul General Thomas White; Reasons 1.4 (b) and (d). 
 
¶1.  (C) SUMMARY:  On March 6, Ambassador Sobel met separately 
with General Motors (GM) MERCOSUL President Jaime Ardila, and 
the Brazilian National Automobile Manufacturer's Association 
(ANFAVEA) President Jackson Schneider.  Both executives are 
bullish about car sales in Brazil, crediting the Government 
of Brazil's (GOB) decision to lower production taxes on 
automobiles for the auto industry's initial recovery in 2009. 
 However, slowing export markets due to protectionist 
reactions abroad, particularly in Argentina, are causing a 
relatively modest decline in sales from last year.  This has 
even prompted some business leaders to advocate that Brazil 
abandon MERCOSUL.  While the GOB has not announced whether 
its car tax suspension will be renewed at the end of March, 
manufacturers credit the measure with stimulating sales and 
believe it will be extended.  END SUMMARY. 
 
Auto Industry Beginning to Recover 
---------------------------------- 
 
¶2. (U) Jaime Ardila told Ambassador Sobel that Brazil was 
GM's most profitable market last year.  Because of the 
financial crisis, however, GM expects its production in 
Brazil to decline from 12,500 automobiles per day in 2008 to 
11,000 per day this year.  Ardila remarked that the decline 
in Brazil was relatively small compared to the 34 percent 
sales drop in the United States.  While GM made USD 1.5 
billion in profit in Latin America (with most of that in 
Brazil) last year, Ardila expects that number to drop by 
approximately one-third in 2009. 
 
¶3.  (C) After production collapsed in December (production 
was 56 percent lower in December 2008 than the same month in 
2007),  Ardila and Schneider both credited the recent boom in 
sales to the GOB eliminating the industrial production tax 
(IPI) on small cars (below 1000 cc) and by 50 percent on 
larger cars (Ref A).  Ardila estimated that this resulted in 
an effective reduction of seven to 10 percent of the total 
price of a new car.  While the IPI tax is scheduled to return 
on March 31, Ardila told Econoff that he expects the tax cut 
will be extended.  (NOTE:  The GOB announced on March 30 that 
it intends to extend the tax break for three months.) 
According to Ardila, the car industry cut a deal with the GOB 
to withhold announcements for an extension of the IPI tax cut 
until the end of March in order to spur auto sales through 
the end of the month.  Separately, Schneider also informed 
the Ambassador that ANFAVEA is lobbying the GOB to extend the 
tax through July and will also push for an indefinite 
extension. 
 
¶4.  (U) Ardila also credited the recent up-tick in auto sales 
to improved credit conditions.  He noted that auto loan 
maturities had returned to what he considers the more 
reasonable range of 42 to 60 months.  In early 2008, the 
Central Bank was concerned that auto loan maturities were too 
long, sometimes exceeding 70 months, which meant that the 
loans effectively went beyond the depreciation value of the 
vehicle.  When the financial crisis first hit Brazil in 
September, the banking industry moved quickly to reduce auto 
loan maturities, meaning consumers needed more cash on hand 
to purchase a vehicle.  Ardila sees that situation now 
returning to normal, which should auger for supporting 
increased demand for new cars. 
 
¶5.  (SBU)  Ford Brazil CEO Marcos de Oliveira presented a 
similar auto sector outlook in a March 17 conversation with 
the Consul General.  After a difficult fourth quarter to 
close 2008, Ford sales in January and February 2009 are only 
two percent lower than the comparable period in 2008.   The 
 
SAO PAULO 00000194  002 OF 003 
 
 
IPI tax reduction has been key, as de Oliveira estimates that 
sales would have been down 30 percent without the measure. 
Like his GM counterpart, the Ford CEO indicated that the Lula 
government will extend the IPI tax reduction for an 
additional 90 days at the end of March.  Domestic passenger 
auto sales in Brazil totaled 2.8 million vehicles in 2008. 
(Brazil produced 3.2 million, with the remainder going to the 
export market.)  De Oliveira believes that Brazil could reach 
2.6 - 2.7 million in domestic sales for 2009, but expects a 
20 percent fall in 2009 exports. 
 
Labor Issues and the Auto Industry 
---------------------------------- 
 
¶6.  (SBU) Ardila told the Ambassador that the local press had 
inaccurately portrayed recent lay-offs at its plants in 
Brazil as firings.  He explained that GM had simply opted not 
to renew the expiring contracts for some of their temporary 
employees.  Ardila expressed concern about Embraer's legal 
woes after dismissing one-fifth of its workforce (Ref B), but 
was optimistic concerning GM's pending labor lawsuit being 
decided in Sao Jose dos Campos, because GM had not violated 
its labor contracts.  Indeed, Ardila told the Ambassador that 
GM plans to hire back some of the workers, and, as a gesture 
of goodwill, GM would allow the union to claim victory. 
 
MERCOSUL and Brazil's Auto Industry 
----------------------------------- 
 
¶7.  (SBU) While GM has been successful with its passenger 
cars in the MERCOSUL region, the heavy truck industry has 
been hit hard, losing 20 percent of its market share, 
according to Jackson Schneider.  Much of this reduction is 
due to a decrease in exports, which account for 20 percent of 
automobile production in Brazil.  Schneider said publicly in 
centrist newspaper "O Estado de Sao Paulo" that exports over 
the last six months have fallen from 115,700 units to 59,200 
units, a decline of 57 percent.  He told the Ambassador that 
he blames the decline on shrinking international markets and 
increasing protectionism, citing Argentina and Venezuela 
specifically.  Despite these setbacks, Schneider expects 
overall passenger car sales in Brazil to decline by only 3.5 
percent in 2009. 
 
¶8.  (C) Ardila expressed similar concern for GM's Argentine 
operations, characterizing the Argentine economic situation 
as "a disaster waiting to happen."  He told the Ambassador he 
believes the GOB is increasingly frustrated with Argentina's 
obstinacy against a bilateral trade deal, and thus sees an 
opportunity for the United States to improve its own 
bilateral relations with Brazil.  Schneider believes that 
ANFAVEA benefits from MERCOSUL's tariff provisions, but 
confided that at a recent meeting at the Sao Paulo Federation 
of Industries (FIESP), top business leaders were privately 
advocating that Brazil leave the trade bloc. 
 
Ardila Discusses Negotiations at GM Headquarters 
--------------------------------------------- --- 
 
¶9.  (SBU) Ardila told the Ambassador that Brazil's GM 
operations were used as collateral in GM's recent 
restructuring  negotiations with the USG.  Globally, GM needs 
an additional USD 5.5 billion to meet its USD 18 billion 
total financing needs to restructure.  Ardila noted that if 
GM filed for Chapter 11 bankruptcy in the United States, the 
company would need some USD 100 billion.  GM's two major 
global costs are labor and health care.  Ardila said that 
Japanese manufacturers pay USD 45 per hour on average to 
their domestic autoworkers, while GM pays USD 65 per hour in 
the United States.  Although this price discrepancy has 
narrowed in the last five years, it still makes small cars 
unprofitable and limits GM's market to larger vehicles. 
Health care payments, especially to retirees, remain the 
 
SAO PAULO 00000194  003 OF 003 
 
 
single biggest global expense for GM. 
 
¶10.  (SBU) Ardila expressed optimism about GM's global future 
if auto sales continue to show some recovery.  He noted, 
however, that GM's global sales averaged 9.5 million in 
January, and if sales did not pick up to an average of 10.5 
million vehicles, its debt payments for 2011 could be 
problematic.  Ardila believes GM will emerge as a much more 
efficient company if it survives the next two years, saying 
that even a small recovery would generate profits for a 
restructured GM.  Ardila told the Ambassador that he believes 
GM is too big to fail, and cited the launch of the new 
electric car, the Volt, as one example of GM's bright future. 
 (NOTE:  GM does not plan to sell the Volt in Brazil.  END 
NOTE.) 
 
¶11.  (C) COMMENT:  Auto production is normally a leading 
indicator of the overall economy as it represents ten percent 
of Brazilian manufacturing.  However using autos as an 
economic indicator this year is problematic as the tax break 
was limited to that sector.  In fact, overall industrial 
production declined by 7.4 percent last quarter, suggesting 
that the financial crisis continues to affect the rest of 
Brazil's manufacturing base.  Since the GOB has extended the 
IPI tax break through July as ANFAVEA hoped, auto sales are 
likely to continue to resist the crisis and stay strong, but 
without a similar stimulus package for other sectors, overall 
manufacturing may not improve.  Last quarter's GDP declined 
by 3.6 percent over the previous quarter, which will have a 
negative carry-over effect on GDP for 2009.  Given the real 
signs of a slowdown, President Lula is actively searching for 
ways to keep the economy strong, and with a recession looking 
increasingly likely, the GOB may consider implementing tax 
breaks similar to the IPI tax cut as a means of stimulating 
other manufacturing sectors and the overall economy.  END 
COMMENT. 
 
¶12. (U) This cable was coordinated with and cleared by 
Embassy Brasilia. 
WHITE