August 21, 2007 at 1:00 am

South America's Auto Boom: First of three parts

Brazil, Argentina buoy Detroit's automakers

GM, Ford offset U.S. losses with gains south of equator

SÃO PAULO -- Whoever says Ford Motor Co. and General Motors Corp. can't make money in the car business has never been to South America.

While the two automakers struggle to pull their North American businesses back into the black, both are making record profits south of the equator. In the United States, declining demand for their cars and trucks has forced Ford and GM to shutter plants and lay off workers. In countries like Brazil and Argentina, they are investing millions just to keep up.

Ford is running three shifts, six days a week at its factory in Camaçari, Brazil, where workers commute past palm huts and coconut vendors to work in one of the most advanced auto factories in the world. Farther south, GM workers in São Paulo fight some of the heaviest traffic in the world to churn out Chevy Corsas and Astras at the automaker's plant in São Caetano do Sul.

Asia is grabbing the headlines, but South America also is booming because of surging global demand for the agricultural and industrial commodities produced here. In many countries on the continent -- though not all -- this has helped usher in an unprecedented era of political and economic stability, giving more people the money they need to buy a new car.

As a result, South America has passed Asia to become the fastest growing regional vehicle market in the world.

Among Detroit automakers, Chrysler LLC has little presence here, but South America has become critical to Ford and GM. It is generating the profits both need to offset their North American losses. It also holds the promise of future growth at a time when the U.S. automobile market is contracting. And it has become a proving ground for new ideas that could help make the companies' North American operations more efficient and profitable.

"The future of General Motors is in emerging markets," said Ray Young, who heads GM's operations in Brazil, Argentina and the rest of the Mercosul region, a trading bloc that also includes Paraguay and Uruguay. "We need to keep on growing and contribute to GM's sales and profits."

Although GM does not break out financial results for South America, its pretax profit for Latin America, Africa and the Middle East combined was $527 million last year, compared to a loss of $6.9 billion in North America. In South America alone, Ford made $661 million in 2006 -- up more than 65 percent over the previous year and far better than the nearly $16 billion loss the company reported for North America.

"The industry has grown so quickly that we are not able to adapt capacity to demand fast enough," said Enrique Alemañy, president of Ford's operations in Argentina and Chile. "It's a good problem to have."

Such statements have not been heard in Detroit for at least a decade.

"Any market area in the world where they can make a profit is extremely important," said George Peterson, president of AutoPacific Inc., a California-based market research firm. "South America has turned out to be that. It is on the radar now of all the major automakers. It's not the backwater it used to be."

One continent, many markets

South America is the fourth largest automobile market, after North America, Asia and Europe, and is growing faster than any of them.

Demand for cars and trucks in the region is expected to grow from 3.1 million units last year to 3.7 million units in 2012, according to Kimberly Kennedy, director of Latin American operations at J.D. Power and Associates. Forecasting firm Global Insight predicts even faster growth, estimating 2007 sales of 3.9 million vehicles.

GM is the market leader in South America, accounting for 21.7 percent of all sales last year, according to Global Insight, followed by Germany's Volkswagen AG at 17.3 percent, Italy's Fiat SpA at just under 17 percent and Ford at 11.5 percent.

Last month, GM said it would invest $500 million in the region. Two weeks ago, Ford said it would invest nearly $157 million -- all to develop new cars and trucks for this exploding market

But what is the South American market?

It is an armored Ford Focus with inch-thick bulletproof glass navigating the urban chaos of São Paulo's shantytowns. It is also the same car, recast as a middle-class sedan, speeding along the wide freeways of Buenos Aires.

In Peru, shiploads of Japanese junkers are refitted on the dock for left-hand drive and sold to a nation too poor to afford anything better. In Brazil, years of stability and a roaring economy have automakers contemplating importing cars from the United States. In Venezuela, those same companies privately worry about a government takeover of their factories.

Consumer tastes and political realities can vary wildly across national borders. The only common denominator here is complexity, a complexity that Ford and GM have learned to navigate.

Brazil: Concrete jungle

Here in São Paulo, luxury condos rise up out of sprawling slums, towers of wealth in a sea of poverty. The fortunate few -- and there are more of them every day -- live lives of enviable elegance in a cosmopolitan metropolis that makes New York seem small. A few blocks away, millions more inhabit the largely lawless favelaswhere a few pieces of plywood, some cardboard boxes and a piece of corrugated tin pass for a home.

Brazil has one of the highest crime rates in the world, but it is also South America's economic powerhouse, the largest country in terms of land and population, its biggest market for vehicles, and the center of the region's auto industry.

Ford projects industry sales of 2.3 million vehicles here this year, up 22 percent from last year.

More than 20 years after a military dictatorship yielded to democracy, Brazil's economy is booming. Once known for four-figure inflation, Brazil's problem today is its strong currency. Interest rates are sky-high and Brazilian exports are no longer a bargain. But Brazil's domestic vehicle market is expanding rapidly, meaning cars and trucks once destined for export can now be sold at home.

"For sure, the economy is growing in Brazil, and people are confident about the future," said Ernesto Geraldi, president of Sonnervig Participações SA, which owns several dealerships in São Paulo. While the per capita GDP is just $8,800, he says it is common for people to spend 30 percent or more of their income on their car. A paulistano with $100 in his pocket who earns at least $750 a month can drive off with a new car today.

Many even finance oil changes here. At his Ford dealership, Geraldi offers customers a special deal: oil and filter both for 39 reais, or $20 a month, for three months.

If that sounds like a lot, try buying a car. Entry level models like the popular Ford Ka start near 24,000 reais -- $12,000 -- but a Ford Fusion that sells for about $23,000 in the United States costs twice that in Brazil, where high taxes make everything expensive except labor. It is hardly surprising that this is a market dominated by small cars.

Argentina: New Old World

Argentina shares a common border with Brazil, but little else. Downtown Buenos Aires could be in Spain or Italy but for the flocks of green parakeets that vie with the pigeons for prime pecking positions. Nearly everyone in Argentina is of European descent, a fact that influences their taste in everything from architecture to automobiles.

Argentina is also a more middle-class country, lacking Brazil's extremes of poverty and wealth. If its capital seems a little threadbare, it is because the country is bouncing back from one of the worst financial crises in its turbulent history -- one in which private bank accounts were frozen by the government and many Argentines saw their life savings evaporate overnight.

The memory of that has made Argentines conservative consumers. Though the country's per capita income is higher than Brazil's, the cars and trucks on Argentina's roads tend to be larger but older. That means margins are higher for automakers in Argentina, but volumes are lower.

"It's a very sophisticated market," said Jorge Di Nucci, public and governmental affairs director for Ford of Argentina. "Argentina is not a small country, but the internal demand is not big enough to absorb all production. However, the quality of our production, together with our competitive cost structure has given Argentina the opportunity to increase exports."

Venezuela: Political struggles

Many of those Argentine exports end up in Venezuela, where an oil boom of Middle Eastern proportions has transformed a once-struggling economy into another South American dynamo.

Flush with cash and able to fill up for about 12 cents a gallon thanks to their newly nationalized oil industry, Venezuelans tend to eschew the smaller vehicles most South American consumers choose in favor of full-size U.S. models like the Ford Explorer and Chevy Impala. That means bigger margins and bigger profits for GM and Ford, both of which have significant assembly operations in the country.

There is, however, one problem with Venezuela: paratrooper-turned-president Hugo Chavez, who recently nationalized the oil industry and makes no secret of his dislike for the United States and its multinationals. Chavez has been tolerant of the North American automakers and promised to keep his troops out of their factories, but as one senior Ford executive said, "He could change his mind when he wakes up tomorrow."

Executives at both companies were reluctant to discuss the political situation in Venezuela on the record, concerned that their comments could inflame the mercurial Chavez. The U.S. automakers have also resisted the temptation to dramatically expand their operations in Venezuela, despite the skyrocketing demand for their products.

"We're being cautious in how much capacity we add," said Dom DiMarco, head of Ford's operations in South America. "We're not adding shifts. We're adding people and upping the line speed."

Chile, Colombia and Ecuador are also growing markets for Ford and GM. As for the other six nations of South America, their new car markets are not significant enough to make a difference.

Designing for differences

Each country in South America has unique tastes and requirements for vehicles.

In Venezuela, the Ford Fiesta is an economy car with a starting price of less than $10,000. In Brazil, the same car is a midmarket offering that sells for more than $17,000.

The extra $7,000 will get you an engine that can run on either gasoline or ethanol. That is crucial, because Brazil is the first country in the world to switch to ethanol as its primary fuel.

Any vehicle sold in South America has to be able to contend with the region's rugged roads. The streets of Buenos Aires may put Detroit to shame, but the same cars and trucks that ply the Autopista, Argentina's version of the Autobahn, must also be able to hold their own in the Amazon.

"As an American -- a North American -- you come down here and you assume it's a uniform grouping of countries," said Hau Thai-Tang, Ford's product development chief in South America. "But you realize the cultures are different, the markets are different. It forces us as product designers to really do a good job of understanding the unique market requirements."

Until a few months ago, Thai-Tang was running the Mustang program in Dearborn.

"The other part of it that's very striking is the contrast between the haves and have-nots," he said. "When you look at the people who are very wealthy, their expectations are not very different than customers in North America or in Europe. But we do have this very fast growing group of middle-class customers who have much more of an emphasis on affordability and reliability. Our challenge is to meet those divergent needs in the best way that we can."

Making it work

The other challenge is doing it profitably.

For Ford, the secret is a regional strategy that makes full use of the region's free-trade zones. Instead of building the same vehicles in each market, Ford has divided its production among the major manufacturing nations.

"We were the first company in South America that decided to complement production rather than duplicate it," said Ford's Alemañy. "It protects us from the sudden economic changes that have happened in the region."

The strategy allows Ford to make money in a variety of economic environments by playing national economies off each other. If the Brazilian real loses value, that lowers the cost of producing vehicles in that country.

As a result, exports from Brazil to Argentina and Venezuela become more profitable for Ford. If the real strengthens, Ford can import more vehicles from those countries into Brazil.

GM is now taking a similar approach, as are most of Ford's competitors. Both companies are also keeping their South American operations as lean and nimble as possible, having been left with huge overcapacity issues when the Brazilian market tanked in the early 1990s.

"Given the volatile markets in the Latin American region, you have to keep your break-even point low," GM's Young said. "Our plants are known to be some of the leanest in the world. We're the benchmark within General Motors."

So, what keeps GM and Ford from doing the same thing in the United States? Young says the answer is simple: Detroit's corporate culture.

"There's no time for bureaucracy here," he said. "We don't get allocated much capital. This forces us to be very creative."

As a result, South America has become a laboratory for some of the best ideas to come out of GM and Ford in decades, and no one is waiting in the wings to shoot them down in the interest of preserving the status quo.

"You get much less management attention and you're really allowed to do the right thing," AutoPacific's Peterson said. "They are allowed to control their own budgets as long as they're profitable, and they are able to respond more quickly to market demand."

He is quick to add that GM and Ford could implement many of the same strategies in the United States, if the management will is there.

Young says that is beginning to happen, and he believes South America can contribute more than just profits to the automakers' core operations in North America.

"This is where we can help the corporation a lot. We need to help them get lean."

You can reach Bryce G. Hoffman at (313) 222-2443 or bhoffman@detnews.com">bhoffman@detnews.com.

Robots assemble Ford's subcompact Ka and its Courier light pickup at the ... (John T. Greilick / The Detroit News)
A Chevy dealership is not far from the poor and largely lawless "favelas" ... (John T. Greilick / The Detroit News)
Argentina gets back on track Workers build Ford Ranger pickups at the ... (John T. Greilick / The Detroit News)
Economy booms in Brazil Customers at a Ford dealership in São Paulo, ... (John T. Greilick / The Detroit News)
The promise of growth "The future of General Motors is in emerging markets, ... (John T. Greilick / The Detroit News)