In Brazil, Whiplash on Assembly Lines

World Financial Crisis Costs Booming Auto Industry Its Middle-Class Customers

SAO CAETANO, Brazil -- The car builders wistfully recall those heady days.

The General Motors factory plowed ahead at full tilt. Stamped, welded and painted, new Chevrolets flew off the line in greater numbers each month. The company added a third shift in March: 1,600 new employees. The union cheered. Assembly-line painter Jair Nery de Andrade used his 11 percent employee discount in February to buy himself a new Chevrolet Corsa Classic.

"I wouldn't buy it now," he said. "I wouldn't feel secure about making that kind of commitment."

The situation over the past couple of months at the GM of Brazil plant in Sao Caetano do Sul, as in many parts of Brazil's economy, was not a crash, or a collapse, or even a crisis, but rather a collective whiplash. A sharp lowering of expectations. A sobering up. These past few years have been boom times for Brazil, and the auto industry was no exception. Newfound prosperity driven by high commodity prices has fostered an expanding middle class -- a group more than willing to seize easy credit terms and buy up automobiles by the thousands.

That changed in a flash when the shock waves of the U.S. financial crisis radiated worldwide. As credit dried up in early October and it became more expensive to secure car loans, Brazil's stock market plunged and its currency rapidly lost value. Automobile sales nationwide fell 11 percent from September to October, the first monthly decline for the industry in five years, according to the Brazilian automakers association, Anfavea.

"It happened practically all at once," said Ivan Favarin, the sales manager at a GM dealership in a middle-class neighborhood of Sao Paulo, where sales dropped more than 30 percent in October. "It was a mix of the decline in credit but also, I think, a psychological effect: People didn't want to commit themselves without first seeing if there were any measures coming to combat this situation."

The government stepped in with a $3.5 billion aid package for the auto industry by funding banks to boost the amount of credit available for car loans. The Brazilian auto industry's ability to weather the downturn will test the assertions of those who say the country's burgeoning and diversifying economy is better prepared to fend off a U.S.-generated crisis than in earlier years.

In neighboring Argentina, the auto sector, which was one of the primary industries that helped the nation rebound from its 2001 financial crisis, has suffered layoffs, reductions in hours and compulsory vacations. Production was down 7.7 percent in October compared with the same month last year. Thousands of Argentine auto workers marched in downtown Buenos Aires last month to protest reduced salaries and job cuts. Unlike Brazil, where most cars produced are sold internally, 60 percent of auto production in Argentina is exported.

"So when there is a lack of international demand, we have a problem," said Mariano Lamothe, an economist at Abeceb.com, a Buenos Aires consulting firm. "The falling demand from Brazil is what is hitting Argentine carmakers the hardest."

In Brazil in October, interest rates rose from about 1.2 percent a month to more than 2 percent. Before the crisis, people were buying cars fully financed, with monthly payments that consumed half their income. Then the rules changed. Now customers' income must be three times the monthly payment or they face a required 50 percent cash down payment, Favarin said.

"The banks are now being much more strict about the criteria for approval for the loan, and if people can't meet those criteria, they require" a down payment, he said.

With falling sales, a downturn in production followed. At two General Motors plants outside Sao Paulo, in Sao Caetano do Sul and Sao Jose dos Campos, the number of automobiles produced rose steadily this year to a high of 42,783 in July, before dropping to 29,240 in October. As have several auto companies in Brazil, GM has instituted mandatory vacations during which the entire plant stops working to slow output.