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GM cutting Brazil profit margins, prices as competition grows

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GM cutting Brazil profit margins, prices as competition grows

September 20, 2010 - 2:22 pm ET

SAO PAULO, Brazil (Bloomberg) -- General Motors Co. is reducing profit margins and prices in Brazil as competition grows in the world’s fourth-largest auto market, said Jaime Ardila, who runs company’s Latin American unit.

“Margins in this industry have come down,” Ardila said in an interview Friday in Sao Caetano do Sul, Brazil. “Everybody for the time being is happy giving priority to volume growth over profitability.”

Carmakers are investing in Brazil to enter the world’s second-fastest-growing auto market. Brazil had record new vehicle sales in March of 337,381 units, an increase of 29 percent from the same month a year ago. Sales also increased 21 percent to 312,812 in August, according to the country’s dealer federation.

Chery Automobile Co., a Chinese automaker, signed an agreement with Sao Paulo state government last week to invest as much as $400 million in a plant to produce 150,000 cars annually in Jacarei, Brazil. Tata Motors Ltd., an Indian manufacturer, is considering building a plant in Brazil or Mexico, the O Estado de S. Paulo newspaper reported last week.

GM pledged to invest more than 5 billion reais ($2.9 billion) in Brazil through 2012. In August, the company had 20.5 percent of the country’s auto market, second to Volkswagen with 22.5 percent. Ardila forecast earlier this year that sales in Brazil will grow by 68 percent to 1 million vehicles by 2014.

Competition from other companies meant prices didn’t rise when a government tax cut on industrial products aimed at boosting domestic demand ended in March.

Real appreciation

“We all expected it to go back, but it didn’t happen,” he said. “The difference is being absorbed by the companies. That is a factor of competition.”

Latin America’s biggest economy will grow 7.3 percent this year, central bank President Henrique Meirelles said in a Sept. 14 speech. The real rose to a nine-month high last week and Finance Minister Guido Mantega pledged the government could use “unlimited resources” from its sovereign wealth fund to step up dollar purchases to avoid appreciation.

GM’s international operations, which exclude North America and Europe, reported net revenue of $16.7 billion, about 26 percent of the company’s total sales worldwide through the first six months of the year. The company created in June a regional organization for South America that is based in Sao Paulo and headed by Ardila. GM South America has about 29,000 employees.

Labor costs

Brazil is among GM’s “medium-cost” countries for labor costs, which are between $15 and $30 per hour, according to a regulatory filing. That puts the country between lower-cost locations such as China and more costly areas such as the U.S.

The real’s strength may also make it hard for companies to be competitive in Brazil. The real is “strong on capital inflows,” Ardila said. “I expect the real to be one of the strongest currencies in the world.”

Competitors such as Tata will mean a better “playing field” in the country once they have plants in the region, he added.

GM is planning an initial public offering in the U.S. to begin repaying government stakes that were acquired as part of its $50 billion bailout in 2009. The company said in a filing related to the offering that it expects “strong sales in China and Brazil” to offset a “challenging sales environment resulting from the global economic slowdown” for the remainder of 2010.

Read more: http://www.autonews.com/apps/pbcs.dll/article?AID=/20100920/OEM01/100929991/1424#ixzz107a7ix9g

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