Industry Trend Analysis - GM Reinforcing Its Latin American Production Base - JAN 2018

BMI View: The recovering consumer market in both Brazil and Argentina will drive up the demand for passenger vehicle s , thereby supporting GM's investment to increase vehicle production in Argentina.

In October 2017, General Motors Company (GM) announced that it will invest USD500mn (USD300mn stemming from GM and a further USD200mn from its supplier network) to upgrade its Alvear plant in Argentina's Santa Fe province, to be capable of producing the new Chevrolet Cruze and increase its production capacity by 2019. However, we are holding off on making any changes to our passenger vehicle production forecasts until an official production increase is known. The Alvear plant services Brazil and Argentina, and the upgrades will accommodate the significant growth in these markets ( see ' Passenger Car Sales Outlook Brightening Further ' , October 23 ; ' Bullish Consumer View Playing Out In Car Sales ' , May 17).

We forecast passenger vehicle sales in Brazil and Argentina to grow 17.2% and 8.1% respectively in 2018 and continue to show strong performance through to 2021 with annual average growth of 8.8% and 8.5% respectively. Furthermore, we expect Brazil and Argentina passenger vehicle sales volume to reach highs of 2,593,549 units and 886,075 units respectively by 2021, thereby highlighting the high demand for passenger vehicles in these markets ( see chart below).

High Reward Potential Supporting Investment Decision
Argentina & Brazil - Passenger Vehicle Sales
f= BMI forecast. Source: National Sources, BMI

Brazil To Lead The Demand For Vehicles

Due to the fact that 80% of the vehicles produced at the Alvear plant is exported to Brazil, we believe that the growing demand for passenger vehicles in Brazil due to improvements in key macroeconomic indicators of private consumption, namely growth in employment, rising real wages and falling borrowing costs, will provide the largest reward opportunity to GM, increasing its vehicle production in Argentina.

Consumer Market Improving
Brazil - Real GDP, Interest Rate & Private Final Consumption
f = BMI forecast. Source: National sources, BMI

This view is predicated on our belief that Brazilian households look set to benefit the most from the forecasted cyclical recovery in Brazilian economic activity during the 2018 to 2021 period. Our Country Risk team forecasts real GDP growth to accelerate to 1.7% in 2018 and continue to average annual growth of 1.8% over our 2018-2021 forecast period, up from an estimated 0.4% in 2017. This uptick will be driven mostly by a recovery in household private consumption, which will rise by 1.5% in 2018 and average annual growth of 2.5% over our forecast period ( see 'Political Uncertainty Will Constrain Recovery', September 29).

Furthermore we expect interest rates to drop to 7.5% in 2017, down from 13.7% in 2016, and continue to average 8.0% over our 2018-2021 forecast period. This decrease in the cost of borrowing will allow for more people to afford new vehicles as consumers who want to take on debt will be able to do so at a lower rate, underpinning growth in passenger vehicle sales over our forecast period.

Bullish Consumer View To Benefit PV
Argentina - Fixed Capital Formation & Private Final Consumption
f = BMI forecast. Source: INDEC, BMI

Argentina Consumer Market Looking Up

We believe that Argentina's new vehicle market has begun its strong and multi-year recovery based on improving consumer spending, increased investment inflows and banking reforms, and these are also the fundamentals that will sustain growth in the future. This view on a recovery in consumer demand for new vehicles for the years 2018-2021 is based on our Country Risk team's view of inflows of investment into Argentina creating more jobs, improving job security and bidding up wages from 2017 onwards ( see 'Recovery Will Take Hold In Q117', March 3 2017). Our Country Risk team forecasts that private final consumption and fixed capital formation will grow at an annual average rate of 3.3% and 6.5% respectively.