Industry Trend Analysis - GM's Exit A Blow To Industry Recovery - JUNE 2017

BMI View: The seizure of General Motors ' Venezuelan plant and the company ' s decision to cease all manufacturing activity in the country will significantly limit the recovery potential of the industry over the long term. The events leading to the announcement also highlight the growing risk of state intervention in the industry.

In line with our long-held views set out as early as 2015 ( see ' Threat Of Manufacturer Exit Now Critical ' , November 9 2015), General Motors Company (GM) became the first original equipment manufacturer in 2017 to announce its exit from manufacturing activities in Venezuela. The exit of GM from Venezuela's autos manufacturing industry will badly damage the future recovery potential of the industry but the decision has not convinced us to revise down our already extremely bearish forecast. The exit also highlights the growing risk of political interference in the industry that is likely to increase over 2017.

GM Exit Can't Make Things Any Worse
Venezuela - Vehicle Production Forecast, Units
f= BMI forecast. Source: OICA, BMI

We are maintaining our forecast of a 41.8% decline in vehicle manufacturing despite GM's announcement. This is due to the fact that GM has not played a meaningful part in auto manufacturing activity since 2015, having not produced a single vehicle in 2016 according to data from the Automotive Chamber of Venezuela (CAVENEZ), so its ceasing of operations is unlikely to hasten any decline in total industry output.

Loss Of GM Is Big Hit To Capacity
Venezuela - Production By Manufacturer (selected years)

The exit does, however, limit the long-term potential for recovery in the Venezuelan autos production industry. In April, GM announced it was ceasing all manufacturing activities in the country and retrenching its entire manufacturing staff, which effectively looks to be a plan to permanently exit from manufacturing activities in the country. This will greatly limit the potential of the industry to produce anywhere near its past high of around 170,000 units in 2011. The reason being that GM had been the country's largest manufacturer until the industry's collapse that began in 2013, producing more than 45% of total vehicle output in 2007 and more than 40% in 2011 ( see chart above).

The events preceding the announcement also highlight the growing risk of excessive political intervention in business operations. GM's announcement was sparked by the seizure of the company's manufacturing subsidiary by local authorities in April, under the pretext of an obscure court ruling made in 2000 when the company was sued by a local dealer. GM said it considered the seizure unlawful and the charges excessive. The scale of the seizure, its timing during social unrest in the country and media reports all suggest that the takeover was politically motivated.

We believe, therefore, that GM is only one example of the potential for political intervention that could be unleashed on any automotive company in the country in 2017 and for as long as the country remains in political and economic crisis. We highlight that all vehicle manufacturers are at risk, given the political gains available to authorities that show they are acting in defence of the grievances of desperate idled workers at plants across the country. Furthermore, given our view that the country will reach a political breaking point this year ( see ' Venezuela Crib Sheet: Breaking Point Approaching ' , April 4), government interventions that impede business operations are likely to increase over the coming months.