It is hard to imagine that it was only a decade ago when Venezuela reached its peak in automotive sales and assembly. It has been in a virtual black hole since then.

In 2007, the country had eight automakers with local assembly plants accounting for nearly 2.4 lakh units capacity with an annual output of 1.6 lakh units. The market was on track to becoming a regional automotive powerhouse alongside Brazil and Argentina and held great potential as an alternative location for assembly operations in South America.

Depressing sales level

Fast forward to 2017 and only one automaker has active operations on temporary furlough while others have suspended activity indefinitely pending a rise in demand. This may continue for a while as sales have remained at depressed levels for two consecutive years now while Venezuela grapples with inflation woes.

Much has occurred over the last decade to precipitate this downward spiral. The Government social programmes were only possible because of oil revenue. When prices were ruling at $100/barrel, money poured in through the State-owned Petroleos de Venezuela and spent on social programmes and food subsidies. However, when oil prices crashed to levels of less than $30 per barrel, this was no longer sustainable.

Since 2003, in order to control capital outflow, Venezuela has operated under official exchange rates controlled by the Central Government as opposed to the free market. These apply to a preset list of essentials such as food and medical supplies, for which the Government sets prices. However, the official rates are generally overvalued, leading many customers to alternative currency trading mediums and, ultimately, to an unofficial functional rate of exchange.

This off-market rate is used by people who are unable to buy goods from Government-supported stores and is often exponentially higher than official rates. As a result, transaction prices for basic goods have increased rather drastically. For example, eggs and powdered milk cost around 450 bolivars and 90 bolivars respectively at the official rate while the off-market rate can range from 1,000 to 1,500 bolivars.

This hyperinflation has had a severe effect on daily life for many Venezuelan citizens and it becomes impossible for them to even contemplate buying a new vehicle. As it relates to the auto industry, the currency constriction has a debilitating effect whereby restricted trading of the weakened bolivar results in limited options.

While automakers are able to pay local wages and domestic suppliers, they cannot convert the bolivars to other currencies for commerce beyond Venezuelan borders. This inadequate access to foreign currency has crippled companies operating in the country with many even considering a complete pullout over the short term.

Exit strategy

Automakers must first consider the various labour laws that could complicate their exit strategy. Yet, regardless of how difficult this may be, the environment has become untenable, and justifying operations is increasingly difficult.

The impact of the currency crisis has had its fallout in other areas too. Today, Venezuela is characterised by rising unemployment, shortage of foods, violent crime, rolling blackouts, shortage of medicines and food.

With the suspension of nearly all light vehicle assembly, the two lakh per annum capacity is sitting idle. So long as inflation is sky high with no signs of correction and reform by the Government, automotive assembly is not likely to resume in a hurry.

Brazil and Argentina will absorb the assembly losses given that they are already grappling with their own challenges in excess capacity. Ultimately, automotive assembly in Venezuela is likely to cease entirely in the short to mid-term as automakers rev up their pullout plans. With the industry now at a standstill, it is only a matter of time before the curtains come down on this beleaguered market.

The writer is Partner, Price Waterhouse

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