GM bets on low-cost vehicles in Brazil in market recovery

The family of vehicles will be responsible for an expected production of 2 million units per year in South America and China.

General Motors is planning to have long-term profitability in South America based on a cost-cutting program conducted during the Brazilian recession and on low-cost vehicles developed for consumers in China that should reach the concessionaires in 2019.

"We are renewing our family of vehicles (in South America), expanding market share and controlling costs, all in preparation for a family of vehicles," GM president Dan Ammann said in a recent interview with Reuters.

The family of vehicles will be responsible for an expected production of 2 million units per year in South America and China that will reduce production costs of the North American automaker.

"This is an unprecedented scale," Ammann said.

GM is betting on South America, where it is already a sales leader, thanks in large part to the Chevrolet Onix and Prisma models. The automaker expects better margins with higher sales and lowers new production cost models, which include SUVs and crossovers that are gaining consumer preference.

The automaker's plan, previously unannounced by GM, is part of the broader strategy focused on profitability rather than trying to compete in all markets. GM left unprofitable operations in Europe and countries like India.

But GM is still betting on Brazil, especially at a time when the domestic market is growing at a double-digit pace, starting a reversal of four consecutive declines in vehicle sales. Carlos Zarlenga, president of GM Mercosul, recalls that during the crisis, executives analyzed each purchase order in excess of USD 10,000.

GM cut its labor force in Brazil by 35 percent, persuaded unions to accept multi-year contracts with inflation-linked readjustments, and reworked its supply chain.

"The goal was to make sure we maximize each payout point," Zarlenga said in a recent interview with Reuters.

Ammann said cost cuts reduced GM's financial equilibrium in Brazil by 40 percent.

After reaching a record sales of 3.8 million units in 2012, licensing in Brazil, the eighth largest automotive market in the world, plummeted 46 percent to 2.05 million in 2016.

The economy began to recover gradually in 2017, and GM's operations in South America made a profit of USD 100 million in 2017, the first since 2013.

"South America can become a great contributor" to GM's global profits, Ammann said.

The US automaker even surpassed Fiat Chrysler Automobiles last year and became the largest seller of vehicles in Brazil for the first time since 2004, according to data from the automakers' association Anfavea.

This week, Zarlenga said during an industry event that sales of the Brazilian automotive industry will reach 2.7 million units by 2018, 2.9 million by 2019 and 4 million by 2027.

"DIFFERENT FOUNDATION"

Last year, GM halted vehicle sales in India, where it had a market share of less than 1 percent, and left parts of Africa to focus on profitable operations.

In 2017, the automaker sold Opel, its European arm, to the French company Peugeot.

In a report to clients on April 20, Morgan Stanley analyst Adam Jonas said GM could "follow similar path" in South America.

"GM's precedent leaving a region with little or no chance of giving positive returns to shareholders has been defined," Jonas wrote.

But leaving other markets has released capital for GM. In August, the company said it plans to invest USD 1.4 billion in three plants in Brazil.

GM was in a better starting position in South America than in markets like India, Ammann said.

"This is a foundation that is different from other markets in the world where we have decided that we do not see a path of success in the long run," Ammann said.

He said South American consumers tend to like models similar to those sold in China, where the automaker is developing a new family of cheaper vehicles with SAIC Motor Corp.

Some of these vehicles will be launched by GM in South America in 2019.

"We can have a level of scale that we could not have in Europe," Ammann said.

Lower production costs mean GM will be able to add safety, entertainment and connectivity features to vehicles that are typically standard on more expensive models, Ammann said.

Guido Vildozo, an analyst at the IHS Markit consulting firm for the Americas, warned that South American consumers have decades more experience in vehicles than the Chinese and therefore have higher expectations.

"There is always a risk in developing a vehicle for China in which the dynamics of driving by the driver is not a high priority, and selling it in a market where this is a priority," said Vildozo. "A lot will depend on how those vehicles will evolve."

(With inputs from Reuters)