General Motors CEO in South America Says Investing in Brazil Still Worthwhile

RIO DE JANEIRO, BRAZIL – In the week in which one of the most commented subjects was the end of the production of Ford vehicles in Brazil and the risk of other companies taking the same path, General Motors (GMCO34) CEO for South America, Carlos Zarlenga, who two years ago also threatened to close operations, says that the dimension of the Brazilian market is still attractive for investments in the sector.

“I believe that it is still worth investing in Brazil,” he says. In early January, GM resumed its plan to invest R$10 billion (US$2 billion) over five years, announced in 2019 and which had been suspended since March, at the start of the Covid-19 pandemic.

A critic of the tax system, which increases the cost of national products and exports, the executive points out that reforms need to proceed, particularly taxation. With five plants and sales leader in the country, the group changed its pricing strategy at the height of the crisis and sales in sharp decline, an initiative also embraced by other automakers. “We increased prices following the devaluation of the Real, something we hadn’t done in a long time”, he says. “I think it is a way to return to profitability”.

How did you see Ford’s announcement to close its plants?

I’m not going to comment on a competitor at a time of such difficult decisions.

Given the discussions that have taken place, some of which cast doubt on Brazil’s ability to attract investment, do you believe that the country has a future as a vehicle manufacturer?

The country will have an industry of 2.5 million to 2.8 million cars this year, a 25% increase or more compared to last year, although it is not a good reference for having been a year of great decline. This rebound will not lead us to the 2019 figures yet, but it is strong and there is great potential to continue in the coming years. So, I believe that it is still worth investing in Brazil.

Are the Brazil Cost, bureaucracy, and tax burden a hindrance?

They are long-standing problems and we have to work to change this picture.

It was also mentioned again that the sector depends on subsidies.

When they say that the industry is used to subsidies, I say: 45% to 50% tax over the price of a car, while in the USA it is 12%, what subsidy are they talking about? What they have is an attempt to reach something a little closer to being reasonable, but not like this, because Brazil has rates two to three times higher than the average in other countries.

To say that the industry depends on incentives and that it hasn’t improved its productivity is lack of information. The tax pressure is stifling. So, the adequacy of the fiscal policy, the size of the state, and the tax reform are critical. The government itself speaks of the importance of working a competitiveness agenda for the whole industry and I understand that this will happen, even for exports. In no other country is export taxed. Brazil levies between 15% and 18% tax on each exported car, which hinders our competitiveness abroad.

In 2019, you talked about suspending investments, which would result in closing plants. Is any measure of this kind still needed?

In the past, if we didn’t invest, there wouldn’t be renovation of products and this risk would exist. But we managed to make agreements and announced investments which we have already begun, such as on the production of the new Tracker. The investment scenario that we needed is approved. Now we don’t have plans of closing plants neither in Brazil nor in South America. The Gravataí plant is the most efficient in the world for the segment of small and medium-sized cars. We did our homework on productivity, cost reduction, and efficiency.

This month the company resumed its plan to invest R$10 billion until 2024, which had been suspended since March. Are there any changes in relation to the initial project?

We stopped at the start of the pandemic because we didn’t know what the impact of the drop in sales would be on our cash flow. Now, the market is back operating at reasonable levels and we decided to resume the investment, mainly in new products. The only change is that it will be delayed by one year and will run until 2025.

How was 2020 for GM?

We adopted a strategy that can help us return to profitability. We have resumed the pricing policy based on the cost spreadsheet. We raised prices at a level that had not occurred for a long time, in line with the depreciation of the Real. The industry stopped thinking about gaining market share by sacrificing margins and so there are more opportunities for profitability.

Why were exchange costs not passed on in the past?

Historically, the depreciation of the Real wasn’t passed on. In 2018 and 2019, we ended up having products that were best not to sell, because the material cost was higher than the sale cost. Now we will operate in an environment where the price will be defined rationally, because a predatory policy does not work for anyone.

In the past, we wondered if the depreciation would be long or short term and no one would pass on the whole loss, but the former depreciations were not as strong. In 2020, it was really difficult. There was a moment in which the dollar came close to R$6 – in 2019, it was at R$3,90. In the year, depreciation stood at 30% and the average increase for our cars was 13%.

Is this pass-on enough to recover gains?

There is a universe of problems that remain, such as the Brazil Cost and the tax pressure that I have already mentioned. If it weren’t for this, the production and sales volumes would be much better.

Will the company give up cheaper products to have profitability with more expensive cars?

It won’t be only higher-value products. If the Real depreciates even more and (the dollar) reaches R$8, I will pass it on to the price of the Onix (the cheapest of the brand). It is a variable that I can’t control. If it depreciates, I will need to pass it on. Otherwise, my operation is unsustainable.

Is it possible to know if readjustments have pushed buyers away?

It is not possible to know the impact of the increases and of Covid-19 on the drop in sales, but our market share has remained solid. In the fourth quarter, sales were already close to what they were in 2019, despite much higher prices. Good products work in Brazil. The Tracker, for instance, was ranked 11th in sales in the SUV segment and became number one. Customers will reward you when you launch vehicles they want.

Does GM intend to focus production on higher profitability models, the most expensive ones, as other automakers are doing?

GM is always focused on the most profitable segments. The Tracker has a waiting line because there is more demand than production capacity. The Onix, the best selling car in Brazil, has scale benefits. We are focusing investment on the segments that we believe will grow more and achieve higher yields.

Do you see the recent partnership between Foxconn and Geely as a model for the sector’s future?

The future lies in technological change, electrification, the autonomous car, and even air mobility. This week, GM showed a prototype of a flying car at the CES (Consumer Electronics Show) in the USA. GM will invest US$27 billion and will launch 30 models globally by the end of 2025. The partnerships are interesting.

Is Brazil being prepared for the technological change?

Here these technologies will take longer to come, but, as always, they’ll eventually come, at times faster than expected. The technology cycle occurs in different ways and in different time frames in each country.

Source: Estadão Conteúdo