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Venezuela Autos Report Q3 2010
Management Report
Published: June 2010
Pages: 52
Tables: For full details, please email keithw@cmsinfo.com
From: GBP 353.33 Buy Now!
Research from: Business Monitor International
Sector: Automotive
The worst may not be over for Venezuela’s crippled auto industry as BMI expects further production cuts this year, on the top of the 17.4% y-o-y in output in 2009. Estimates from the Venezuelan automotive industry association, Cavenez, show that the carmakers continued to operate on reduced capacities in 2010, producing 28% fewer vehicles, to 24,688 units, during Q110, prompting BMI to forecast at least a 15% year-on-year (y-o-y) fall in output this year before any improvement in regulatory and operational issues can result in positive, if any, growth in 2011. In addition to the tough operating environment, another major bottleneck to Venezuela’s production this year comes from the government’s policy towards power rationing which will make any recovery in production very difficult.
The worst may not be over for Venezuela’s crippled auto industry as BMI expects further production cuts this year, on the top of the 17.4% y-o-y in output in 2009. Estimates from the Venezuelan automotive industry association, Cavenez, show that the carmakers continued to operate on reduced capacities in 2010, producing 28% fewer vehicles, to 24,688 units, during Q110, prompting BMI to forecast at least a 15% year-on-year (y-o-y) fall in output this year before any improvement in regulatory and operational issues can result in positive, if any, growth in 2011. In addition to the tough operating environment, another major bottleneck to Venezuela’s production this year comes from the government’s policy towards power rationing which will make any recovery in production very difficult.
Meanwhile, restrictions on vehicle imports, combined with mounting inflation and negative growth has resulted in domestic demand falling almost 50% y-o-y, to 136,500 units, during 2009 and a further 43.6% y-o-y, to 27,784 units, during Q110. In fact, domestic demand seems to have been caught in a vicious circle of low production and hence poor availability of vehicles and further marred by the falling oil incomes. Therefore, we see domestic auto demand contracting a further 17% y-o-y this year before the Venezuelan economy’s return to positive growth rate in 2011 - for the first time since Q109 - will drive demand up nearly 18% y-o-y, to 133,000 units. By the end of 2014, we expect the domestic market to reach just over 206,500 units. Much of this will, however, depend on whether carmakers have been able to significantly improve their production levels in line with the increased demand.
With manufacturing from existing carmakers looking rather shaky, it has become imperative for Venezuela to bring in more auto investments into the country which will also contribute towards reducing its dependence on oil incomes in the longer term. With this view, in April 2010, Venezuela signed 31 bilateral agreements with Russia for future business cooperation in the fields of oil, nuclear power and trade, which include a deal with Russian automaker AvtoVAZ. As part of the deal, AvtoVAZ will supply 2,250 Lada Kalina cars to Venezuela and will also build an assembly plant in the country. BMI believes that the move is equally strategic for AvtoVAZ as it will be looking to use Venezuela as an entry point to the other Latin American markets.
BMI chooses to maintain Venezuela’s last position on our ratings this quarter as we see little chances of improvement in its frail institutional framework in the near future. Although investments from new entrants will indeed be encouraging, BMI remains concerned if that will help bring back some of its lost credibility. More worrying is the fact that some of the existing carmakers are tentatively looking to withdraw from the market which poses serious downside risks to its rating.
Meanwhile, restrictions on vehicle imports, combined with mounting inflation and negative growth has resulted in domestic demand falling almost 50% y-o-y, to 136,500 units, during 2009 and a further 43.6% y-o-y, to 27,784 units, during Q110. In fact, domestic demand seems to have been caught in a vicious circle of low production and hence poor availability of vehicles and further marred by the falling oil incomes. Therefore, we see domestic auto demand contracting a further 17% y-o-y this year before the Venezuelan economy’s return to positive growth rate in 2011 - for the first time since Q109 - will drive demand up nearly 18% y-o-y, to 133,000 units. By the end of 2014, we expect the domestic market to reach just over 206,500 units. Much of this will, however, depend on whether carmakers have been able to significantly improve their production levels in line with the increased demand.
With manufacturing from existing carmakers looking rather shaky, it has become imperative for Venezuela to bring in more auto investments into the country which will also contribute towards reducing its dependence on oil incomes in the longer term. With this view, in April 2010, Venezuela signed 31 bilateral agreements with Russia for future business cooperation in the fields of oil, nuclear power and trade, which include a deal with Russian automaker AvtoVAZ. As part of the deal, AvtoVAZ will supply 2,250 Lada Kalina cars to Venezuela and will also build an assembly plant in the country. BMI believes that the move is equally strategic for AvtoVAZ as it will be looking to use Venezuela as an entry point to the other Latin American markets.
BMI chooses to maintain Venezuela’s last position on our ratings this quarter as we see little chances of improvement in its frail institutional framework in the near future. Although investments from new entrants will indeed be encouraging, BMI remains concerned if that will help bring back some of its lost credibility. More worrying is the fact that some of the existing carmakers are tentatively looking to withdraw from the market which poses serious downside risks to its rating.