GM bets on Brazil with millions of cheap cars developed for China

‘Unprecedented’ scale, but will Brazilians have higher expectations?

SAO PAULO, Brazil — General Motors is planning for long-term profitability in South America built on the back of draconian cost cutting during Brazil's recession and the same low-cost vehicles it is developing for Chinese consumers, which are due to hit dealerships in 2019.

"We have been refreshing the vehicle family (in South America), building up market share and getting the cost point right, all in preparation for one vehicle family," GM President Dan Ammann told Reuters in a recent interview.

That "one family" will consist of an expected 2 million units made annually for South America and China that will lower production costs.

"That is an unprecedented level of scale," Ammann said.

GM is doubling down in South America, where it is already the top-selling automaker, thanks largely to two Chevrolet models, the subcompact Onix and the Prisma sedan. It expects better margins from rising sales and new lower-cost production models, including SUVs and crossovers increasingly favored by consumers.

The automaker's plan, which GM has not previously disclosed, is part of an overarching strategy focused on profitability instead of trying to compete in every market.

The U.S. automaker has pulled out of unprofitable operations in Europe and countries such as India.

But GM is still betting on Brazil, a country just starting to come out of its deepest recession in decades. Carlos Zarlenga, head of the automaker's operations in Brazil and Argentina, recalls that during the downturn executives scrutinized every purchase request over $10,000.

GM cut its Brazilian labor force 35 percent, persuaded unions to agree to multi-year contracts with wages pegged to inflation, reworked its supply chain and ditched a slick Sao Paulo building for offices at a nearly 90-year-old auto plant.

"The whole purpose was to make sure we maximized every inch of expenditure," Zarlenga told Reuters in a recent interview.

Ammann says the cost reductions lowered GM's breakeven point in Brazil by 40 percent.

After hitting a record of 3.80 million units in 2012, auto sales in Brazil — the world's eighth largest market, accounting for a majority of South American sales — plunged 46 percent to 2.05 million in 2016.

The economy began to gradually rebound in 2017, lifting auto sales by 9 percent. GM's South American operations posted a profit of $100 million in 2017, the first since 2013.

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

GM also passed Fiat Chrysler Automobiles NV last year to become Brazil's top-selling automaker for the first time since 2004, according to data from industry group Anfavea.

Brazil auto sales rose 16 percent in the first quarter from a year earlier, Anfavea reported. GM expects 2018 industry sales will hit 2.4 million units.

Rival Toyota has also invested in new plants in Brazil and is working to become more competitive in South America.

In January, U.S. automaker Ford hinted at possible significant changes for its money-losing South American business.

Last year, GM halted car sales in India — where it had less than one percent market share — and pulled out of parts of Africa to focus on profitable operations.

In 2017 it sold Opel, its struggling European arm, to France's Peugeot SA.

In an April 20 client note, Morgan Stanley analyst Adam Jonas said GM could "follow a similar path" in South America.

"The precedent of GM exiting a region with little or no chance to generate positive returns for shareholders has been set," Jonas wrote.

But exiting other markets has freed up capital for GM. In August, it said it plans to invest $1.4 billion at three plants in Brazil.

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

"That's a foundation that's different than some of the other markets in the world where we've decided we don't see a path to long-term success," Ammann said.

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

Some of those vehicles will join GM's South American lineup in 2019.

"We can get a level of scale that we couldn't in Europe," said Ammann.

Lower production costs mean GM can add features — safety, infotainment and connectivity — normally standard in more expensive models, he added.

Guido Vildozo, IHS Markit's senior manager for the Americas, cautioned that South American drivers have decades more driving experience than Chinese consumers and higher expectations.

"There is always a risk when you develop a vehicle for China where driving dynamics are not such a high priority and sell it in a market where they are priority," Vildozo said. "A lot will depend on how these vehicles evolve."

Reporting by Nick Carey and Brad Haynes

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