The New York Times
September 26, 1998

          Brazil's Auto Industry Shaken by World Economic


               TAUBATE, Brazil -- The Volkswagen factory here was built for
               better days. Thanks to aggressive streamlining over the last four
          years, the plant's 2,304 shift workers, 137 robots and miles of machinery
          send another boxy Gol subcompact or Parati station wagon into the world
          every 90 seconds.

          But finding homes for all of those cars is something else again.

          With the international financial crisis that wrecked economies in Asia and
          Russia now buffeting Latin America, the Brazilian car industry is slamming
          on the brakes. Shortly, 20,000 of Volkswagen's workers here and at a
          plant in Sao Bernardo do Campo, about 100 miles away, will take 10
          days of forced vacation.

          There will be unexpected time off soon, too, at the factories of other
          automakers here in the Sao Paulo region: 12 days at Ford Motor; two at
          Mercedes-Benz, a unit of Daimler-Benz, 11 at General Motors.

          Just two years ago, Brazil was seen as the most promising new market for
          car makers, the natural gateway to South America and its more than 300
          million consumers. Automakers including General Motors, Volkswagen,
          Fiat and Honda Motor poured billions of dollars into opening plants here,
          encouraged by forecasts of 4 percent annual growth and by new laws that
          lowered import tariffs for companies with factories in Brazil and made it
          easier for them to take money out of the country.

          Though manufacturers remain excited about the country's long-term
          prospects -- indeed, Toyota Motor just cut the ribbon on a $150 million
          Corolla factory near Taubate -- today's reality is less promising.

          Earlier this month, as the world financial crisis reduced confidence in the
          Brazilian currency and sparked a $1-billion-a-day run on dollar reserves,
          the central bank responded by doubling interest rates to nearly 50 percent
          -- an increase that is striking the automobile and appliance industries
          especially hard. Devaluations in Asian currencies are lowering prices for
          competing Asian-made products by as much as 20 percent, according to
          the auto industry, which expects its export sales to fall 15 percent this
          year from their 1997 levels.

          Lately, fears of an imminent currency collapse have lessened, but a
          recession, brought on by the high interest rates used to maintain currency
          stability, now looks all but inevitable in the year ahead.

          In Brazil, Latin America's largest market, with 160 million people, the end
          of hyperinflation created a growing class of consumers, many of them
          blue-collar workers. The biggest booms were in cars and appliances, with
          demand running so high that steel had to be imported from Argentina to
          keep production rolling here.

          Now those consumers are not only shrinking from the high cost of
          financing large purchases but also fearing their jobs may vanish as the
          downturn in the economy deepens. Economists forecast little or no
          growth this year and next, and unemployment in this region, the industrial
          and financial center of Brazil, is running at 19 percent and expected to
          grow. The Brazilian stock market has bounced wildly throughout the year,
          with huge losses on some days followed by big jumps as investors are
          torn between optimism and pessimism.

          The National Association of Electronic Products Manufacturers reports
          that sales of electronic goods in July, before this month's latest round of
          interest rate increases, had already plunged 30 percent from their levels in
          July 1997. In appliance stores from Manaus to Rio de Janeiro to Rio
          Branco these days, customers look at the rows of television sets,
          refrigerators and stereos but seldom buy.

          "When the government increased interest rates last year, it made
          consumers lose confidence," said Paulo Periquito, vice president for Latin
          America at Whirlpool. "People who lost their jobs and people who were
          afraid of losing their jobs stopped buying." Because sales were so hard hit
          over the last two years, Periquito said that Whirlpool did not expect this
          month's interest rate increase to make much difference.

          The National Association of Car Manufacturers here expects car sales to
          shrink by at least 15 to 20 percent for 1998, compared with sales in
          1997. Auto exports in August dropped 16 percent from levels in August
          1997. Volkswagen's pause in operations will reduce its production by
          15,000 cars, said Antonio Fre, the manufacturing operations chief at the
          Taubate plant. But he said no layoffs were expected.

          "Before we reach the point where we have to let people go, we have a lot
          of other measures we can take," said Thomas Bielefeld, the plant's
          director of human resources.

          But labor representatives are worried. "We're in the middle of a crisis,
          and the government is worried only about re-election," said Paulo Justi,
          who represents employees at the Volkswagen plant here. "As workers
          we have to think not only about today or tomorrow, but about the future,
          and the future to us looks very bleak."

          Miguel Jorge, a company spokesman, said that the highly popular
          four-door Gol (the name means "goal" in Portuguese) was not expected
          to slip in sales, though other models could. Some 15 percent of
          Volkswagen's production goes to exports, principally to Argentina and
          Mexico. The Gol, which is not sold in the United States, is the most
          popular car in Brazil, accounting for one of every four cars sold, Jorge

          Over the last four months, the company has reversed a policy of aiming
          for export business only in large markets, he said. "We used to say: 'St.
          Martin wants to buy 10 Volkswagens? Oh no, 10 cars is too few; it's not
          worth the trouble.' Now, we'll send 10 cars. Five cars we'll send. There is
          no longer any market too small for us."

          The first tremors from the tumult elsewhere in the world reached Brazil
          last fall, as investors who had lost money in Asia and Russia became
          skittish about investing in nearly all emerging markets. Since then, Justi
          said, trends in the auto industry have grown steadily more threatening for
          the Volkswagen workers. Faced with company plans to lay off 10,000
          workers last year, the union agreed to a buyout plan and voluntary
          retirement for more than 4,000.

          Workers also agreed to give the company more flexibility to tackle the
          crisis with three "tools." The first was a bank of hours. Workers would
          stay home to slow production and make up the time when the company
          wanted to step up production. The second was a bank of days that
          functioned the same way. The last was collective vacations.

          "The fourth tool is going to be layoffs," Justi said, and shook his head.

          Though Volkswagen and a number of other automakers signed
          agreements with the ABC Metalworkers Union, which represents auto
          workers, guaranteeing jobs through December, workers are worried
          about their prospects after the New Year.

          "This crisis hasn't even really begun to take its toll," said Joao Antunis, the
          union representative for auto workers at the two Volkswagen plants and
          two others. The layoffs, he predicted, would begin with the automakers,
          then hit parts suppliers and then whip through the suppliers of the
          suppliers. The union leadership is floating a plan to occupy the Via Dutra,
          an important north-south highway that runs through Sao Paulo. Paralyzing
          this commercial artery, they think, will force the government to take their
          plight into account.

          "Obviously, the union is going to work, to pressure for a dialogue with the
          companies and with government so that there won't be layoffs," said ABC
          Metalworkers Union president Luis Marinho in an interview at union
          headquarters in Sao Bernardo do Campo. "But sincerely, I don't believe
          that we're going to be able to avoid layoffs."

          The union represents 80,000 of the 117,000 workers in metal-related
          industries in metropolitan Sao Paulo. According to its analyses, car sales
          are not likely to reach their level of last November for at least another

          "The recession is only going to get worse," said Moises Selerges Jr., a
          33-year-old union member who works at Mercedes-Benz. "We're in the
          boat, water's coming in, and we're sinking."

          At car dealerships, the central bank's increase in interest rates this month
          might as well have been an evil magician's wand, instantly making sales
          disappear. Last month, after the government reduced a tax affecting cars,
          domestic auto sales surged, registering 13 percent over August sales in
          1997. But they fell dramatically with the interest-rate increase this month.

          Outside Rio de Janeiro, at Recreio Vehicles , the biggest Volkswagen
          dealership in Brazil, sales fell 30 percent after interest rates on typical
          two- or three-year car loans rose to 4 to 6 percent a month from 2.5 to
          3.5 percent a month.

          "The market is very unstable, so the interest rate can vary more than once
          in the same day," said Mario Rubino, the manager of the dealership.

          Dulcemar Portilho Baliera, a 28-year-old bank employee, was looking
          over the cars for sale but did not expect to buy. "So far, I haven't had to
          change my standard of living, but I think we're headed for recession," she

          Ms. Baliera said that now, when poverty could lie a paycheck away, was
          not the time to splurge on a car at such high rates. "In a recession, the
          ones who suffer most are the ones who have the least," she said.

          Luciana Silva Vieira, 28, a systems analyst, was more optimistic. She was
          trading in her Chevrolet Corsa, a small hatchback, for a new Gol at an
          interest rate of 5 percent a month, or 60 percent a year. "Maybe I'm
          rushing things, but I was able to get a really good price for my car," she

          Ms. Vieira said she did not expect a currency devaluation, which would
          probably lead to a return of inflation, after the election. "If there's one
          good thing about Fernando Henrique Cardoso, it's that," Ms. Vieira said,
          referring to the Brazilian President.

          The gloomy economic news, she said, had not affected her standard of
          living in the least. "But I'm such a little fish," she said.