Car production is declining and layoffs are increasing. What are the prospects?

You are a company in the automotive supply industry in Brazil. What do you think when you read this headline?

Slowly!

Let's first take a look at the basic data of total production (in million units):

2011 3.144

2013 3.490

2016 2.080

2019 2.804

2020 1.160 (January to August 2020)

At 210,900 units, vehicle production in August was 22% down on the same month of the previous year. This year, car manufacturers produced 1.1 million cars, trucks and buses, 900,000 fewer than in the same period in 2019.

With this high level of unused capacity, manufacturers are expanding their workforce reduction programs. It must be assumed that these programs will intensify in the coming weeks, as some major measures have not yet been published at this time and are only circulating as rumors in the industry.

According to the National Association of Automobile Manufacturers (Anfavea), a kind of "point of no return" has been reached and it is inevitable to make significant and permanent job cuts.

The sector has already cut 4,100 jobs since March 2020 in the wake of the pandemic. In the eight months of this year, sales fell by 35% to 1.16 million units and exports by 41.3% to 177,000 units.

The massive slump in exports is very surprising at first glance, as the Real had devalued massively. However, the devaluation had not translated into significant price reductions, as the share of imported components gained disproportionately in importance in product calculation and prices had to be adjusted by up to 10%. This price adjustment is still not sufficient, so that now entire model lines are threatened to be completely discontinued.

No help is expected from the Brazilian Central Bank either, since massive interest rate cuts are putting the national currency under considerable further devaluation pressure.

Next week the outcome of the negotiations between Volkswagen do Brasil and the unions of the four national factories was to be announced. The group's goal is to achieve a reduction of 35% of the workforce, which is about 5,000 employees.

The company's production will be reduced by 44% in 2019, which corresponds to a production of just 186,000 vehicles. The decrease is at the same level for the major European and North American manufacturers. I have no robust information of my own about the situation of the Asian manufacturers from Japan, Korea and China.

Thus, VW do Brasil operates with about 43% of the currently installed total capacity. 

Is this situation temporary or what should an entrepreneur in the country, active in the automotive industry, expect? 

Only a few months ago, great hope was always expressed publicly, but in smaller circles the expectation was already low. Now one can see that hope and expectation seem to be balanced: 

VW do Brasil is probably the first to put it in public - no significant recovery is expected for the next five years.

This will have a massive impact on the entire value chain of the industrial sector.

It can be observed that many small suppliers installed in the country, be they Brazilian or foreign companies, have so far not reacted decisively to this situation. This applies strongly to companies from Northern Europe.

Especially German-speaking companies had not really actively managed their Brazilian subsidiaries since the financial crisis 2008/09 and mostly looked to China and/or Eastern Europe. Brazil "went along with this". Low interest rates make it easy for the parent companies to obtain easily needed credit lines from their house banks to ensure monthly liquidity in Brazil. 

We have carried out numerous reorganization projects in this sector with iManagementBrazil since 2014. In many cases, family businesses from the DACH region really shied away from taking action. Therefore, we had to create corresponding "going concern" reports on a regular basis in order to provide the house banks of the companies in DACH with the necessary argumentation to generously extend credit lines. Restructuring would have been necessary.

Today, so-called zombie companies are being discussed. But they did not come into being today. 

Whether it is too late, everyone has to judge for himself. But there is really not much room for maneuver anymore.