The eight-hundred-and-seventeen-car-per-month economy

/ April 4, 2014
As Yordano would say, "no queda nada"

As Yordano would say, “no queda nada”

Our friends over at the Latin American Herald Tribune have an alarming article on Venezuela’s squalid car market. GM has written down $400 million from its books, courtesy of Maduro’s “non-devaluation,” which wiped out their profits for the entire sub-continent … and then some. Ford also saw their profits in the region wiped out by the government’s … well, let’s not sugar-coat this – it’s theft.

The money quote,

“Ford is only operating 3 days a week and Toyota and Chrysler have already suspended Venezuela operations… In February, Venezuela — a country of 28 million — had only 817 new car sales, according to Cavenez, the Venezuelan Automotive Association. 811 of those cars were produced in Venezuela, and the other 6 were imports.”

Which only makes me wonder – why are GM and Ford still in the country? If they continue losing money there, at some point they will have to decide whether to stay or not.

The only explanation is that they expect change. Whatever form that change takes is a mystery.

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41 thoughts on “The eight-hundred-and-seventeen-car-per-month economy”

  1. Theft? Really?

    C’mon, it’s not theft. It’s a deliriously risky bet that went predictably wrong.

    Car execs are sophisticated players. They knew all along the risks they were taking. They saw they had a chance at extraordinary profits if they managed to stay in a very high-margin, low competition market and IF the government allowed them to repatriate their profits.

    But nobody sucks their thumbs here. They knew there was a very live chance that the bet on that second “if” would go sour. They sized up the risks and the opportunities, rolled the dice, and they came up snake-eyes.

    But nobody forced them to play. Renault saw the same odds and walked away from the croupier.

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    • Using that argument, what the government did to the airlines was also not theft. To me, it obviously is – you play by the rules the government sets for you, they change those rules unilaterally, and that amounts to theft – they are taking away the profits you earned under certain expectations. The fact that they do it to the “greedy” shareholders of GM or Ford Motor Company doesn’t change the essential nature of the act.

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      • OK, there’s something to that. But say it had gone the other way. Say the government had allowed them to remit profits at Bs.6.30:$. This probably would’ve earned them profit margins in the absolute friggin’ stratosphere, the kind unheard of in any other country operation they run. Would you have called that “theft from the Venezuelan people”? In some way, wasn’t that their goal?

        I guess what I’m getting at is that given the scale of distortions that pervade EVERY part of the economy, using moral language to speak about the winners’ wins and the losers’ losses is just a bit forced. Isn’t the driver who fills his tank for a few US cents stealing from PDVSA? Isn’t the domestic worker who remits her wages to her family back in Colombia at Bs.6.30:$ “stealing”? They’re getting something of value at *way* below what its price would be in anything like normal circumstances.

        What’s interesting to me is the way the Control Raj just scrambles our intuition about what’s theft and what’s kosher, turning ethical conduct illegal and legal conduct unethical. I don’t know how to unscramble those eggs once that omelette is made, you know what I mean?

        ¡Hoy resulta que es lo mismo
        ser derecho que traidor!…
        ¡Ignorante, sabio o chorro,
        generoso o estafador!
        ¡Todo es igual!
        ¡Nada es mejor!
        ¡Lo mismo un burro
        que un gran profesor!
        No hay aplazaos
        ni escalafón,
        los inmorales
        nos han igualao.

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        • Hey, you know what’s a nifty solution to this? How about we set maximum earnings for companies?

          Look Quico, the only one who should say whether or not their profits in Venezuela are/were too high or not should be the market. Neither you, nor me, nor the government has any right in determining that they earned way too much before, so now we’re going to decide that they should lose money. That’s just too slippery a slope for me.

          Let the libertarian who lives inside of you free!

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        • “Isn’t the driver who fills his tank for a few US cents stealing from PDVSA? Isn’t the domestic worker who remits her wages to her family back in Colombia at Bs.6.30:$ “stealing”?”

          Of course not! They’re playing by the rules! Using your logic, then the folks who are stranded overseas because Cadivi was suspended or whatever have nothing to complain about.

          Besides, these are poor analogies. What we’re seeing is akin to filling up your gas tank thinking you will have to pay 3 BsF, and then having the government charge you 10.000 BsF just to exit the gas station, or else! It’s theft.

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        • Those damn workers at Ford (181,000) and GM (219,000) are making too much money! This will teach them to come to Venezuela and try to make more than 30%!!
          CALSTERS (California State Teachers Retirement System) should be ashamed of themselves for trying to earn dividends from companies working in Venezuela. How dare them to have invested $233,260,000.00
          (GM-$73,100,000.00) (Ford-$160,160,000.00) in shares of two companies that are “chupando la sangre de los Venezolanos”!!

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    • Suppose you go to a casino and you know that once you leave, there might be some choros out there waiting to steal your earnings. You play anyway, earn some money, go outside, and sure enough, the choros steal from you. That’s not theft either, right? Because you knew going in that you could get robbed…

      That, my friend, is what I call situational ethics.

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      • Say you read in the newspapers that the choros who used to loiter outside the casino have taken it over and are now running the craps tables, and you still decide to go play…

        ;)

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          • Here’s my two cents on the debate:

            There’s something to be said to the incentives in play at the moment those earnings were reported. I remember that back before 2010, when the permuta market was still legal and corporations did have the option of repatriating those dividends at the permuta rate, many of their tax and treasury departments refused to do for a number of reasons:

            1) SEC reports would suffer retroactively, therefore having a negative effect on share price
            2) Bonuses would suffer, since, lets face it, local and regional execs get their greenback bonuses based on the quarterly report the issue. So, it great to report revenues at 6 – 10 times the real figure, and bonuses would still be 6 – 10 times what they would have been otherwise. They were just using the perverse incentives the system gave them to work with.
            3) Lets face it, for assembly plants and companies selling hardware into the market, the real profit came in at the transfer price which was set beforehand (i.e. at the time of sale of the assembly pieces or the actual hardware sold). Dividends, which they knew they had no real hope of repatriating because it hadn’t been allowed by the system, were just the icing on the cake. Yes, they were hedging a bet that at some point the value of those revenues would be on par with reported sales, but as I said at the beginning, there were other incentives at play.
            4) For airlines, who sell services provided by employees paid in foreign currency, pay for gas in foreign currency, pay maintenance of airplanes in foreign currency and pay other airlines for connecting flights contracted in Venezuela through their alliances, its a whole different ball game.

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    • Francisco,

      That is one way to look at it, but if a woman walks down a dark ally at night and gets raped, do you excuse the rapist by citing the woman’s lack of reasonable caution?

      Secondly, very large multinational companies tend to look at the long-term, and they are loathe to abandon any market they currently occupy.

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  3. Please point to where I can find an 82 Malibu for 200,000. They were going for that about a year ago.

    BTW, IMHO Quico is right: a very risky bet that finally went wrong. The same as with airlines.

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  4. One thing that has always surprised me when watching videos from Venezuela is how good the Venezuelan fleet is compared to other Latin American countries, their cars are not very different from what you see people driving in Miami, and better than many European countries’ fleets. Many imported SUVs all over the place. Well, it was expected that the Chavistas would find a way to destroy that too. Chavisyas have some sort of “opposite Midas touch”, anything they touch turns to shit.

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  5. But we still have “PATRIA”, right? FT is completly right, is all about risk. One think I disagree with is the assumption that “cars executive are sophisticated players”. Actually they are not…For a token of my thoughts simply watch GM’s ignition switch debacle…That doesn’t show sophistication or even professionalism. BTW, why GM & Ford still in Venezuela? It might simply show poor judgement or calculated risk. You be the judge.

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  6. I call it stealing. It is no different than the Venezuela citizen that was traveling with their government debit card that was issued at an exchange rate of 6.3. The government changed the exchange rate for travelers to 11.3 and cut back the number of available dollars for trips to Florida. Does the change only apply to future travelers? Hell no! The available balance for Venezuelans traveling out of the country is cut by 1/2 or 2/3 and essentially leaves them begging from family and friends for a place to stay. Gisela and I were happy to help friends in need, but it’s just plain wrong.

    A contract is a contract. The government arbitrarily (no negotiation with the lien holder) deciding to pay at different rate that what was contracted is stealing. If you can’t meet your contractual obligation, declare bankruptcy and enter negotiations…….

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    • A contract is a contract. The government arbitrarily (no negotiation with the lien holder) deciding to pay at different rate that what was contracted is stealing.

      OK, this is something I’m really not clear on. Is an Autorización de Adquisición de Divisas a legal contract?! Does it bind the government to execute a given trade at a given price? I don’t know for a fact that that’s true.

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      • That´s called country risk. Everybody, including Ford, GM et.al. were well aware of this. In the meantime, local CFOs were all happy to report to their bosses abroad (who understand squat about Cadivi and the like), that they were making huge profits, and so collected their year-end bonuses accordingly. Time to face reality.

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        • Certainly yes. These “supposed” paper profits are recorded at the official exchange rate of BsF 6.30 per one US$. Hence, they look very substantial and completely exaggerated, but the reality is…they are non-existing and a GHOST. Nevertheless, the true profits for this type of “risky” operations are not in the foreign country, but in the CKD exports to their Venezuelan affiliates, with hefty margins.

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      • In a country with impartial rule of law, it should bind the Govt., except, perhaps, in cases of “force majeure”, which in Venezuela might be translated as “Farce Majeure”.

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      • You have to consider how long they were forced to hold on to the bolivars. Have they been allowed to buy dollars on a daily basis?

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      • I think it’s an enforceable administrative act. Regulations establish a procedure to legally obtain dollars and sets a time to do so. In theory (and only in theory) you should be able to enforce an AAD or ALD in an Administrative Court if the government refuses to do so (Actually I’ve seen one case of a Company who won a case against CADIVI after a number of years but I forgot the particulars of the case).

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  7. OK, let us make a reality check: GM is choosing (wisely) to stop using the 6.3 rate in their accounting, replacing it with the very-slightly-more-realistic 10.7 one. I fail to see who is robbing them. They are just (like everyone of us who live or work in Venezuela) facing the fact that the Bolivar went down, and that its assets are worth less dollars. Tragic, but hardly a theft, unless you wanna wax philosophical about how the government robbed us all. Which, of course, is ultimately the truth.

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    • When the government says you will be able to repatriate profits at 6.3, and you go ahead and work hard to earn said profits, and then the government forces you to freeze repatriation, and then says “OK, you repatriate, but I’m keeping this chunk”… well, that’s theft.

      Imagine if the government told you – work as hard as you want, but at the end of the year, when your taxes are due, you come to Seniat and I will tell you what tax rate you can use.

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  9. Its not theft but something different , In an ordinary country if the govt has a rule that your local currency is exchangeable for foreign currency at a certain rate , then a legitimate expectation is created that the rule will be honoured . thus if you accumulate profits from the sale of cars in local currency then you have a legitimate expectation that you will be able to exchange those profits at that rate . If after vouching that the rate would not be changed the govt suddenly changes the rate and meantime has failed to honour the carmakers requests to exchange its profits denominated in local currency for foreign currency at the officially established rate then you could have a claim against the govt either because it has failed to meet such request ( if validly made and approved ) or (more chancy) because the expectation was not sattisfied .

    The basic principle is that the govt is free to change the rules but that to the extent reliance on those rules created certain legitimate expectations for third parties then these may request the govt to indemnify them for changing those rules . Its probably not as cut and dried as explained here but broadly the govt is responsible for the losses it causes whenever it changes the rules of the game even where it it is allowed to change those rules .

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    • You explained this much better than my rant! My point is that the government receives a request (maybe this is not the right word) to change bolivers for dollars when the exchange rate is clearly defined and frozen. Isn’t the government legally and morally obligated to provide dollars in a timely fashion and at the rate that is in place at the time the request is submitted?

      The consequences of not doing so can be devastating….The airline Dutch Antilles Express no longer exists and Insel is on the brink of default in Curacao. Both are small carriers and their financial issues in large part can be attributed to VZ not exchanging bolivars to dollars in a timely fashion.

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  10. I guess I am too simple minded to understand. So tell me again why we should set earnings limit for companies or corporations? You can’t protect the pendejo from doing pendejadas. Let tell you a story…..I was working on the design for a multi-level Retail Mall in the “imperio” and someone decided it was our responsibility to ensure a pendejo could not jump over the guardrailing. hmmmmm I sat there in the meeting for a good 5 minutes thinking….”I guess this is where our humanity is headed” Its now someone’s else’s job to ensure the pendejos don’t hurt themselves….. No my friends from CC, Mother Nature does not work that way….nor should we. Those US companies doing business in VZ make a calculated decision and determined the risk is bearable. If they make a win fall then they make a win fall….if they lose a boat load of investor monies then they lose a boatload of investor monies. No game is fair and the current VZ government shouldn’t be expected to follow “the rules”. Their volativity is a component of the risk equation, no? So I am of the opinion that the market must be allowed to balance out the equation. Sooner or later everything balances out just as Mother Nature seeks out balance. The concept of fair just doesnt exist.

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  11. Let’s see. A Ford Fiesta costs 19750.50 USD in Colombia http://www.ford.com.co/carros/fiesta. The same car has been on sale on Venezuela since last year for 406.839 Bs. http://www.ford.com.ve/carros-y-camionetas/fiesta, that’s 64.577,61 USDat the 6,3 rate and 37.670,27 USD at the Sicad 1 exchange rate.(That without counting the aprox. 100 G extras by mandatory accessories ) Either we have the world’s most expensive Ford Fiestas or the Company has been taking into consideration the risk of not being paid at 6,3. I don’t blame this on FORD, but it just shows the crazy distortions created by FX controls

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  12. Item 1: Expecting to repatriate your profits at 6.30 is not an ethical dilema. Those were the rules agreed upon. Cadivi’s 6.30 exchange rate produces outrageous earnings? That’s not the automaker’s fault, it’s the government’s fault for allowing such an overvalued BsF during so much time.

    Item 2: The driver filling up his car for two bucks IS NOT STEALING. It’s PDVSA, or the government, or whatever, who are stealing from the country by giving gasoline away basically for free. If you’re made manager of a grocery store and you start throwing food and stuff out the windows and yelling “IT’S FREE!! EVERYTHING IS FREE!! LOVE ME, LOVE MEEEE!!”, you’d be making an awful mess on the street, AND you’d be stealing from your employer.

    Item 3: Regarding that comment at the top (Quico?) about the automakers, airlines, etc playing a betting game that they lost, I don’t agree at all. Imagine that you get invited to a party and you ask what you can bring over, and the host says “nothing! Just come here and enjoy!”. When you get to the party it’s indeed one heck of a party, with 21-year-old scotch, gourmet food, exquisite desserts, the best music, etc. You’re like WOW, enjoying the crazy-good party. And then the party abruptly ends with a loud screech through the stereo speakers. When you want to go home, the host stands at the door, points a gun at you and takes your car, your watch, and your iPhone away, and those of the other guests, in order to pay for the whole deal.

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