Bring on 2003: automakers roll out new vehicles, but 2002 inventory stockpiles on dealer lots everywhere except Mexico.

Shiny new 2003-model cars and trucks have arrived in South America--and none too soon. Dealers in Argentina, Brazil and Venezuela are eager to leave 2002 behind.

"We have had some difficulties this year," says Arthur Rawl, president and CEO of the Brazil America Auto Group, a Sao Paulo-based holding for Volkswagen, General Motors, Renault, BMW and Toyota dealerships throughout Brazil.

"I'm optimistic that it's just part of the economic cycle."

Rawl is not the only one hoping that the recent downturn won't last. Even a red-hot Mexican market could not jumpstart stalling Latin American vehicle sales in 2002. Yet, the major markets are expected to start firing on all cylinders in 2003.

According to research group DRI-WEFA, vehicle sales in the 11 largest Latin American markets will fall 4% to just more than 3 million units this year before rebounding 10% to nearly 3.4 million in 2003.

Brazil, the largest single market, struggled to move cars and trucks as political uncertainty mounted before the October elections and financial trouble crept up from Argentina. "The boom in automobile sales in Brazil will resume next year as the world economy improves and Argentina recovers," according to DRI-WEFA's forecast, which calls for Brazilian sales to rise almost 14% in 2003.

Argentina, however, will not recover soon from its head-on collision with the economy in 2002. This year's vehicle sales are expected to finish two-thirds below 2000 levels and behind those of Venezuela and Chile. The economic crisis combined with the deposits trapped in the corralito banking freeze means that the country may not recoup its spot as the No. 3 vehicle market until 2005, although that year's total sales will remain at less than half of 1998 levels.

Mexico will continue as one of the few bright spots in Latin America, with vehicle sales expected to expand almost 10% in 2002 and another 5% in 2003. The market will get an added boost if the Mexican Congress approves measures to eliminate the tax on new autos and cut in half the vehicle-ownership tax. DRI*WEFA estimates that the measures could reduce the price of a new car in Mexico by as much as 30%.

The big automakers' results largely reflect geographic presence. With strong poositions in Mexico and Brazil Volkswagen and General Motors are maintaining moderate single-digit growth overall amidst the turmoil in countries like Argentina and Venezuela.

Maru Santiago, General Motor's director of Latin America, says the U.S. automaker will keep a tight focus on the fastest-growing segment of the two leading markets: small cars. The carmaker's compact sold under the names Joy and Swing, and known in some markets as the Corsa, has picked up good speed in the Mexican market even as sales have slowed in South America. Santiago says the car has been so successful that the company has developed sedan, station wagon and pickup versions. "All these models born in Latin America are exported in kits to other developing economies:' says Santiago.

In contrast, Fiat's regional sales have fallen sharply as the Italian vehicle has lost market share in Brazil and cob lapsed with the Argentine market. It has no meaningful presence in Mexico. Nissan is in the opposite position. With minimal operations in Brazil and Argentina, it has achieved rapid expansion in Mexico.

Going forward, automakers will increasingly seek to make up for lackluster sales in a specific market by increasing exports to the rest in the region. Mexico and Mercosur's recent free-trade agreement included provisions to reduce tariffs on autos. With Brazil and Argentina idling massive amounts of capacity, many automakers say they will seek to park some of their South American output in the rapidly growing Mexican market. Auto dealer Rawl sees no reason why Brazil-based producers would not be able compete effectively in the Mexican market. "The quality of Brazilian production is well-suited to the export market," he says.

That trend promises to make an already difficult market increasingly competitive.