Car of the people: Volkswagen rides the Brazilian auto recovery to new export markets across the globe.

German auto giant Volkswagen, already Brazil's No. 1 carmaker, has a plan to pull away from U.S. rivals General Motors and Ford with a not-so-secret weapon: a comfy new compact car that is catching on both in Brazil and abroad.

Volkswagen do Brazil introduced the compact, called the Fox, in Brazil and in the rest of Latin America in late 2003. The carmaker, Brazil's fifth-largest exporter in 2004, racked up US$1.485 billion in export sales--ahead of GM's $1.16 billion and Ford's $786 million--shipping 25% more cars than in 2003, a total of 208,000 vehicles. Most of these cars were the Gol, the company's entry-level sub-compact, and the hot-selling Fox.

In 2005, Volkswagen says exports will increase by another 10%, a climb almost entirely due to stepped-up output and foreign sales of the Fox. It plans to export up to 60,000 of the compact cars this year, from 24,000 vehicles last year. In part, sales of the Fox are increasing in Latin America, but Volkswagen also began exporting the compact to Europe in April. This month, VW opens its second Fox production plant in Brazil to meet the increasing demand.

"The Fox is selling very well in Mexico and Brazil because the two countries have similarly structured markets. In both countries, 70% of car buyers purchase subcompacts and compacts, and around 30% buy larger cars," says Berthold Krueger, vice president of sales for Volkswagen do Brasil.

Krueger says the Fox is aimed directly at city dwellers across the region--which is to say most people in Latin America, where cities have mushroomed over the past few decades. "The car is most popular with young Latin American urban adults, not just because of their lower acquisitive power, but because a small vehicle makes more sense in congested cities where streets are narrow and where parking and garage space is limited," he says.

Mexico and Argentina accounted for 45% and 28% respectively of all of Volkswagen do Brasil's exports in 2004, and the two countries are expected to again be the leading foreign markets for these cars in 2005, followed by the rest of Latin America. "Having a big domestic market means you don't have to rely on exports to drive sales," said Krueger. "Relying solely on exports to drive sales also creates currency exchange-rate risk, which is reduced when you sell a large part of your output in the local currency."

Volkswagen, Europe's largest carmaker, decided to build the Fox in Brazil and Brazil only because the country offered cheap, highly skilled labor, a good engineering base, a thriving parts industry, and a huge domestic market, at 1.5 million cars sold annually. In 2004, Volkswagen sold nearly 64% of its output--360,000 vehicles--domestically, and exported the rest. In 2005, the carmaker expects to increase domestic sales by 5%, mainly because of a rebounding demand. Brazilian buyers should account for half of Fox sales, with exports accounting for the other half.

Profitable. Volkswagen executives expect the Fox to be profitable in the first generation, even though cars produced in this first seven-to-eight-year period don't usually post profits, thanks to the high upfront cost of developing and designing a new car. To keep development costs down, the Fox shares components with the company's other small cars, the Lupo and the Polo.

When the Fox begins production in Silo Paulo in July--complementing output at a production plant in the southern city of Curitiba--it will increase production at Volkswagen's Silo Paulo plant to 75% of capacity, compared to the current 65% capacity average of the Brazilian car industry today. "The July opening of the Fox plant in Silo Paulo will bring all 600 of the now-idle Volkswagen Sao Paulo autoworkers back to work and result in new hirings," says Jose Lopes Feijo, the president of the Silo Paulo metalworkers union. The union represents 105,000 workers, of which 12,000 are VW employees.

Part of the reason for the turnaround is an innovative five-year labor deal signed by the car maker and the union in 2001, a year in which the Brazilian economy flat-lined, under which Volkswagen made an unprecedented agreement not to lay off workers for the duration of the contract. Instead, it invested in new models, like the Polo, a premium compact launched in 2002, and the Fox, introduced one year later. The returning workers, who were retrained, were guaranteed the first of the new assembly-line openings.

More recently, VW in May began selling its newest model, the Cross Fox, a compact, SUV-styled off-road version of the Fox. The company will begin exporting it to other Latin American countries beginning in the second half of 2005.

Like the Fox, the $16,200 Cross Fox--which runs on gasoline, ethanol or a mixture of the two--comes with a 1.6-liter engine but doesn't have four-wheel drive. A raised suspension, however, makes it better equipped for bumpy dirt roads, ubiquitous in Brazil. Having sliced out a chunk of bargain-car buyers looking for a little bit more for their money, Volkswagen is aiming up-market, to younger drivers with more disposable cash and a burning desire to occasionally leave city life behind.

MICHAEL KEPP, RIO DE JANEIRO