Pedal to the metal: Latin America's auto sector climbs out of the basement in a bid to return to record output.

Driven by an improving regional economy, the Latin American automotive sector stepped on the gas and recovered strongly from the slowdown it suffered beginning in 1998. In 2004, auto production in the region jumped 17.2%. Much of that increase is due to a 27% jump for the region's biggest car producer, Brazil, and because of the extraordinary turnaround of the Argentine automotive industry, which grew 50% in 2004, and that of Venezuela, up 120%.

Along with Mexico, where production stayed level, these three countries form a bloc of four main participants in the region's auto sector. Things slowed in 2005, with growth estimated to stay under 8.5%, a regional output of 4.53 million vehicles.

Nevertheless, the Latin American auto sector is barely back to its historic peak in 1997, when output was 5 million vehicles. That number is unlikely to be posted by the region until 2008, according to forecaster Global Insight. "After having had a 'lost decade' in terms of growth, growth will be more stable in the region," says Global Insight's Diego Portillo. Reactivation of the sector in Latin America depends a lot, he says, on Brazil and Mexico, which are responsible for 90% of the region's output.

Brazil, the largest auto producer in the region, has found that exports growth means not having to depend on the whims of the domestic market, where the sales record sits at 1.9 million vehicles. According to the National Association of Auto Manufacturers (Anfavea), exports rose 52.3% in 2004 over the previous year, more than double the figure from 2002.

Auto makers have pushed to reposition the Brazilian industry, which is preparing to grow as a producer of cars for emerging markets such as China, India and Africa, says Portillo. "Brazil is making what North American and European producers can no longer make: Modern cars with inventive designs at attractive prices," he says. Between 1994 and 2002, auto assembly plants invested US$16.6 billion, changing the image of Brazilian automakers and conquering foreign markets.

Volkswagen, the largest builder and exporter of cars in the country, reported record exports in the first half of more than 127,000 vehicles, a 36% increase over the previous year. The export increases were based on demand for the European version of its Fox compact. "In 2006, we should export 100,000 Foxes," says Gustavo Schmidt, executive sales manager for autos at Volkswagen do Brasil.

Current production levels are below what the industry would consider a good level in terms of profitability. According to Anfavea, minimum production should be 80% of capacity, 2.6 million vehicles a year. "Another factor which could affect things is the exchange rate, which makes Brazilian cars less competitive," says Cledorvino Belini, president of Grupo Fiat Brasil. "Brazil needs to retain its ability to attract new investments, since other producers in the world are interested in these resources."

In Mexico, the situation is a little different. Since the North American Free Trade Agreement took effect, the domestic industry concentrated on making cars for the newfound market to the north, estimated at 17 million vehicles a year. Domestic consumption meanwhile was met by cheaper cars, many of them made in Brazil. According to the Mexican Automotive Industry Association, more than 70% of production last year--1.1 million cars--was sent abroad, 90% of them to the United States and Canada. "Auto production should increase in the next few years thanks to investments of $3.5 billion by the auto plants in the last two years," says Cesar Flores Esquivel, the association's president. Exports. Ford Mexico, No. 3 in sales in the country, invested the most. It put $1.2 billion into expanding and modernizing a plant inaugurated in August to make three models for the U.S. auto maker--the Ford Fusion, Mercury Milan and Lincoln Zephyr--for export. "We want sustained growth, Ford grew 7% while the Mexican market grew by 4%," says Herman Morfin Ortiz, market relations manager for Ford Mexico.

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MARGARIDA O. PFEIFER * SAO PAULO