Seller Beware.

Automakers are investing billions to crank out cars in Brazil too bad there are no buyers.

MARCOS PIMENTEL, A 40-YEAR-OLD BRAZILIAN FATHER OF TWO, PLANNED TO BUY A car in March by borrowing half the purchase amount. Instead, he opted to save his money to cover his eldest daughter's tuition fees at school. "I preferred to be cautious and keep my savings," says Pimentel, a supervisor at a Sao Paulo department store. "I don't know what's going to happen tomorrow. It's very scary."

The Brazilian auto industry has reason to be scared as well. The country's dealerships are bursting at the seams with new cars--but buyers are nowhere to be found.

This is not what the world's biggest automakers envisioned, despite warning signs--some say as early as October 1997--that Brazil's economy was heading south. "Just a couple of years ago, everybody thought we would have a stable environment in Brazil. There was low inflation, a steady currency, and more and more consumers coming into the market. Who knew about Asia or Russia? As investors, we did not really contemplate the current scenario," says Ford Brazil President Ivan Fonseca e Silva. "Everyone assumed auto sales would reach 2 million cars and keep going higher. These expectations drove everyone to invest in new plants. The future seemed too good."

Overkill? Too good to be true, that is. Far from breaking the 2 million mark, vehicle sales are set to reach a bit more than half that figure this year. "Brazil has always been a volatile market, never going in one direction for very long," says Gene Williams of Auto Strategies International, a U.S. company that tracks global auto sales. "It's a true roller-coaster market." With the ride heading downhill, manufacturers have dismissed nearly 24,000 of the nation's 117,000 autoworkers over the past two years. VW suspended production three times last year, idling 20,000 workers, while Ford dismissed 40% of its local workforce just before Christmas.

Yet, led by the country's top manufacturers--Volkswagen, Fiat, General Motors and Ford, in that order--automakers are forging ahead with billions of dollars worth of investment. Volkswagen will spend $650 million to refurbish its plants. Fiat is pumping $1.5 billion into three facilities. By the end of next year, Ford will have invested $3.5 billion. GM has announced plans to invest as much as $3 billion to reach annual capacity of 500,000 cars. Even in the face of dismal sales, Volkswagen Chairman Klaus Lines has faith that the investments will pay off. "[Brazil] will become prosperous again," he told shareholders.

It had better be soon because the market is becoming an increasingly cluttered and competitive place to sell cars. Brazil's big four are not the only players gearing up. Mercedes-Benz is opening a plant this year in in the state of Sao Paulo to build mid-priced sedans. Last year, Chrysler inaugurated a pickup-truck line and Honda started selling new, locally produced models. Toyota has a new Corolla plant and Renault just opened its first factory in Brazil to build compact cars and vans. By the end of this year, 11 new factories will be up and running, with at least 13 automakers chasing after consumers in Brazil, soon to be the world's eighth-largest producer of vehicles.

Credit crunch. Analysts say automakers should have known better than to believe that consumers could keep up. But just a few years ago, things seemed far more promising.

Launched in July 1994, the Real Plan, brainchild of President Fernando Henrique Cardoso, stopped chronic hyperinflation in its tracks. The stabilized economy encouraged a parade of Brazilians to march into dealerships, sending vehicles sales soaring from nearly 1.4 million in 1994 to 1.9 million in 1997. Strong revenues and the fact that only one Brazilian in 10 owned a car was apparently all the automakers needed to know about the market to announce ambitious plans to collectively sink a staggering $20 billion into building enough factories to churn out 3 million vehicles a year by the year 2000.

The downturn began in October 1997, a few months after the Asian economies began to tumble. At the time, the Brazilian government reacted by raising interest rates as high as 40% to keep dollars from leaving the country. That caused auto sales to dip because the majority of Brazilians--over two thirds--were buying cars on credit. Brazil's Association of Car Manufacturers, Anfavea, announced that volume was down 17% during the first six months of 1998. The slide got steeper by year-end: 21% off record-setting 1997. "[The first-time buyer] has almost completely deserted the market," says Paulo Pacifico, a former Fiat manager who now owns a number of car dealerships in Sao Paulo and Rio de Janeiro. "The crisis is hard and it won't be short-lived." The dramatic drop in sales has left Brazil's major automakers battling in a depressed market that has sunk further since the government's January decision allowing its currency to devalue.

Losing money? Take the long view. With the investment already going into the ground, the auto companies have little room to maneuver. "Pulling out is very costly," says Auto Strategies International's Williams. "If there's light at the end of the tunnel, even if it's as vague as that of Brazil's, then you have to stay."

Ford, the world's second-largest manufacturer of cars and the fourth-biggest seller in Brazil, reported US$145 million in losses in 1998 in South America. "Economic and market conditions in Brazil continue to be difficult," President Jacques Nasser told shareholders upon releasing the 1998 sales figures. "For 1999, we have established a milestone of improving our operating results in South America, but we are not expecting to be profitable there." While the losses hurt, Nasser isn't losing sleep over Brazil because sales there account for less than 3% of all worldwide sales. The company's $3.5 billion investment in Brazil represents a mere 15% of the company's cash reserves at the end of 1998, according to Duff & Phelps, the international credit rating company.

Brazil's other leading carmakers--Volkswagen, Fiat and General Motors--have similarly sized stakes in the region. General Motors, the world's largest auto company, is investing additional billions in constructing new factories all over the world--in such places as Poland and India--to meet the company's goal of building cars close to where they are sold. Latin America represents only about 5% of GM's worldwide sales. The company's annual report cites the region as full of "long-term growth potential." Says Marcos Stricker of A.T. Kearney's automotive practice in Brazil: "[Brazil] is still considered a growth market. Most automakers are looking at an investment horizon of as many as 15 years."

Optimists look for sales to pick up as early as July as fiscal reforms take hold and the International Monetary Fund continues to inject funds as part of its multibillion-dollar bailout package.

Others take a longer view. "Even if things go well, it won't be until around 2001 when things improve," says Marc Scheinman, a Pace University professor and a Mercosur auto market expert. "Automakers are looking at what I would call the three lost years."

Like the others, General Motors' top brass claims few worries. "We faced a similar economic crisis in Brazil in the 1980s," said GM Chairman and President John F. Smith Jr. in a public speech before the devaluation. "GM not only stayed in Brazil, we invested in new products and facilities. In the 1990s, we benefited tremendously from those investments. More recently in 1994 to 1995, when the Mexican economy crashed, we continued our investment program. Now the market has recovered, and GM is number one there."

GM' s sales have suffered less than its competitors because it has a variety of products for most sizes of Brazilian wallet, from the Corsa to the Chevy Vectra to the Chevy Blazer, a sports utility vehicle (SUV) with high profit margins. "The SUV market is growing significantly in Brazil because it's an expensive car and wealthy Brazilians can afford it," says AT. Kearney's Stricker.

Whether sooner or later, when the economy does turn around, it will be market leader Volkswagen that has the most to lose from other companies' growing appetites for Brazil. VW executives have already watched their share of the market fall last year to 28% from 36% in 1996. "The competition is going to be very intense, especially because these newcomers are building efficient, state-of-the-art factories," says Rogerio Aun, another A.T. Kearney auto analyst. "VW has tough decisions because its plants are old and need to be modernized."

All the carmakers face tough decisions as they wallow through hard times. Ford's Fonseca says he's looking at ways to cut costs, measures that can save cash now while getting ready for the future. "We're attacking costs because when things turn around--and they will--we might see Brazil's auto industry grow at unprecedented levels over the next several years," says a confident Fonseca. Such talk is a familiar refrain among auto executives in Brazil. In fact, it sounds almost too good to be true.

Export!... Where?

With sales near rock bottom in Brazil, the world's automakers are trying to export their way out of the bleak situation. But that presents another problem: The country's export market is primarily Argentina. As goes the region's biggest economy, so go those of Argentina, Paraguay and Uruguay.

This year, automakers hope to export less than a third of the 1.5 million vehicles slated for production, but most analysts say that's too optimistic.

Exporting is hardly the answer, adds Jose Carlos de Pinheiro, president of the Brazilian association of automotive manufacturers. "There has been an extraordinary push toward exporting, but it won't be sufficient to make up for the fall in the domestic market," he says. The Brazilian car market is far too large to be replaced by exports--the country accounts for 6 of every 10 cars sold in the region.

Even if automakers could somehow manage to ship the huge volume of cars abroad, with most of the world in a slump there are few countries worth targeting for exports. In a best-case scenario, manufacturers will be able to find an international market for parts, say experts. "Auto companies need a base market to make money," says Jim Crate, the international editor of Automotive News, a weekly trade magazine. "You can't produce just for an export market."

For now, Fiat Brazil has found some success selling its compact Palio Weekend and the Fiorino pickup back in Italy. GM's plants are exporting compacts and pickup trucks to the Middle East, while sending sport trucks to Russia. The auto giant also inked a deal to export more than 200,000 Brazilian-made Chevy Blazer assembly kits to China. kits to China.

Ameristar Jet Charter, Inc.

The automotive industry is a vital and significant part of the on-demand charter market. In fact, it represents a majority of all charters operated in North and South America every day. Moving parts to support the automotive industry and keep your plants running is what Ameristar Jet Charter, Inc. does best.

Ameristar Jet Charter, Inc. is a full-service Air Charter Company specializing in Cargo and Hazardous Materials. We offer on-demand service, allowing you to move your vital cargo according to your schedule. We meet and exceed the needs of each and every customer daily. We've built a reputation for service that goes beyond expectations.

All Your Bases Are Covered

In addition to our Dallas headquarters, Ameristar Jet Charter also has aircraft bases strategically placed throughout the U.S. Our large fleet and diverse aircraft distribution position Ameristar perfectly to meet your needs. Chartering abroad can be difficult and costly if not managed properly. Worldwide Operating Authority allows us to provide for your international shipping needs. Let Ameristar Jet Charter's experience eliminate the unknowns, and manage your interests worldwide.

Expediency Enhanced by Expertise

Time-sensitive solutions from a company who knows the critical nature of your business.

Customer-focused response from people who understand that urgency is paramount to success. At Ameristar, we realize that even lost minutes can mean lost business. Having the right connections can make a world of difference.

Experienced, Efficient, Reliable

The time-critical response you need. The customer-focus and market expertise you demand. Ameristar Jet Charter, Inc.

Just Say When.

Ameristar Jet Charter, Inc.

P.O. Box 700548

Dallas, TX 75248 USA

Telephone: [phone].

Web site: www.ameristarjet.com

E-mail: [e-mail]

                         BRAZIL'S TOP SELLING CARS

PASSENGER CARS
1                         Fiat Palio   270,867
2                         VW Gol       255,504
3                         GM Corsa     154,177
4                         GM Vectra     66,647
5                         Fiat Uno      63,703
LIGHT COMMERCIAL VEHICLES
1                         VW Saverio    37,672
2                         Ford Courier  21,004
3                         VW Kombi      19,514
4                         GM S-10       15,391
5                         GM Blazer     13,205


SOURCE: DRV Standard & Poor

              PRODUCTION AND SALES OF AUTOS IN LATIN AMERICA
                   Production (in millions of vehicles)

      Brazil Latin America [*]
1994    3.32              1.58
1995    3.08              1.63
1996    3.53              1.80
1997    4.11              2.07
1998    3.72              1.57
1999F   2.71              0.95
2000F   3.00              1.07



                    Sales [+] (in millions of vehicles)

      Brazil Latin America [**]
1994    2.93               1.40
1995    2.73               1.73
1996    2.87               1.73
1997    3.43               1.94
1998    3.06               1.54
1999F   2.33               1.00
2000F   2.70               1.24

F=Forecast

(*.)Includes Argentina, Brazil, Chile, Colombia, Ecuador, Mexico, Peru, Uruguay and Venezuela.

(**.)Includes Argentina, Bolivia, Brazil, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela.

(+.)Sales of domestic and imported vehicles.

Sources: Anfavea, Standard & Poor's DRI 

                 BRAZILE'S AUTO EXPORTS AS % OF PRODUCTION

     EXPORTS
1990   20.5%
1998   24.5%


SOURCES: Anfavea, Standard & Poor's DRI, LATIN TRADE.

               BRAZIL'S MARKET SHARE BY MANUFACTURER IN 1998

FIAT           23.7%
FORT           12.7%
GENERAL MOTORS 22.4%
VOLKSWAGEN     28.3%
OTHERS         12.8%


Sources: Anfavea, A.T. Kearney