CUTTING LOSSES

Venezuela just did General Motors a favor by seizing its car assembly plant

This week the Venezuelan government took over a car factory owned by General Motors, a company that’s been doing business in the country since 1948. The carmaker quickly condemned the action, saying it caused GM “irreparable harm.”

But in the end, the takeover might prove to be a blessing in disguise.

The political and economic crisis that has been simmering in Venezuela for months appears now to be boiling over. Tens of thousands of protestors have been filling the streets of cities all across the country to express their outrage against president Nicolás Maduro’s catastrophic economic policies and his attempts to squash the country’s democratic institutions. Several people have died in clashes with government forces. The country’s dismal economy is expected to contract even further in 2017—by 7.4%, per International Monetary Fund estimates—as unemployment and inflation continue to swell.

Business for GM and other foreign carmakers in the Caribbean nation was already suffering before the seizure. For years, they’ve struggled to import car parts and other raw materials due to government currency controls. Car buyers are also scarce; this is not surprising given that many Venezuelans can’t even afford enough food. Last year, only 3,000 total cars were sold—in a country of roughly 30 million people, per statistics from Venezuela’s chamber for the automotive industry, CAVENEZ.

As a result, car production has plummeted, CAVENEZ data show.

The effects on GM have been acute. Since 2016, the company has produced zero cars, per CANAVEZ.

Yet, due to the country’s strict labor laws, the company has had to keep its roughly 2,700 workers on the payroll. By seizing its installations, the government has essentially given GM a chance to cut its losses. A GM spokeswoman declined to comment beyond an Apr. 20 statement saying operations at the plant had halted and it is laying off employees “due to causes beyond the parties’ control.”

Until now, GM had endured the effects of Venezuela’s brand of populist socialism. The same currency controls that kept the company from importing parts has also made it impossible to repatriate its earnings. Competition in the shrinking market has also increased as the Venezuelan government partnered with Chinese companies to import cars and manufacture them locally.

GM and other major automakers stayed because Venezuela has traditionally been a great car market—and still has the makings of one. “This is a country that doesn’t have any railroads,” said Héctor Lucena, a professor at the University of Carabobo and an expert in labor relations in the car industry. “Everything moves by car.” Due to government subsidies, gasoline is also very cheap. And although automakers have not been selling many cars lately, there’s still a steady business for parts and services, he adds.

Indeed, despite the turmoil, car companies have so far appeared to be committed to Venezuela for the long haul and played nice with the government, says Raúl Gallegos, an analyst with consulting firm Control Risks. The General Motors seizure will force them to rethink that strategy.

GM, which was once the country’s leading car manufacturer, is getting the perfect out. Others might not be so lucky.

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