Issue #3

Latin Stock Investing | Dec. 23, 2008

Latest indications are that the US auto industry is headed for a major transformation. Either one or none of the current companies will survive the credit crash of 2008. Who wins this battle?

General Motors (NYSE:GM), Ford (NYSE:F), Toyota (NYSE:TM)

The likely winners are foreign competitors and the remaining suppliers to the auto industry.

Right or wrong the the current US government will extend another $17.4+ billion financing lifeline to the industry as it prepares for an even worse deterioration next year.

Auto sales are down. In November, US auto sales plunged 37 percent to their worst level in 26 years. Zero percent financing deals are not bringing buyers to the showrooms.

Costs are rising. The culprit is labor inflexibility say company managers. But even if the unions agree to concessions, untangling the existing web of regulations imposed by Washington is not something that can be done in a weekend.

There is a solution. Almost no one likes the pain of bankruptcy, restructuring and admitting that the US is no longer a viable place to produce cars. But over the last decades, auto makers picked up on new approaches and built plants abroad in Mexico and even Brazil more efficiently.

The mantra of "Made in America" is now being replaced with "Made in The Americas".

Today, Mexico ranks as a major global auto manufacturer. GM, Ford and Chrysler as well as Volkswagen, Honda, Toyota, Nissan and related suppliers employ over half a million workers in Mexico. The industry now accounts for 20% of all Mexican exports.

It's not just cheap labor that attracts the auto industry. In Brazil, the world's most advanced plant is owned by none other than Ford. The auto industry accounts for about five percent of Brazil's gross domestic product. Most production is for the domestic market. Over 80% of the news cars are flex-fuel and can run on ethanol.

Longer-term this is all positive for Latin America. But for now lower car production and falling commodity prices will reduce the rapid growth of the last five years. The International Monetary Fund is forecasting next year's GDP growth for Latin America at 3.2% down from 5.6% in 2007. On the bright side, this is still better than the US. The IMF is forecasting a .7% decline in GDP for the US next year.

While the Japanese auto makers are clearly winners here, they too will have to modify their growth expectations. This week's announcement by Toyota that it is posting its first loss in 70 years sent tremors around the globe and resulted in the resignation of the company president.

Credit downgrades. Loan extensions. Profit cuts. It sure does look like the global auto industry is in a spiral.