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Venezuelan consumers gobble up U.S. goods despite political tension
- Focus Venezuela: Part 2 of a 3-part series

By David J. Lynch

VALENCIA, Venezuela — You might think a country headed by the ferociously anti-American President Hugo Chávez would be a lousy place for American companies to do business.

Think again. Amid an oil-fueled boom, scores of well-known U.S. corporations are notching impressive sales in Venezuela. This nation of 26 million people is entering the fourth year of a robust economic expansion and, despite sour relations with the United States, consumers are gobbling up American cars, appliances, fast food and shampoo.

Few manufacturers are doing better than General Motors. The automaker last year sold a record 92,000 cars and trucks in Venezuela and expects to reach almost 160,000 this year. "The industry is going really fast. … Today, I have a waiting list for every single product," says Ronaldo Znidarsis, 42, GM's local managing director.

GM, which has sold cars here since World War II, literally can't make vehicles fast enough to satisfy Venezuelan buyers. Its local plant, housed on "General Motors Avenue" in an industrial district near this city's airport, added a third shift in 2006 and is running flat-out producing more than 20 models.

FIND MORE STORIES IN: General Motors | Venezuela | Venezuelan | Caracas | Chevy | Valencia | Procter | CANTV
But rather than expand capacity to meet ravenous demand, GM — like other U.S. companies — is importing additional products. With Chávez, a self-described revolutionary, promising a grandiose "socialism for the 21st century," new multibillion-dollar investments are just too risky.

"Commercially, the country's in a good moment. But I don't think this is sustainable in the long term. … The truth is there's no more investment coming in," says Michael Penfold, former executive director of Venezuela's investment promotion agency.

From an annual level that fluctuated for much of the past decade between $400 million and $700 million, investment from U.S. companies last year collapsed to no more than $50 million, according to Edmond Saade, president of the Venezuelan-American Chamber of Commerce & Industry in Caracas.

GM's last major investment here, a $55 million paint shop, occurred seven years ago. Economywide, the lack of investment means Venezuela's economic growth is producing fewer jobs and higher inflation than it otherwise might.

Economy is dependent on oil

Venezuela's unbalanced growth is reflected in statistics on the growing trade between the two political antagonists. The U.S. exported to Venezuela $9 billion worth of products last year, up 89% from 2004. Cars, oil field equipment, chemicals and computer gear were among the leading items.

Venezuela's shipments to the USA also rose, but by only 49%. And almost all of its $37 billion in exports to the USA were crude oil and other petroleum products. Venezuela has made little progress diversifying its economy: Oil revenue accounts for more than three-quarters of Venezuela's exports and about half of its government budget.

Aides to Chávez deny any problem. Alberto Muller Rojas, one of the president's top foreign policy advisers, insists that foreign companies are investing. Venezuela also compares favorably with such market-friendly countries as Chile in terms of the ability of foreign companies to repatriate profits, he says. "If you've been to a shopping mall here, you've seen how socialism is killing us," he said sarcastically.

Few leaders are as passionate in their anti-Americanism as Chávez, a former military officer re-elected in December with 63% of the vote. He's accused the U.S. of seeking a global dictatorship that "threatens the very survival of the human species" and routinely accuses President Bush of plotting to overthrow or assassinate him.

As relations between Caracas and Washington continue to deteriorate, some companies with significant local manufacturing and distribution arms have grown gun-shy about discussing their Venezuelan operations. Johnson & Johnson, Procter & Gamble, Cargill, Kellogg and 3M all declined interview requests. 3M employs more than 350 people in Venezuela, Kellogg more than 200 workers.

By most measures, Venezuela is booming. The economy grew at an annual rate of more than 9% each of the past two years; this year, it's expected to slow somewhat to a still-healthy 7%.

Under Chávez, the government has directed a torrent of oil money into the domestic economy, jacking up spending on health, education and training programs. Government spending shot up to 41% of gross domestic product from 33% the year before, according to the Institute of International Finance. The president also has lavished benefits on his military, granting sweetheart deals on new cars to graduates of the officers academy. Many of the vehicles are built by GM.

The American presence here is reflected along the highway between Caracas and Valencia, 100 miles to the west. Billboards for familiar names such as Maytag, Goodyear and McDonald's line the road. "This market is a very good market for U.S. companies," says Saade. "They're selling a helluva lot of product."

Homegrown socialism

For now. The question is how the mercurial Venezuelan leader will treat the private sector in the future.

Chávez, who said earlier this month that he was re-reading Che Guevara's writings on Soviet economic policy, vows to construct a homegrown socialism that will improve on the discredited models of the past. He came to power in 1998 after Venezuela's embrace of market-oriented policies known as the Washington Consensus backfired and deepened poverty.

In the late 1980s, the government here began instituting austerity measures demanded by its lenders at the International Monetary Fund. Price increases for public transport in 1989 sparked major riots, known as the caracazo, ushering in two decades of coups and political turmoil.

Venezuela hit bottom after an opposition general strike paralyzed oil production for two months beginning in December 2002. The economy shrank by 8.9% that year and an additional 7.7% in 2003.

Now, Chávez, 52, is redirecting oil revenue to help the poor. But the Venezuelan president has not defined the precise contours of the socialism he seeks, leaving a pronounced air of uncertainty about the future. The government has ripped up contracts with four oil industry giants engaged in development of its Orinoco Belt region, wanting to renegotiate more favorable arrangements. And when Chávez announced in January that he would nationalize Electricidad de Caracas, an electric company, and telecommunications provider CANTV, the stock market plunged by one-third.

But Chávez's decision to pay for the foreign-owned stakes rather than seize them outright eased investor fears. Venezuela paid AES Corp. $739.3 million for Electricidad de Caracas and paid Verizon $572 million for its stake in CANTV, helping the Caracas exchange rebound about 15% from its mid-January low.

Still, it's not clear whether additional companies will be nationalized. And executives wonder where the government's proclivity for regulation will end. Price controls in some sectors already have led to shortages of products such as meat. Yet, inflation continues to rise, topping an annual rate of 20%.

"It's a completely new ballgame. We just have to see how we can play," says Saade. "I'm not sure how, at this point."

Some companies aren't waiting to see what happens. Procter & Gamble, which maintains its Latin American headquarters in Caracas, has been gradually reducing the number of personnel it has in Venezuela while shifting some manufacturing operations elsewhere in Latin America. "P&G has been phasing out very quietly," says Robert Bottome, editor of the VenEconomia newsletter in Caracas.

Doug Shelton, a P&G spokesman, said he could not confirm any changes in the company's Venezuelan operations without being provided more specifics.

Meanwhile, at GM, Znidarsis is drawing up plans for another record year. A native of São Paulo, Brazil, the 42-year-old finance specialist could be a poster boy for the globalized auto industry. Since joining GM more than two decades ago, he's done stints in Detroit, Zurich, Singapore, Shanghai and South Korea.

In Venezuela, he enjoys a market of motivated buyers. The boom means middle-class Venezuelans have plenty of cash. Controls on foreign exchange keep the money trapped in the domestic market, and rising inflation means consumers who dawdle face higher prices. Interest rates are low, making car loans attractive. The government also provides a partial value-added tax exemption for some small cars and trucks, which this year will act as an effective 11% price cut.

Demand is so strong, GM has been able to increase prices an average of 6% in real terms. "Venezuelans see a vehicle as a way of saving money. It's a hard asset," Znidarsis says.

That's one reason graphic designer Karen Lopez, 25, bought a Chevy Spark last month after idling on a waiting list for five months. "Everyone said that the dollar would shoot up, and prices would rise on everything, including cars, because of the instability of the (December) elections. So I hurried. … In the five months — from September to February when I got the car — the price went up from 19 million bolivars ($8,837) to 21 million ($9,767)," she said.

Selling cars here may be easy. But building them is another matter. The Valencia factory is one of GM's most complex, producing scores of different models from small commuter cars such as the Spark to hefty Chevy TrailBlazer sport-utility vehicles. The 24-acre factory employs almost 3,200 workers.

One bottleneck is the country's principal seaport, Puerto Cabello. Each day, vessels bearing about 1,700 shipping containers arrive in the northern port. It can process only about 1,000 of them, leading to backlogs for manufacturers like GM that rely on imported parts.

Paperwork delays

The government in December also introduced without warning a new regulation that makes it more difficult and time-consuming for manufacturers to import needed parts. Now, to purchase the U.S. dollars needed to pay his foreign suppliers, Znidarsis must obtain a certificate from the Ministry of Light Industry and Trade confirming that domestic parts aren't available. GM must obtain separate certificates each time it orders one of several thousand parts.

Paperwork delays are complicating the task of stockpiling the proper amount of each part for just-in-time production. Assembly lines at local Toyota and Ford plants earlier this month were slowed or stopped by the new regulation.

So far, GM appears to have navigated the tricky Venezuelan scene better than most. But it's hard to know how long the good times will continue.

" '07, I believe, is going to be a great year. The reason we don't show 2008 and the out years (on forecasts) is that it's a big question mark. If petrol prices stay the same, and there's no significant change in government policies, then '08 could be reasonable," says Znidarsis. "I don't know about '09."