High Rates Cut Into Brazilian Demand

PARIS — Volvo Truck Corp. has temporarily stopped production of heavy trucks at its Curitiba, Brazil truck plant because of concerns the global economic crisis may visit Latin America’s biggest economy next.

“We consider the situation very, very difficult to evaluate,” says Tommy Kohle, a spokesman for Volvo in Gothenburg, Sweden.

Other truck manufacturers are looking at temporary measures to reduce production too. Scania, Volvo’s Swedish rival, is considering such things as asking Brazilian employees to take early vacations, according to Hans-Ake Danielsson, Scania’s South American regional manager for communications.

The problem facing Volvo, Scania, and Mercedes Benz, which control about 90% of Brazil’s heavy truck market, is a recent rise in interest rates to 50% to protect the national currency, the real from devaluation.

“You can imagine how willing people will be to invest in trucks at those high interest rates,” said Mr. Danielsson.

This is the second time in less than a year that Brazil’s government has had to raise interest rates dramatically to defend the real. Last year, the November rate hike proved temporary and Brazil’s market totaled 19,360 Class 8 units, a good year. Through the first half of this year, the market was up 5% to 9,390 units.

According to Mr. Kohle, through August Volvo’s sales were up 24% over the same period in 1997. But since interest rates soared, he estimates sales are off about 30%. Mr. Danielsson estimated that Scania’s sales have dropped by about 20%.

If interest rates remain high, there is a concern that Brazilian economy, the eighth largest in the world, could be thrown into recession, which could create a domino effect in the rest of Latin America.

“We expect the other markets to follow the Brazilian market,” Mr. Kohle said. “Actually, markets like Chile are much more connected to Asian markets than Brazil.”

“Brazil is the most effected, but demand is also low in Mexico,” Mr. Danielsson said.

The South American market is important to the three European truck manufacturers. It represents about 16% of Scania’s worldwide sales, 12% for Mercedes-Benz and about 7% for Volvo.