Lead-acid batteries manufactured locally and distributed worldwide

Battle-tested by years of tough economic conditions that have resulted in the shrinking of the industry, Venezuela’s core group of manufacturers has emerged alarmingly resilient and successful.

The double-edged sword of domestic under-capacity and stiff foreign competition continues to challenge the less competitive companies, but industry survivors have diversified and grown even stronger. And the recent devaluation of Venezuela’s currency, the bolivar, represents an opportunity for the country’s non-oil exporters to expand further.

The industry’s predicament has penetrated to such deep levels, that "crisis management," considered a buzzword among many U.S. firms, is an engrained business philosophy for every Venezuelan manufacturer. Production capacity has been dismal, and consumer demand has diminished.

Employment in the sector has plummeted nearly 40 percent over the past four years alone, and it is estimated that the entire industry is operating at just over 50 percent capacity. Less than a year ago intermediate and final-products segments of the industry were estimated to be operating at 56 percent capacity, far too low in light of the operational costs involved.

Chemical and petrochemical plants have been operating at around 75-80 percent productivity, but even this is worrisome since plants are extremely capital-intensive and generate enormous depreciation expenses.

"We can duplicate our capacity at any moment, but the demand isn’t there now, and it is clearly tied to the ups and downs of oil, and the construction and engineering sector," remarked Tomas Gunz, President of CEBRA, S.A., Venezuela’s leading manufacturer and distributor of paint and cleaning brushes.

CEBRA, the first factory of its kind in Venezuela and the country’s only paint brush supplier and distributor not owned by the paint industry, invested in new machinery in 2001 that today remains unused or underutilized. Despite tough conditions, Gunz said, CEBRA remains the leader in its field, producing 126 products and more than three million units yearly for over 2,000 clients.

A second major problem that has undermined the industry in recent years is import growth, spurred by overvaluation of the Venezuelan currency. Until February of this year, the overpriced exchange rate severely undercut the competitiveness of Venezuelan products on the international market.

"A lot of things we used to produce in Venezuela are now being brought in from Mexico and Colombia, because it is more economical to produce them there," noted Gonzalo Mendoza, President of Asoquim, Venezuela’s chemical and petrochemical association.

And even though local manufacturers have found some raw materials and machinery cheap to import, the cost of labor in Venezuela has remained very high. Necessities such as electricity, gas and other services have risen steadily, more than offsetting any potential markdown on raw materials.

Products made from some of the highest quality and most sought-after minerals in the world, such as Venezuelan aluminum, have also suffered. "We do not receive export credits, nor do we buy the metal at any advantage from the government, and we have shown we are competitive. But we need more than that. This country needs to promote its exports," declared Gabriel Pinochet, Executive Vice President of Ruedas de Aluminio, S.A. (Rualca).

Rualca, the market leader in aluminum wheels produced for GM, Ford and Chrysler worldwide, exports 98 percent of its product since the aluminum market for Venezuela is so small. Economically, the company stood out as a role model, but the decisions of Venezuela’s politicians adversely impacted business last year.

Rualca endured harsher times than most last year because customers’ incentives to buy decreased dramatically after the Venezuela government shifted policies to promote its auto industry within the Andean community. Rualca was forced to drop the price of its wheels last year and operated at just 30 percent capacity. However, given Rualca’s resiliency, Pinochet is more optimistic for the 2002 outlook.

Add other variables to this economic equation, including a well-intentioned but costly and inefficient tax scheme, interest rates averaging above 50 percent, and expensive public utilities, and the result is an environment that has hampered growth of the private industry. So how have Venezuela’s leading manufacturers managed to come out ahead?

Silvano Gelleni, President of Acumuladores Duncan, Venezuela’s only successful battery manufacturer and distributor, stressed that, to compete, companies must position themselves with a deeper reach in the market. "Duncan has passed the acid-test of the product – everyone accepts it. Now we have to develop the market," said Gelleni.

Duncan used to be one of eight battery manufacturers in Venezuela, now it’s the only one. Faced with tougher competition yielding world-class products, all other Venezuelan companies changed from manufacturer to importer. "Staying on top of technology, leading in quality assurance, having our own distribution system to give us deeper market penetration, and capitalizing on our institutionalized knowledge has kept us as competitive as we are," said Gelleni.

Another strategy, adopted by aluminum export giant Aluminio de Carabobo, S.A. (Alucasa), has been to dollarize all of the company’s operations, hold onto very little debt, invest nearly all of its earnings back into technology, and to make sure employees feel they have a genuine stake in the company.

Over the past two years this has helped Alucasa, maker of household and industrial foil, become more profitable than ever. Ricardo Bethencourt, the company’s president, is optimistic about future success and predicts $5 million in revenues this year.

Indeed, manufacturers well-prepared to increase exports in international markets have a new opportunity to do so after Venezuela’s Central Bank’s dropped its currency band system and adopted a floating exchange rate. The Bolivar has lost 30-40 percent in value since the currency float took place in February.

"The devaluation is a blessing for us, because we are exporting 75 percent of our product in dollars. We will have no problem paying down debt, unless inflation rises above 25 percent," said Bethencourt.

Silvano Gelleni also sees good opportunities, since Acumuladores Duncan exports 20 percent of the batteries it produces; just six years ago it did not export batteries at all. "The floating exchange rate will help local producers be more competitive internationally. On the other hand, our market will likely shrink, since we are an import-driven nation," cautioned Gelleni.

Absent any political leadership determined to strengthen the fundamentals of the industry, Venezuela’s manufacturers know self-reliance will be the key to success.

"Most Venezuelans wait for the government to solve their problems, but this view is changing as people realize they get more results and satisfaction by working through their own problems," said Bethencourt. In the broader sense, no other sector has learned this lesson so clearly.