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Why General Motors Might Stop Investing in Brazil

By John Rosevear - Feb 22, 2016 at 4:34PM

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Not long ago, GM committed to spending almost $3 billion in Brazil on new products and technologies. But now, GM's president says it's reconsidering that investment. Here's what's going on, and what it means for shareholders.

President Dilma Roussef of Brazil and GM CEO Mary Barra together announced in 2014 that GM would invest $2.9 billion in Latin America's largest country. But now, GM says it's reconsidering that investment in light of Brazil's economic difficulties. Image source: General Motors

What's happening: General Motors ( GM 0.22% ) president Dan Ammann told a Brazilian newspaper that GM will reconsider a major investment plan for Brazil if the country's economic and political situation doesn't improve.

The key details: GM announced in 2014 that it would invest $2.9 billion in new products and technology in Brazil through 2018.

But the Brazilian economy has fallen on hard times since, and new-vehicle sales have been down sharply. In an interview published on Feb. 21 in O Estado de S. Paulo, Brazil's fifth-largest newspaper, Ammann said that GM might reconsider its plan if conditions in Brazil don't improve.

In the same interview, GM South America chief Barry Engle said that the country doesn't just need changes in its fiscal policy, it also needs reforms to its tax, labor, and regulatory laws to become more competitive.

Ammann noted that much of GM's planned investment won't happen until 2017, so there's still time to evaluate.

What it means: Ammann's statement might well have been an attempt to nudge Brazil's president, Dilma Roussef, and her government toward reforms.

In the interview, Ammann pointed to neighboring Argentina, where a similar economic slump was under way. But Argentine president Mauricio Macri began a dramatic program to jump-start the country's economy shortly after taking office in December, cutting taxes and subsidies and arranging for new lines of credit abroad. The changes have already had a positive effect.

Ammann said that the same kind of thing could happen in Brazil "if the right changes happen," meaning if the government takes similar steps to stabilize the economy.

What it means for GM and its shareholders: GM has had a big presence in South America for decades, but lately it's a money-losing one. GM doesn't report profits by country, but its South America regional unit lost $47 million in the fourth quarter, down from a $119 million profit a year earlier. It isn't alone: Rival Ford ( F 0.42% ) lost $187 million in South America in the fourth quarter and $832 million for the full year last year.

Given that, Ammann's threat to cut off investment should be taken seriously. Ammann's boss, GM CEO Mary Barra, has committed the company to a disciplined approach to capital allocation. Barra and Ammann have already shown that they're willing to cut GM's losses and exit a situation if they aren't satisfied with the likely return on investment.

GM withdrew from Russia amid a protracted economic slump, and it ended its efforts to sell low-cost Chevrolet-branded vehicles in Europe when sales (and profits) weren't promising.

For shareholders, while it doesn't seem like a good idea for GM to bail out of one of the world's largest emerging markets, Barra's approach to capital allocation is a very good one and a decision to cut back new investment may well end up being the right move if Brazil's economy doesn't bounce.

What happens next: That's up to Brazil's government. We'll check in with GM on South America again when it reports first-quarter earnings in April.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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