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By Rogerio Jelmayer and Luciana Magalhaes SÃO PAULO--Two of Brazil's largest global auto makers, Volkswagen and Fiat, are furloughing at least 2,600 workers, the latest sign that the world's fourth-largest vehicle market is hitting the brakes.
After a decade of strong growth, helped by government incentives, Brazil's car sales fell 0.9% in 2013 and are down 2.1% through the first three months of 2014 compared to the first quarter last year.
Analysts blame a stagnant economy and a pullback in consumer lending at home as well as turmoil in Argentina, Brazil's largest export market. Production costs are also going up due to new safety regulations requiring the installation of air bags and anti-lock braking systems in all new cars produced in Brazil.
On Friday, Fiat said that it put 1,700 workers on mandatory vacation earlier this month because of slower-than-expected sales in April. The company owns a factory in the Southeastern state of Minas Gerais where it employs around 19,800 people. The employees put on mandatory vacation will return to work in early May, a company spokesman said.
Meanwhile, Volkswagen confirmed earlier this week in an email that it will furlough workers in the states of São Paulo and Paraná because of slack demand. The company wouldn't confirm a number, but the union said 900 workers at the Anchieta plant near São Paulo will be off work for as long as five months.
Daimler AG's Mercedes-Benz, meanwhile, also confirmed Friday that it has launched a voluntary severance program. According to the company's labor union, Mercedes-Benz expects the program to reach around 1,500 employees, a number the auto maker declined to confirm.
The slowdown comes as global auto makers have invested billions to expand manufacturing capacity in Brazil. The government in recent years enticed consumers in Latin America's most populous nation to buy cars by extending easy credit. And it forced auto makers seeking a piece of that market to build locally to avoid steep import duties.
By 2017, global auto makers will be able to build six million vehicles a year here, according to a study by consulting firm Roland Berger Strategy Consultants, up from around 4.5 million in 2012.
But it isn't clear whether Brazil's domestic market will continue expanding fast enough to absorb all of that production. The government is tightening the credit spigot and consumers are laboring to pay off debts they racked up over the past few years.
"Demand for cars will continue to be below expectations in the next 12 months," said Renato Meirelles, president of Data Popular, a research group that studies consumer trends.
Exports are struggling too. Sales to Argentina slumped 32% in the first three months of 2014, compared to the same period a year earlier, according to the Brazilian auto maker association Anfavea. Vehicle sales in Argentina have tumbled since a stiff new tax was imposed in December. The duties, which are as high as 50% on some models, hit virtually all imported cars and most domestically manufactured models as well.
Luiz Moan, president Anfavea, said Brazil's government has been holding talks with Argentine officials to figure out a solution. The nation accounts for about 75% of Brazil's auto exports.
"Our main priority is Argentina," Mr. Moan said.
Mr. Moan said Brazil is looking to boost sales to other nations such as Colombia and Ecuador as well as the European Union to diversify its export base. But that could prove challenging given the Brazilian industry's high manufacturing costs.
"Brazil must to take a lot of steps to increase its competitiveness and I don't see an easy or a short-term solution," said Rodrigo Baggi, an auto-sector analyst at Brazilian consulting firm Tendências.
--Shane Romig contributed to this article.
Write to Rogerio Jelmayer at rogerio.jelmayer@wsj.com and Luciana Magalhaes at luciana.magalhaes@wsj.com
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(END) Dow Jones Newswires
April 25, 2014 19:38 ET (23:38 GMT)
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