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How disgruntled GM dealer persuaded Venezuela to seize a $100M car factory

13 July 2017 - Autoblog

How disgruntled GM dealer persuaded Venezuela to seize a $100M car factory

Venezuela's government has seized assets from dozens of foreign corporations in nationalizations by the late President Hugo Chavez and the embattled current government of Nicolas Maduro.

The man behind the confiscation of General Motors' $100 million assembly plant in April is a much more obscure figure: Kaled Kansao, the owner of two long-defunct GM dealerships.

Kansao persuaded a court to seize the plant as the remedy for a relatively small-time business dispute - over GM's termination of his franchises - that mushroomed into a 17-year court battle.

The legal fight that pushed GM out of Venezuela offers a unique case study in the struggles of foreign corporations to keep operations afloat - much less turn a profit - amid the OPEC nation's economic and political chaos.

The seizure stands out because it stems from a dispute with private citizens rather than the government, highlighting yet another risk of doing business in Venezuela – the specter of debilitating legal judgments, said Francisco Martinez, president of Venezuela's main business organization, Fedecamaras.

"It would be impossible to say that the legal proceedings against General Motors had any legal logic," Martinez said. "Venezuela does not provide even the most minimal guarantees with respect to investment or private property."

The Venezuelan government's Information Ministry did not respond to a request for comment.

Venezuela ranked 187 out of 190 countries in the World Bank's 2017 Ease of Doing Business report, which evaluates countries' regulatory systems. Only Eritrea, Libya and Somalia scored worse.

Under Chavez, the socialist firebrand who died in 2013, some asset seizures featured gun-wielding soldiers and live television broadcasts. The GM case had its own less publicized drama, including dueling allegations of courthouse misdeeds; recusals by judges citing security concerns; a dispute over 158 vehicles that GM says "vanished"; and mysterious damage calculations awarding the dealers thousands of cars.

GM stopped producing vehicles here in 2015 amid a lack of access to supplies. But the judgment appears to have doused any remaining hopes that it will produce cars again in Venezuela anytime soon. The company terminated the plant's 2,700 workers after the decision.

In its initial announcement in April, GM did not connect the plant seizure to the dealers' lawsuit, saying only that the facility was "unexpectedly" seized by "public authorities." In response to inquiries from Reuters, the company provided a detailed history of its frustrations with the proceedings, which it called "absurd" and rife with "irregularities."

In the end, a civil court in the western state of Zulia granted the dealers' request to attach GM assets worth up to about $115 million.

Venezuelan law requires the court to auction off the factory to satisfy the judgment.

In the meantime, it ordered GM to pay the dealers to pay an "occupation fee" that at the time equated to about $36,000 a month - in effect, rent on its own plant.

"The illegal and outrageous seizure was the final act of a series of unfortunate events beyond GMV's control," GM told Reuters, referring to its Venezuela subsidiary.

GM did not respond to questions about whether it had any intention of paying the court judgments or trying to regain control of the factory.

In a May press statement, Kansao and his business partner, Elena Rodriguez, accused GM of perjury, influence trafficking, and violation of the United States Foreign Corrupt Practices Act, without offering evidence.

GM has ignored court rulings because it believes "might is right as a law," Kansao told Reuters.

IDLED WORKERS COLLECT SALARIES

Back in 2000, Kansao and Rodriguez operated two GM dealerships that had originally been founded by Kansao's father.

In an interview, Kansao said GM arbitrarily stripped him of his franchise, which he said brought "tragedy and calamity" on his family.

GM said it terminated the agreement for a range of reasons, including the dealers' failure to meet a minimum monthly sales average of 25 vehicles.

Nearly two decades later, the dealers' hopes of collecting on the judgment now hinge on whether a court-ordered auction attracts a buyer - an unlikely prospect in a nation where the auto industry has all but collapsed.

Chronic shortages of hard currency have left automakers unable to import parts, while triple digit inflation has left would-be customers struggling to buy basics like food and medicine.

In 2016, output at Venezuela's seven biggest auto plants had dropped below 3,000 cars, down from a peak of 172,000 vehicles in 2007 – 79,000 of those from GM, according to auto industry group Cavenez.

Labor laws dictate that the dealers would also have to wait behind GM workers - who contend they are owed severance payments - to collect any proceeds from a factory auction.

GM did not respond to questions about workers' severance.

The automaker had agreed with union leaders to continue paying workers after the plant stopped making cars, said Adan Tortolero, one of several union leaders at the defunct plant.

GM tried to shed that obligation last year by offering buyouts of about $3,500 per worker, Tortolero said, but workers spurned the offer because it seemed small in comparison to the pay and benefits the workers had previously enjoyed.

One lucrative perk was the right to buy two factory cars every year at government-regulated prices that were well below their actual market value.

The regulated prices were theoretically available to anyone, but because demand for cars far outstripped supply, most buyers had to get waiting lists – which usually required large under-the-table payments.

GM employees had been among the first in line to buy the cars at regulated prices, which allowed them to sell the vehicles at a steep premium.

9,725 CARS

In 2007, the Zulia court ordered the automaker to compensate the plaintiffs with 9,725 vehicles, according to the decision, which offered no explanation for that number of cars.

It did require the plaintiffs to pay GM for the vehicles, but only after they were sold.

Asked to provide evidence that the proceedings had been corrupted, GM pointed out that six judges and two court employees had recused themselves, with most citing "threats and personal security concerns."

It also said that the court failed to enforce an order preventing the dealers from selling 158 cars that they seized during the dispute. GM said those vehicles later "vanished," and the dealers never paid for them.

Kansao and Rodriguez did not respond to questions about the 158 cars.

The case bounced through different courts for the next decade until April 4 of this year, when the Zulia court authorized the plaintiffs to encumber GM assets worth up to 477 billion bolivars - at the time worth about $115 million - as leverage to collect a cash judgment of half that amount.

The court based the compensation on the full value of the 9,725 cars - rather than the much smaller profit the dealers would have made selling them, GM said.

But the legal victory may have little payoff in reality, just as GM's losses may be largely symbolic - given that it hasn't produced or sold cars in Venezuela since 2015.

Asked what sort of buyer the factory might attract in a government auction, Kansao responded: "Only God knows that."

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