Brazil leads the way for the automotive industry in a continent beset by economic and political challenges, writes Nick Gibbs
South America as a whole is becoming a hotbed of automotive production thanks to intense activity in Brazil, which is producing the bulk of vehicles and stimulating manufacturing elsewhere on the continent.
A combination of that enormous growth and the Brazilian government’s successful attempts via import tax to get OEMs building within its borders has led to huge cash flows into the automotive industry. “We’re seeing significant investment in Brazil, more so than in Mexico”, says Guido Vildozo, head of Latin America for analysts IHS Automotive. He calculates that the figure will be $26 billion between 2011-2016. The Brazil effect is seen throughout South America, but in different ways.
The biggest beneficiary of Brazil’s fast growth is its neighbour, Argentina. In the first six months of this year, the country produced 394,550 vehicles, including 261,866 cars – up 19% on the year before, according to figures from the International Organization of Motor Vehicle Manufacturers. That beats established car-making countries such as Italy, Poland and South Africa. Figures from the local automotive industry association Adefa show that Peugeot Citroën produced the most cars in 2012 (133,534 units), with GM next at 128,510. Other big players producing over 100,000 last year include VW, Renault, Fiat and Ford.
The domestic market is pretty hot, too. IHS estimates that it will reach 880,000 this year. All this is encouraging the OEMs to invest. Honda started production at a new plant in Campana with a total capacity of 30,000 two years ago, after investing $250 million, and last year GM said it would spend $450 million up to 2015 expanding its Rosario Chevrolet plant, which already has a stamping press. Toyota is to expand capacity at its Zaraté plant from 92,000 to 140,000 units by the end of 2015.
However, Honda said in 2011 that 60% of its factory output would be heading to Brazil, and IHS says well over half the vehicles made in the country are exported thanks to a bilateral trade agreement which cuts import duties.
While Argentina’s capacity of 1.3-1.5 million a year once satisfied excess demand in Brazil, that is slowly being fulfilled by Brazil itself, according to IHS. Furthermore, Argentina is not as cost-effective as it was before. “It depends on how the currency fluctuates,” says Vildozo. “When the Brazilian real was strong, Argentina was cheaper. Now the real is weaker, Argentina has lost its competitiveness.”
The fiscal problems continue at home, where inflation and an overvalued peso are artificially boosting the car market. “People are converting pesos on the black market and buying cars at official rate,” said Vildozo. As a result, he reckons the car market is around 10% higher than it should be and anticipates a fall.
All this will affect car production. The government talks of boosting production to 2 million, but OEMs aren’t necessarily going that way, says Vildozo. “They say they will expand, but if you look at the aggregate of this money, $2-3 billion over the next five to six years compared to $26 billion to Brazil, Argentina is really overshadowed by Brazil.”
Colombia prepares for take-off
Colombia currently ranks third in South America in terms of vehicle production, just ahead of Venezuela.
Increased political stability and economic growth led to record vehicle sales in 2011 of 324,570, and although last year was down 2.6%, IHS estimates that sales will soar as spending power increases. “If we look at Brazil, the market there took off as soon as GDP per capita broke $10,000,” says Vildozo. “Columbia is moving that way, and as soon as that happens the market will climb to 500,000.”
According to IHS, the Colombian government is looking at Brazil’s Inovar-Auto regulations, which set taxes based on local content and other criteria in cars sold, to help expand and modernise its own, currently small-scale, production.
The advantage of setting out a framework for car-makers is that compliance will mean modernisation. Colombia has also followed Mexico in setting up a number of free trade agreements to make exports easier. As the US government notes in a document published by its Export.gov arm earlier this year, these free trade agreements mean that Colombia has access to a market of 34 million vehicles.
A big step for Colombia’s vehicle production was the switching on of a new stamping facility at GM’s Colmotores plant earlier this year, which meant that the country joined Brazil and Argentina in offering stamping facilities. The $200 million additional investment by GM in the plant will increase production of Chevrolets to 60,000 a year. The plant marks the country’s change from “an assembler to a car manufacturer”, said Colombia’s trade and industry minister, Sergio Díaz-Granados, at the commissioning ceremony in Bogotá in July.
The second largest vehicle assembler is Renault, at its CKD Sofasa plant, which produces mainly rebadged Dacias, including the Duster SUV. According to Vildoza, Renault is already starting to source Sanderos and Dusters for Mexico from Colombia in accordance with the government’s dream of becoming an export hub. The Columbian government believes the country’s location gives it a “strategic and competitive advantage in logistics” as a stop-off point for shipping heading north-south.
Venezuela once had a thriving car industry of the type Colombia is aiming for, but it has been decimated by governmental policies. Last year, sales were 126,594 – a long way from the market record of 491,351 in 2006.
“The government has taken a strong approach against the auto industry,” states IHS’s Vildoza. He says the government has been limiting the amount of foreign exchange which car manufacturers can access to buy parts. “The OEMs would build like crazy for two to three months then have to stop.” As a result, a country with capacity to build 200,000 a year now makes half that. Nor are the car companies allowed to lay off staff to compensate.
Former president Hugo Chavez made business difficult for car-makers in other bizarre ways. In 2009, he threatened to eject Toyota for stopping production of “rustic” off-road vehicles like the Land Cruiser. As with other manufacturers, Toyota builds cars from kits, making 10,000 in 2011.
The slowdown in vehicle production and a strict quota on imports has seen waiting lists for new cars climb to between eight and 14 months, IHS observes. “We think over time something’s got to give, and we think the government is going to open up its doors to more automotive manufacturing,” says Vildozo. His view is that the administration under new president Nicolas Maduro is less radical. “The government has already started to signal that they believe a reasonable production figure would be 200,000 units,” he states.
Ecuador has a capacity of around 80,000 units and a car industry dominated by GM and its Chevrolet brand, with Hyundai also assembling there. GM said earlier this year that it was increasing production of local parts, including axles and driveshafts, but the local industry is too underdeveloped to satisfy new-car sales. “We’re starting to see Ecuador mimic what is happening in Venezuela,” says Vildozo. “Last year, they started import quotas and pushed the local automotive industry, but there are minimal local parts built in Ecuador, so it has been an uphill battle.”
Uruguay has a bilateral agreement that Brazilian components and vehicles can enter without import taxes if an equivalent amount heads the other way, also tax-free. CKD kits can be imported for the domestic market with just 2% import duty, while SKD kits attract an 18% tariff.
Uruguay is one country where Chinese car assembly has taken hold, with Geely assembling Emgrand cars at the Nordex plant near Montevideo. Also assembling cars are Chery and Lifan, which mainly target the Brazilian and Argentinian markets. However, production is still small – only 14,000 cars were assembled in 2011.
Yet Uruguay does have one unique parts supplier exporting all the way to Europe. German leather specialist Bader has taken advantage of the country’s cattle industry by locating one of its seven global plants there.
Chile and Peru could have gone down the Brazilian route, as both have a history of automotive assembly and have seen rising GDP per capita. But neither chose to.
“Chile discovered they didn’t need to have local production,” says Vildozo. Free trade agreements made more sense than protecting local assembly plants and the last one, owned by GM, shut in 2008.
Peru was a similar case; costly locally produced cars were inhibiting the market, and after reforms in the 1990s opened up sales to importers, local assembly plants closed down. In 2011, Reuters reported that 96 Chinese brands were being offered in the country.
Looking at the continent as a whole, traditional economic upheaval means that vehicle and parts production remain a tricky investment outside Brazil, but that country’s growth – and more enlightened protectionism when it comes to local assembly – is spreading beyond its borders to bring a potential new dawn to automotive manufacturing in South America.