Argentina's auto industry, booming just two years ago, is catching its breath after one of its rockiest periods in recent memory.
If Argentina had been an example of how a country can boom from international investment, it's become a cautionary tale of what happens when it loses its attractiveness. Argentina's appeal ended in one swift move by its biggest trading partner. In January 1999, Brazil, struggling to keep the economic crisis in Asia from invading its shores, devalued its currency, the real. Until then, both the real and the Argentinian peso were pegged to the USA dollar, at a one-to-one rate.
Instantly, it became 40 percent cheaper to do business in Brazil. And because Mercosur rules allowed a tax-free flow of goods between the two nations, it took only months for companies to shift production from Argentina to Brazil and to cut back on the operations that remained.
Over the past 18 months, auto sales have plummeted; unemployment has jumped; and more than 30 manufacturers have closed plants, cut back on production and shifted operations to neighboring Brazil. Among them: Such major industry players as General Motors, Fiat, Peugeot, Delphi and Goodyear.
Among the moves:
General Motors closed its truck plant in Cordoba, home to the Chevrolet Silverado, a high-priced vehicle for the Latin American market whose production costs soared because of devaluation in other markets. GM shifted Silverado production to San Jose dos Campos, Brazil, where it already was building trucks and sport-utilities. Meanwhile, GM's new plant in Rosario, opened in 1998, is limping along at half of its capacity. Pegged to build 85,000 vehicles, production there only is about 45,000 a year.
Goodyear closed its tire plant in Hurlingham, which had been open since 1932. The plant produced radial tires for cars, trucks and farm vehicles. Goodyear's Latin American tire production now is centered in Brazil. Meanwhile, Owens Corning officials are struggling to keep their Cordoba pipe plant afloat. Internal company forecasts estimate that Owens Corning will lose money in Argentina this year.
In April, Fiat Auto announced a second round of production cuts this year at its plant in Cordoba. Workers there were not expected to return to their jobs until early May. The move comes as Fiat is expanding investments in Brazil, where its Palio world car is the market's number one-selling vehicle.
Nasty trade fight
By the end of 1999, Argentine auto sales fell 17 percent. Exports plunged to fewer than 100,000 units, and overall production fell by one-third. More than 10,000 auto workers were laid off, a major reason Argentina's unemployment rate nearly doubled in one year to 14 percent. These cutbacks led to a nasty trade fight between Argentina and Brazil. Last fall, Argentina threatened to cancel its automotive accord with Brazil. Meanwhile, the government introduced a $1 billion program called Plan Canje, in which companies, dealers and the government joined forces to offer consumers discounts on new vehicles.
All of this is a shock for this wealthy country, to which manufacturers flocked in the 1990s after Argentina helped form the Mercosur trading group. The union - which includes Argentina, Brazil, Paraguay and Uruguay - comprises 210 million people and has an estimated $1 trillion gross domestic product. Mercosur's implementation in 1995 woke up a sleepy auto industry. Argentina and Brazil agreed not to impose import duties on vehicles built in each other's countries but maintained stiff duties on cars imported from elsewhere.
That gave investors a strong incentive to launch local production. And it gave them two countries for the price of one because a Brazilian-built car could easily be shipped for sale in Argentina, and vice versa.
Enticed by offers of tax breaks, free land and other incentives, the world's auto companies poured an estimated $10 billion into Brazil and another $2 billion into Argentina, whose demographics made it an even more attractive investment candidate than Brazil in many economists' eyes. While Brazil's 166 million population dwarfs Argentina's 32 million, Argentina boasts a per-capita income of almost $9,000 a person, far outstripping Brazil's $4,700. (Economists say a country is ripe for investment when per-capita income hits $2,000.)
Argentina has one car for every six people, compared with Brazil's one-to-12 ratio. Thanks to economic reforms by past president Carlos Menem, Argentina has long defeated the raging inflation and soaring interest rates that hurt its economy in the late 1980s and early 1990s. Add to that a car-crazy people, whose buying habits mimic those of Western Europe, and it's easy to see what made Argentina a place to be for automakers.
'Companies will look at these smaller countries for investments if they have some level of resonant technology, a quality work force and a favorable investment climate,' explains PaineWebber auto analyst Joseph Phillippi.
GM, Ford and DaimlerChrysler joined European competitors such as Fiat, Renault and Volkswagen in building new plants and updating existing ones. By 1998, auto sales in Argentina had jumped to a record 450,000 units. About 200,000 vehicles were exported, nearly all to Brazil.
Now, however, the wounds between Argentina and Brazil are beginning to heal. After nine months of wrangling, the two countries signed a new automotive trade pact in March. The move gradually will loosen trade rules between the pair over the next six years, entirely eliminating them by 2006. There also are stiff fines for companies that abruptly abandon Argentina, a move that is meant to ensure stability in the shaken auto sector.
Meanwhile, the two countries are ganging up on outsiders: The 23 percent tariff on vehicles imported from outside Mercosur will rise to 35 percent. Tariffs on imported auto parts will reach 18 percent, up from less than 10 percent now. The pact also stipulates that to be considered Mercosur-made, a vehicle must contain 60 percent local content, ideally to be split between Brazilian and Argentine parts.
'We're hopeful that the new Mercosur agreement will pave the way for a more long-term strategic approach to the region,' says GM Argentina President Arturo Elias. 'It's absolutely the right thing.'
Stiff fine for Renault
Not everyone agrees. Smaller parts makers still are concerned that there is not enough protection designated for them. They would like to see higher tariffs immediately imposed on imported parts. And unexpected government moves still are surprising major manufacturers. This winter, Renault squawked when Argentina's customs agency threatened to impose a $519 million fine on parts it contended the French auto company reportedly smuggled from Uruguay in the early 1990s. The move followed the indictment of Renault's former Argentine president on corruption charges.
Renault called the move 'nonsensical' because the amount dwarfed the parts' actual value. Company officials loudly questioned whether companies could feel comfortable doing business under Argentine law. Government leaders quickly stepped in to disassociate themselves from the customs ruling. Argentina President Fernando de la Rua, who took office in December on a vow of economic stability, reassured Renault CEO Louis Schweitzer that Argentina would offer investors 'security, reliability and guarantees.'
While the fine against Renault is pending, there is evidence that companies are starting to feel more confident in Argentina. In the wake of the new trade pact, Ford announced in April that it would increase its investment in Argentina by $38 million. Ford now plans to spend $152 million over the next few years, largely at its Pacheco plant outside Buenos Aires. It recently _retooled the factory to produce the Ford Focus. Next, it plans to modernize Pacheco's paint shop and Escort assembly line; and update safety and environmental equipment on Ford Ranger trucks.
Meanwhile, Suzuki is producing the Grand Vitara sport-utility at partner GM's Rosario plant, the Japanese automaker's first venture in Argentina. Industry vehicle sales are starting to increase. March sales rose nearly 12 percent over year-ago levels, exports climbed 18 percent and production jumped more than 70 percent.
These actions appear to be proof that the world's automakers are willing to take a chance on emerging markets, says PaineWebber's Phillippi. 'Although these markets today, and for a reasonable period of time, pale in size to North America and Western Europe, the growth is in these developing markets,' he said.
Companies simply need to be prepared for the unexpected, he adds. 'You can make a lot of money in those markets if you're successful. If those markets turn, you can lose your initial investment pretty fast. Whether it's China or Brazil or India or Argentina, it's never been easy.'
You can e-mail free-lance writer Micheline Maynard at [email protected]