South America’s main trading bloc Mercosur is set to attract significant new investments from global automotive manufacturers keen to benefit from the region’s strong economic growth prospects and free trade tariffs, according to market participants.
“There is going to be a substantial flow of cash in that direction, mainly because of rising demand from Brazil,” confirms Guido Vildozo, a Latin America automotive analyst with IHS Global Insight.
Indeed, analysts expect the bloc comprising Brazil, Chile, Uruguay and Paraguay will woo some US$4bn a year between 2010-2016. That’s significantly more than the $2bn-$2.5bn annually raised during the previous six-year period.
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Brazil, which currently leads the bloc’s production, will receive 90% of the investment, experts said, as car makers are keen to profit from impressive sales forecasts driven by booming consumption rates (on the back of easy credit) and a stellar economic performance.
To benefit from Mercosur and achieve economies of scale, industry giants, such as PSA Peugeot Citroen, General Motors and Volkswagen have set up huge manufacturing facilities in recent years, boosting employment and providing a compelling business case for continuing to drive down tariffs and forge ahead with the region’s economic integration.
Spending blitz
And that’s not about to end anytime soon. Volkswagen is set to announce ‘huge’ investments in the region, one analyst said, followed by Asian manufacturers, which have woken up to the region’s growth potential.
In June, GM said it plans to spend US$2.5bn between 2007-2012 to bolster production in Mercosur. Then came Ford, which last autumn said it would plough US$2.26bn to lift production in Brazil as record-low borrowing costs stoke demand in Latin America’s largest economy.
Ford said the bulk of the funds will go to enlarge its Camacari factory in Bahia that is said to churn out a vehicle every 80 seconds. The investment will see Ford boost output at Camacari, which makes the EcoSport and Fiesta subcompacts, by 20% to 300,000 units.
Brazil is Mercosur’s pumping heart, accounting for 80% of production. It also has the biggest and fastest growing market with car sales expected to grow 9% this year.
Aurelio Santana, technical director at leading automotive federation Anfavea, told just-auto he expects production to grow 5% annually in coming years, matching similar rates in the pre-crunch era.
This year, Brazil will churn out 3.4m cars of which roughly half will be exported to other Mercosur countries. He noted that while exports dipped significantly during the recession, they are expected to improve soon as demand begins to pick up across the region.
Threat?
Analysts said much of the investments will also go to improve the manufacturing quality in the bloc to keep the Mercosur product competitive with imports. Mercosur is opening up to Mexico, which is raising exports to Brazil, while Argentina is receiving a growing number of Korean and other Asian imports.
“There is an influx of cars from Mexico as the Brazilian currency has appreciated significantly,” Santana said, adding that governments must act to protect the labour-intensive local industries from this .
“You can’t open up Mercosur to [foreign] competition. The product is a generation or two behind global markets so if you do do this it would put production lines in jeopardy,” he continues.
Vildozo says manufacturers will be making investments to ensure Mercosur factories are equipped to make their newest models, on par with factories in the rest of the world.
Meanwhile, Santana maintains that Mexican and other imports don’t represent an immediate threat to the Mercosur industry. He says the imported cars are generally more “sophisticated” with better equipment and accessories but not of better quality.
“Rather than a threat, I see them as a complement to our existing lines,” he says, adding that manufacturer strategies to export certain models from Mercosur while importing others makes up for any losses arising from potential product cannibalization.
Currently, Brazil imports only 20% from Mexico, Santana noted, while 60% comes from Argentina (which produces most cars for sale to Brazil) and other countries.
Uruguayan hope
Uruguay has a tiny market share in Mercosur but the government is keen to see that change. Igancio Paz, general manager of importers’ federation Acau, says the state is boosting its incentives programme to lure more global manufacturers to its shores.
“Uruguay wants to attract more investment,” he says. “There are several and very interesting stimulus of different types including tax breaks for the build-up and start-up period of a new factory.”
Another perk is a free-on-board programme through which the state pays 10% of a car’s export value back to the manufacturer, Paz claims, adding that he expects these measures to boost manufacturers’ interest in investing in Uruguay.
Kia is about to begin producing the Bongo mini truck in Uruguay while Chery is understood to want to ramp up production of the Tiggo mini which it sells to the region and other global markets.
With 3m inhabitants, small Uruguay lacks the scale to compete with Brazil and Argentina’s assembly production chain, Paz notes. However, he says the country could make a greater contribution to Mercosur by expanding its components sector which boasts two large domestic manufacturers of batteries and tyres.
“The idea is for Brazilian parts manufacturers to build plants here,” he says. “Auto assembly is not profitable here without major subsidies. The labour force is not available or qualified and the country doesn’t have the capacity to build what the region needs.”
However, “we do have a strong know-how in making batteries, tries and other components.”
Ivan Castano
