Now in its sixth year of recession and crisis, Argentina today is practically unrecognisable from the country it once was. Vehicle sales are running at barely a quarter of their ‘normal’ levels. But could things be about to look up? Rebecca Wright reports.
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In 1916, just 13 years after Henry Ford set up his own company and started building cars in a converted wagon factory in Detroit, he chose Argentina as the third foreign country after Canada and the UK to test his manufacturing system. Ford had high hopes for the country; a rising industrial power, which indeed went on to become more European in many ways than it was South American, certainly in terms of standard of living and education.
Yet 86 years on and the worst political and economic crisis the country had seen since democracy was restored in 1983 was pushing Argentina to the brink of collapse. By the end of 2001, it seemed impossible that things could get any worse as the country finished its fourth year of economic and financial crisis. The International Monetary Fund (IMF) said that the recession facing Argentina was worse than the US Great Depression of the 1930s. In December of that year, bank accounts were frozen, the country announced the largest sovereign debt default in history and the most educated and literate nation in South America suffered deadly riots, in which 28 people were killed.
Things did get progressively worse, however, as the peso was unpegged from the dollar in January 2002, causing the Argentine currency to plunge 70 percent overnight. All but essential consumer buying was halted and the country saw five new presidents in one month. These days, half of the population is considered ‘poor’, according to the World Bank and one in five is unemployed.
The chart below gives a good idea of what has happened to Argentine vehicle sales in that time. At the start of the millennium, monthly domestic demand was hovering at around 25,000 to 30,000 units (in January 2000, 28,806 units were sold) – today demand is running at barely a quarter of that (January 2003 – 7,171 units sold).
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Yearly sales figures give an even better picture; 1994 was the best year on record for Argentina, when annual domestic light vehicle sales reached a record high of 486,335 units. By 1998, sales were back down to 473,754 units and in 2000, 306,945 units were sold in total. By 2001, this had plunged by 42.4 percent to 176,702 units and at the end of 2002, domestic vehicle sales reached their lowest levels since records began in 1960, down a further 53.4 percent on the previous year. In fact, throughout the whole of 2002, in a country which is five times larger than France, and has a population marginally smaller than that of Spain (Argentina has 37m people, Spain 40m), just 81,305 vehicles were sold in total (car sales alone reached 1.4m in Spain last year). Of course Argentina’s GDP per capita (ppp) of US$12,000 must be taken into account against US$18,900 in Spain (CIA World Factbook 2002 figures), which is still relatively rich by Latin American standards (Brazil – US$7,400, Mexico US$7,000), but nevertheless the extent of the depression faced by the industry is clear.
But could the tide be about to turn in the troubled South American country? A number of recent investments in Argentina by vehicle manufacturers suggest so, whilst the very fact that so many have remained there despite five years of crisis and deep recession imply that they see potential in the country still. For example, in February, PSA Peugeot Citroen surprised analysts when it announced that it is investing €50m in Argentina to start producing the Peugeot 307 in Buenos Aires from 2004. “The investment decision confirms PSA Peugeot Citroen’s long-term strategy in Latin America, as well as its commitment to sustaining its business despite the difficult economic environment,” it said in a statement. In the same month, Toyota echoed those sentiments with its announcement that it is restructuring its South American operations by effectively merging its Brazilian and Argentine units to create Toyota Mercosul, through which it hopes to obtain a ten percent regional market share in the next ten years, up from just 1.8 percent in 2002. Meanwhile the local market leader Renault, in its outlook for 2003, predicted ‘a slight fall in the western European market, but a recovery in markets such as Poland, Turkey, Argentina or Brazil, which we think hit the bottom in 2002’.
For its part, the Argentine vehicle manufacturers’ association ADEFA has predicted that 2003 will be similar to 2002 for the automotive industry. AutoData, the Brazilian automotive news agency, recently quoted an ADEFA official as saying: “The expectations are that the current political uncertainties will continue throughout the first semester of the year, and the absence of credit will limit the possibilities of an eventual recovery of the domestic market, despite a strong pent-up demand.” ADEFA did seem to see some light at the end of the tunnel, however, noting that new trade agreements with Mexico, Chile and Brazil, broadening Argentina’s access to those markets, that have come into effect this year. Since Argentina’s problems began, exports have become an increasingly important part of the manufacturers’ sales mix as they look to offset weak domestic sales with exports to its Latin American neighbours. Although Brazil has been swallowing up around 90 percent of Argentina’s exports, a rigid pact with the continent’s largest country had scuppered any chance of an export-led recovery, until last year’s signing of a more flexible deal.
Others, on the other hand, express more hope with regards to what 2003 could bring to the Argentine automotive industry. In January, the World Bank agreed to a US$600m loan to provide urgent relief to Argentine families with unemployed heads of households, at which time World Bank vice president for Latin America and the Caribbean, David de Ferranti said he was optimistic about Argentina’s future: “The major challenges that confronted the Argentine people in 2002 are fading into the past.”
Kimberly Kennedy, senior manager of Latin American Forecasting at J.D. Power and Associates in North America told AWKnowledge that she agrees with this. “We think that the Argentina hit rock bottom in 2002. J.D. Power is predicting that vehicle sales will increase in 2003, compared to last year.” She explained: “Firstly, January and February sales were up around 35 percent above the same two months last year. In our opinion, demand has hit a point where it is at replacement demand now – many people have delayed their purchases so long to the point that it is highly likely that vehicle sales will improve regardless of whether the economy manages to straighten itself out.”
Furthermore, Kennedy said she expects Argentine consumers to have improved access to credit again by the second half of 2003, which will undoubtedly bring a huge boost to sales: “Our expectation is that the post the election that is coming up in April in Argentina, with the new government in place, one of their primary objectives will likely be to straighten out the credit situation.”
Whilst there is no doubt in everyone’s minds, however, that sales can only improve from the depths they reached in 2002, the question is, beyond this, will they ever return to the levels that manufacturers enjoyed in the 1990s? “J.D. Power is forecasting that sales will reach 100,000 units in 2003,” Kennedy said. “Beyond 2003 our five year forecast is to reach around 300,000 units by 2008. We expect it to take ten years or more for the Argentine market to return to the levels it saw in 1994 when the light vehicle market peaked. The most likely scenario is that by 2013 or 2014, sales will be back to 500,000 units,” she concluded.
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