Automotive manufacturing and metals production to drive Argentine industry

The continued liberalisation of the Argentine economy has been a boon for local industry. Pro-business reforms implemented by the administration of President Mauricio Macri, as well as the recovery of the Brazilian economy, have helped manufacturing begin to rebound from a period of stagnation that began in 2015 with the onslaught of the wider economic recession.

Accounting for roughly 16.7% of Argentina’s GDP, manufacturing was the largest contributor to the economy in 2017, according to data provided by the National Institute of Statistics and Censuses (Instituto Nacional de Estadística y Censos, INDEC). Industrial output is highly diversified within the sector. In 2017 food and beverage processing comprised 30.9% of gross production value. This was followed by chemicals manufacturing (13.6%); motor vehicle and auto parts manufacturing (7.4%); petroleum refining and nuclear fuel (6.4%); and base metals production (5.7%).

Making a Comeback

Coming on the back of troubling 2016, when growth contracted by 4.9%, industrial output showed signs of recovery in 2017, registering a 1.4% growth rate. According to INDEC data, in the first two months of 2018, industrial activity increased by 3.9% compared to the same period in 2017. This progress was bolstered mainly by the automotive sector, base metals production and non-metal mineral manufactures, which showed year-on-year (y-o-y) expansion of 27.4%, 22.2% and 13.6%, respectively.

As the country is susceptible to regional economic performances, Argentina has benefitted from the reactivation of the Brazilian economy. Dante Sica, the minister of production, told local media in January 2018, that for every 3% of growth in Brazil’s GDP, Argentina’s industrial sector expands by 1% as a result of increases in exports. According to Marcelo Elizondo, the director-general at software suppliers and specialists DNI consultancy, there are three main sectors that benefit from greater Brazilian demand: the automotive industry, chemical and plastics manufacturing, and wheat production. Brazil is also home to a large number of global firms, which import significant services from Argentina, providing opportunities in logistics and transport, audio-visual and content services, and technical support, Elizondo told local media.

Automotive Industry

The recovery in Brazil’s economy also bodes well for car manufacturers. Argentina has strong roots in the automotive industry, with its first activities beginning in the early 20th century. Since then, car manufacturing plants have become concentrated in the provinces of Córdoba, Santa Fe and Buenos Aires. In 2017 the industry produced some 500,000 cars and directly employed over 70,000 workers. Currently, there are 11 automotive terminals based in Argentina, housing global brands such as French firms Peugeot, Citroën and Renault, the US’s General Motors, German automakers Volkswagen and Japan’s Toyota, among others. INDEC data for the first two months of 2018 illustrated a strong 61.3% y-o-y growth in the sector. Exports registered a 120.1% y-o-y expansion.

In conversation with OBG, Juan Cantarella, general manager of the Association of Argentine Autoparts Manufacturers, highlighted that the various automotive terminals and car components suppliers established locally have created a solid foundation. “We estimate that the number of automobiles produced will reach around 570,000 in 2018. It’s a positive trend, but still below the record high in 2011, when over 800,000 new cars entered the market,” Cantarella told OBG.

Indeed, there is significant room for growth. Argentina has a relatively low saturation rate, which leaves ample room for expansion. Regional exports are also an important facet of the industry considering that over 40% of production is shipped abroad, Cantarella added.

Bumps in the Road

The concentration of export markets has caused issues of late, however. The automotive sector is highly dependent on Brazil, which accounted for 64.8% of all exports in 2017. This was followed by Central American countries (8.5%), Chile (4.6%), Peru (4.6%) and Mexico (4.1%). During the recent economic slowdown, overreliance on the Brazilian market caused two main issues: first, vehicle exports to Brazil dropped significantly; second, Brazilian cars were sold cheaply on the Argentine market, posing a serious obstacle for the local industry. “An important task is to diversify our export partners. A significant risk, like we have seen in the past two to three years, is that when the Brazilian market passes through economic hardship, it backfires on our car industry,” Cantarella told OBG.

Another key challenge is improving the industry’s competitiveness in order to safeguard its manufacturing base. External factors, such as a high tax burden and the rising cost of labour have undermined the sector’s competitive capability. Additionally, when investment dries up, production processes, equipment of soft technology are often not revised or upgraded. This situation can pose added difficulty for highly specialised segments, which have shown real promise. “Argentina’s high cost of labour limits our sector’s ability to compete internationally. However, there are opportunities in niche products in the region, as not many countries here have the technology and know-how to develop high-value products,” Diego Pino, president of electrochemical production firm Transclor, told OBG.

Next to continuous innovation, reducing tax rates and encouraging investment incentives are likely to play a key role in increasing the sector’s competitiveness. According to Cantarella, until a full tariff restructuring occurs, the government has implemented a transitional measure that grants tax returns to terminals when they buy automotive spare parts manufactured by Argentine companies, in turn, stimulating the local market.

The government recognises the importance of the sector, and in 2017 stakeholders signed a sectoral agreement with the provinces of Santa Fe, Córdoba and Buenos Aires to improve competitiveness. Aims of the agreement include increasing the participation of local auto-parts manufacturers, promoting constant modernisation and technological advancements, facilitating the processes by which products are approved and setting a production goal of 1m cars by 2023.

Base Metals & Steel

Another key sector is the base metal and steel industry, which registered y-o-y growth rates of 22.2% and 27.6%, respectively, in the first two months of 2018, propelled principally by the boom in public works and other construction projects. César Castro, technical institutional manager of the Argentine Chamber of Steel, told OBG that the steel sector would continue expanding in 2018, sustained by a number of factors. These include demand from the construction industry, which consumes approximately half of local steel production, and the increase in activity in the energy sector as a result of investments in oil and gas fields, such as the recently discovered Vaca Muerta Shale field in the Neuquén Basin.

Increasing interest in renewable energies is also benefitting the industry, considering the necessity of high-quality steel products for the construction of hydroelectric terminals and wind turbines. Meanwhile, demand from the agricultural sector constitutes roughly 15% of internal consumption, as the production of farming equipment requires base metal inputs.

The Steel Chamber also welcomed the approval of road trains. The progress of this transport method has a double importance for the industry. First, the metal-mechanical industry will benefit from the development of micro-alloyed steel for coupling systems; second, the production of larger and longer trailers will necessitate greater quantities of steel. The authorisation of the new trucks will also improve the transportation of goods and products from the principal steel-producing regions of the country to markets. Industry specialists estimated that logistical costs could be reduced by 25-35% and capacity increased by between 30% and 60%.

It will be key that Argentina maintains its markets. “The country in principle was exempt from the steel tariffs imposed by the US in March 2018. This is encouraging, especially for the seamless steel pipe producers, who are estimated to export a quota of 180,000 tonnes to the US during 2018,” Castro told OBG. In the meantime, stakeholders continue to lobby for the EU-Mercosur free trade zone to safeguard a strategic position on the international market.

Outlook

The manufacturing industry will continue to depend on the liberalisation of the economy, and renewed trade relations with Brazil and other markets. “The world is acknowledging Argentina from a new perspective, with open doors to imports and zero import duties on some products,” Luis Galli, CEO of electronics manufacturer Grupo Newsan, told OBG, “The key for manufacturers is thus learning how to adapt to new situations and boost competitiveness, which will require working hand-in-hand with authorities and unions.”

While estimates vary, the government predicts that construction, agriculture and energy production, along with the continuation of liberalising reforms will encourage economic growth in 2018.

“There are important economic imbalances that will correct themselves with normal market forces,” Carlos Schilling CEO of Clariant Argentina, told OBG. That being said, structural reforms have put us in a much better situation today to boost the country’s competitiveness.”