SUBJECT: The impressive recovery of Argentina's automotive sector.
SIGNIFICANCE: A new export-led profile has improved perceptions of the industry.
ANALYSIS: Driven by a recovery in domestic demand, car sales are expected to reach 450,000 units in 2006 -- up 17% from 2005 but still short of the all-time record 473,754 units sold in 1998. A new record could finally be achieved in 2007, when sales are expected to reach 450-500,000.
Further growth in domestic demand is likely to be tied to continued credit expansion; currently, only 20-30% of new units are sold on credit. Lending restrictions have fuelled sales of second-hand units, which have consistently outpaced the growth rates of new car sales. Sales of second-hand cars reached an all-time record of 1.03 million units in 2005, and are expected to set a new record -- 1.2 million units -- in 2006.
Market overview. Family and compact cars account for 79% of vehicles sold in Argentina:
Light utility vehicles (LUV) take a 17.8% share while buses and trucks make up the remaining 7.3%.
Volkswagen led car sales in the first three quarters of 2006 with a 19.5% share, followed by Ford (14.3%), General Motors (14%), Renault (10.9%) and PSA Peugeot Citroen (10.1%).
Export rankings, in turn, are led by Ford, Toyota and PSA, in that order.
Production profile. Local production is expected to close the year at around 400,000 units -- up 20% from 2005 (319,755) but still short of the record 455,372 units produced in 1998. There are currently eight active assemblers. In the 1990s, half of all cars sold in Argentina were produced locally; that share has dropped to less than 40% at present. Roughly 80% of imported cars come from Brazil.
In 1998, a total of 24 models were produced locally, split evenly between compact cars, family cars and LUVs. The age of models on the road reached 40 months on average. Currently, the average age has increased to 73 months while the diversity of models produced locally has shrunk to 18, with family cars and LUVs gaining ground at the expense of compact cars, mostly imported from Brazil. While some of the changes are a consequence of manufacturing specialisation, the shrinking range and increasing age of models produced locally point to investment deficiencies.
Investments panorama. Investments since the January 2002 devaluation total 1.2 billion dollars -- well short of the nearly 5.0 billion invested in the second half of the 1990s. Most of the post-devaluation investments were tied to exports. Idle capacity is the highest among Argentine industrial sectors (40%), offering scope for further growth. However, investment announcements have been anaemic in 2006:
The only significant project corresponds to General Motors, which will invest around 300 million dollars to produce a range of new models at its Rosario plant.
Fiat signed a preliminary agreement with India's Tata to resume production in its Cordoba plant next year, as part of a wider, global deal. The agreement, which has yet to be confirmed, would demand an investment of 100 million dollars.
French Renault has announced unspecified plans to revamp its assembly lines in 2007. The company is among the few assemblers not to have made significant investments since 2002.
Bus market. A number of smaller investments have been announced by other companies, among them two local players targeting the domestic bus market. There are some 14,000 bus units in circulation in the city of Buenos Aires and suburbs, over half of which exceed the maximum permitted age. The revaluation of the Brazilian currency has created an opportunity for local manufacturers. Two new bus makers have begun production in this niche: local firms TATSA (owned by bus lines operator Cirigliano) and Materfer, which have announced plans to produce 60 units per day each in 2007.
Investment concerns. Despite having more attractive exchange rates, Argentina is well behind Brazil in key areas such as investor friendliness and market size. Leading concerns discouraging further automotive investments include:
Energy doubts. Doubts over energy availability have led to the postponement of investments in electricity-intensive industries, like the automotive sector.
Union disputes. Conflicts with trade unions, which lead to frequent production stoppages, have become more relevant as the industry shifts to a more export-oriented profile.
Price controls. Car prices rose by 10.6% in 2006 on average, but prices of the cheaper units (mostly imported from Brazil) recorded increases of up to 30.0%. In July, automotive assemblers signed an agreement with Argentine authorities to freeze car prices, which expires at the end of 2006. Companies claim that due to the impact of salary increases, the revaluation of the Brazilian real and the rise in costs of components, price hikes in 2007 are inevitable.
With presidential elections scheduled in 2007, the government is likely to persist with price controls and will also be tempted to give priority to securing energy supply for households (ie voters) rather than manufacturers.
Exports. With projected foreign sales of over 4 billion dollars in 2006, the automotive industry cluster is the third largest export sector in Argentina, surpassed only by the oilseeds and oil and gas clusters.
Exports have yet to recover to pre-crisis levels -- foreign sales will reach some 226,000 units, falling slightly short of the record 237,497 units shipped abroad in 1998 -- but their relative weight in total production has increased in that period. Exports currently account for nearly 65% of output as opposed to an average of 45% in the 1990s. Argentine cars are currently exported to 70 countries -- twice as many as in 2004. Sales to Brazil, which accounted for nearly 90% of shipments in 1998, now reach 45%. Other relevant markets include Mexico (21.6%), Chile (11.8%), Venezuela (3.0%) and Uruguay (2.0%).
Car parts. Car parts producers have also benefited from this change in the industry's profile. There are around 400 car parts producers in Argentina, 90% of which are small and medium-sized companies. The sector is expected to report sales of 11.8 billion pesos (3.8 billion dollars) in 2006, with exports accounting for half that figure. As has been the case with assemblers, investments in recent years have been largely tied to short-term projects. Big capacity-boosting investments have been rare.
Brazil trade concerns. Argentine cars have a modest 5% share of the large Brazilian market -- down from 14% in 1998 -- while imports from Brazil account for nearly 60% of cars sold in Argentina -- up from 45% in the 1990s. In an effort to balance bilateral trade, Argentine and Brazilian authorities signed a new two-year administered trade agreement in July 2006. Maximum authorised tariff-free trade ratios were cut to 1.95-1.00 (up to 1.95 dollars of imports are authorised for every dollar of car exports) from 2.60-1.00 previously, reversing a twelve-year trend towards liberalisation. Plans for full liberalisation -- originally scheduled for 2007 -- have been virtually scrapped and the governments have been unable to agree on a new agenda and long-term goals for the industry.
CONCLUSION: The populist agenda pushed by the Argentine government in key economic issues is discouraging the investments which are needed to drive the competitiveness of the increasingly export-oriented automotive industry, negatively affecting long-term prospects for the sector.