INVESTMENT OPPORTUNITIES. Automotive Industry in Argentina. Driven to meet global market needs

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1 INVESTMENT OPPORTUNITIES Automotive Industry in Argentina Driven to meet global market needs

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3 Highlights >> A STRONG LOCAL INDUSTRY IN A PROMISING CONTEXT The global automotive industry is currently registering record production levels, mainly driven by an increasing demand and export dynamism in developing economies. A heavyweight in Argentina s manufacturing sector, the automotive industry is a growth leader. >> OUTSTANDING PRODUCTION AND EXPORT PERFORMANCE Rocketing exports and domestic sales are driving Argentina s automotive production, which has almost doubled since Automobile production grew almost 30% per year over a five year period, reaching a record high of 545,000 units in Manufacturers decision to use Argentina as an export platform for some models gave a big push to exports, which grew 22% per year in the same five year period. >> FIRST CLASS INTERNATIONAL PLAYERS International corporations with a historical presence in Argentina like Fiat, Ford, General Motors, Mercedes Benz, Peugeot-Citröen, Renault and Volkswagen as well as more recent arrivals like Toyota are making substantial investments to expand production capacities and improve technological capabilities. This dynamic industry is at the forefront of Argentina s manufacturing sector. >> A BOOMING AUTO PARTS INDUSTRY The auto parts industry is booming. Auto parts manufacturers are seeing increased demand as automakers roll out new models, increase production capacity and move to outsource more of their needs. Current trends signal an important opportunity for domestic auto part suppliers to upgrade their production by working closely with automobile manufacturers with global presence. >> ATTRACTIVE AND PROFITABLE SEGMENTS Regional market growth, local skills and the country s competitive exchange rate have opened profitable investment opportunities in the automobile, truck and motorcycle manufacturing segments.

4 I. Why Invest in Automotive Industry in Argentina? PROMISING GLOBAL OUTLOOK. The global automotive industry has reached record production levels. With over 70 million motor vehicles produced in more than 40 countries, this industry has seen steady growth over the past years. With global annual growth rates of approximately 3%, performance has been diverse across regions. The highly fragmented global auto parts and equipment market is valued at over US$500 billion. A NEW ROLE FOR EMERGING ECONOMIES. A remarkable trend of the last decades is the growing share of emerging economies in global automotive production. New corporate strategies oriented towards the global and regional markets have sought to increase competitiveness, reduce costs and expand the product mix. With a thriving auto sector, the Asia-Pacific region doubled its production in the last decade, while South American output grew 50% during this period and Eastern Europe s over 30%. With a demand previously concentrated in fewer regions, the auto parts and equipment market has also grown rapidly in emerging countries. STRONG FOUNDATION FOR SUCCESS. In Argentina, the automotive industry is highly dynamic and remains a leader in the country s overall manufacturing production. Vehicle production has more than tripled since 2002 and strong growth is expected to continue. Access to new markets, large Foreign Direct Investment (FDI) inflows, regional cooperation and the country s competitive exchange rate have increased the sector s technological know-how and driven growth. FROM ARGENTINA TO MERCOSUR AND THE WORLD. Domestic production in the automotive industry is increasingly oriented towards both Mercosur and the global market, apart from satisfying the expanding domestic demand. Key global players in the sector have chosen the country as an export platform to produce specific models to supply the growing regional market and, furthermore, to export automobiles from Argentina to the rest of the world. PROFITABLE OPPORTUNITIES: AUTO PARTS MANUFACTURING. In Argentina, auto part manufacturing has mirrored the growth pattern in motor vehicle production and investments in the sector have also led to auto parts exports reaching unprecedented levels. Intense competition has led auto parts manufacturers to focus on certain elements of the value chain. Top performers in this market have been able to incorporate modern production technologies and best practices, and have concentrated on high-tech segments of the market. Due to past and projected investments, Argentina is well positioned to compete successfully in this global market. ATTRACTIVE SEGMENTS: TRUCKS AND MOTORCYCLES. Argentina s strong economic growth has also encouraged a rise in demand for trucks and motorcycles. Currently, demand in these two markets is mainly met by imports. Although domestic production has increased in response to this trend, there is still a sizable opportunity for local manufacturers to increase their market shares. 4

5 II. Sector Structure and Performance INDUSTRY STRUCTURE SECTOR PERFORMANCE Manufacturers. There are ten manufacturers present in Argentina Fiat, Ford, General Motors, Iveco, Mercedes Benz, PSA Peugeot-Citroën, Renault, Scania, Toyota and Volkswagen producing a total of 18 different models. A few of the models are commercial vehicles, however the majority are passenger cars. Vehicle Production by Company (2007) Peugeot % GM 1% Argentine Association of Automobile Manufacturers (ADEFA) Iveco 1% Ford 1% Mercedes Benz 5% VW 11% Renault 1% Toyota 1% A key sector. The automotive industry is a key contributor to manufacturing production and exports in Argentina. In 2007, it represented 2.5% of GDP (including automotive parts manufacturing), 8.5% of industrial production and 10% of exports. The automotive industry remains one of the principal engines of industrial growth and technology transfer. A sustained expansion in both domestic demand and exports has supported continued fast growth in the sector: production expanded at an average rate of 29% per year during and the industry reached record high production numbers. As a result, automotive production explained more than 30% of growth in the country s industrial production over the past three years. Exports and employment also boomed steadily since 2002: exports were up 22% per year in the last five years (as some manufacturers have chosen Argentina as an export platform for certain models) and employment increased 55% between 2002 and Production and sales. Regarding production, Peugeot was the leader in 2007, followed by Ford and GM. Toyota is one of the fastest-growing manufacturers in Argentina, thanks to large investments since Honda has also announced its establishment in the country in In terms of sales, Volkswagen was the market leader in 2007, accounting for 22% of the market. General Motors is the second-largest company in Argentina regarding sales, with 16% in Ford and Peugeot-Citroën share the third place with 14% market share each Production and Exports of Vehicles (in thousands of units) Production Exports Argentine Association of Automobile Manufacturers (ADEFA) Auto parts. In addition to manufacturers activities, Argentina has developed a large auto parts industry comprised by more than 400 companies. This segment creates 62,000 jobs, vis-à-vis less than 20,000 jobs at the manufacturers. Most firms are located in the provinces of Buenos Aires, Córdoba and Santa Fe. Record production and export levels. A recordhigh level of 545,000 units was produced in 2007 (64% passenger cars, 36% commercial vehicles), comfortably surpassing the previous peak of In 2007, 58% of the vehicles produced were exported, reaching a new exporting record of 316,000 units. Brazil accounted for over one-half of Argentina s vehicle exports. However, the export base has diversified in recent years, reaching 84 different countries in 2007, with Mexico (13% of exports), Venezuela (5%) and Chile (5%) becoming increasingly important markets. Triggered by growing automotive production, automotive parts sales also expanded 5

6 significantly between 2002 and 2007 (at a compound annual rate of 24%) and peaked at US$5.5 billion in Auto parts exports have doubled in the last five years, reaching an unprecedented level of US$2.2 billion in Innovation. Large inflows of FDI expanded production capacities and brought technological know-how for process improvements. All automotive companies currently operating in Argentina increased their production levels to meet the rising local and external demand. At the same time, the industry started playing a more important role internationally when the manufacturing of new models was set in the country: seven new models were introduced between 2003 and higher in the provinces than in the city of Buenos Aires. The domestic market for motorcycles has boomed over the past five years, reaching 680,000 units sold in 2007, compared to 12,000 units sold in Production increased significantly to keep up with rising demand, peaking at over a quarter million units. Demand was fostered as a result of the strong economic growth of the past years, the recovery of purchasing power, employment, consumption and the widening gap between prices of automobiles and motorcycles. During this period, imports (634,000 units in 2007) grew even faster than production (at a compound annual growth rate of 128% between 2002 and 2007 vis-à-vis a rate of 121% for production during the same period). Over 90% of imported models, mainly small motorcycles, come from China. INDUSTRY SEGMENTS Some new segments are gaining share in vehicle production and represent attractive investment opportunities. Car production accounted for 64.4% of total production in the industry and light commercial vehicles represented 34.6% in Heavy trucks, coaches and buses represented the remaining 1%. Regarding sales, cars accounted for the lion s share of the domestic market with 75% of the total, light commercial vehicles accounted for 20% of total sales, and heavy trucks, coaches and buses for the remaining 5%. Trucks. Demand for trucks has increased stimulated by the economic growth over the past five years and particularly by the agriculture boom. IVECO is the only truck manufacturer in Argentina (5,100 units in 2007). The domestic market is mostly supplied by imports. Production has grown steadily since 2002 to meet the increasing demand; however imports increased faster than production. Currently imports are 3.5 times the level of domestic production. Motorcycles. Both world-class foreign companies (Honda, Yamaha, Cagiva, BMW, Gilera, Jawa) and domestic firms are players in the local motorcycle industry. The most important motorcycle manufacturers are located in the province of Buenos Aires. Additional companies are located in the provinces of Córdoba, Santa Fe, San Luis, San Juan and Catamarca. Demand remains INVESTMENT The strong recovery of automotive production has prompted strong investment commitments on behalf of a number of manufacturers. According to the Argentine Association of Automobile Manufacturers (ADEFA), manufacturers have invested US$1.2 billion in facilities since 2003 and estimate that investment will exceed US$3.5 billion between 2007 and 2010; over US$1.7 billion in 2007 alone. This would increase output to 800,000 units by Volkswagen announced a US$100 million investment to expand current capacity for the production of transmission gears; and another US$320.5 million to manufacture its first pick-up truck, with an estimated output of 90,000 units in Ford: will invest US$161 million for the production of a new medium-sized model in 2008 and a new pickup truck in In 2006, the completion of previous investment projects resulted in an increase in production from 300 units per day to 340 units. PSA Peugeot-Citroën: announced a US$24 million investment to expand current capacity and to increase the integration of local parts in their domestic production. 76 million were already invested to start the production of the new Citroën C4. Toyota: announced an investment of US$41.5 million to increase production of auto parts. Toyota has so far invested US$ 1 billion in Argentina.

7 Honda: is investing US$100 million in a new plant in the city of Campana to produce a new medium-sized model. The start of production of 30,000 units is projected for 2009, two-thirds of which is expected to be exported to Brazil. Mercedes Benz: announced a US$50 million capital investment to produce the NCV3, a new commercial vehicle. General Motors: announced a US$200 million investment for the production of a new model at the company s plant in Rosario. Fiat: following an agreement between Fiat and Tata Motors, the Fiat plant in Ferreyra in the province of Córdoba is expected to reopen to manufacture a new medium-sized car model and a pick-up truck. In 2008, the company will invest US$60 million to produce 50,000 units per year of the Siena model. Renault: announced a US$80 million investment for the production of a new vehicle, and to increase the production of the Kangoo and Clio models. Auto parts: auto parts companies of all sizes are also investing to improve their productivity levels, broaden their production capacity and develop new products. Projected investment by car manufacturers will require a 120% increase in the production of auto parts, and might generate up to 50,000 jobs. Investment announcements are expected to reach US$460 million in 2008, twice the amount of TRADE PERFORMANCE Rising imports. The surge in demand during the last five years triggered production as well as imports in the industry. While automotive exports expanded at a compound rate of 22% in the period , imports doubled this expansion rate, reaching a record high number of 330,000 imported vehicles in Brazil was the source of over 75% of vehicle imports in 2007, followed by Mexico (5%) and Germany (5%). The elevated amount of imported units surpassed exports in 2004 originating a trade deficit of 14,000 units in The auto parts segment also exhibits a trade deficit, due to high-speed imports expansion (at a compound rate of 38%) since An opportunity. This trade deficit represents an opportunity for both automobiles and auto parts manufacturers to further develop local production and increase the share of nationally produced components in the automotive global value chain. Growth Projections (in thousand of units) 100 Production Exports , ,4 00 Automotive Production Trade Balance (in thousands of units) Argentine Association of Automobile Manufacturers (ADEFA) ,000,000 4,000, ,000 Exports Imports Trade Balance Source: Argentine Association of Automobile Manufacturers (ADEFA) Autoparts Trade Balance (in US$ millions) Exports Imports Trade Balance PERSPECTIVES Sustained growth expectations. According to ADEFA, the sustained growth trend in the sector will keep up in the foreseeable future. Nine new models are expected to begin production in Argentina between 2008 and In total, forecasts estimate that between 2007 and 2013 production will increase 85%, exports will double and domestic market will grow by 30%. As a result, it is expected that the share of the whole industry in GDP will double between 2007 and ,000 -,000 Source: Association of Argentine Auto Parts Manufacturers (AFAC) 7

8 III. Foundation for Success LOCAL SKILLS AND TALENT ATTRACTIVE MARKET Industry expertise. Motor vehicle production has been present in Argentina for more than six decades. This tradition and experience in automotive production is reflected in a highly qualified domestic labor force, characterized by both well-built technical capabilities and flexibility to adapt to a changing work environment. Growing skills. This pool of high skilled workers is permanently increased by professionals trained in universities (including the National Technological University) and technical schools (in some cases managed by the own manufacturers, such as the case of the Henry Ford School). Additionally, the National Network of Professional Training in automotive mechanics was created in 2004 jointly by the government, the Mechanics and Automotives Transport Union (SMATA) and the Argentine Federation of Auto-repair Shops (FAATRA). This network is aimed at promoting professional education in the sector at the national, provincial and municipal level. Promising market potential. Vehicle penetration in Argentina is elevated compared with Latin American economies and other developing markets (146 vehicles per 1,000 population, vis-à-vis 149 in Mexico, 103 in Chile, 96 in Brazil and 81 in Venezuela), but still reduced compared with developed markets. These figures entail room for further sustaining the recent growth in sales, particularly supported by a rising domestic purchasing power. Mercosur. Argentina is a full member of Mercosur, a common market also integrated by Brazil, Paraguay and Uruguay. As such, Argentina has preferential access to a regional market of 238 million inhabitants, with a combined GDP of US$1,607 billion (2007). As part of Mercosur, Argentina has concluded Economic Complementation Agreements with Bolivia, Chile, Colombia, Ecuador, Peru and Venezuela, enlarging the potential market to 381 million consumers and a combined GDP of US$2,346 billion.

9 INDUSTRY NETWORKING ADEFA. Founded in 1961, ADEFA represents all the automotive manufacturers in Argentina. The association s main purposes are to boost the local production of vehicles, to foster investment in the automotive sector and to promote the industry entrepreneurship and competitiveness. Of particular importance among the numerous activities carried out by ADEFA are those intended to promote the specialization of the automotive sector and a complementary symmetric system within the Mercosur. Furthermore, ADEFA permanently seeks the penetration of new markets for vehicles made in Argentina and throughout Mercosur. CASE STUDY MERCEDES BENZ a leading automotive company increasing export production in Argentina Mercedes Benz, one of the world s premier automobile companies, has been in Argentina for the past 57 years. Since its arrival, the company has been a strong industrial presence in the country with a demonstrated export bias. Its industrial center Juan Manuel Fangio, located in La Matanza (Province of Buenos Aires) reflects the firm s early commitment to investing and producing in the country, as it was the first center ever to be located outside the company s country of origin, Germany. AFAC. Auto parts manufacturers are represented in the Association of Argentine Auto Parts Manufacturers (AFAC), an association founded in 1939 whose task is the promotion of auto parts and all those necessary components for the manufacturing and repair of automobiles in the country. AFAC aims to improve and strengthen the development of the auto parts business, promote the development of the Argentine automobile industry as a whole and promote exports. In Argentina, Mercedes Benz is a full-liner company and commercializes trucks, buses, vans and premium vehicles. The company s industrial center currently operates 24 hours a day and has more than 2,700 employees. This high production rates prompted the addition of more than 100 new skilled employees in 2007 and Since 1996, Mercedes Benz Argentina produces and exports the Sprinter passenger van model to more than 58 countries. More than 85% of production is exported to countries in Europe, Asia, the Middle East, Oceania and the Western Hemisphere, making Sprinter the Argentine vehicle with the highest number of global destinations. This locally produced vehicle has the same characteristics and quality standards than those produced at Mercedes Benz German headquarters, a fact that accounts for the outstanding level of local labor. Mercedes Benz Argentina has just concluded investments for more than 65 million in the creation of a new assembly line and production platform in Argentina. The passenger car built on this site is 100% destined to the external market. The company is also working with a number of local providers to develop national production of auto parts for its vehicles and is investing more than 12 million in this process. In addition, production of a new chassis for urban buses (OF 1418) has just begun and has been added to the production of the OH 1315, already made in Argentina.

10 IV. Policy Initiatives REGIONAL TRADE Incentives Special trade regime with Brazil. The automotive sector enjoys significant government support, benefiting from a special trade regime with Brazil and various incentives for manufacturers. As part of Mercosur, both Argentina and Brazil share a common external tariff (CET) of 35% for finished products (with an inferior tariff in Argentina for trucks and buses) and of 14-18% for non-locally produced parts. In 1994, the two countries signed a bilateral trade agreement, providing for duty-free trade both in automobiles and auto parts, subject to the requirements of national regimes. Currently, zero-rate tariffs for bilateral trade are in place, subject to (decreasing) balanced trade requirements and regional and national content requirements. Bilateral trade with Brazil is tariffexempt within a flex mechanism, which determines the level of Brazilian imports in relation to Argentine exports (tariffs apply if this level is exceeded). This mechanism is aimed at protecting the domestic industry as it gains global competitiveness. Currently, an asymmetric flex is in place, favouring Argentine exports within Mercosur (Argentina can export US$2.50 for every US$1.95 imported). This new system encourages investment plans by setting a predictable framework for the next five years and looks to foster the share of domestic auto parts in bilateral trade. Local integration. Additionally, other policy initiatives have been put in place to promote the auto parts sector, including reimbursements to automobile manufacturers, trade negotiations conducted by the national government and a specific regime. A cash reimbursement fiscal benefit is in place for vehicles produced domestically and that have imported parts whose value do not exceed 30% of the wholesale price of the final good (Decree 774/05). Specifically, a company manufacturing vehicles in Argentina receives a cash reimbursement equivalent to 6% of the value of the locally produced parts being purchased. In addition, a Domestic Auto Parts Promotion Law was enacted in June The initiative projects a production level of 500,000 engines and no less than 700,000 motorcycles by 2011, via the support of investment and setting of new tax benefits. This includes reimbursement of 8% over the total domestic auto parts acquired by manufacturers during the first year. The reimbursement levels will be progressively reduced to 7% for the second year and 6% for the third. In relation to local components used for engines and transmission gears, reimbursement percentages are 10% for the first year and are then progressively reduced to 6% on the fifth year (total period covered by the initiative). Trade with Mexico. In 2006, Argentina and Mexico eliminated all bilateral trade barriers in automobile trade and in June 2006 numerous tariffs were abolished in the auto parts sector. 10

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12 V. Main Challenges Industry players and government agencies face key challenges to sustain growth and consolidate the sector s competitiveness. In themselves, these challenges present attractive opportunities for the industry and Argentina. Improve the local industry s insertion in the global value chain: encourage more investment in training and R&D, in order to increase the industry s capacity to migrate towards higher value-added activities. Pursue a balanced development of the sector s local value chain: the surge in automobile manufacturing should serve as a basis for a strong increase in domestic auto parts production. A closer integration between manufacturers and local auto parts suppliers has the potential to increase the sector s competitiveness and encourage technological advances. Take full advantage from a demanding domestic and regional market: the advanced level of development of the domestic and regional markets presents an attractive opportunity for the sale of models adapted to regional consumer demands. Continue to strengthen the sector s publicprivate partnership: a sustained increase of the industry s competitiveness will require a coordinated effort by public and private players, among other actions promoting Argentina as an increasingly attractive option for international manufacturers to locate production facilities. OUR CHALLENGES ARE YOUR OPPORTUNITIES. SOURCES: The trends, data and figures included in this material were elaborated by ProsperAr on the basis of: National Institute of Statistics and Census; CEP; ADEFA; AFAC; López, A. (coord.), Complementación Productiva en la Industria Automotriz en el Mercosur, (2007); The International Organization of Motor Vehicle Manufacturers; Automotive Forecast, The Economist Intelligence Unit, January 2008; and Auto Report 2006/2007, International Metalworker s Federation. 12

13 The information provided through this brochure does not constitute legal or professional advice whatsoever. ProsperAr (Agencia Nacional de Desarrollo de Inversiones) reserves the right to revise, amend, alter or delete the information provided herein at any time, but shall not be responsible for or liable in respect of any such revisions, amendments, alterations or deletions. Photos: courtesy of Basso, Stock Exchange and Flickr under Creative Commons license. 13

14 Argentina at a glance Country profile Official name Capital city Main cities Surface area Population Population growth República Argentina Buenos Aires La Plata, Mar del Plata, Mendoza, Rosario, Cordoba,780,400 square kilometers,356,383 inhabitants 1.0% per year GDP per capita (PPP) US$ 13,307 Currency Argentine Peso ($) Adult literacy rate Life expectancy at birth Form of government Political division 7.2% 75 years Federal Presidential Republic autonomous provinces Time zone GMT - 03:00 and the Autonomous City of Buenos Aires Official language Spanish Main Economic Indicators E GDP growth rate (annual %).8% 9.0% 9.2% 8.5% 8.7% 7.4% GDP (PPP) (millions of US$), , , , , ,392 GDP (millions of US$) 129, , , , , ,004 Exports (millions of US$) 4,439 39,864 46,825 54,207 65,838 78,756 Imports (millions of US$) 18,827 27,930 34,946 41,133 53,358 68,737 Balance of trade (millions of US$) 15,611 11,934 11,879 13,074 12,479 10,019 Trade surplus (% of GDP) 12.0% 7.8% 6.5% 6.1% 4.8% 3.3% Current account surplus (% of GDP).3% 2.1% 2.8% 3.6% 2.8% 2.2% Primary fiscal surplus (% of GDP).3% 3.9% 3.7% 3.5% 3.2% 3.6% Gross capital formation (% of GDP) 15.1% 19.2% 21.5% 23.4% 24.3% n.a. Gross national savings (% of GDP) 19.6% 20.6% 23.7% 26.4% 26.6% n.a. Foreign direct investment (millions of US$) 1,652 4,125 5,265 5,037 5,713 n.a. Exchange rate ($/US$) Foreign reserves (millions of US$) 14,119 19,646 28,077 32,037 46,176 55,597 Unemployment rate (% of EAP) 14.5% 12.1% 10.1% 8.7% 7.5% 7.0% Source: ProsperAr based on Argentinean National Institute of Statistics and Census, Central Bank s Market Expectations Survey (REM) and International Monetary Fund. 14

15 ProsperAr is Argentina s National Investment Development Agency Our mission is to encourage foreign and national investment for Argentina s competitiveness and sustainable development ProsperAr s five main objectives: Provide services to investors ProsperAr acts as a centralized contact point for both foreign and local investors in Argentina. We provide potential investors with personalized professional services at all stages of the investment process: from investment assessment and set up to post-investment (through our aftercare activities). We supply key information on business sectors, legal framework, investment incentives and regional profiles, necessary to establish and grow your business. We also facilitate contacts between potential investors and prospective local partners and government agencies. Attract and generate investment ProsperAr works to promote, attract and expand both domestic and foreign investment in the country. We identify investment and innovation opportunities in high growth sectors, and in turn, communicate them to national and international investors. We also encourage existing firms to expand and develop their businesses in the country. ProsperAr is implementing a set of programs to facilitate access to credit and capital for investment and innovation. Support the internationalization of local companies ProsperAr promotes the growth and internationalization of Argentinean firms. Fostering local innovation capabilities and overall competitiveness is key to our strategy. ProsperAr also assists international companies to invest in and work with Argentinean peers in global joint ventures. In short, we plan to financially support pioneers and domestic companies to achieve their global expansion goals. Communicate Argentina s advantages ProsperAr communicates Argentina s advantages and opportunities to both local and global investors. We aim to create a differential image for the country, highlighting the reasons that make Argentina an attractive, profitable and strategic investment location. We also work to build relationships that enable international companies to take advantage of local, regional and global opportunities. Boost the Investment Environment ProsperAr works to strengthen Argentina s investment environment. We interact with local and overseas companies, as well as potential investors, identifying and removing possible obstacles to do business in Argentina. Through active dialogue with the private sector, and in coordination with other government departments, we advocate for the formulation of policies and programs to optimize the investment and innovation environment. What ProsperAr can do for you: >> Provide timely and relevant information on business sectors and geographical locations in Argentina >> Help identify investment and innovation opportunities in strategic sectors >> Troubleshoot red tape and obstacles; facilitate the whole investment process >> Assist in building partnerships between foreign investors and local companies 15

16 To learn more about how investing in AUTOMOTIVE INDUSTRY in Argentina can benefit you, please contact us: