To meet demand in South America’s two largest markets, OEMs have implemented a manufacturing strategy which involves assembling different vehicle models in Argentina and Brazil, and exchanging them in order to benefit from the terms of the Mercosur trade agreement.
The existing trade agreement between the two countries has been in effect for the last 14 years. Negotiations are under way to write a new agreement covering imports and exports that is expected to guide future trade between Argentina and Brazil.
In June 2014, the two countries extended the current agreement by another year, to 30 June2015. Under the terms of the extension, for each US$1m of cars imported from Argentina, Brazil can export US$1.5m to that country. Previously, the agreement called for US$1.95m exported by Brazil versus US$1m imported from Argentina.
The new vehicle markets in Argentina and Brazil are currently topped by fairly similar segments, with the sub-compact B-segment accounting for more than 50% of sales.
Here we take a closer look at activity in the new vehicle markets in Argentina and Brazil, and consider the longer-term impact of these trade negotiations.
Argentina in 2013: it was a very good year…
Full year vehicle sales in Argentina in 2013 totalled 955,000 units, a 13.5% increase year-on-year. The growth was driven by the high rate of inflation – officially 10%; in reality, 30% – which made customers look on cars as a secure investment. There was also a high discrepancy between the official dollar and the black market dollar, which made vehicle purchasing a good deal for those with foreign currency (historically, Argentineans have saved US currency).
The number of vehicles imported into Argentina rose by 18.5% in 2013, from 488,864 units in 2012 to 579,060 units; meanwhile, exports grew by 4.8% in 2013, from 413,500 to 433,300 units. Brazil was the source of most imported vehicles, and the destination for most of Argentina’s vehicle exports.
…while Brazil’s 2013 disappointed
The decline in Brazil’s new vehicle market in 2013 has been well documented; the total, of 3.76 million units, was down by 0.91% on 2012’s figure of 3.8 million units. The decline was attributed to the banks tightening conditions for loan approvals, and a lower full year GDP, which ended at 2.3% compared to the 3.5% forecast at the start of 2013.
New vehicle imports fell by 10.8% in 2013 from 784,100 units in 2012 to 699,600, due to the higher IPI tax on imports. Exports, however, grew substantially in 2013. At 563,300 units, the total was up by 26.5% (2012: 445,200), with the main destination being Argentina.
2014 won’t be a great year for either market
Argentina’s automotive market is showing signs of slowing in 2014, and year-to-date sales in May were down by 22.7%, at 328,700 vehicles, compared to 425,500 in the same period last year.
Brazil is again experiencing a market slowdown; the YTD May sales total of 1.4 million vehicles marks a 5.5% decline over the equivalent period in 2013, when sales reached 1.48 million vehicles.
South America’s two largest vehicle markets need each other
The Argentinean automotive industry is highly dependent on exports to Brazil. Vehicle production was up 3.5% from 764,500 units in 2012 to 791,000 in 2013. Argentina produced a total of 257,500 vehicles from January to May 2014 and 137,000 were exported, mainly to Brazil. Currently, exports account for 52% of Argentina’s vehicle production. The latest CARCON forecast for 2014 sees production of 600,000 light vehicles in Argentina, a 23% drop from last year.
As illustrated by the accompanying chart, 40% of light vehicle production in Argentina is made up of B-segment cars, followed by pickups at 25%.
Like Argentina, vehicle production was up in 2013, rising by 9.9% from 3.4 million to 3.74 million units, with the increase attributed to higher demand in Argentina.
In the period January to May 2014, Brazil produced a total of 1.351 million vehicles, with 146,000 units exported, mainly to Argentina. Currently, exports account for 10% of Brazil’s vehicle production. The latest CARCON Automotive forecast for 2014 sees production of 3.3 million light vehicles in Brazil, a 5% drop from 2013.
The accompanying chart shows that in Brazil, B-segment cars account for almost 70% of its light vehicle production, followed by pickups, which account for 12%.
Foreign exchange
With a few exceptions, OEMs that have plants in both countries produce different vehicle models in each country and exchange them, as detailed in the accompanying table. This strategy avoids duplication of manufacturing processes in the two countries and provides higher volumes of a given model at one plant only, while optimising investment in tooling and facilities.
What does this all mean for the future?
There are, of course, other OEMs producing in Brazil that don’t have plants in Argentina, such as Hyundai, Mahindra, Mitsubishi, Nissan and Suzuki. Over the next two years, the following light vehicle brands will also begin production in Brazil: Audi, BMW, Chery, JAC Motors, Jeep and Land Rover.
Since both countries levy high taxes on vehicles not produced in the Mercosur countries or Mexico, which has a trade agreement with Mercosur, OEMs that plan to enter or increase sales in either Argentina or Brazil will need to develop a manufacturing strategy that also looks at the other country, and possibly also Mexico.
Vehicle trade between both countries is vital, but there’s an important additional step to take in order to conquer new export markets: recent OEM strategies have seen new products launched in South America that are of global standard, and could easily be exported providing the price and rate of exchange are favourable. This scenario is completely different from the one we have seen in the past, where vehicles built in the region were outdated and had lower technological and safety content, and certainly could not perform on the global stage.
