Argentine Automakers Under Siege on Export Front

BUENOS AIRES – Argentina’s automotive industry is in a pinch as import restrictions limit output, sales to Brazil slow and a sluggish economy threatens to stifle demand.

Production has dropped more than 30% over the past two years, and a recovery is not expected until 2017.

The biggest drag is the key Brazilian export market, where a corruption scandal, political crisis and high inflation have thrust its economy into recession. Argentina sells about half of its vehicle output to 202 million-population Brazil (Argentina’s population is 41 million).

“When Brazil catches a cold, Argentina gets the flu,” says Alejandro Ovando, a director of IES, a business consultancy in Buenos Aires.

Indeed, Argentina’s auto exports plunged to 175,478 vehicles in the first eight months of 2015, down 21.3% compared with 222,902 year-ago, according to the Association of Automotive Makers. As the destination for about 80% of Argentine overseas vehicle shipments, Brazil’s economic slump drove the decline.

This slammed production, with output dropping to 364,574 vehicles in the January-August period, down 9.7% year-on-year from 403,534, according to the industry group.

“The export market represents the biggest challenge for our industry,” Isela Costantini, the president of ADEFA and General Motors Argentina, says in a statement. “For the moment we are not seeing a reversal in the trend.”

What is worse, the export decline exacerbates a problem that has been restricting growth in the sector since it enjoyed a banner year in 2011: a lack of U.S. dollars.

After Argentina’s foreign-currency reserves started dwindling that year, the government stepped in to restrict access to U.S. dollars. It needed them to pay the national debt and for imported essentials such as food and energy.

Unlike most countries, Argentina cannot borrow on global financial markets, having yet to fully restructure debts outstanding from a $100 billion default in 2001.

Scarce Dollars Curtail Imports

For automakers, the dollar scarcity means they get monthly rations to bring in finished vehicles or parts for manufacturing. “You can import, but only so much,” says Gonzalo Dalmasso, an auto analyst at ABECEB, a consultancy in Buenos Aires.

Without a free flow of parts, manufacturers have been struggling to keep up with demand by its car-hungry population.

“The problem is on the supply side, not demand,” says Alejandro Lamas, a Buenos Aires car dealer and secretary of the Argentine Automotive Chamber of Commerce.

To turn things around, he says the key is to free up dollars for automakers.

“We cannot be isolated from the world,” he said. “No country makes 100% of the components for a car.”

Dalmasso says the need for dollars has become more urgent this year, as the export decline has reduced the flow of dollars for car companies to import parts and vehicles.

In response, some automakers are trying to widen exports to new territories. Toyota, for example, is completing an $800 million plant expansion to enable shipments of its Hilux pickup beyond Brazil. Daimler has said it wants to widen exports of its Mercedes-Benz Sprinter van in Latin America and to Australia, New Zealand and South Africa as well.

“They need to generate more dollars to continue operating in Argentina,” Dalmasso says.

Plant Expansions Fuel Modest Recovery

With these and other plant expansions by GM for its Chevrolet Cruze and Nissan, Renault and Daimler for pickups, the analyst says output likely will recover to between 570,000 and 575,000 units in 2016, up 4% to 5% from an expected 550,000 this year.

That is far slower than the more than fivefold surge to a record 828,771 vehicles in 2011 from a low point of 159,356 in 2002, before slumping 22% to 617,329 vehicles in 2014 from 791,007 in 2013, according to ADEFA.

The task of freeing up dollars will fall on the next government taking office Dec. 10 following an Oct. 25 election.

The new president “must put the house in order” before the car industry can grow, including by addressing an overvalued exchange rate, closing a widening fiscal deficit and bringing down nearly 30% inflation, IES analyst Ovando says.

A favorite to win the poll is the ruling Front for Victory party’s candidate, Buenos Aires Gov. Daniel Scioli.

While Scioli has vowed to create conditions for sustainable profits, his capacity to act could be limited by ties to current populist President Cristina Fernandez de Kirchner. To secure and maintain her important endorsement, Scioli may struggle to implement belt-tightening needed to revive the economy and encourage fresh investment.

His closest opponent, the conservative mayor of Buenos Aires, Mauricio Macri, could push austerity, but his smaller Republican Proposal party likely will face strong opposition in Congress after the vote.

Ovando says he does not expect the economy to recover until 2017.

Indeed, if government spending cuts free up dollars and devalues the Argentine peso, this could help the auto sector by bringing down labor costs and making exports cheaper in dollar terms. However, a weaker peso would cut purchasing power in dollar terms within Argentina, dampening demand for cars.

Dalmasso says he expects new-car sales to drop 12%-13% to 600,000 in 2015 compared with 2014, and another 2%-5% in 2016. That is down from a record 963,917 in 2013.