Colombia Ready With Program to Prop Up Auto Sector

BOGOTA – Colombia’s struggling automobile sector is anticipating as early as today the launch of a new government program designed to help it follow the successful tactics of its principal competitors abroad.

The primary objective of the scheme, dubbed PROFIA (Development Program for the Automotive Industry), is to help the sector recover market share from inexpensive imports, notably by slashing tariffs on parts and materials imported for vehicle assembly.

However, industry insiders are warning the scheme will do little to tackle the internal and external conditions shackling the sector’s competiveness.

Just two years ago, the Colombian auto industry was riding high. Between 2009 and 2011, sales grew 97.2% to a record 351,012 units, while production swelled 69.3% to 154,261 units, according to statistics compiled from government records by the ANDI, Colombia’s business association.

In 2012, the wave broke, with a 7.3% fall in consumption and a 9.8% drop in production.

While government figures have yet to be compiled, preliminary statistics for 2013 show sales dropped a further 7% and may have ducked below the 300,000 mark. Even more of a concern is the growth in the penetration of imported vehicles, which now account for 67.3% of the market, compared with 51.5% in 2009.

In addition, the industry has been hit by a series of factory closures, the most recent of which, by Mazda, will halt all production at its Bogota plant April 30.

The loss is a serious blow. Mazda is one of eight automakers with assembly plants in Colombia, and along with General Motors, Renault and Toyota accounted for 99% of vehicles manufactured locally in 2012, according to the ANDI.

“The automotive industry is in serious trouble,” says Tulio Zuloaga, president of ASOPARTES, Colombia’s auto parts industry association. “Because of high taxes, energy costs and other factors, the sector’s competitiveness is meager.”

One of the central concerns is the industry’s inability to compete with imports, especially from Mexico, which has capitalized on a 1995 Free Trade Agreement with Colombia to claim a 23% market share, according to ANDI.

The Colombia sector has looked to Mexico in search of answers to how to boost competiveness, developing the PROFIA scheme based on Mexico’s PROSEC program, which abolished tariffs on the import of goods and equipment used for manufacturing of vehicles or parts in the country.

“The objective of PROFIA is to provide the automotive sector with a new mechanism to strengthen companies in the domestic market, making relations between the production chain and the government more effective,” says Camilo Montes, head of Colombia’s Ministry of Commerce’s production transformation program.

Suppliers Also to Benefit

While the principal beneficiaries of PROFIA will be the assembly sector, it also was designed with an eye on auto-parts production. Whereas PROSEC removed tariffs from everything used in production, in Colombia 5% to 10% tariffs will remain on imports of any parts similar to those produced locally.

In addition to PROFIA, the government has looked to boost the auto sector with $25 million of favorably termed credit for parts manufacturers and with investment in a new specialist research and training center.

For Montes, PROFIA is a sign of the strength of the Colombian market.

“What it shows is the maturity of a sector that has managed to bring two fundamental actors, assemblers and parts manufactures, into alignment in a new scheme to level out the playing field, so that everyone can share and grow.”

However, many inside the industry do not share his rosy assessment.

“The PROFIA program is like a Band-Aid on a gaping wound,” Zuloaga says. “The impact will be minimal.”

Experts doubt PROFIA will be sufficient to offset what they consider an overvalued Colombian peso, and the sector’s vulnerability to several free-trade agreements recently passed or under negotiation.

Mexico remains the main worry due to its proximity and superior economies of scale, while concerns are mounting over a deal struck in 2013 with South Korea, as well as others currently under discussion with Turkey and China.

“We have to re-evaluate or renegotiate some of the FTAs so they are more balanced and don’t damage the auto sector,” says Camilo Llinas, president of ACOLFA, the association of local auto parts makers.

Also, he says, demand for autos in Colombia is hampered by poor infrastructure conditions in the country, notably a crumbling road network and high transportation costs.

As a result, even the associations involved in lobbying for PROFIA regard the program as at best a step in the right direction. Industry representatives now are calling for further measures such as 50% tax breaks and public-services subsidies, as well as drastic action to overhaul infrastructure and logistics.

Nevertheless, optimism remains that the size of Colombia’s internal market and its steady economic growth mean that given the right conditions, the sector still could thrive.

“I am sure that if we sort out some of these circumstances, and with the help of the government, that this sector could be a driving force,” Llinas says.