If you consider politics a sport, then Argentina would perennially be in the World Cup. The world has watched for years in fascination at the goings on in this most southern country of South America.
Argentina has had a rather volatile political system dating back to when the country was formed. The country secured its independence from Spain in 1810, and proceeded into a period of civil war that lasted more than half a century. By the late 1800’s, Argentina had settled down as the country we know today. It’s a nation with spectacular natural beauty, from the Andes to Tiera Del Fuego. It boasts a highly diverse population of 42 million people.
The people of Argentina are largely of Spanish, Italian and Native American descent. Asians, Middle Easterners and Africans all make up significant minorities with the country. Buenos Aires, the capital, is often compared to cosmopolitan European cities like Paris and Rome. But in a land of such diverse peoples, landscapes and ideas, the one constant has always been tumultuous politics. And politics aren’t always good for business.
Political discourse in Argentina has always had a direct, and often negative, impact on the economy. Shifting ideologies have lurched Argentina’s economic policies from centrist right to centrist left stances on several occasions. This pattern has become a generational cycle. Understanding this cycle is important to develop selling strategies and to manage risk in this volatile market. Automotive aftermarket exporters have many opportunities in Argentina, but it would be wise to proceed with caution.
Argentina has a modest population of motor vehicles with roughly 17 million cars and trucks in use as of 2014. While this makes it the second largest automotive market in South America, it’s still only about one fourth the size of the Brazilian market. Volkswagen currently commands the most market share, with approximately 19.7 percent, but Ford and General Motors trail it closely with 15 percent and 14 percent, respectively. Toyota ranks seventh in market share with 10 percent, so it seems there is no particular brand that dominates the market.
The most popular vehicles tend be smaller and fuel efficient. With gasoline approaching nearly $8 a gallon, most vehicles use engines that are 2.0 liters or less in displacement, with most in the 1.0 to 1.3 liter range. Most vehicles sold in Argentina are either produced locally or in Brazil, which along with Argentina is part of Mercosur Free Trade area.
Economic conditions have made selling cars problematic. The new vehicle sales market has contracted slightly this year, and is expected to come in at roughly 550,000 new cars being sold in 2015. However, with an economy that is highly dependent upon commodities, there is a strong demand for aftermarket parts to help service vehicles and equipment used in agriculture and mining. In fact, it is this dependence on commodities that has resulted in making exports to Argentina a challenge.
One impact of the Great Recession of 2007-2008 was that global commodity prices tumbled. This put tremendous pressure on Argentina’s already large trade imbalance. The government of President Cristina Fernández de Kirchner responded by passing a highly controversial law known as the Prior Sworn Import Declaration. Essentially the DJAI (as it is known by its Spanish acronym) requires that importers meet certain pre-conditions in order to obtain an import license. These conditions could include investment in new factories or industry, but most often they require an offsetting exports of equal value from Argentina.
Since Argentina does not have a strong industrial capacity, it was hoped that this law would spur development of native companies, or at the very least, prevent further trade imbalances with trading partners. But despite these efforts, the law had the opposite effect of slowing down all economic activity and pushing the country further into recession and rapid inflation. According to data from the International Monetary Fund (IMF), after growing at nearly 2.8 percent in 2013, the economy is expected to contract by nearly 0.3 percent in 2015.
According to U.S. Commerce Department statistics, Argentina is ranked 28th in the world as a destination for American exports, totaling roughly US$10.8 billion in 2014. The challenges to exporting to Argentina are numerous.
According to Guillermo Diez, director of sales and operations for Intraco Latin America, the most difficult aspect of exporting to this market is the need to get import licenses, which could take up to six months or be denied without a reason being given. It is a market where payment terms are regulated by the government, and import duties of 15 percent to 25 percent could make your products uncompetitive. Some products, such as tires, are banned completely in order to protect local industry. “Permanent devaluation and inflation make market pricing information difficult to understand and elaborate upon,” says Diez.
Necessity, however, can breed opportunity. According to Diez, “The implementation of such regulation [DJAI] resulted in additional costs, lack of key auto parts for the assemblers and an increased cost for the final consumer.” There is demand that is currently not being met in the market. But approaching the market requires careful consideration and planning. The best approach, according to Diez is to “make a partnership with a company that encompasses domestic production with structural exports as the most adequate model to be successful under current conditions.” This would allow U.S. exporters to have a local partner to help navigate the laborious licensing process, determine the best possible pricing models, and assist in determining the proper product range needed in the market. A good piece of advice is to have your finance team involved early in the process.
On November 22, 2015, the winds of political change were again blowing through Argentina. The ruling political party, Front for Victory (FPV), which had been in power since 2003, lost key national elections. In its place was elected a new political party called “Cambiemos” or “Let’s Change.” The new president-elect, Mauricio Macri has already formed a cabinet comprised of private sector professionals, and the new government has signaled its intentions to liberalize regulations and commerce. These are steps in the right direction according to Diez, “It has already been perceived by local and foreign investors, as well as several developed countries from around the world, as a very positive sign. That means that the Argentineans may expect an inflow of investments both in the private and public sectors. Certainly the automotive industry will benefit from easier bank credits, lower inflation, and it is expected that the parity of the local currency with the U.S. dollar will reactivate the industry during 2016.”
It is important to remember that there are substantial differences between the vehicle makes and models that are popularly available in Argentina versus those in the U.S. Exporters should do their research ahead of time to make sure the products they offer are appropriate to the market. Heavy duty and off-road equipment suppliers have significant opportunities in both the mining and agricultural sectors, as those sectors are growing rapidly. With an improved economic outlook on the horizon, a well-prepared company can take advantage of the opportunities available in Argentina.
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