For decades, when deciding on where to focus their marketing attention, Central America never seemed attractive as an aftermarket opportunity to sales executives. The vehicle populations were relatively small, the political and economic conditions hazardous, and the rules governing imports were a plethora of contrary regulations that made it difficult to harmonize a sales and distribution strategy throughout the region.
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While it has gone mostly unnoticed during the past 20 years, Central America has matured into a vibrant, stable and lucrative market. Yes, even for the automotive aftermarket.
The development of the market shouldn’t surprise anyone who’s kept close watch of the region. The primary driver of this turnaround has been economic growth. As a sub-region, Central America was expected to grow 4 percent in 2016, as opposed to a .5 percent economic contraction in Latin America. The countries that make up Central America include Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama. But within those seven countries, growth rates could vary dramatically.
In 2016, Panama grew its gross domestic product (GDP) by 5 percent, which led the region. In that same period, Belize’s economic activity shrank -1 percent, so due diligence should be used when considering a market strategy. Population demographics remain strong, with a combined population approaching 47 million people, with a significant number of millennials making up the population.
In today’s highly charged political climate, free trade agreements often are viewed with skepticism, if not outright derision. The North American Free Trade Agreement (NAFTA), a tri-lateral trade agreement between the U.S., Canada and Mexico, has its share of critics. But on purely economic terms, NAFTA has widely been considered a success.
Other efforts to emulate the NAFTA example led us to two agreements that govern the U.S. trade relationship with the region. One is the Central American Free Trade Agreement (CAFTA). This includes six of the seven countries in Central America, but not Panama. Panama has a separate agreement with the U.S known as Panama Trade Promotion Authority (PTPA). The U.S. had total exports of $30 billion in 2016 to the CAFTA region, versus imports of less than $20 billion. This trade surplus makes it unlikely that CAFTA will come under the same kind of scrutiny in the U.S. that NAFTA has.
Essentially, what both the CAFTA & PTPA agreements do is eliminate tariffs on certain goods manufactured in a participating country. In the case of automotive parts and accessories, this benefits the U.S. manufacturers, as there is little manufacturing of automotive items within Central America that gets imported back to the U.S. However, this does give American manufacturers a small advantage over their Asia-based competitors.
“CAFTA has provided us with a slightly better competitive advantage due to the reduced import duties,” says Mark Marutiak, international sales director at the Fram Group. “Of course, this applies only to U.S.-manufactured products.” He laments that due to the competitive nature of the industry, “more and more product is being sourced off shore.”