How will the global turmoil, as well as local trade and tax changes, affect Latin America's auto sector? Three experts share their insights.
BY LATIN AMERICA ADVISOR
While the dire circumstances of the global auto sector have dominated business headlines worldwide in recent weeks, a number of trade and tax changes in Latin America have been capturing the attention of auto industry watchers. What have been the most important trends in auto sector trade and taxation to surface in Latin America over the past year? How vital is the auto sector to economies of the region, and how will the changes taking place in the auto industry in the United States, Europe and Japan affect Latin America's economies and consumers?
Luis Kolster, assistant general counsel and director of public policy for General Motors Latin America, Africa & Middle East: Latin American economies have been able to implement fiscal and financial measures to support auto sales. Brazil has cut taxes on vehicle purchases in 2009 and Chile suspended fuel taxes in the last year. Brazil, Argentina, Colombia and Chile have lowered interest rates and offered preferential financing to auto consumers. With respect to trade, Mercosur continues to protect its local industry through import duties and the ban on imports of used vehicles. Trade arrangements negotiated last year among Mercosur countries allow intra-regional trade at reduced or no duties, provided that vehicles fulfill legal and technical requirements. Chile is the most open market with free trade agreements signed with almost all its sources. The Colombian automotive sector has signed agreements with the Andean Community, Mexico, Chile and Mercosur. Negotiations with the European Free Trade Association, Canada and the United States were concluded last year and are estimated to take effect in 2010. In the cases of Venezuela and Ecuador, both countries have decided to protect their local markets by implementing import restrictions raising external tariffs. The auto industry is one of the largest manufacturing sectors in virtually every country that has an auto industry. The industry accounts for roughly 10 percent of manufacturing employment in Brazil. In Latin America, this industry is likely to emerge even stronger following the crisis, as long as the countries in the region continue to follow sound macroeconomic policies implementing the necessary measures. So far, the performance of most of the auto industries in the region will allow them to emerge relatively well from the global downturn.
Michael Warren, executive director for global research & strategic services at Hart Energy Consulting and former head of Latin American strategic research at Toyota Motor North America: Given that the vehicle manufacturing industry constitutes between 5 and 9 percent of GDP in Argentina, Brazil and Mexico, governments recognize the importance of this key industrial sector. Most of the policies designed to boost sales involve supply-side tax cuts and lending programs to enhance vehicle purchasing. Yet, some countries also appear to be crafting policies that would reduce the environmental impact of personal mobility by revamping the vehicle fleet. Late last year in Brazil, the government reduced taxes on new vehicle purchases and provided financing to financial institutions offering auto loans. In Argentina and Mexico, the governments resorted to financing schemes meant to boost vehicle sales, but the results have not been as impressive as in Brazil. In Argentina, the program is complicated and has many restrictions—consequently it has been slow to take off. Mexico's loan guarantees to auto lenders have been deemed insufficient by these institutions, and have not yet had the desired effect on vehicle sales. Both Chile and Ecuador have announced tax programs that look favorably on hybrid and flex-fuel vehicles (FFV), and Colombia has mandated that 60 percent of vehicle sales (with 2.0 liter engines and below) must be FFV by 2012. So, the changes in vehicle taxation policy and the incentives for fleet renewal adopted by the industrialized countries such as Japan, Germany and France—and currently under consideration in the US—may be shifting south to Latin America. Going forward, the lion's share of vehicle sales growth will take place in emerging markets. Latin America is well placed to receive new investment from the established industry players—such as VW, Ford, Toyota, etc.—and new entrants from China and India.
Guido Vildozo, senior market analyst for Latin America in the automotive group at IHS Global Insight: When looking at the automotive sector in Latin America, it is important to focus on Brazil, given that it accounts for the vast majority of volumes in the region. Brazil launched two measures to support vehicle demand last November and December: funds for vehicle financing and reduction of production wholesale tax. This resulted in significant pent up demand going from 1.8 million units on an annualized basis for November and December to 2.8 million units for January and February. Brazil is the only other big market in the world outside of China where sales have not declined, roughly 0.5 percent year over year for sales through April. Argentina has launched a vehicle financing program too, but its effect has not been as successful. Vehicle demand is heading downward in double-digit fashion. The importance of the sector to the region is significant, with the automotive industry representing 25 percent of industrial GDP and 8 percent of total GDP in Brazil, for example. As a whole, this is why we've seen governments take measures to help an ailing auto sector.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.