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Economic downturn hurts Colombian car market
Ward's Automotive International / August 1, 1997

By Larry Luxner

BOGOTA, Colombia -- Foreign petroleum executives are routinely threatened -- even kidnapped -- by left-wing guerrilla groups, yet Colombia holds so much promise that they continue to pour billions of dollars into oil and gas exploration. Tourists are warned to stay away from Colombia, even as luxury business hotels ranging from Embassy Suites to Radissons sprout up all over metropolitan Bogotá, whose traffic-choked streets carry more than 530,000 vehicles a day.

The president of Colombia, Ernesto Samper, is strictly forbidden from visiting the United States because of his suspected ties to drug dealers -- yet the U.S. remains Colombia's largest trading partner and accounts for 44% of all foreign investment in the country.

Perhaps no South American republic gets as much negative press as does Colombia, whose 37 million inhabitants make it the continent's second-largest nation; only Brazil is more populous. The wave of bad publicity reached its height last year, when the Clinton administration "decertified" Colombia's efforts to crush the drug trade and revoked Samper's visa for life, pointing to his alleged acceptance of $6 million in campaign money from the Cali cocaine cartel. In February 1997, Colombia was once again decertified, lumping it with such pariah nations as Afghanistan, Burma, Iran and Syria -- and sparking outrage throughout Latin America.

"We're a very stable democracy," argues Carlos Ronderos, Colombia's new foreign trade minister. "We've had over 40 years of uninterrupted growth, and we're the fourth largest Latin trading partner of the United States."

Nevertheless, after the boom years of Colombia's economic opening (1992-94), things took a swing for the worse due to high interest rates and general political uncertainty. Many sectors of the economy, including the automotive sector, have since been forced to lower their expectations.

Last year, as a result, vehicle sales plummeted 10.6% to 117,635 units (compared to 131,624 units in 1995). Roughly 38,000 new vehicles were imported, accounting for 32.3% of all sales.

For the past decade, the Colombian market has been dominated by General Motors (Colmotores) with an average market share of 33.5%. In 1996, GM sold 38,577 vehicles (around 32.8%), just ahead of Compañía Colombiana Automotriz, which sold 20,825 Mazdas, giving CCA a market share of 17.7%. In third place was Sofasa-Renault, which sold 20,250 vehicles, giving it a 17.2% market share.

Official figures reveal that 74,328 automobiles and 43,307 commercial vehicles (taxis, buses, minivans and trucks) were sold during 1996. Chevrolet, whose best-selling passenger models here are Sprint and Corsa, enjoyed a 38.5% share of the commercial vehicle market.

In spite of the economic problems, says the U.S. Embassy in Bogotá, "production at the three assembly plants is gaining market share over imported vehicles because of their infrastructure, aftermarket service and ease of obtaining replacement parts. The Colombian assembly plants are taking advantage of the Andean regional trade agreements and are striving to become more competitive in Venezuela and Ecuador."

Indeed, several 1995 and 1996 regulations regarding local content and the importation of automobiles and auto parts have gone into effect this year.

The G-3 (Group of Three) Agreement signed in 1994 between Colombia, Mexico and Venezuela establishes a common market within these three countries. Chapter IV of this agreement deals with the automotive sector, some of whose provisions became effective on Jan. 1, 1997. Total compliance is slated for Dec. 31, 2007.

After a two-year grace period, the three countries are gradually beginning to slash import duties for motor vehicles and parts. Those reductions will continue over the next decade, so that 12 years from now, import duties on vehicles and parts will be reduced to zero. The G-3 accord also establishes several categories of motor-vehicle imports for the three countries, with duties ranging from 13.2% to 35%. Parts are levied at 15% to 35%.

Separately, Colombia has signed an economic integration agreement with Chile and Bolivia, under which motor vehicles and parts bought and sold among the three nations are exempt from import duties (exceptions being oil drilling and testing vehicles, crane trucks and public-utility vehicles). New trade agreements have also been negotiated with the Central American Common Market, the Caribbean Community (Caricom) and ALADI.

The government has also increased value-added tax from 16% to 20%, 35%, 45% and 60% for sales of several categories of vehicles. The most affected category is the one for vehicles with engine sizes of 1,400 to 1,800 cubic centimeters; VAT on these cars and trucks is now 35%.

Decree 440, approved by the Colombian government in March 1995, addresses local-content rules. The law stipulates that during 1997, at least 32% local content is required for any automotive part or component to be recognized as being of national or regional origin.

On Jan. 1, 1998, the minimum local-content requirement will be raised to 33% for vehicles carrying up to 16 persons and cargo vehicles up to 10,000 pounds; it'll go up to 18% for all other vehicles. The government warns that a regional policy with penalties will be enforced to assure compliance with the minimum integration percentages.

While no one can predict accurately when Colombia's auto industry might turn itself around, observers seem optimistic about the economy in general.

On May 19, Moody's Investors Service upgraded its rating of Colombia's long-term foreign-currency debt to Baa3, noting the country's "record of uninterrupted growth, prudent macroeconomic management and political stability."

Meanwhile, Samper's economic advisers claim Colombia's economy has bottomed out and will start showing growth soon, ending the year with GDP growth of 3.8% and inflation of 20% (compared to 22% inflation for 1996).

The prognosis for 1998 is even better, with most estimates projecting 5% growth. The Economist Intelligence Unit, which in April sponsored a roundtable between Samper and 60 multinational executives, predicts 3.8% and 4.5% GDP growth in 1997 and 1998, respectively, while projecting a drop in inflation to 18.8% and 16.8% over the same years.

"Despite current pessimism among some Colombian businessmen and private consultants, foreign analysts trust that the economy will recover during the second half of this year," says government economist David Ramírez. "Not only growth will be higher than in 1996, but in addition, inflation will decline, the currency appreciation process will slow down and the balance of payments will strengthen."

And that can only mean good news -- finally -- for Colombia's car manufacturers.

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