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Paraguay works to attract auto manufacturers
Ward's Automotive International / September 1, 1997

By Larry Luxner

ASUNCION -- Paraguay, the only full-fledged member of South America's Mercosur trade bloc without its own automobile industry, could soon get one -- though as with almost everything else here, it's often hard to separate rumor from reality.

Last year, the impoverished, landlocked nation of 5.2 million was swept with rumors that Lamborghini might locate a factory here to produce $240,000 Diablo VT racing cars for Argentine and Brazilian millionaires. At the time, published reports hinted that Paraguayan businessmen would put up half of the necessary $25 million investment for the factory, which would produce 300 cars during the first 12 months. Nothing ever came of the announcement.

Now, in a similar vein, General Motors do Brasil has begun distributing its cars and trucks in Paraguay through a network of three or four local dealers. But the company says rumors it'll invest tens of millions of dollars in an auto factory are untrue. The São Paulo-based newspaper Gazeta Mercantil reported back in April that GM would build 25,000 small and medium-sized Chevrolet trucks, and eventually parts, in an assembly plant near Asunción, the Paraguayan capital. The pickups would then be exported, primar-ily to Argentina and Brazil. The paper added that the factory's construction "still depends on a firmer position from the government" to stop the trade in cars stolen from Argentina and Brazil, which account for an estimated 60% of the 500,000 autos on Paraguayan streets and highways.

"Paraguay is an interesting market for us, but we don't see any reason to make an investment like this now," GM spokesman Luis Fanfa said in an interview from São Paulo.

At least one U.S. expert, Tom O'Keefe, is also skeptical.

"Some things about Paraguay have to be resolved, says O'Keefe, president of Mercosur Consulting Group Ltd. in Washington. "Until they are, I think it's pretty far-fetched to think there'll be any significant foreign investment in Paraguay, particularly something so capital-intensive as automobile manufacturing."

Those "things" include widespread corruption dating from the days of Gen. Alfredo Stroessner, who ruled Paraguay with an iron fist from 1954 until his overthrow in 1989. Now a democracy under President Juan Carlos Wasmosy, Paraguay is still plagued by various crises -- the latest one being a banking scandal that in mid-July forced the resignation of Ubaldo Scavoni, Paraguay's minister of industry and commerce.

On the other hand, foreign interest in Paraguay as a manufacturing center seems to be picking up lately, thanks to passage of a law earlier this summer authorizing the establishment of overseas assembly plants, known as maquilas, in an effort to attract badly needed investment.

The law aims to bring hundreds of clandestine factories now churning out bootlegged apparel, consumer goods and electronics into the legal economy -- and shed Paraguay's reputation as "contraband capital of Latin America."

Observers say the local business community's interest in legalizing such activity is linked to U.S. and Brazilian pressure to curb counterfeit name-brand goods, particularly in the eastern border town of Ciudad del Este.

Under the maquila system -- common along the U.S.-Mexican border -- a foreign firm ships equipment, technology and raw materials to an overseas assembly plant, exploiting cheap labor and electricity (both in abundance in Paraguay, which owns half of Itaipú, the world's largest hydroelectric dam). The result is a low-cost product, which is shipped back to the parent company or exported.

Since maquilas don't buy, sell or directly generate profits, they'd only pay a 1% value-added tax, as well as the VAT on utility bills.

Gerry McCullough, executive director of the Paraguayan-American Chamber of Commerce in Asunción, says the measure is sure to attract foreign investors if properly implemented.

"The law allows maquilas to be set up. The next step, of course, is to designate areas and to actually manufacture, which is the toughest part," said McCullough, whose organization represents 240 corporate and 80 individual members. "It offers U.S. investors a way of getting into the Mercosur market."

According to local sources, the law has already revived several projects which had been at a standstill. The Czech automaker Skoda -- which plans to sink $100 million in a truck factory in Salvador, Brazil, and is planning a second truck plant in Santa Catarina -- says it's encouraged by calculations of production cost, and recently confirmed it would use Paraguay's maquila sector to assemble minivans.

For the moment, Skoda -- which is 70% owned by Volkswagen AG -- says it'll only import motors and dashboards. The fiberglass bodies will be brought from Brazil, while the chassis, upholstery and other mechanical parts will be strictly Paraguayan.

In addition, South Korea's Daewoo is negotiating with the Paraguayan government to set up a factory in Ciudad del Este capable of producing 30,000 units a year for the Mercosur trade bloc.

But all these projects would be dwarfed by General Motors, which has reportedly conditioned its initial investment of $10 million on a reduction of the inflow of used cars from the Chilean port of Iquique.

Says McCullough: "There is the possibility GM would set up an assembly plant for Chevy pickup trucks for the Mercosur market, but they're waiting for some conditions to be met by the government before committing.

"One of the things new car dealers are trying to stop is this Iquique business," he adds. "The Japanese are bringing the cars into a free-port area," and from there, the autos are driven to Paraguay. "Depending on mileage, you can get a pretty good car for $3,000 or $4,000, much less than for a similar car here. Dealers pay even less."

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