Bobbin / August 1995
By Larry Luxner
ASUNCION, Paraguay -- Year after year, the little Paraguayan town of Itaugua -- 30 kilometers from Asunción -- is mentioned in guidebooks as the world's best place to buy ñandutí, Paraguay's traditional lace embroidery.
This year, however, Itaugua has another claim to fame: it's the home of Hilandería Central SA, a recently inaugurated textile factory and one of the most modern facilities of its kind in Latin America.
Fernando Villalba, vice-president and CEO of Aceitera Itaugua SA and part-owner of the gleaming new factory, says Hilandería Central's 92 employees produce 6,000 kilograms of threads a day for export to Brazil and other countries.
The $10 million plant -- located just down the highway from the colorful roadside ñandutí stands -- is a 50-50 joint venture between Villalba and Italian investors, and the most tangible example yet of Paraguay's efforts to become a major textile exporter.
"We have a very important niche market in Brazil, where we have a comparative advantage," Villalba said in a recent interview here. "Paraguay produces good-quality cotton fiber, and Brazil is a net importer of fiber and threads. The state of Santa Catarina alone imports more than 50,000 metric tons of threads per year. Considering our short distance, we have some big advantages over rival countries, mainly Pakistan, India and Argentina."
Probably the biggest advantage is that Paraguay, a landlocked nation slightly smaller than California, is a major cotton grower, with exports worth around $300 million a year. Nearly three-fourths of all production is trucked over the Río Paraná to Brazil; the remainder goes to Chile, Uruguay, Peru, Venezuela and occasionally Europe.
Up until now, however, 90% of the country's cotton has been exported as raw material, without any value added.
"This is nonsense," says Villalba, who got his start in the oilseed business. "We are so far behind. You don't always get a niche market in the world. We have one, and we should take advantage of the situation."
Francisco R. Gutierrez, director of the export promotion agency Pro-Paraguay, agrees: "We have high-quality cotton right here. We don't have to import it. This is one of our biggest strengths."
Another strength is Paraguay's low cost of labor. According to the World Bank, average factory wages here come to $242 a month, compared to $626 in Brazil, $825 in Chile, $901 in Uruguay and $1,005 in Argentina. In addition, electricity is relatively cheap here, given Paraguay's proximity to the Itaipú Dam, and investment incentives are generous. Law 60/90, for instance, guarantees tax exemptions on the importation of capital goods and raw materials, and provides a 95% exemption on corporate income tax during the first five years of investment.
Perhaps most importantly, though, is Paraguay's membership in Mercosur -- a customs union that took effect Jan. 1, 1995, uniting Argentina, Brazil, Paraguay and Uruguay into a trading bloc of 200 million people. The pact allows duty-free movement of products and services between the four countries, allowing Paraguay, for instance, to export value-added products such as cotton fibers or finished garments to Brazil, without having to pay customs duties or tariffs.
"We want to position Paraguay as an attractive production base for all the investors who want to take advantage of Mercosur," said Gutierrez, whose agency has designated textiles -- along with meat exports, agribusiness, leather goods, wood products and manufactured goods -- as one of six industrial sectors worth promoting. "We have a lot of potential: cheap manpower, compared to Argentina or Brazil, very low electricity costs, abundant natural resources, and a strategic geographic position. In less than two hours, you can be in all three other Mercosur capitals."
Paraguay also has a few disadvantages, starting with a decidedly undemocratic tradition. Until March 1989, the country was ruled by Gen. Alfredo Stroessner, a brutal dictator who tolerated no dissent. Legacies of the Stroessner regime include an oppressive bureaucracy, widespread corruption, high illiteracy and poor infrastructure, particularly regarding telecommunications. International phone service is among the worst in South America; even calls from Itaugua to nearby Asunción rarely go through on the first try.
On the other hand, Paraguay does have several economic factors in its favor. Its per-capita foreign debt of $273 is among the lowest in Latin America, and its gross domestic product -- estimated at $6.4 billion in 1993 -- is growing at a healthy 3.5% a year. President Juan Carlos Wasmosy, who in 1993 became Paraguay's first civilian head of state in nearly four decades (and who happens to own the country's leading cotton production company) is a stauch free-market businessman and the chief architect of Paraguay's entry into Mercosur.
Maria C.Thomas, an investment officer with the Washington-based International Finance Corp., has been following the Paraguayan private sector for nearly a year. She says the IFC, an arm of the World Bank, has already visited several Paraguayan textile operations including Hilandería Central, and is currently looking to finance projects that make sense for Paraguay and for foreign investors.
"The system, in terms of how cotton is grown, is not organized in the way it is other industrialized countries," said Thomas. "There are thousands of cotton growers in Paraguay, and they each have farms of two or three hectares. It's a very important crop in Paraguayan society. Moving further up the value-added chain could benefit a lot of common people."
In the meantime, she said, Brazil is actually saving money by sourcing cotton fibers from neighboring Paraguay, rather than incurring inventory costs. Some Brazilian firms are also investing directly in the Paraguayan textile industry.
Last year, for instance, Teka of Santa Catalina acquired a local textile plant for $19 million and spent another $25 million to increase installed capacity, according to Pro-Paraguay. The company also plans to build a second plant to manufacture towels for the export market.
In addition, the Hering industrial group, which has long purchased Paraguayan cotton, wants to build a factory with an installed capacity of 20,000 articles of clothing per day, mainly to export T-shirts to Argentina and other markets.
Villalba also has big plans. He anticipates doubling production at Hilandería Central from the current 2,000 metric tons per year to 4,000. In October, he intends to inaugurate a second plant, Manufacturas del Bolzano, right next to the first one. Manufacturas del Bolzano is actually an 80-20 joint venture between Paraguayan and Italian investors, and is projected to employ 80 people. Later down the road, a third factory may be built for the production of blue jeans. It would involve both the Brazilian firm Alpargatas Santista and the Italian company GM Filatti. And still, it might not be enough.
"By the year 2010, Brazil will not be self-sufficient in either fibers or threads," Villalba says. "Only to satisfy the needs of Río Grande do Sul, we'd need 25 spinning plants."