Development Business / November 30, 1997
By Larry Luxner
CORDOBA, Argentina -- Lured by falling import barriers and pent-up regional demand, Detroit's Big Three automakers -- along with a number of European and Japanese manufacturers -- are flocking to Argentina in hopes of tapping into the booming Mercosur auto market.
Just outside Córdoba, Argentina's second-largest city, both Chrysler and General Motors have set up sprawling factories on the pampa flatlands. In April, Chrysler began assembling the Jeep Grand Cherokee here. The company now expects to produce 20,000 vehicles a year, 70% of them for export to neighboring Brazil. Córdoba, located 300 miles northwest of Buenos Aires, is already host to Italian carmaker Fiat and French carmaker Renault -- whose factory is just across the highway from GM's.
Under a December 1994 pact that governs the two countries' auto trade until Dec. 31, 1999 (after which a common Mercosur auto regime takes effect), finished vehicles and parts originating in either Argentina or Brazil have free access to the other's market, as long as imports are compensated for by exports to any market within or out of the customs trading zone. In addition, new vehicles must have at least 60% local content in order to qualify for duty-free trade.
Under the rules, both countries allow a maximum 40% of imported material per vehicle; in Argentina, this percentage is calculated per vehicle manufactured, while in Brazil it's calculated per factory.
Despite economic upheavals that have swept both countries in the wake of Asian currency devaluations, automakers are unlikely to slow their expansion plans. That hasn't yet happened in Thailand, Malaysia or Indonesia, and it probably won't happen in South America, say industry experts who view the current stock-market fluctuations as temporary blips rather than precursors of a prolonged recession.
"The Argentine market has had a history of very high protectionist tariffs which discouraged investment," said Charles N. Busch, president of Chrysler Argentina S.A., in a recent interview here. "Long production runs were epitomized by the Ford Falcon, but with the opening of the economy, things started changing very rapidly. In round numbers, it's projected that between 1995 and 2000 almost $5 billion will pour into Argentina's auto industry, and about $15 billion into Brazil."
Built on what was once a potato field, the gleaming new Chrysler plant covers 25,000 square meters; supervisors interviewed more than 800 people to hire the current 142 production workers. All are salaried employees, working one 7-4 daytime shift.
Meanwhile, General Motors' four-year-old, $120 million Córdoba facility produces 22,000 Silverado pickup trucks a year, 70% of them for export to Brazil; soon, its 466 workers will begin making Chevy Blazers at the 16,000-square-meter plant.
But what GM is really excited about is its new $350 million showcase factory in nearby Rosario. Argentine President Carlos Menem is due to inaugurate the 900,000-square-foot facility sometime in mid-December.
"Rosario is a template for three new plants in Poland, Thailand and China. It's a new concept of lean manufacturing," says Alberto García Carmona, director of investor relations at General Motors de Argentina S.A., which began operating in 1993 after a 15-year absence. "The last plant we built was in Eisenach, Germany. We are adding some new technology; for example, the press shop is almost completely automated."
In addition, the Rosario complex includes an engine plant, a stamping plant and other basic operations. The plant -- which employs 1,600 factory workers and 350 non-manufacturing workers -- is already producing the 4-door Chevy Corsa sedan. Beginning in May 1998, workers will assemble the Corsa station wagon. Annual production should total 84,000 units in two shifts, with 60% of production destined for Brazil and other South American markets. "GM is a global company," says García, "and we're analyzing the possibility of exporting to Venezuela and Colombia as well."
Ford, meanwhile, says it'll sink $1 billion in its 35-year-old plant in Pacheco, near Buenos Aires, to be spent as follows: $136 million on modernization, $147 million on "expanding productive capacity" and $717 million on new products. The factory will keep its current workforce of 5,000 and will begin manufacturing such models as the Ford Ranger pickup, the Orion and the Escort. Ford will keep about two-thirds of the 154-hectare complex which had been owned by Autolatina, a joint venture between Ford and Volkswagen that began to separate in Decmeber 1994 and for all intents and purposes is no longer in existence.
According to the American Chamber of Commerce in Argentina, "the Big Three want to secure themselves a dominant position in our country, and in Mercosur. This demands an aggressive investment policy to open up a niche in this European-dominated market."
Besides Argentina, U.S. auto giants Ford, GM and Chrysler -- as well as European and Japanese rivals Toyota, Fiat, Volkswagen, Hyundai and Kia Motors have also made huge investments in Brazil, which has a much bigger internal market; in addition, Brazilian state governments such as São Paulo and Paraná have offered lucrative tax incentives to lure auto factories to their states.
"We all want to work under consistent rules of the game," says Busch. "I think Argentina has been sticking to the rules, while Brazil is the muscle man in Mercosur. This makes it more difficult." Besides Brazil, automakers want to begin selling cars to consumers in prosperous Chile, just over the Andes Mountains to the west.
"We expect by year's end that a special automotive agreement will permit the flow of imports and exports between Argentina and Chile," Busch told Development Business. "Last year, we sold 2,000 units there. This year, we wanted to double that, but we may come close to 6,000."
Chrysler says nearly all of its factory workers have been trained at company facilities in Austria or Venezuela; many of them speak English in addition to Spanish.
"Our strategy is not to tackle the mainstream of the market," says Busch. "We're the first Jeep sport-utility vehicles being produced in the area. We feel the opportunity for growth is very strong in some key niches." The two models being produced in Cordoba are hardly cheap by Argentine standards; the Grand Cherokee Laredo sells for $44,000, and the Grand Cherokee Limited for $49,000.
"This is the first greenfield plant Chrysler has built by itself in over 20 years, the first totally new building and workforce," says plant manager Joseph J. Ozdowy. "This is a testbed to implement new ideas, managed from the bottom up. There's only one salary classification for this whole plant, and the union has been 100% cooperative."
Likewise, all the workers at GM's Córdoba facility -- originally a Renault warehouse -- don the same blue sweaters, regardless of rank. The employees' average age is 23, and one in five are taking English classes. "There's no time clock here," says a GM spokesman. "It's a matter of trust."
GM workers get an average 46 hours of training a year, and the factory produces 253 of the 1,379 categories of parts found in the Silverado (the rest come from the United States and Brazil). In the four years since GM's return to Argentina, domestic market share has jumped from 1.2% to 8.3% (compared to 14% for Ford, which never left, and just under 2% for Chrysler).
Despite all the new investment, however, the Buenos Aires-based Argentine Association of Car Part Manufacturers claim recent agreements between Argentina and Brazil have actually resulted in fewer suppliers and lower vehicle production.
Although current regulations require a car to have 60% local content to carry the "Made in Argentina" label, it's possible for a car to have only 17% local product to be considered domestic, says the association's president, Horacio Larre Oroño. "That's because "manufacturers have been substituting local components with imported parts," many of which come from Brazil.
In fact, while Argentine car exports have grown by nearly 30% a year (with 67% of exports Brazil-bound, 11% destined for the United States and the rest going to Uruguay, Chile and France), the number of local suppliers has been dropping since 1991, he claims.
"It's possible to bring a dismounted vehicle from Brazil to Argentina, assemble it here and re-export it because the accord says anything coming from Brazil -- as long as it is compensated by an exported product from Argentina -- is considered a national product." As a result, warns Oroño, Argentina may soon become just an assembler of cars, rather than a producer.
Foreign manufacturers say that's simply not true.
"The eight largest auto suppliers in Argentina represent 30% of the invoicing of all companies," says GM's García. "In total, there are around 480 suppliers, of which 20 represent half of all our invoicing. We have many middle-sized companies as suppliers."
Adds Busch: "In its protected days, Argentina had a lot of Argentine-owned suppliers. What's happening today is that all the European, Japanese and U.S. investors are improving the supplier situation. All manufacturers are developing a supplier base."