VZCZCXYZ0000
RR RUEHWEB

DE RUEHBU #1443/01 2951928
ZNR UUUUU ZZH
R 211928Z OCT 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 2283
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUCNMER/MERCOSUR COLLECTIVE

UNCLAS BUENOS AIRES 001443 
 
SIPDIS 
SENSITIVE 
 
USDOC FOR 4322/ITA/PEACHER AND SABOTTA AND LEBLANC 
 
E.O. 12958: N/A 
TAGS: ECON EINV EIND ETRD ELAB AR BR
SUBJECT: Argentina's auto sector still somewhat strong despite 
financial crisis 
 
REF: (A) Buenos Aires 1374 
      (B) 07 Buenos Aires 1127 
 (C) 07 Buenos Aires 831 
 
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Summary 
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¶1. (U) The Argentine auto sector is on track for another 
record-breaking year in 2008, in spite of the adverse impact of the 
global financial crisis on the Argentine economy and recent high 
profile media reports of slowdowns in sales and planned layoffs. 
Production, sales, and exports are at all-time highs as the auto 
sector appears set to record yet another strong year in its 
remarkable, six-year recovery since the 2001-02 economic crisis. 
The sector, in which Ford and General Motors are key players, is a 
centerpiece of Argentina's industrial base, with significant future 
investment planned.  While a recently-updated Mercosur auto trade 
pact with Brazil further consolidates Argentina's already-strong 
auto production, integration, and export ties with its giant 
neighbor, the GoA's current priority is to promote its 
still-fledgling auto parts sector.  Like the rest of the industrial 
sector, the auto sector's competitiveness challenges include 
inflation, energy, high labor costs, and infrastructure bottlenecks. 
 And while the global financial crisis has increased fears of 
softening domestic production, sales, exports, and job security, 
industry analysts point out that the industry is better positioned 
than it was during the last economic crisis in 2002 due a stronger 
domestic consumer base and greater export diversification, and 
industry prospects are still generally positive.  END SUMMARY. 
 
------------------------------------------- 
2008 still on track for another record year 
------------------------------------------- 
 
¶2. (U) Despite the largely negative impact the global financial 
crisis is having on the Argentine economy (septels), the Argentine 
auto sector is enjoying a record year, and continues its starring 
role as the key driver of Argentina's industrial expansion.  Auto 
production, sales, and exports continue their strong, post-crisis 
recovery.  2007 was an all-time record in terms of production, 
exports, imports, and new and used car sales, and a still-relatively 
strong economy appears set to propel the sector to an even better 
year in 2008.  The Argentine auto producer association, Adefa, in a 
recent report, estimates that the 2007 all-time records for 
production (545,000), exports (316,000, 58% of production), imports 
(365,000), and domestic sales (565,000) will be exceeded in 2008 
with 600,000 units produced, 340,000 exported, and 610,000 cars sold 
domestically.  In addition, the estimate of 1.65 million used car 
sales easily surpasses the 2007 used car sales record of 1.4 million 
units. 
 
¶3. (U) Argentina is now the 24th largest auto producer in the world. 
 Currently, almost 60% of all cars produced are exported, of which 
about 60% are sent to Brazil.  Argentina has moved to diversify its 
export markets and reduce its over-dependence on Brazil, cutting the 
percentage of its exports to Brazil from an all-time high of 81% of 
total autos exported in 1998 to about 60% today.  Argentina also has 
auto trade pacts with Mexico, Venezuela, and Chile, among others, an 
important factor in its auto export diversification strategy, and it 
now exports to 140 nations. 
 
¶4. (U) Ford and GM, both with nearly 100 years of presence in 
Argentina, are among Argentina's top producers and exporters. 
Together, they accounted for 34% of 2008 production and about 58% of 
exports through September.  Since 2006, Peugeot-Citroen has been the 
top single producer, followed by GM, Ford, Toyota, Renault, and VW. 
Domestic sales are led by VW, followed by GM, Peugeot-Citroen, Ford, 
Renault, Fiat, Toyota, and Daimler-Chrysler. 
 
------------------------------------------ 
Crown jewel of Argentina's industrial base 
------------------------------------------ 
 
¶5. (U) The auto sector provides well-paying and high-skilled jobs, 
technology transfer, and is an important multiplier in the 
industrial chain.  The industry had a 2007 turnover of about $15 
billion, almost 6% of GDP.  It employs about 121,000, plus several 
times that number in indirect jobs.  The sector accounts for about 
20% of industrial production, 36% of industrial exports, and 36% of 
industrial growth.  Argentina's industrial output grew by 7.5% in 
2007, mainly driven by the auto sector's 25.4% growth.  Capacity 
utilization remains comparatively low, at about 58.3% through July 
2008, below the average of 73.0% for the industrial sector as a 
whole.  Given these figures, it is not surprising that the sector is 
 
 
of great political importance, and one that the GOA strongly 
promotes. 
 
¶6. (SBU) Car companies have built a good relationship with 
high-ranking officials in the Kirchner administration - a major 
asset in a country where decisions are generally concentrated among 
a handful of people.  Under President Cristina Fernandez de 
Kirchner's (CFK) administration, former Peugeot-Citroen president 
Luis Ureta Saenz Pena was named GOA's ambassador to France, while 
Fiat truck maker Iveco's President, Fernando Fraguio, was named 
Industry Secretary. 
 
--------------------------------------------- --- 
Investment of $3.5 billion over next three years 
--------------------------------------------- --- 
 
¶7. (U) Auto makers have announced investments for new models and/or 
increased capacity of about $3.5 billion for the 2008-2010 period, 
according to the local car makers association Adefa.  This is well 
above the $562 million invested in 2002-04 and $1.5 billion in 
2005-07.  (The financial crisis could cause some of these plans to 
be scaled back, but not scrapped completely, according to industry 
sources.)  Companies have also begun production or unveiled plans to 
produce at least six new models in 2008-09 alone, nearly as many as 
were launched in 2002-07, and to manufacture gears and engines.  New 
capacity expansions have been announced by VW ($320 million), 
Peugeot ($700 million), GM ($600 million), Ford ($500 million), Fiat 
($420 million), Honda ($300 million), Renault ($200 million), and 
Fiat's truck division Iveco ($150 million).  Honda will start local 
production in 2009, marking the first entry of a major manufacturer 
in the car sector in over ten years.  Honda expects to produce 
30,000 compact cars per year, roughly 60% of which will be exported 
to Brazil. 
 
-------------------------------------------- 
New Mercosur managed trade accord, 2008-2013 
-------------------------------------------- 
 
¶8. (SBU) In June 2008, Brazil and Argentina signed a five-year 
extension to their Mercosur managed auto trade regime, the fifth 
such accord (ref C).  Argentina-Brazil auto trade currently 
constitutes about 18% of total intra-Mercosur trade, and totaled 
over $4 billion in 2007.  Total Argentine and Brazilian production 
is projected by the industry chamber Adefa to be six million autos 
per year by 2013, which would make the two countries combined the 
fourth-largest auto producer in the world, after the United States, 
Japan, and China.  About 4.9 million units would be produced in 
Brazil, and about 1.1 million in Argentina (almost double 
Argentina's output today). 
 
¶9. (SBU) Despite an expectation by some analysts that Argentina 
would agree to free trade in autos, this latest accord effectively 
extended the managed trade system further.  GOA officials have long 
voiced concern about the asymmetries they see in the relative 
competitiveness of Argentine and Brazil auto production, due to the 
latter's much larger domestic market (about four times Argentina's), 
scales of production (about five times Argentina's), broader 
consumer base (and consequent ability to sustain new car models), 
and its longstanding promotion of industrial development with 
subsidies and incentives from national, state, and local 
governments.  Brazil's share of the Argentine auto market also 
dwarfs Argentina's market share in Brazil.  Industries Secretary 
Fernando Fraguio told EconCouns in June 2008 that bilateral free 
trade in autos was not acceptable, noting that Argentina has a 
significant bilateral auto and parts trade deficit with both Brazil 
and Europe.  "I believe in free markets and all, but the political 
reality is that Argentina's industrial policy is - and should be - 
geared to creating jobs." 
 
¶10. (SBU) Completely free auto trade between Argentina and Brazil 
was again put off by Argentina, and will not begin until 2013 at the 
earliest.  Under the 2008-2013 accord, for each $100 of exports 
Brazil sells to Argentina, Argentina may ship up to $250 worth of 
vehicles and auto parts back to Brazil.  And for each $100 of 
Argentine exports, the Brazilian auto industry can ship up to $195 
to Argentina.  (Under the previous agreement, for the export of 
every $100 to the other country allowed the partner to import up to 
$195.)  According to the trade publication "Just-auto," Brazil heard 
Argentina's complaints about possible free trade with its larger and 
more competitive partner (Brazil), and the need for Argentina to 
have more time to attract investments and devise strategies to 
counter any move toward more liberal and competitive trade after 
¶2013.  Producers (including U.S. car makers) support the Mercosur 
auto regime and claim they have adjusted well to it, that it has 
provided predictability and consistent rules -- an anchor of sorts 
 
-- in a nation often seen as lacking in those areas.  This success 
has in turn ensured continued political support for the auto pact, 
in a country where trust in the free market is often lacking.  With 
the failure of the Doha round, Brazil and Argentine automaker groups 
Anfavea and Adefa have teamed up to propose an action plan in the 
hope of agreeing on a series of new automotive bilateral trade 
accords.  Apart from a long-pending Mercosur trade agreement with 
the European Union, Anfavea and Adefa are also looking into possible 
deals with South Africa, Nigeria, Egypt, Indonesia, and Thailand, 
among others. 
 
--------------------------------- 
Auto parts: Argentina's next push 
--------------------------------- 
 
¶11. (SBU) The GOA's next auto-related push is to help out its own 
local auto parts industry, as it seeks to wean local manufacturers 
from its heavy dependence on mostly Brazilian parts.  According to 
the consultancy group abeceb.com, Brazil supplies more than 50% of 
auto parts used to manufacture cars in Argentina.  The bilateral 
auto pact called for the promotion of the parts industry, and the 
two sides pledged to discuss the possibility that the Brazilian 
Economic and Social Development Bank (BNDES) might help finance the 
establishment of Brazilian and Argentine auto parts plants in 
Argentina.  In addition, the Argentine Congress recently passed a 
national auto parts promotion plan, with measures that include 
long-term credit at competitive rates and GOA rebates to local 
manufacturers that source local parts.  GOA Industries Secretary 
Fraguio recently said that "we want cars produced in Argentina to be 
manufactured with more local parts."  Argentina car parts 
association Afac President Rodolfo Achille said that "the objective 
is that, in two to three years, up to 70% of auto parts used in 
Argentina will be produced locally." 
 
¶12. (SBU) While Argentina is already a relatively strong auto parts 
producer, Argentine producers' competitiveness has been squeezed by 
high wages and high prices for imported primary inputs.  Producers 
are still expected to invest $500 million in the next three years to 
keep up with demand from their main clients in Mercosur and other 
emerging markets, but in the first half of 2008, Argentina had a car 
parts deficit of $2.0 billion. 
 
¶13. (SBU) According to Dante Sica, Director of abeceb.com, and a 
former Secretary of Industry, the point of the GOA's auto parts 
promotion is "not about competing with Brazil, but about the GOA 
trying to find solutions to remove bottlenecks in the industry. One 
of these (solutions) is boosting local parts production."  With so 
many Argentine cars using Brazilian parts, and around 35% of all 
cars made in Argentina being sent to Brazil, Sica believes there is 
a strong case for more local parts production, to minimize the 
back-and-forth of cars and parts. 
 
----------------------------- 
Challenges to competitiveness 
----------------------------- 
 
¶14. (SBU) Auto manufacturers and analysts widely agree on the major 
challenges facing the sector, which are largely similar to those 
facing the rest of the industrial sector: inflation and frequent 
labor demands for higher wages, both which hurt competitiveness; 
energy shortages; transport bottlenecks; and expectations of slowing 
domestic demand, as the economy cools from its blistering pace of 
over 8.5% real growth per year, 2003-2007, to between 4-7% for 2008, 
and lower growth in 2009.  Annual wage increases are now running at 
a minimum of 20%, and the union representing the auto workers, 
Smata, has publicly called for much higher increases.  Regional and 
global inflation pressures are also reflected in higher prices for 
parts, transport and energy.  Companies claim their production costs 
in dollar terms are now higher than in the 1990s. 
 
¶15. (SBU) Energy shortages, especially during peak seasonal times, 
have forced most companies to incorporate energy conservation 
programs and engineer more costly solutions, including 
self-production via high-cost diesel generators, rotating shifts, 
forced worker leave, and sometimes switching production to the more 
expensive night shift.  Transport and infrastructure bottlenecks are 
also a concern.  Analysts widely cite the challenge and costs 
inherent in Argentina and Brazil's high volume, cross-border trade 
in autos and parts, over an already congested road, rail and river 
transport system.  "While all this back and forth of parts and 
finished products between the two nations is all part of the 
Mercosur trade regime we all support, it is not exactly a great 
business model," said the CFO of General Motors Argentina. 
 
¶16. (SBU) While access to consumer credit has been crucial for 
 
domestic sales expansion (the stock of car financing loans rose 60% 
in 2007 and a similar increase is expected in 2008), and the share 
of cars sold on credit has risen in 2008 to about 25%-30%, this is 
still far from the 70% peak in the late 1990s.  (The still 
relatively low purchasing power and limited access to credit in the 
Argentine market have boosted sales of second-hand units.) 
Ironically, since such a small amount of sales are done via credit, 
the sector could be less vulnerable to the effects of the global 
financial scare. 
 
--------------------------------------------- ------- 
While the current financial crisis clouds the scenario . . . 
--------------------------------------------- ------- 
 
¶17. (SBU) Even before the onset of the current global crisis, a 
slight slowdown in auto production, sales, and exports had been 
detected.  While first-half 2008 figures were strong, the 
July-September period revealed a slight slowdown (but still up from 
the same period in 2007), and analysts were already predicting a 
weaker fourth quarter.  According to anecdotal evidence, until early 
2008, car buyers had to wait up to three months for delivery of many 
models.  Now, there is plenty of stock.  The crisis has worsened 
this outlook in the last couple of weeks, in Argentina and Brazil, 
and some analysts fear that consumers will pull back, affecting 
sales and exports. 
 
¶18. (SBU) Brazil's Banco UBS Pactual said in a recent report that 
"Argentine automobile production has decelerated at a rapid pace to 
the point that auto companies have reduced production plans for the 
fourth quarter by half and auto parts companies have announced 
layoffs."  (Embassy has not been able to confirm any layoffs so far, 
but the local the local press widely carries reports of cuts in the 
auto parts sector.)  It also noted that the recent weakening of 
Argentina's key trading partners' currencies, primarily Brazil's, 
will make domestic production relatively less competitive.  For 
example, from its low on August 7 to October 17, the Argentine peso 
appreciated about 22% against main trading partner Brazil's real. 
"The auto industry is very worried because we see a future quite 
different from what we'd like to see," Dante Alvarez, president of 
auto dealer association Acara, which foresees declining sales for 
the next months.  Several automakers, including GM, Fiat, Mercedes, 
Iveco, and Peugeot have announced worker holidays of one to five 
days, or shift reductions in the coming weeks.  Others are reported 
to be considering outright furloughs for up to several hundred 
workers. 
 
¶19. (SBU) Ford Argentina's President Enrique Alemany said the three 
pillars that had until now made 2008 a "spectacular year" - the 
sector's integration with the world, strong domestic growth, and 
competitiveness - are now being challenged.  He said that "there is 
no more space in the automotive sector to allow increases in costs 
that are not accompanied by improvements in productivity."  All this 
comes amidst tough ongoing wage negotiations for some automakers, 
including GM and Peugeot, and in which the main auto workers union 
(Smata) initially demanded a 65% wage increase.  GM's CFO told 
Emboff that Smata's demand was more of an "opening bid," and some 
media reports note that the two sides could eventually settle at 
around a 20% increase.  (These same media reports note that the 
situation has changed enough that some workers will now be content 
to just keep their jobs.) 
 
---------------------------------- 
Others remain guardedly optimistic 
---------------------------------- 
 
¶20. (SBU) Many auto players and analysts remain cautiously 
optimistic.  While acknowledging that the remarkable six-year-long 
auto sector growth streak has likely peaked, they point out that the 
industry is much better positioned than it was during the last 
economic crisis in 2002.  It is more internationally export-oriented 
and less dependent on Brazil, with many more auto trade agreements 
(including with Mexico, Venezuela, and Chile), investments, and a 
larger consumer base.  These analysts point out that 2008 is still 
on schedule to be the all-time record year for production, new and 
used car sales, and exports.  The industry's early 2008 goal for 
total production of 600,000 and sales of 620,000, if not quite 
achieved, will certainly come in at nearly those levels.  Through 
September 2008, production, sales and exports were up 24%, 18%, and 
23% over the same period in 2007. 
 
¶21. (SBU) Ford Argentina's President Enrique Alemany predicted that 
the downturn would be short-lived.  "I believe that the positive 
trend in the long term is still valid," he said.  "We will see the 
impact of this financial crisis in the short term - that is, the 
next three to four months."  Ford's local CFO told Emboff that as of 
 
now, they are "cutting production a bit, but not laying anyone off," 
and otherwise not making any changes, and "we are still in the 
wait-and-see mode."  He said that while they see signs of slightly 
lower sales and lower consumer confidence here and in Brazil (over 
half of Ford's production goes to Brazil), "I still see things going 
pretty well in Argentina."  The local GM CFO told Emboff that while 
the economic situation is "worrisome, and while Brazil and Argentina 
sales are suffering right now (GM Argentina also exports over 50% of 
its production to Brazil)," overall he is "optimistic, and the 
industry is still reasonably strong.  2009 will likely see an 
overall market softening here, but I don't think it will be bad." 
 
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Comment 
------- 
 
¶22. (SBU) While the outlook for Argentina's economy appears to be 
deteriorating (Ref A and septels), auto industry analysts are 
relatively upbeat.  The sector is clearly better positioned to 
weather an economic storm than it was during the 2002 economic 
crisis due a stronger domestic consumer base and greater export 
diversification.  One's view of the sector also greatly depends on 
one's expectations: compared to the high hopes of the last few 
(record-breaking) years, the latest developments could be seen as a 
disturbing.  However, the fact remains that Argentina's auto sector 
is still enjoying another record year, and is the nation's 
industrial leader. 
 
WAYNE