Automaking continues to decline despite subsidy to sales

8th August 2019

By Fermín Koop

Automaking continues to decline despite subsidy to sales

Many sectors across the economy have been hit by recession and lower consumption, but hardly anyone has suffered as much as the automotive industry.

While car manufacturing has been on a downtrend since its peak in 2011, the steep devaluation seen in 2018 disrupted the long-term plans of the sector even further, hitting at sales and local production.

Since then, the numbers have remained in the red, with only 30 percent of the installed production capacity currently being used. If the pace of the decline seen so far this year continues, production in 2019 could see the worst figures since 2005.

</p> <p>Seeking a solution, the government recently unveiled a plan to reduce vehicle prices at the retail level. While helping sales numbers, the plan has had no effect on production, as up to 70 percent of the cars that are sold in Argentina are imported.</p> <p>“The first half of the year was really bad for the automotive sector in every way imaginable. Sales dropped 50 percent amid a scenario of economic uncertainties in the country,” Franco Roland, vehicle sector expert at Abeceb consultancy, said. “At the end of the year all figures for the sector will be negative.”</p> <h2><strong>A steepening decline</strong></h2> <p>Vehicle manufacturers produced <a href=";idt=1">182,828 units</a> on the first seven months of the year, a 35.6 percent drop compared to the same period last year.</p> <p>July, the last month reported, saw a 47.8 percent year-on-year decline, while also declining 9.5 percent when compared to June. This means that the decline has been even faster last month than on the year’s average, meaning that no signs of recovery are yet in sight.</p> <p>In 2018, the ADEFA car manufacturers association reported 466,649 units sold, 46 percent below the peak in 2011, at 828,771. If the decline in 2019 continues at the current pace, only 300,000 units will be manufactured this year, the <a href="">worst number since 2004</a>, in the aftermath of the 2002 financial crisis.</p> <p>Experts consulted by <em>The Essential</em> hoped for a 350,000 to 400,000 figure by the end of the year, but they believe the results will be tied to variations in the exchange rate.</p> <h2><strong>The Brazilian factor</strong></h2> <p>Of the vehicles manufactured in Argentina, half are destined for the domestic market and the other half is shipped to other countries, with Brazil accounting for 60 percent of those shipments.</p> <p>But the economy of the neighboring country hasn’t picked up as fast as expected, leading to lower sales. At the same time, the Bolsonaro administration is encouraging the vehicle sector to produce more and import less, which is not good news to Argentina.</p> <p>On the first seven months of the year, 127.599 vehicles were sold to Brazil, 13.2 percent less than the same period last year. The decline in exports was larger in July, with 21.5 percent.</p> <p>“While in 2012 vehicles from abroad represented 24 percent of the sales in Brazil, now they barely exceed 11 percent,” a research paper by Invenómica consultancy said. “The country has clear public policies that favor domestic production.”</p> <h2><strong>Retail sales subsidy</strong></h2> <p>Sales register a similar scenario than production in Argentina. Almost 300.000 vehicles were sold from January to July, a 47 percent inter-annual drop.</p> <p>However, the trend of the last few weeks shows that something might be changing. In July, new car sales dropped at only half the pace compared to the same month last year, at 26.4 percent, and rose by 36.8 percent when compared to June.</p> <p>The uptick, analyst believe, is linked to the latest government program.</p> <p>The Mauricio Macri administration introduced at the end of June a scheme to grant subsidies between 50,000 and 90,000 pesos (1,000 to 2,000 dollars) for car sales. The plan will continue in August and will represent an accumulated expenditure of 2.1 billion pesos for the government.</p> <p>“The deal represents a slight aid for the sector, in a context of declining sales due to the economic scenario and the high interest rates that limit any financing plans,” Mariangel Ghilardi, economist at Ecolatina, said. “But the effect is only on sales and not on production.”</p> <p>Most of the extra vehicles sold because of the government’s plan were imported, sources from the sector claimed, not benefiting local output. On the first half of the year, only 27.7 percent of the units sold had been manufactured in the country, the lowest level in five years, a report by UNDAV University said.</p> <h2><strong>International competitiveness</strong></h2> <p>While the sector originally expected to manufacture around 700,000 units this year, expectations are now much lower and closer to 400,000, according to Abeceb consultancy, which claims 2019 will end with a decline of 29 percent in production and 39 percent on sales.</p> <p>The numbers represent a call to discuss competitiveness in the sector, experts argue, so not to depend on a strong peso as the single factor sustaining the industry. But this could mean discussing which vehicles are worth manufacturing in Argentina and which are not, with a potential effect on the jobs of those producing for the protected local market.</p> <p>“While other countries are making big changes to be more competitive, in Argentina we are lagging behind. The sector didn’t gain much on competitiveness on the last few years, placing the country in a weak position to compete with other countries,” Roland said.</p> <p>Argentina is usually described as a much more expensive market than Brazil and Mexico, its largest competitors in the region. This could represent a mid-term problem for the sector ahead of the trade deal between the <a href="">European Union and the Mercosur bloc</a>, as the vehicle sector is one of the most protected ones in Argentina at present.</p> <p>All vehicles imported from outside the Mercosur bloc currently pay tariffs of 35 percent, one of the highest imposed by the bloc. Factories in Argentina can import vehicles from Brazil without paying those taxes.</p> <p>“The vehicle sector would be among the <a href="">most affected because of the trade agreement</a>. It would have to start discussing changes, such as focusing its production on specific vehicles such as pick-up trucks (which are globally competitive), while stopping production of others that are less profitable,” Ghilardi said.</p> <p>

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Fermín Koop

Fermín Koop is an economic and environmental journalist from Buenos Aires. He is editor at Diálogo Chino and co-founder of Claves 21.