BUSINESSWEEK ONLINE : OCTOBER 23, 2000 ISSUE
INTERNATIONAL -- LATIN AMERICAN COVER STORY A Sputtering Sound in Argentina (int'l edition) In 1916, three years after he invented the assembly line, Henry Ford was already thinking global. Having set up factories using his revolutionary production process in Canada and Britain, he chose Argentina, which looked like a future industrial powerhouse, for his third foreign venture. Eighty-odd years later, Latin America's oldest auto industry may be going the way of the Model T. A deep recession slashed total Argentine vehicle sales by 30% in 1999, to slightly above 380,000 units. And sales have continued falling--down 8% in the first eight months of this year. For the 11 foreign car- and truckmakers with operations in Argentina, the industry's problems run much deeper than an anemic economy. The country's currency-board regime, which pegs the peso to the dollar at a rigid 1-to-1 rate, has become a straitjacket ever since Brazil floated its own currency in January, 1999. The devaluation of the real made cars 30% to 40% cheaper to produce in Brazil than in Argentina. As a result, some 20 Argentine auto-parts suppliers, including Goodyear Tire & Rubber Co. and Delphi-Packard, have moved to Brazil in the past year. Auto factories may soon join the exodus. As far as analysts are concerned, the only thing keeping car companies in Argentina is Mercosur, the South American trade bloc made up of Brazil, Argentina, Paraguay, and Uruguay. Under Mercosur's automotive regime, carmakers with plants in both Brazil and Argentina are allowed to ship vehicles and parts in either direction duty-free, so long as they comply with local-content requirements. Meanwhile, autos built by companies without two-country operations are subject to tariffs. Yet in 2006, all Mercosur auto trade will be tariff-free, so a company can consolidate all production in Brazil if it so desires. That's probably just what the carmakers want. ''If trade were liberalized today, I'm convinced that just about every OEM [original equipment manufacturer] would move to Brazil,'' says Diego Portillo, South America analyst at Standard & Poor's DRI, a Lexington (Mass.) research group that tracks the auto industry. With them would go 220,000 jobs and about 3% of Argentina's gross domestic product. Already, carmakers appear to be scaling back their Argentine investments. According to Adefa, the Argentine auto makers association, outlays this year will be down 29% from their annual average of $570 million over the past decade. PESO PAIN. Several newly minted factories are running well below capacity. General Motors Corp. inaugurated a new plant in Rosario in October, 1997, just months after the Asian crisis sent Argentina into a tailspin. Built to churn out 84,000 Corsas a year, the facility is now running at just 50% capacity. One answer for Argentina's auto makers may be to find new markets. The industry suffers from an acute Brazil dependency, with 95% of total vehicle exports, or 50% of production, heading north. However, as long as the peso remains pegged to the greenback, Argentine-made cars will continue to be priced out of most international markets. Meanwhile, companies have been lobbying the government to cut taxes, which in Argentina account for as much as 47% of the cost of a new car--almost twice that in Brazil. Relief could not come too soon for Gustavo Paz. With the production line at Ford's plant in the Buenos Aires suburb of Pacheco idle for as many as 15 days out of every month, the 63-year-old machinist has joined the ranks of unregistered taxi drivers that ply their trade along the capital's congested streets. ''For the first time in my life, I'm really scared, and there's nothing I can do about it,'' Paz says. Henry Ford famously said that every Ford worker should earn enough to afford one of his cars. Paz's hope is that he can hang on to his job long enough to finish the payments on his Escort. By Joshua Goodman in Buenos Aires _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Car Power (int'l edition) LATIN AMERICAN COVER IMAGE: Car Power CHART: Auto Output Is Rising TABLE: Big-Ticket Items Brazil Shows How Much It Loves Carmakers (int'l edition) A Sputtering Sound in Argentina (int'l edition) Parts Shops Are Tailgating Carmakers to Latin America (int'l edition) INTERACT E-Mail to Business Week Online

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