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Cablegate: Argentina's Auto Industry Roars Ahead; Ford and Gm Leaders

VZCZCXYZ0000
RR RUEHWEB

DE RUEHBU #0831/01 1171912
ZNR UUUUU ZZH
R 271912Z APR 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 7984
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 6128
RUEHMN/AMEMBASSY MONTEVIDEO 6399
RUEHSG/AMEMBASSY SANTIAGO 0378
RUEHBR/AMEMBASSY BRASILIA 5989
RUEHLP/AMEMBASSY LA PAZ APR CARACAS 1214
RUEHVL/AMEMBASSY VILNIUS 0044
RUEHGT/AMEMBASSY GUATEMALA 0207
RUEHSO/AMCONSUL SAO PAULO 3262
RUEHRI/AMCONSUL RIO DE JANEIRO 2203

UNCLAS BUENOS AIRES 000831

SIPDIS

SIPDIS
SENSITIVE

PASS NSC FOR JOSE CARDENAS, ROD HUNTER
PASS USTR FOR SUE CRONIN AND MARY SULLIVAN
TREASURY FOR MATT MALLOY
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER AND SABOTTA

E.O. 12958: N/A
TAGS: ECON EINV ETRD AR BZ VZ
SUBJECT: Argentina's Auto Industry Roars Ahead; Ford and GM leaders

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Summary
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1. (U) Argentina's auto industry is in full throttle. In 2006, it
enjoyed its best year since 1998 - for production, new and used car
sales, exports and imports - and all categories registered strong
increases from 2005. With investments in 2007-2008 totaling at
least $720 million, the future looks bright. The industry is
expecting 2007 to be its best year in history, and could reach
500,000 cars produced and 300,000 exported. The auto industry,
composed entirely of American, European and Japanese partnerships,
is one of the pillars of the Argentine industrial economy, the most
dynamic manufacturing sector in recent years, and an important
source of quality employment and technology transfer. Fueling the
industry's continued optimism is the sustained strong economy,
increasing domestic consumption, and a growing and more diversified
export base. Ford and GM are prime players here, and in 2006
together accounted for 35% of production and 43% of exports. Brazil
and Argentina, the only auto producers in Mercosur (not including
associate member Venezuela), have a substantial auto and auto parts
trade under their managed trading regime (to be reported septel).
The GOA prefers this managed trade arrangement, fearing Brazil's
potential to dominate regional production. All told, Argentina
offers a fairly attractive base for growing domestic and export auto
markets. However, an unpredictable regulatory outlook, moderating
economic growth levels, price controls, sensitivity to changes in
Brazilian currency values, potential electricity shortages in this
energy-intensive industry, and problematic labor unions all add to
auto sector uncertainties in the medium term. End Summary.

2. (U) 2006: BEST YEAR SINCE 1998. Argentina's auto industry
attributes its success in 2006 to a continued strong domestic
economy, expanded employment, strong consumer demand, rapidly
increasing credit availability (currently only 20-30% of new cars
are sold on credit), and a growing export market. Total national
production in 2006 exceeded 432,000 units, up 35% from 2005 and just
shy of 1998's record. Exports reached 237,000 units, up 30% from
2005 and representing an impressive 55% of total production.
Argentina now exports to 75 nations, with Brazil comprising about
55% of total export value, the latter under the auspices of the
Mercosur managed trade auto pact. Imports totaled 257,000 units, a
14% increase from 2005, with Brazil providing about 90% of the
total. New car sales reached 460,000, a 14% increase from 2005.

3. (U) Peugeot-Citroen ranked number one in 2006 production, with
almost 96,000 units, 22% of national total, followed by Ford
(79,000), GM (72,000), Toyota (64,000), Renault (52,000), and VW
(47,000). Due to the heavy auto trade volumes between Argentina and
Brazil, production and sales performance statistics in Argentina are
not generally related, as many of the top domestic sellers are
actually made in Brazil. The most popular 2006 sales were VW's Gol
(made in Brazil), Chevy Corsa (in Argentina, and currently number
one in 2007), Peugeot 206, Renault Clio, Ford Ecosport and Fiesta
(Brazil), Fiat Palio and Renault Megane (Argentina). Used car sales
in 2006 grew 19%, to 1.22 million units, and market observers expect
an even better 2007 for this segment as well. Luxury car sales in
2006 had their best year in history, more than doubling in the last
two years, with 7,200 units sold, 48% higher than 2005, and
forecasted to increase 30% in 2007.

4. (U) 2007: ITS BEST YEAR EVER? The Argentine auto industry is
predicting its best year ever in 2007, hoping to produce 500,000 and
export 300,000. First quarter 2007 production and export figure
were already at an all-time record. Industry analysts say that at
this moment, demand is outstripping supply, and plants are going all
out. GM and Toyota have added second shifts, and others are
studying increased shifts and hiring.

5. (U) A PILLAR OF THE INDUSTRIAL ECONOMY, WITH GOA SUPPORT. The
auto industry has been Argentina's most dynamic manufacturing sector
in recent years, and its importance is widely recognized as central
to the development of the manufacturing and industrial economy, with
well-paying jobs, a culture of innovation and technology transfer.
According to the national census bureau, the auto industry grew
32.2% in 2006, accounts for 3.2% of GDP, 20% of the industrial
economy and 7% of total exports. In 2006, the entire industry
provided total direct and indirect employment for about 105,000
workers. Average auto sector wages, roughly $1,000 per month, are
much higher than the $420 national formal employment average.

6. (SBU) President Kirchner and senior ministers - who frequently
visit auto plants - are generally attuned to the industry's
importance. Acknowledging that wages and global commodity prices
(such as steel, copper, and oil-based plastic) are increasing,
severely affecting margins, the GoA has allowed 2007 new car price
increases of 10%, about the level of inflation, even as the GoA
continues to pressure producers and retailers to cap primary
consumption item prices. On the other hand, the GoA has been less
sympathetic to problems for the domestic auto sector generated by
the real and nominal appreciation of the Brazilian Real against the
Argentine peso over the last few years: Argentine commitments under
the Argentina/Brazil bilateral auto pact (see para. 8) for
substantial imports of cars and auto parts from Brazil, has hit
domestic auto producer margins. However, according to industry
contacts, the GoA has essentially told automakers that the strong
Real is their problem, and that they cannot use the appreciation of
the Brazilian currency as a justification for raising prices.

7. (U) UNTIL EARLY 1990S AND START OF MERCOSUR, CLOSED AND PROTECTED
AUTO MARKETS. Argentina and Brazil largely protected their domestic
auto markets through the early 1990s with a mix of quotas, high
tariffs and subsidies, as a part of their import substitution
schemes. With the advent of Mercosur, they slowly began to open
their auto and parts trade. Given the political sensitivity that
emblematic auto production holds for both nations, progress has been
uneven. However, liberalization has come a long way: auto sector
trade today constitutes about 18% of total intra-Mercosur trade, and
Argentina-Brazil auto product trade in 2006 totaled over $4 billion.
Argentina and Brazil are the principal members of Mercosur and its
main auto producers. (Venezuela, still an associate member of
Mercosur, also produces automobiles.)

8. (SBU) As originally envisioned in the mid-1990s, the trade bloc
would move towards free trade in autos, but Argentina over the years
has resisted full free trade, fearing domination by Brazil, whose
economy is about four times the size of Argentina's. Over the last
decade, the two countries have had several successive bilateral
agreements on managed and balanced auto trade (to be reported on in
detail septel). These agreements helped assuage Argentina industry
concerns about differential levels of competitiveness given Brazil's
larger production scale, broader consumer base (and consequent
ability to attract new models), and entrenched system of federal and
state fiscal incentives. Brazil's auto industry is four times the
size of Argentina's and Brazil's share of the Argentine auto market
also dwarfs Argentina's market share in Brazil.

9. (U) With Argentina and Brazil's managed auto trade accord of
2002-06 soon to expire, the two sides agreed in June 2006 to an
updated agreement. This pact runs from 2006-08, and sets the amount
of automotive products that Brazil-based firms may export
tariff-free to their Argentine affiliates at $195 for every $100 of
automotive products it imports from Argentina. This was a reduction
from the $265-to-$100 ratio during 2002-06. Most industry analysts
expect that a managed trade regime, in some form or another, will be
extended for the foreseeable future.

10. (U) FORD, A HOUSEHOLD NAME SINCE 1913; AS ARGENTINE AS TANGO AND
WINE. Ford's remarkable story began in 1913, Ford's first foreign
venture after Canada. For generations of Argentines, Ford is a
familiar and reliable brand name, and has remained here through
crises and coups, downturns and heydays. Ford was Argentina's
second biggest auto producer in 2006 (79,000, about 18% of national
production), second only to Peugeot-Citroen, and the number one
exporter (59,000, breaking its own 1998 export record). Ford's
plant outside Buenos Aires employs about 2900. It also boasts a
strong social responsibility history, having built and maintained 43
primary schools over the years, employed generations of family
members, and won many service awards. It mainly builds the Focus
and the Ranger 204, exported primarily to Brazil, Mexico, Venezuela
and Chile. The Ranger was Argentina's export leader, with 34,000
units, followed by its Focus, with 25,000. In turn, Ford Brazil
exports to Argentina the popular four-door hatchback EcoSport.

11. (U) GENERAL MOTORS. GM Argentina was established in 1925, and
is represented here under its Chevrolet brand. It produced over
70,000 cars in 2006, the nation's third largest, and plans to
produce 86,000 in 2007. In the last several years, GM has exported
more than 60% of its production, mainly the Corsa and Suzuki Grand
Vitara. GM also has an active social and corporate responsibility
program. In 1978, following a sharp reduction in sales and
political problems related to the military dictatorship, it left
Argentina. In 1985 it appointed a licensee to assemble its pickup
truck, and in 1993, returned to Argentina. Its plant in Rosario was
built in a record 22 months and inaugurated in 1997, has an annual
capacity of 100,000 units, and employs 2,000. In September 2006, GM
Argentina opened a second shift, hiring 400 new employees and
ramping up production by 40% due to increased domestic demand and
growing export sales. It recently announced plans to invest $350
million in 2007, to further expand production. GM produces Corsas
and the Suzuki Grand Vitara SUV for the South American markets.

12. (U) OTHER LEADERS: PEUGEOT-CITROEN, FIAT, VW, TOYOTA, RENAULT.
Peugeot-Citroen was Argentina's top auto maker in 2006, producing
96,000 cars or 22% of the total. Peugeot is also very optimistic
about 2007, with plans for new investments and launches, and hopes
to produce 124,000 cars, 55% of them for export. In 2006, it
transferred production of its Peugeot 206 from Rio de Janeiro to
Buenos Aires. It inaugurated its $150 million Peugeot 307
manufacturing line in July 2006, attended by President Kirchner.
Fiat is also a major regional player. Presently, Fiat only imports
cars into Argentina, mainly from Brazil, and in 2006 sold 43,000
autos, 9% of total national sales. In early 2007, Fiat announced
plans to invest $80 million to begin manufacturing 20,000 pickup
trucks per year in 2008 at its refurbished Cordoba plant, in an
alliance with India-based Tata Motors. Volkswagen was the number
one auto seller in 2006, with 94,000 units, 20% of sales, and
produced 47,000 units, 11% of total production. In 2006, it
invested $100 million in its launch of the SpaceFox/Suran model.
VW's Brazil-made subcompact Gol has been the best-selling car in
Argentina since 1998. Renault produced 52,000 autos in 2006, and
sales totaled 59,000. Toyota built 64,000 cars in 2006, and sold
24,000 units. It also has big plans for expanded production and
sales, and is investing $40 million to expand auto production,
mainly the Hilux truck and SUV, and parts for exports. Several
other auto makers, including Daimler Chrysler, Scania, Honda and
BMW, among others, sell their imported models here. In November
2006, China's Chery Auto formed a 51-49 %, $100 million Uruguayan
plant, joint venture with Argentine holding company Grupo Socma, for
a planned entry into the Mercosur market, the first for a Chinese
car maker into a market in the Americas. The business will target
sales in, and source components from, Mercosur, and plans to
assemble SUVs and compact cars beginning in May 2007, to ultimately
produce 100,000 cars annually.

13. (U) ARGENTINA CAR MARKET HAS POTENTIAL TO GROW. With an annual
new and used car market of 1.6 million cars (new car sales of
460,000, used car sales of 1.22 million), and as a platform for
Mercosur exports, Argentina offers medium and long term opportunity
for sustained production, exports, and investment. According to the
GoA's statistical agency, INDEC, the industry overall is presently
running at only 51% capacity (up from 37% in 2005). Only 20-30% of
new car purchases are done on credit, also leaving open the
possibility of more sales. Argentina's export market today is also
much more diversified than during the 1990s, when it relied almost
exclusively on Brazil. As late as 1998, 90% of Argentina's auto
exports went to Brazil; today the figure is 55%. Argentina's
automakers are now exporting to many more nations and regions,
including Mexico, Chile, Venezuela, Uruguay, the EU, and Asia,
thanks to auto agreements forged in the last decade. In the longer
term, with still a relatively high person per car ratio (5.6 persons
per car, vs. about 1.4 in the United States), vast land mass, decent
roads and an established driving culture there is room for an
expanding auto market.

14. (U) RICH AUTOMOBILE CULTURE, BOTH GOOD AND BAD. Argentina also
has a rich driving culture: three and four decade-old classic Fords,
Fiats, and Volkswagens ply the roads. Argentina's artificially low
gas and diesel prices are about half the price in the region. There
are now about 1.2 million cars on the road that have been converted
to run on compressed natural gas, greatly reducing driving costs.
In June 2007, the Argentine Automobile Manufacturers Association
will host its 4th annual international auto show, highlighting the
latest models, technologies, and importance of this sector. The
exposition expects 700,000 visitors, and will be supported by the
highest levels of the GOA and industry. On the down side, Argentina
has one of the highest fatality rates in the hemisphere, with a
reported 29 driving-related deaths per 100,000 (about 11,000 per
year), compared to 25 in Mexico, 17 in Brazil, and 15 in the U.S.,
according to GOA's Road Safety Institute.

15. (SBU) POTENTIAL DOWNSIDES. As positive as the auto market looks
right now, the industry is similar to many others in Argentina, in
that it faces uncertainties about possible GoA policy and regulatory
changes. Price controls, sensitivity to changes in Brazilian
currency values, potential electricity shortages in this
energy-intensive industry, and potentially problematic labor unions
and salary demands all add to auto sector uncertainties in the
medium term.

16. (SBU) COMMENT. These are heady times for the Argentine auto
industry, as it enjoys a seemingly perfect storm of strong domestic
demand and diversified export markets, a favorable intra-Mercosur
managed auto trade regime and generally positive GOA treatment.
However, such strong growth is not likely to last in the medium term
- as industry leaders themselves caution - and growth will moderate.
As with many other sectors of the economy, GOA macroeconomic and
micro-pricing policies will have an important impact on the auto
industry, and they will watch closely GOA signals as they plan
future investment and production. As for Argentina's managed trade
regime with Brazil, and regardless of one's philosophical view of
this, these successive agreements have been seen generally as a
positive for Argentina. In the view of many observers, with the
ability to attenuate variations in the relative competitiveness of
the two markets, it has helped ensure continued local production and
investment, and has been politically helpful for the continued
viability of Mercosur.

WAYNE

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