The Automotive Industry Is In A Major Crisis And It's Only Getting Worse
The woes of the automotive industry reflect a combination of factors. Domestically, these have included a rise in taxes on luxury models implemented in November 2013, which pushed the tax rate on the most expensive models (which are imported) up to 50%, in an effort to bolster the dwindling trade surplus. January's 15% peso devaluation has also boosted automotive prices (as many cars are imported from Brazil, and the use of imported inputs in the industry is prevalent). The sharp interest-rate hike that followed January's devaluation has also reduced supply of and demand for credit and had a major dampening effect on sales, which had been boosted in recent years by easy access to credit. Externally, persistently weak growth of the economy in Brazil, the main destination of Argentina's car exports, has hit the industry's sales abroad.
Production, sales and exports are all down
As a result, production, exports and domestic-sales indicators fell dramatically in the first four months of the year. Local automotive production dropped by 18% year on year in January-April, to 206,581 units. Car production, which accounts for just under two-thirds of the total, fell by 23%, while production of passenger-transport vehicles fell by 43% and that of SUVs was down by 7%. Production of freight vehicles actually rose by 6%, but they represent just 3% of total output. The unsold stock of cars is now 200,000 units, equivalent to three months of sales. This is only around 10% higher than the year-earlier period, but the relatively modest increase in unsold cars reflects the frequent stoppages at car-assembly plants in recent months.
Sales in the domestic market fell by 30%, to 202,652 units. Sales of locally assembled vehicles were down by 26%, but sales of imported vehicles fell by more than twice that figure (59%), reflecting the substantial impact of devaluation and the recent tax hike on (imported) luxury models. Suggesting the outlook for consumers is, if anything, worsening, the decline in sales has actually accelerated during the course of January-April, to reach 40% in April.
Exports, meanwhile, contracted by 19% in January-April, to 106,827 units. Exports are highly dependent on the Brazilian market, which accounts for more than 80% of total exports. This dependence has been cemented by agreements under the framework of the Mercado Común del Sur (Mercosur, the Southern Cone customs union), which has led to an increasingly integrated production and sales network. In this context, synchronous economic downturns have exacerbated weaknesses in the automotive industries in both countries. Talks are currently under way between the two countries to attempt to agree a new trade strategy, following the expiry last year of the automotive complementarity agreement governing tariffs between the two countries, and, more broadly, to help promote recovery in the industry via a joint external-promotion strategy.
Knock-on effects
The slump in production and sales will lead to job losses. According to union estimates, around 12,000 workers (out of a total of 100,000 in the industry) are at risk of redundancy, and some workers have already been dismissed. Labour troubles are more serious in the auto-parts segment: for small auto-parts companies, labour costs represent 30-35% of production costs, and these companies are unable to sustain employment during downturns. Labour troubles are also affecting cars distributors (of which there are around 800), as well as those in the logistics and transportation sectors.
Given the industry's typical spillover effects (it has been estimated that each new job in the car industry generates 3.7 additional jobs elsewhere), the slump will soon also be reflected in other industries, such as metallurgy, aluminium, chemicals, plastics and glass. It is unclear as yet how the government intends to respond. Some months ago, there were rumours that the government would rescind or reduce the recent automotive-tax increase, but this has been denied by government representatives. Cheaper directed credits may well be attempted instead, but, amid extremely weak consumer and business confidence, this is likely to have only a relatively muted impact, at least in the short term, and a quick recovery does not appear to be on the cards.
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