Chinese Automakers Explore Latin American Market

China's Yuton Group, which was set up in Lanzhou, Gansu Province in 1993, announced exciting news in December 2008: the sale of 200 medium-sized passenger cars to Cuba, making it the first Chinese automaker to penetrate that area.

Yuton reports that the cars were assembled with parts shipped from China, and that they will be used to carry students and workers between home and workplace.

The cars were assembled in Cuba to escape the hefty tariff on complete cars, which is far higher than the duty on auto parts. In this way, said a group executive, "we could help Cuba save 12-15% of the cost of importing cars." Further, this achievement "creates a new channel for exports by China's auto parts makers."

Latin America and the Caribbean constitute one of the world's most important emerging auto markets, and Chinese carmakers see it as a stepping stone to the global market. With a rapidly expanding middle class having increasing amounts of disposable income, auto sales there have been growing strongly over the past several years. This fact has made the area a powerful magnet not only for auto exporters in other parts of the world, but also for investors.

While the Latin American auto market has inevitably been affected by the current international market woes, it is still expected to perform better than the more mature markets in the United States and Europe.

The impact of the global financial crisis has been somewhat mixed. Brazil, which is the largest auto producer in Latin America (followed by Argentina and Mexico), is experiencing difficulties as a tightening of credit in early October last year has made it much more difficult to buy new cars. According to the Brazilian auto manufacturers' association, Anfavea, October auto sales dropped 11% from September 2008, the first decline in five years.

Before the current financial tsunami struck, Brazil's auto industry had been growing rapidly with sales in April 2008 reaching an all-time high of 244,200 units and output soaring to 300,600 units that month.

General Motors operates the largest auto plant in Brazil and has just invested US$200 million in a new engine and components plant there. In early 2008, it added 1,500 employees to its payroll.

Argentina's Woes

Argentina's auto industry has suffered layoffs, reductions in working hours, and compulsory leave; compared to the same month of 2007, production was down 7.7% last October. Unlike Brazil, where most domestically made cars are sold locally, Argentina exports 60% of its auto production and is thus heavily affected by the global recession.

The government is trying to get things moving again. In December Argentina's president, Christina Fernandez de Kirchner, announced a US$3.85 billion economy-boosting program with about a quarter of the total amount being earmarked for low-interest loans to automakers.

As a member of the North American Free Trade Agreement (NAFTA), Mexico has closer links to the U.S. than other Latin American countries and, thanks to investments from the American Big Three automakers, the auto industry now accounts for a fifth of the country's manufacturing output and employs 55,000.

The dire economic problems in the U.S. are having a heavy impact on Mexico, which traditionally ships three-quarters of the cars it makes to its northern neighbor.

The hard times that Latin American automakers are currently undergoing are expected to be temporary, given the massive potential of markets there. Tightened consumer budgets, however, will likely lead to increased demand for low-priced, fuel-efficient cars.

Indeed, almost all of the cars made in or imported into Latin America are claimed to be fuel-efficient. Around 90% of all new cars sold in Brazil, for example, come with flex-fuel engines that can run on either gasoline or cane-based ethanol. Some automakers-VW is one-are even entirely phasing out the production of gasoline-only cars in Brazil, betting that the enthusiasm for ethanol is here to stay.

"If you don't have flex-fuel cars," comments a Brazilian auto salesperson, "you will have a very difficult time selling anything here."

The Brazilian government's eco-friendly policies have encouraged automakers to develop hybrid-electric vehicles (HEVs) that use ethanol as a fuel, or other types of highly fuel-efficient cars. This is a trend that automakers all over Latin American will have to follow if they want to survive in today's troubled and increasingly competitive economy.