Colombia: Looking to auto manufacturing
While small in volume when compared with Northern giants Mexico and the US, Colombia has long been proud of its automotive industry. It plays a mighty role in the economy, accounting for 6.2% of GDP and providing jobs for 34,000 people. However, the sector is bracing for big changes as it confronts increased competition brought on by the implementation of new free trade agreements and an increasingly strong Colombian peso.
GM Colmotores, the local manufacturer of General Motors (GM) and Chevrolet brand vehicles, is the current industry leader. Historically, GM Colmotores has succeeded as an assembler of completely knocked-down kits (CKDs), which means Colmotores does not manufacture parts but locally assembles imported components In some cases, the vehicles are exported in their finished form.
The newly implemented free trade agreement (FTA) with Mexico, in particular, puts this model in danger. In an interview with local press, Jaime Ardila, the Colombian director of GM South America, explained, “We can no longer be competitive with just assembly because the costs are lower in other places, the logistics of bringing CKDs to Colombia are difficult, and we need more scale.”
The evidence of Ardila’s claim is in the numbers. Since the FTA with Mexico came into effect in 2011, Mexico has seen an 85% increase in auto exports to Colombia. Meanwhile, Colombia’s participation in the domestic auto industry is down to 32.6% from 33.5% in 2010 and 36.1% in 2009.
More telling are the remarks of GM Colmotores president, Santiago Chamorro, who informed local press, “the FTA with Mexico was a disaster for Colombia’s auto industry”. According to Chamorro, the benefits of the accord only go one way. “Last year Colombia sent only four cars to Mexico,” he said.
Auto industry leaders have also expressed their concern about the implementation of FTAs with South Korea and the US. Korean imports already account for 15.6% of the Colombia’s total automobile market and 26.5% of foreign vehicle imports. With the elimination of import duties, these numbers are sure to rise.
The FTA with the US is slightly less concerning, as the US is not a big player in Colombia’s car import market. Additionally, the import duty on American-made vehicles, which currently stands at 35%, will be reduced gradually by 3.5% annually over a 10-year period.
In addition to the new FTAs, the strength of the Colombian peso brought on by the country’s rapid growth and the development of a booming oil industry has impacted export markets. So far this year, the peso is up 8.5%, reaching a five-month high on February 3rd. The central bank has attempted to combat the peso’s rise by increasing the benchmark interest rate and going on a three-month, dollar-buying spree. So far the peso has dropped only .2% in response.
“There are two roads: the easy one, which is to convert ourselves into car importers; and the other more difficult option — to create a much stronger automotive industry,” Chamorro said.
At least for the moment, Chamorro seems to be intent on doing the latter. On February 7, GM Colmotores’ leadership, as well as Colombian President Juan Manuel Santos, gathered to lay the first brick of a new automotive manufacturing plant known as the Colmotores Industrial Zone, or ZOFICOL. The plant, which will be fully equipped to manufacture auto parts, should be completed within the next two years at a cost of $50m. The Ministry of Commerce, Industry, and Tourism predicts that, when completed, ZOFICOL will create up to 900 jobs, directly and indirectly.
The government is lending the industry a helping hand by financing the creation of an Automobile Development Centre which will work on innovative automobile technology that could make Colombia a stronger regional competitor. This project is expected to be completed before the end of the year.
Santos has further reassured the industry by claiming that the nation’s FTA negotiators “do everything possible to ensure whatever new competition there is will be fair and just.” However, Santos also warns, “The work is not just for us. The world will not permit the auto industry here to rest on its laurels.”
Indeed, Colombia’s auto industry will have to get creative about the way it does business. Its very survival and the jobs of thousands depend on the steps the country takes.