International Molding Report: Opportunity and competition in South America

This IMM International Molding Report is prepared for IMM by Agostino von Hassell of The Repton Group, who provides IMM's monthly Molders Economic Index.

Molders in the U.S. probably know very little about injection molders and their markets in South America. But a wise and careful molder would be smart to start learning as much as possible about opportunities far south of the border—in Brazil, Argentina, Colombia, Chile, and Venezuela primarily. The other, smaller countries do offer some opportunity, but their markets are too small at this time to be of any material interest. South America should be seen both as a major and rapidly evolving competitor and as a significant market opportunity for exports.

Consider this example: Total U.S. consumer goods exports to Sao Paolo, Brazil—with 20 million people the single most concentrated market in the world—amounted to just $12 million in 1998. Brazil projects massive growth in consumer spending as the middle class grows and poverty is reduced. As a result, U.S. exports of consumer goods to that area could reach more than $150 million by 2005, one Brazilian projection shows.

Chile and Colombia
One of the more successful economies in South America is Chile. For instance, in June 2000 manufacturing production rose 5.1 percent as factories revved up to make more furniture and chemicals. Export of manufactured goods to the U.S.—many including injection molded items—has risen on average 12.3 percent in each of the last three years. Conversely, however, Chile remains a somewhat lackluster market for U.S. producers as domestic spending is slack; unemployment is rising and the Chileans are very careful about their consumer spending.

Chile has a small but vibrant collection of injection molders making high-quality, high-precision automotive parts as well as aircraft components aimed at export markets in Argentina and Brazil. One group of Taiwanese moldmakers told us that their sales of automotive injection molds to Chile has quadrupled over the past two years.

Overall, even though Chile's inflation is in check, the economy will not return to the eye-popping GDP growth rates of 7 percent seen for most of the 1990s. We project 5.8 percent growth in the next 12 months after about 5.5 percent growth in the past 12 months. Prior to that the economy contracted 1.1 percent as Chile plunged into recession.

Colombia, on the other hand, holds enormous potential. This country could quickly emerge as a major exporter of molded products, with key markets in the U.S. and Europe. Growing wealth could bolster a still small middle class, creating an attractive market for U.S. consumer products. Consumer sales are on the rise and U.S. exports of consumer goods should show nice increases. In fact, Colombian retail sales, excluding fuel, rose 5.29 percent January through April 2000, compared to the same four months in 1999.

The country's gross domestic product rose 2.2 percent in the first quarter of this year and is expected to gain a further 3.8 percent in the second quarter, following a 4.48 percent contraction for all of 1999. But before the U.S. molder can see this country as a serious target market, Colombia needs to resolve problems associated with drug terrorism and civil war conditions.

Automotive: Brazil and Argentina Lead
U.S. injection molders with solid expertise maximizing productivity in the manufacture of automotive parts have a significant opportunity in Brazil and Argentina. The automotive industry there is booming, and parts suppliers are setting up shop. Several major European and Japanese auto parts makers have opened offices, looking for ways to capture a piece of what will be a significant market.

The opportunity for U.S. molders is simple: Demand for know-how and technology is high and both countries would be receptive to import of "services" from molders.

The economies of Brazil and Argentina have stabilized with signs of growth. Even though the car-buying middle class remains hampered by a lack of funds, growth is expected for the next few years.

That's why major automakers are poised to make massive investments in South America. Germany's Volkswagen is planning a $250 million plant expansion in Cordoba, Argentina. In August France's Peugeot-Citroën announced a $410 million project to double its daily Argentinean production after Mercosur trade bloc members Argentina, Brazil, Paraguay, and Uruguay sealed an auto pact liberalizing trade by 2006. This will create a massive regional market and the world's largest trade bloc.

All this is likely to turn around car production for Argentina. In 1999 auto output fell 33.4 percent to 304,913 vehicles after Brazil, the major buyer, devalued its currency, the real, by more than 30 percent. Car production in Argentina could easily reach 1.2 million units by 2006, say automotive sources.

"This is a ground floor opportunity for savvy parts makers," says a source at Volkswagen in Germany. "Now is the time for parts makers to move in. Those countries [Brazil, Argentina, Chile, Uruguay] are starved for modern parts manufacturing technology." U.S. molders with ties to car makers in Argentina and Brazil—France's Renault, Italy's Fiat, DaimlerChrysler, Ford, Toyota, and Scania—should contemplate a move.

This past July GM opened a new Brazilian auto manufacturing plant designed to be the benchmark for GM plants elsewhere. The factory, located in southern Brazil, is the birthplace of GM's new compact car, the Chevrolet Celta. The Celta, set to hit the market in September, will compete with Volkswagen and Fiat and will be priced at less than $8500. GM aims to use the plant to test its new factory model, which cuts expenses through ultraswift delivery of components and increased automation. This is a major opportunity as well as a challenge to molders.

At the Brazil plant all molding operations and other parts-making facilities are clustered around the assembly plant in an industrial campus. Although this facility already has its own suppliers, GM is likely to copy the model elsewhere. This is an opportunity for U.S. molders as GM builds more facilities.

Volkswagen, a major car producer in Brazil (with 31 percent domestic market share) and net exporter, will feel pressure from the new GM plant and is likely to aggressively invest in new facilities. "We will also try to recruit leading-edge parts makers that can work with us in setting up flexible assembly plants," a VW source says.

As new production from companies such as GM and PSA Peugeot-Citroën reaches showrooms, Brazil's annual vehicle production capacity will rise to about 3.3 million units.

Embraer: Leading Technology
Brazil's leading-edge airplane manufacturer Embraer is a potential customer for U.S. molders with expertise in small-volume production of precision components. Embraer is the fourth largest commercial airplane manufacturer in the world and a Brazilian export leader. The company now has orders on the book worth more than $20 billion.

Embraer has committed to becoming a Knowledge-Based Organization (KBO). Initially, it intends to use the technology to assist in the rapid design and prototyping of wire harnesses and to create a knowledge-based wing-component application. Additionally, Embraer will sponsor and facilitate Knowledge-Based Engineering (KBE) programs at universities and colleges in Brazil.
Sources at the aircraft maker say that the anticipated revolution in manufacturing and design technology will benefit other industrial enterprises in Brazil. "Companies in all fields will have the capability to become global leaders," a contact says.

Electronics: Future Growth
The market for electronics in South America remains small in numbers. But, say major suppliers such as Dell and Compaq, South America will show "spectacular" sales increases in the next few years. One projection has the sale of PCs in all of South America doubling each year for the next five—certainly an opportunity for U.S. molders.

At this time Brazil is the single largest PC market in South America. According to Dataquest, in the first quarter of 2000, 62 percent of all PCs in South America were sold in Brazil and Mexico. Brazil, with a population of 165 million, has emerged as the region's PC leader with a growth rate of 85 percent in the first quarter of 1999, the research firm reported.