Colombia's exposure to international markets drives improved productivity and cost cuts

 

Industrial growth has given Colombia a strong internal mechanism for development and an effective way to supply internal demand.

Despite its importance in the 1980s and 1990s, when civil conflict and insecurity kept international investors away, the sector has been losing ground as a component of GDP. The opening of the Colombian economy to international trade and a growing number of trade agreements have exposed manufacturing sectors to competition. However, it has also opened up new diversification opportunities for the country’s exports. The underlying objective to raise exports’ contribution to GDP is guiding the national policy to strengthen the industrial sector.

A handful of industrial segments have attracted foreign investment, expanded operations and shown growth potential. Furthermore, ongoing investments in transport infrastructure to reduce the cost of logistics as well as the devaluation of the Colombian peso, which began in 2014, are encouraging for the sector’s development. The biggest challenge faced by Colombia’s policymakers is how to increase productivity and reduce manufacturing costs.

Weight

Diversification of the economy over the past decade and an acceleration of oil and mining exports have progressively led to a decline in the relative size of manufacturing within the economy. Industry, as a percentage of GDP, fell from 14.5% in 2007 to 11.2% by 2015, according to the National Administrative Department of Statistics ( Departamento Administrativo Nacional de Estadística, DANE). Part of this reduction was caused by buoyant oil exports between 2005 and 2014, which led to a steep fall in the weight of industrial production within real GDP, according to a report by the National Association of Financial Institutions (Asociación Nacional de Instituciones Financieras, ANIF).

Increasing exports of added-value goods has been challenging. The National Department of Planning (Departamento Nacional de Planeación, DNP) found that from 2010-14, primary goods such as mining resources and fossil fuels accounted for 65% of exports. According to the World Bank, exports of goods and services as a percentage of GDP amounted to 14.7% in 2015, compared with 21.3% in Peru, 20.7% in Ecuador and 35.4% in Mexico.

In Figures

A number of factors made 2016 an unusual year for Colombian industry. A 40-day strike by truck drivers left many factories without inputs and affected the distribution of finished goods, while lower levels of domestic consumption caused by economic uncertainty and underperforming industrial exports also affected the sector.

Despite the challenges, improved performance in the last months of the year led to 3.5% growth in industrial production in 2016, compared to a 1.8% increase in 2015, according to statistics from DANE. The figures were nonetheless heavily influenced by the performance of the refining sector, which was boosted by the resumption of operations at Cartagena Refinery, known as Reficar, Colombia’s largest refinery, which came back on-line at the end of 2015 after extensive upgrading work.

Without the impact of renewed refining activity, industrial performance would have risen by just 1% in 2016, according to the National Association of Colombian Entrepreneurs (Asociación Nacional de Empresarios de Colombia, ANDI), underlining the structural weaknesses that have allowed relatively weak sectoral performance over the years. Nevertheless, 21 out of 39 industrial activities improved their performances in 2016, led by petroleum refining and fuel mixing, which grew by 19.4%, the production of metal products, which expanded by 9.8%, and beverage manufacturing, which was up 7.6%.

Competing Abroad

The last decade has seen an expansion in Colombia’s international trade, and the country now has 15 free trade agreements (FTAs). Between 2010 and 2016 the number of countries to which Colombia exported non-petroleum and non-mineral products increased from 168 to 191, according to government figures. Still, most of the country’s exporting potential remains unexplored. In 2016 the Ministry of Commerce, Industry and Tourism (Ministerio de Comercio, Industria y Turismo, MINCIT) reported that of around 1.4m active companies in Colombia, fewer than 1%, were responsible for 80% of all of the nation’s exports.

Improving competitiveness levels remains a key challenge. ANDI has underlined the need for Colombian manufacturing to be able to attract more foreign direct investment, participate in global value chains and accelerate the incorporation of emerging technologies into manufacturing processes.

In an effort to improve the competitiveness of Colombian companies, the government launched the Productive Transformation Programme ( Programa de Transformación Productiva, PTP) in 2008. Included in the 2010-14 National Development Plan and managed by MINCIT, the PTP has become an important support tool for companies in 20 sub-sectors of the manufacturing, agricultural and services industries. It runs a series of co-financing programmes to support innovation and productivity improvements through improved processes and technology adoption. In addition to improvements in individual businesses, the PTP promotes industrial clusters across different regions of the country.

Economic Zones

Since 2005 the government has accelerated the development of special economic zones as a mechanism to attract industrial investment. The zones are managed by the Commission for Economic Zones, which is overseen by MINCIT and has the participation of a representative of the presidency, the DNP, and Colombia’s tax and Customs agency. In 2016 exports from Colombia’s economic zones surpassed $3bn and grew by 46.7%, according to MINCIT. Authorities have been encouraging the development of new areas, and offer incentives for companies setting up in the zones. By early 2017 there were a total of 108 economic zones operating in 20 of the country’s 32 regions. Authorities reported that COP38trn ($11.4bn) of investment was channelled into economic zones between 2007 and 2016. Key industrial segments in these economic areas include biofuel production, beverages, sugar, oil refining, cement production and cosmetics.

Economic areas account for 163,000 direct and indirect jobs. The special tax status that comes with them can be granted to individual firms or areas hosting different businesses. Despite the changes introduced with the recent fiscal reform, which included raising the special status corporate tax rate from 15% to 20%, economic zones still offer several advantages. In addition to tax incentives, firms also have access to preferential trade tariffs. In late 2016 four new economic areas were given the green light by the government, including a business process outsourcing centre in Antioquia, a multipurpose port to improve logistics on the Magdalena River, a regasification plant for liquefied natural gas in El Cayao on Colombia’s Atlantic coast and Ecocementos, a new clinker factory in the Antioquia region.

Industrial Investment

Despite Colombia’s overall production costs being negatively impacted by difficult logistics, the country’s geographic position has attracted new manufacturing units.

In mid-2015 a joint venture between Colombian manufacturer Haceb and multinational brand Whirlpool led to the establishment of a new $50m washing machine factory in Medellín. The facility is expected to produce 400,000 units per year to be exported across Latin America. In mid-2016 Indian packaging group Essel Propack inaugurated a $5m laminated tube factory in Cali, set to service cosmetics and pharmaceutical industries. The unit, Essel’s second in Colombia, will cater to the domestic market and export to the Andean region. Colombian multinational group Corona also opened a new $3m manufacturing plant in Cali in 2016. The 4000-sq-metre unit will produce adhesives and other materials for the construction sector. In March 2016 another domestic manufacturer, Grupo Sanford, saw the opening a new $60m agglomerated wood planks plant in Tocancipá, in the Cundinamarca region.

“The great thing about Colombia is that different regional opportunities exist here,” Helio Duenha, general manager at BOSCH Colombia, told OBG. “For instance, in Cali industrial investments are booming, while in Barranquilla there’s a mix of industry, tourism and port-related activities.”

Refining

Accounting for 11% of industrial activity, the refining sector remains a key contributor to industrial GDP. The temporary closure of Reficar for most of 2015 shaved 0.5% off industrial GDP that year. After a delayed upgrade was finally completed, Reficar restarted operations in November 2015, and reached full production capacity in mid-2016. Initially budgeted at $4bn, the project to expand refining capacity at the plant from 80,000 barrels per day (bpd) to 165,000 bpd ended up costing $8bn.

“Reficar has been operating at full capacity since 2016. In addition to increasing the refinery’s output, it has boosted other industries, helped reduce costs and cut imports,” Ricardo Bribiesca, general manager at PPG Industries Andean Region, told OBG.

Considered Latin America’s most modern refinery, Reficar’s conversion factor – which measures the yield of product from a barrel of crude oil – was expanded from 75% to 97%, according to ANIF.

Reficar’s output is also expected to be cleaner, with diesel having less than 10 parts per million (ppm) of sulphur, compared to 2400 ppm before the revamp, and gasoline under 50 ppm as opposed to the previous 800 ppm, according to ANIF.

Authorities expect the upgraded refinery to add 51% to refining sector GDP. The expansion of Colombia’s refining capacity to 275,000 bpd will also have a positive impact on the industry, boosting industrial GDP by as much as 3.4% in 2017, which is the refinery’s first complete year of full-capacity operation, according to projections by ANIF.

Ultimately, the modernised unit will save the country an estimated $600m-800m annually in imports through the use of locally available refined products.

Cement Industry

Programmes to develop transport infrastructure as well as the government’s housing policy that accelerated after 2010 have supported cement consumption and production increases across the country. Six companies produce cement domestically, with Colombian Cementos Argos, Mexico-based Cemex and LafargeHolcim leading the market. Domestic producers such as Cementos Tequendama, Cementos San Marcos and Cementos del Oriente run smaller operations.

In addition to a general slowdown of the economy, delays on some of the fourth-generation (4G) road projects reduced consumption prospects, as did the arrival of new authorities after municipal elections in late 2015. “In their first year in office, governors and mayors generally take the time to organise and review their projects, so investment is very slow – something usual after elections,” Manuel Antonio Lascarro, general director of the Colombian Ready Mixed Concrete Association, told OBG.

Overall, cement sales in Colombia have increased markedly in recent years, from 8.9m tonnes in 2010 to 12.1m tonnes in 2016, according to DANE. However, delays in the construction sector and the overall macroeconomic environment in Colombia led to a 6% fall in 2016, after sales had increased by as much as 7% in 2015. January 2017 figures indicate cement sales of 913,200 tonnes, a 2.8% reduction year-on-year (y-o-y). However, with the government and the IMF projecting GDP growth of 2.7% in 2017, and a handful of road projects entering their execution phase, sales are expected to rebound. With annual consumption surpassing the 12m-tonne mark over the past two years, local producers’ sales are still far below their installed capacity, which is currently at around 18m tonnes per year, according to Lascarro.

Expansion Projects

A number of expansion projects are under development. Set to come on-line in 2018 is Cementos Argos’s new $450m factory in Boyacá, which will have an annual capacity of 2.3m tonnes. Corona and Spain-based Cementos Molins, meanwhile, have partnered to build a $238m production unit in the Antioquia region. The new clinker factory will have an annual capacity of more than 1.35m tonnes and is scheduled to begin operations in 2018. LafargeHolcim is currently building a $30m cement factory in Buga, in the Valle del Cauca region. The plant will begin operations in 2018 and produce 500,000 tonnes annually. The company already has another cement plant, which has a capacity of 1.8m tonnes per year, in Boyacá. Cemex also recently inaugurated a $360m cement factory in Antioquia, with an annual production capacity of 1m tonnes. “If all the production expansion projects announced by the government are fulfilled, we should have an installed capacity of at least 23m tonnes by 2018. But by that year, consumption will be around 15m tonnes, according to official data, expected projects and experts’ opinions,” Lascarro Mercado told OBG.

Cement consumption patterns have largely followed infrastructure development efforts, which have moved away from larger urban centres and are increasingly focusing on Colombia’s regions. This has been visible not only in public transport and social infrastructure projects, but also as private real estate developers expand housing availability in intermediate cities. “Around 20 years ago, Bogotá accounted for more than half of the cement and concrete consumption in the country. However, construction has been growing in other areas, especially along the coasts. Bogotá today represents less than 13% of cement and 35% of ready mixed concrete,” Lascarro Mercado told OBG.

Steel

Similarly to other construction materials, Colombian steel producers are in a strong position to take advantage of construction sector expansion. With large volumes of investment planned for infrastructure development, housing programmes and the rebuilding of school facilities, domestic producers have been aiming to improve competitiveness.

Colombian steel production has focused on long steels – 80% of which is rebar – although a few small-scale manufacturers process imported flat steel. Rebar is an essential component of the construction sector, as large areas of the country remain exposed to seismic risk. Despite the large increases in consumption of steel in Colombia – it rose by 10% in 2015 – the segment was impacted by several negative trends in 2016. Consequently, there was a 9% fall in consumption of long steel to 2.3m tonnes and a 7% decrease in production to 1.3m tonnes. Imports of long steel reached 1m tonnes in 2016.

Construction material manufacturers were affected by an unusual dry spell as a result of the El Niño climactic phenomenon, leading to droughts. Due to the country’s high dependence on hydroelectric sources – which account for more than 70% of energy production – authorities encouraged producers to cut energy consumption through tariff incentives. Several energy-intensive manufacturers across the country took the opportunity to make maintenance improvements in their factories over the first half of 2016. However, these interruptions in production were compounded by a 40-day strike by truck drivers in mid-2016. “That had a huge impact on the industry, affecting production and deliveries, but also the construction sector. Steel companies had reduced production to save energy in the previous months due to El Niño, but with the strike they were forced to stop production again,” Camila Toro Dangond, executive director at the Colombian Committee for Steel Producers, told OBG.

Colombia is home to five steel producers. The two leading manufacturers – Acerías Paz del Río, which is part of Votorantim, and Gerdau Diaco – are Brazilian-owned. Gerdau Diaco controls iron-ore deposits in Cundinamarca and Boyacá, where the company’s production unit is also located. Acerías Paz del Río manufactures steel from scrap in three mini-mills in Boyacá, Cali and Tocancipá. Sidenal runs two plants in Boyacá and Cundinamarca, and Sidoc operates a steel mill in Cali. Ternium Colombia, owned by the Techint Group, operates a mill in Manizales.

Increasing Capacity

A a top priority for Colombia’s steelmakers has been increasing production capacity. A total of $366m was invested by the country’s five producers to expand capacity between 2010 and 2013, with an additional $373m in investments expected from 2014 to 2017, according to ANDI.Colombia’s steel industry currently provides more than 6700 direct jobs, but comprises 43,000 direct and indirect jobs overall, when including those within its network of suppliers. Furthermore, steel production accounts for annual expenditure of COP1.7trn ($510m) in terms of inputs, of which COP900bn ($270m) are acquired within Colombia.

The country has been affected by rising imports of long steel from countries such as Mexico, Turkey, Brazil and China, which was the target of anti-dumping measures by the Colombian government in 2016 against low-carbon steel imports. Steel demand is expected to keep rising, buoyed by the large amount of construction and infrastructure projects set to take place in the country. “The Colombian steel industry has an opportunity to grow during the next few years, because more than COP120trn ($36bn) is set to be invested in infrastructure projects under planning, and about COP10trn ($3bn) will start to be invested in 2017. We estimate that for the 4G highways alone, about 940,000 tonnes of steel will be required,” Toro told OBG.

An array of other projects likely to boost demand are also set to take place at regional and city level. These developments include the construction of the first line of the Bogotá Metro and an urban railway to link the city with its outskirts. Toro anticipates a 6% increase in demand for steel in 2017.

Automotive

The motor vehicle segment continued to suffer from a weaker peso in 2016. In addition, consumers had to factor in the recently implemented fiscal reform, which lead to value-added tax (VAT) rising from 16% to 19% in 2017. Sales of new cars saw a 10.5% reduction, falling from 283,267 in 2015 to 253,395 in 2016, according to ANDI. The market leader in 2016 was Chevrolet, which sold 60,025 vehicles, followed by Renault (50,864), Kia (26,271) and Nissan (18,247).

As an effective and lower-cost alternative means of navigating traffic-laden cities, motorcycle sales continued to grow rapidly. A total of 560,000 motorbikes were sold in Colombia in 2016. In addition to the poor infrastructure in some areas, motorcycle sales have also been boosted by their affordability. “Motorcycles used to be a luxury item, but now you find some that cost around COP1.8m ($540),” Tulio Zuloaga, president of the Association of the Automotive Sector and Parts (Asociación del Sector Automotriz y Sus Partes, ASOPARTES), told OBG.

Growth in the segment was also propelled by expanding local manufacturing capability, which increased at an annual average of 16% in 2010-14, making Colombia the region’s second-largest motorcycle manufacturer after Brazil, with an annual output of more than 662,000 units, according to figures from ProColombia, the country’s trade support agency, which promotes exports abroad.

Assembly

The continued fall in the local currency supported local manufacturing by making imported cars more expensive. Locally assembled cars’ share in the market rose to 37.5% during the first nine months of 2016, a 2.1% increase y-o-y. However, the country’s automotive assembly industry is facing increasing competition from imported vehicles. In 2017 an FTA between Colombia and South Korea came into effect, stipulating a gradual reduction of import tariffs for Korean cars and auto parts down from 35%. The deal established a 3.5% annual reduction for 10 years until tariffs are eliminated.

“Before the treaty with South Korea, a car that came into Colombia, paying taxes of 35%, expenses, intermediation and so forth, arrived at the same price as a car made here. This is a reflex of our lack of competitiveness. As the agreement comes into effect, competition will tighten further,” Zuloaga said. After the country became an integral part of the Pacific Alliance, Mazda, for example, closed down its manufacturing operation in Colombia and now imports vehicles into the country – tariff-free – from its factory in Mexico.

International trade deals are helping reshape Colombia’s assembly sector, pushing manufacturers to increase competitiveness and secure regional export market share. Renault and General Motors are the only manufacturers that assemble locally, supplying the domestic market and exporting to other Latin American markets, as well as to the Caribbean. Of the 87,386 cars produced in Colombia in 2015, 28,446 were exported.

Auto Parts

The value of annual auto parts sales currently totals $4.1bn. The industry is marred by informal activity as a result of stolen vehicles, which according to Zuloaga brings its real value closer to $8bn. Although the establishment of assembly plants in Colombia was viewed as an opportunity for local parts manufacturers, the reality has been less favourable and initial goals for local content have yet to be met. In the 1970s Colombian authorities planned that vehicles would be manufactured using 30% domestic inputs, but under the prospect of raising the contribution of local industries to 65%.

However, the country’s array of FTAs has encouraged an increase in imported parts for the domestic vehicle assembly industry, which currently only receives around 15% of inputs from local manufacturers, according to figures from ASOPARTES.

Textiles & Fashion

The textiles industry has been developing in recent years, currently accounting for 5% of the nation’s manufacturing industry, according to the National Traders Federation ( Federación Nacional de Comerciantes, FENALCO). Furthermore, sales of textiles, clothing and shoes comprise 6-7% of all retail sales in the country. According to the latest available data from MINCIT, textiles exports fell by 10% to $771m in 2015.

Colombia’s main textile production units are located in Medellín, which also organises Colombiamoda, the country’s main fashion event, and Colombiatex, one of the continent’s largest textiles industry exhibitions. The sector has benefitted from significant demand from domestic consumers, although Colombian clothing producers have expressed concern over what impact the rise in VAT might have on consumption (see Economy chapter).

Devaluation of the peso, however, is making the country’s garments more attractive abroad, although the impact will vary depending on the amount of exports, due to the higher cost of outsourcing inputs from abroad. Textile production increased by 6.1% y-o-y in January 2016, while sector sales rose by 5.9% over the same period, according to MINCIT figures reported in local media.

Colombia’s manufacturers have striven to increase local sourcing. In the Antioquia region, for example, the contribution of imported inputs has been reduced from 100% to 60% over the past 20 years, according to authorities. The strengthening of local production sourcing capabilities, however, has developed as the international environment has become more complex, with competition from Asian manufacturers posing a greater threat in the domestic market as well as in export countries. “Competition from Chinese textiles has meant that Colombian producers have had to reinvent themselves and focus on market niches,” Rafael España González, economic director at the National Traders Federation, told OBG. Women’s underwear in particular has become a signature speciality of textiles production.

Outlook

Industry is set to remain an important part of Colombia’s economy, not only for its capacity to create employment, but also for its significant impact on regional development. However, manufacturers face a challenging domestic environment due to fiscal reforms, which are likely to reduce consumer expenditure in 2017. Still, the devaluation of the peso has made the country’s exports more attractive abroad – an opportunity that local manufacturers are looking to capitalise on to solidify their position in foreign markets. Given the number of FTAs the country has signed, Colombian industrialists also face greater competition, the impact of which will vary between segments. Improving competitiveness and productivity is crucial for industrial activities to compete internationally.

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The Report: Colombia 2017

Industry & Retail chapter from The Report: Colombia 2017

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