Getting back on track: Aggressive government programmes stimulate activity

Since the 1990s Colombia’s strong push for economic growth has substantially contributed to development via exchanges with key international markets. However, this has also put many local industries in a position where they compete with international giants that often have more experience, economic advantages and occasionally unfair export practices. Over time a combination of these factors has taken a toll on national production. Along with lowered international demand from an almost global recession, industrial activity in general has declined slightly. Despite the challenges, manufacturing had displayed resilience until 2012, when sector output fell 0.7%. For a sector that currently contributes 12% to GDP, these negative figures set off alarm bells for authorities and many in the private sector who are actively searching for ways to expand products and markets.

The Ministry of Trade, Industry and Tourism ( Ministerio de Comercio, Industria y Turismo, MCIT) has been playing an important role in directing state funding towards the most vulnerable industries while also implementing several initiatives to enhance productive practices. The recently announced Stimulus Plan for Production and Employment (Plan de Impulso a la Producción y el Empleo, PIPE) will channel major resources to revitalise activity while the Productive Transformation Programme (Programa de Transformación Productiva, PTP) works with select industries to increase their competitiveness nationally and internationally. Manuel Laborde, the president of Proquinal, told OBG, “If we don’t want Colombia to suffer from overreliance on natural resources – Dutch disease – the government needs to continue its diversification policies by strategically planning each industry.”

STIMULI: In April 2013 the government announced aggressive fiscal and legal measures to tackle several issues hindering the economy. The PIPE stimulus package proposes investing COP5trn ($3bn), aimed primarily at more vulnerable sectors, such as industry and agriculture, which have been negatively affected by increased international competition, a strong Colombian peso, the entry of contraband goods into the country and higher production costs. The plan expects to generate 350,000 new jobs and drive the economy towards the desired 4.8% growth rate by the end of 2013.

PIPE includes strategies to reduce payroll taxes by 5%, which will benefit labour-intensive industries, such as manufacturing. However, to compensate, that percentage will be deducted from funding of certain state entities such as the National Learning Service (Servicio Nacional de Aprendizaje, SENA), one of the leading educational programmes for technical training and job placement. Selective subsidies will also go to certain industries, such as oil refining and energy.

INCREASING CONTROL: To address issues with the exchange rate, the Central Bank of Colombia has been buying dollars over the past year in a bid to keep appreciation of the peso within manageable limits. PIPE now aims to provide more incentives by encouraging pension funds to increase their foreign assets, hoping to increase their external participation from 6% to 11%.

While many sector specialists interviewed by OBG agree that regulating capital flows is necessary to increase the dollar’s value in Colombia, some critics point out that capital should not be leaving the country; instead, capital entering it should be better controlled.

One of PIPE’s most significant contributions towards reducing costs consists of deferring import tariffs on raw materials and capital goods until 2015. This is expected to aid many companies – especially small and medium-sized enterprises (SMEs) – in modernising their production facilities. The MCIT estimates the fiscal cost of this measure will be $647.8m. PIPE is also tackling the issue of contraband goods, for which a law has been sent to Congress that proposes structural changes to the country’s Fiscal and Customs Police.

STILL POSITIVE: As the least affected industry in 2012, fast-moving consumer goods (FMCG) continue to display significant potential on the production end. Some auspicious emerging industries within this segment include cosmetics and household cleaning products, which also form part of the government’s PTP initiative (see analysis). Although the overall production of cosmetics fell 0.8% in 2012, sales grew 6%, reaching a value of $4.1bn, according to the National Business Association of Colombia (Asociación Nacional de Empresarios de Colombia, ANDI).

As a group, cosmetics and household cleaning products have been growing steadily by about 3% over the past couple of years, according to the PTP. Colombia, known for a strong tradition of personal care, is among the top five markets for cosmetics in Latin America, and producers are increasingly participating in export segments. ANDI figures for 2012 indicate that exports grew 4%, accounting for $880.2m. Leading exporters included Belstar, with a market share of 28%, followed by Johnson & Johnson and Yanbal, with 10% each.

R&D: Many international cosmetics companies have invested heavily in Colombia and have begun to establish permanent operations. This is the case with Brazil’s Natura, Peru’s Yanbal and the US-based Kimberly-Clark, possibly one of the largest players to enter the country. In the case of Kimberly-Clark, the company not only began producing but also set up its second research and development (R&D) centre globally, which is located in Medellín. The centre is a milestone for national cosmetics production. One of the government’s goals is to increase the level of industrial self-sufficiency through technological developments.

One attractive avenue for cosmetics R&D is Colombia’s well-preserved biodiversity, providing the conditions for natural ingredients along the development chain. For companies like Kimberly-Clark, expanding also entails setting up shop in strategic locations in Latin America to easily access other regional markets.

FOODS: Among other FMCGs, food and beverages have also fared well. Foreign companies, like food processor Alimentos Polar, which arrived from Venezuela 15 years ago, consider Colombia’s legislative framework to be one of the main factors behind the country’s stable investment climate. A leader in pre-cooked oats (65% of market share) and flour (50%), the company recently delved into pet foods, controlling 5% of that market. Covering the entire production chain from agriculture to eventual commercial sales, Alimentos Polar has invested heavily in boosting the competitiveness of white corn through a public-private partnership. Since the launch of this programme three years ago, the company has increased the percentage of Colombian white corn that it purchases locally from 18% to 50%. José Antonio Pulido, the general manager of Alimentos Polar, told OBG that “the company’s goal is to purchase 80% of the raw material locally in 2015.” Since 100% of oats are imported from Chile, this programme is just one example of initiatives that can be undertaken to improve self-sufficiency in food processing.

In line with the overall trend of decreased growth, Alimentos Polar experienced declines in 2012. Oat consumption, which had been growing by around 5% in 2011, dropped to 1% growth, while pet food fell from 25% to single-digit growth. However, Pulido remains confident in government plans to reinvigorate production and open up new export markets. These hopes may be borne out by the positive figures for growth entering 2013. While over the previous year, production of foods as a group increased by 4.2%, creating 2.6% more jobs, in February 2013 alone, sector growth was up 11.7%. Primary export markets include the US, regional countries of the Andean Community (Comunidad Andina de Naciones, CAN), Costa Rica and several farther off, such as Angola and the UAE, which experienced growth rates of 73.1% and 30.6%, respectively.

IMAGE & INVESTMENT: Colombia’s determination to build a solid economy is even more of a challenge considering the levels of corruption and violence that have affected the country throughout the past half century. Efforts have paid off, as is evident in major international accomplishments such as temporary removal from the “black list” of the Inter-American Commission on Human Rights. Colombia could be permanently removed from the list in 2014 if the government follows through with the official recommendations that have been given by the commission.

International recognition and aggressive campaigns to improve the country’s image of safety have supported rising foreign direct investment, which in 2012 increased by 16% to reach $15.8bn. Of that amount, the manufacturing sector received $2.04bn, representing an annual increase of 159%, according to the MCIT. Nearly half of that comes from member countries of the EU. Spain is the second-largest investor in Colombia after the US. The new free trade agreement (FTA) with the EU and the recession in Spain should increase investments by Spanish companies in the short term.

Colombia’s promotional agency, Proexport, has played a leading role in improving the country’s image abroad. By embarking on vigorous campaigns to attract foreign investment and identify commercial opportunities for Colombian products overseas, the agency is viewed as a first-stop resource for investors. Proexport performs joint work with the PTP, developing market studies and participating in trade missions. Additional strong external promotion work has been carried out by the MCIT, which recently launched its campaign Compre manufactured products from SMEs.

TRADE: Colombia’s preferential trade agreements have come a long way since the 1990s, when the country began opening its economy to the world. Between FTAs and partial scope agreements, Colombia has 35 deals with other countries and will nearly double that number once the already signed FTAs with South Korea and Costa Rica enter into full force by the end of 2013. Trade relations with the EU have been limited up to now and the new FTA is set to highlight the outlook for industrial and agricultural products, despite hard economic times in Europe. While most FTAs have been established throughout the region, Colombia now has its sights set farther, entering into negotiations with Turkey, Japan and Israel. Colombia is also a member of the Pacific Alliance, comprised of Chile, Peru and Mexico. Although it already has FTAs with these countries, the alliance will continue to ban tariff restrictions on certain goods and allow the freer exchange of services, capital and people, among other preferential conditions. Additionally, Colombia is a member state of CAN, a regional exchange alliance between Venezuela, Ecuador, Peru and Bolivia, that has existed for the past 40 years, albeit under a different name.

One of the most significant FTAs the country has managed to seal was with the US, which completed its first year in May 2013, with overall positive results for national production. Patricia Tovar, the executive director of the Colombian-British Chamber of Commerce, believes preferential trade with the US is also an enticement for other foreign investors looking to begin operations in Colombia. “For European exporters who do not enjoy FTA benefits with the US, re-exporting through Colombia can significantly cut down on their shipping costs,” Tovar told OBG. She mentioned an important British furniture company that began producing tables in Colombia destined solely for export to the US, a strategy that reduced production costs by 60%. “During times of crisis in Europe, many investors want to find a stable, growing country in which to invest, and they will find that in Colombia,” Tovar said.

PROS & CONS: While many industries fear increased international competition, the general consensus among sector specialists interviewed by OBG is that FTAs will benefit the country in the long run, if drafted responsibly. For example, considering the strength of the US milk industry, the FTA with the US established that dairy products would gradually be introduced with preferential terms over a span of 10 years, allowing the national industry to increase competitiveness. However, not all FTAs provide the same security, such as that with South Korea, which threatens to severely affect Colombia’s manufacturing of vehicle parts and assembly; in fact, they are already showing signs of vulnerability.

VEHICLES: The automotive industry in Colombia consists of vehicle assembly, auto parts production and the assembly of motorcycles, and it accounted for 4% of industrial production in 2012, according to the National Administrative Department of Statistics ( Departamento Administrativo Nacional de Estadística, DANE). In the production of parts, the majority is locally produced, including batteries, tyres, brakes, speakers, radios and seats. Within the assembly segment, virtually all capital comes from abroad, mainly from Renault, Mazda and General Motors (GM), by far the largest of the three with a 28% market share. Over the 12 months prior to February 2013, vehicle production grew by 0.2%, although January and February 2013 showed severe drops in the production of bodywork (-46.4%) and parts (-17.4%), according to DANE. One of the main causes behind this was the loss of several markets. To export cars to CAN member states, 34.6% of the product must be Colombian-made, according to Juan Carlos Garavito, the general manager of PTP. For heavier vehicles of 16 passengers or more, the product origin requirement amounts to 18%. Renault has focused its efforts primarily on Mexico, while GM still concentrates on the local market and Mazda’s production remains small.

HANG-UPS: The increasing number of cheaper vehicles from Asian countries has resulted in an even bigger threat to the industry’s future. Imported vehicles dominate the sector, representing 60% of purchases. Compared to revenues of $330m in 2011, only $140m worth of vehicles were locally produced, according to leading car supplies company DANA Transejes Colombia. Rodolfo Ramírez, the general manager of PPG Industries Colombia, told OBG, “Although imports have gained a large market share in recent years, vehicle consumption in Colombia is only 71 per 100 inhabitants, a figure that is very low and that will certainly tend to grow as people’s economic conditions improve.”

The FTA with South Korea could aggravate this situation, since the Asian country produces many more cars than it consumes, providing big incentives for pursuing exports. While Korean cars imported into Colombia arrive with a 35% tariff, the new FTA will reduce that rate by 3.5% annually. Within five years, cars will enter the market at half the current rate, and after 10 years they will be completely tariff-free.

Carlos Alberto Estrada Durán, the general manager of DANA Transejes, believes the government has not sufficiently protected the national industry. “A solution that could allow the increase in imports to coexist with the local automotive industry would be to promote assembly in Colombia through fiscal incentives, as is done – and works very well – in Mexico,” he told OBG. With an unclear horizon, some production companies have begun to migrate, like Toyota, which moved to Ecuador.

Thus, there are high hopes for initiatives such as the PTP and the Centre for Technological Development of the Automobile Industry. However, if government measures fail to resuscitate the industry, Estrada forecasts that many companies will follow the migration trend.

BIKES: Motorcycles, which represent 52% of the automotive fleet, display a brighter outlook within the vehicle assembly industry. As a widely accessible means of transportation, nearly 600,000 motorcycles are sold each year, according to leading motorcycle production and distribution company Auteco.

“The motorcycle boom in Colombia is due to an unmet need for transportation of the lower strata of the population,” the president of Auteco, Javier Bohórquez, told OBG. “The momentum of the exchange rate, coupled with an increase in credit facilities, created the possibility for everyone to buy a motorcycle. This has led to market growth of 400% in the past five years, and has contributed to the inclusion of a large part of the population in the formal economy.”

Bohórquez also told OBG that 95% of motorcycles distributed throughout the Colombian market are locally assembled, while the remaining 5% corresponds to high-end imported bikes from places like the US and Europe. Although sector growth is slowing slightly, from 24% in 2011 to 12% in 2012, forecasts for 2013 suggest growth of around 10%, which is still solid amid setbacks in various other segments of vehicle assembly.

TRADITIONAL INDUSTRIES: The negative effects of increased Asian imports are also being felt in other traditional industrial sectors, such as clothing and textiles. Many products, particularly from China, are arriving in large volume and at below-cost prices. The Colombian Association of Footwear and Leather Manufacturing Industries (Asociación Colombiana de Industriales del Calzado, el Cuero y sus Manufacturas, ACICAM) has observed an unbalanced ratio between local production and imports, which currently make up around 50% of the leather and footwear market. In 2012 Colombia imported 76m pairs of shoes, of which nearly 50% arrived at prices much lower than the normal market values, according to ACICAM. For ACICAM President Luis Gustavo Flórez Enciso, the new contraband law proposed within the framework of the PIPE package will be fundamental to addressing adverse import situations. “The law must cover the different instruments and measures necessary to neutralise these sorts of absolutely irregular import phenomena,” he told OBG. “Contraband and dumping are currently the largest problems affecting small manufacturers.” As president of ACICAM, whose company representation has surpassed 90% of relevant SMEs, Flórez is familiar with these setbacks, since smaller companies tend to suffer most.

ALTERNATIVES: Private sector initiatives have also sought to address these conditions within alternative legal parameters. Free zones, for example, are areas legally designated for industrial activities receiving tax benefits. While tax deductions have risen in the past year, this option still offers attractive opportunities for export firms, which have continued building new plants and factories in these zones (see Economy chapter).

For SMEs, the policies of industrial parks and clusters have also provided solutions for increased efficiency, cutting down on costs and reducing damaging environmental impacts. In Bogotá, for example, the clothing and fashion industry has developed a cluster in the Restrepo neighbourhood that houses some 1300 companies. Taken under the wing of the PTP, the leather and footwear industries will soon adopt a clustering strategy, particularly in areas where production is most abundant, like Bucaramanga, Cúcuta and Medellín.

OUTLOOK: Colombia is actively participating in the trend among Latin American countries to shift industrial focus from primary products to added value, in an effort to generate more revenue from its resources as well as increased employment opportunities. Evidence of this can be seen on a small scale in several emerging FMCGs and in a larger context through industries like petrochemicals (see analysis). Traditional industries have been hit the hardest by reduced external demand and stronger international competition, as have the manufacturing of vehicle parts and their assembly. However, concrete strategies to overcome economic challenges within Colombia’s various industries indicate that the public and private sectors are now approaching this situation in a serious manner.

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The Report: Colombia 2013

Industry chapter from The Report: Colombia 2013

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