Colombia's exports rise as logistics infrastructure improves

 

Colombia has a well-established industrial base with a presence in a range of products, from processed foods to vehicle manufacturing. While growth rates for some industrial lines have been robust during the past decade, the economic slowdown experienced in 2016 and 2017 stunted industrial development as a whole during those years, adding to long-standing challenges such as high transportation costs. However, ongoing efforts to improve logistics infrastructure, coupled with policies to incentivise exports and a weaker peso, have made exports of Colombian industrial goods more competitive in international markets. Improved economic activity towards the end of 2018 and in the beginning of 2019 has also driven demand at home, providing positive short-term prospects for the industry.

Competitiveness

For the last four years Colombia has maintained its position as the fifth-most competitive country in the region, according to the World Economic Forum’s “Global Competitiveness Report 2018”. It ranked 60th globally out of 140 countries, behind Chile (33rd), Mexico (46th), Uruguay (53rd) and Costa Rica (55th). While Colombia ranked ahead of many regional peers in terms of macroeconomic stability and health, its lower scores on innovation capability, ICT adoption and institutional capacity reduced its overall standing. In another global compilation, Colombia was 58th out of 63 countries in the IMD’s 2018 World Competitiveness Ranking, but climbed six places in the 2019 edition.

According to the “National Competitiveness Report” by local think tank Private Council for Competitiveness, high logistics costs, the lack of technical skills needed by the market and a less-than-favourable track record of institutional capacity are some of the biggest obstacles to improving competitiveness. Moreover, non-tariff barriers to trade such as administrative hurdles, over-regulation and an inefficient fiscal system continue to limit the potential of private sector investment.

With improving competitiveness an overarching goal of the new administration, efforts to address these gaps have already begun to be implemented. According to the Ministry of Commerce, Industry and Tourism (Ministerio de Comercio, Industria y Turismo, MINCIT), in the three months following the September 2018 launch of the Estado Simple, Colombia Ágil (Simple State, Agile Colombia) programme, 615 administrative procedures were either simplified, eliminated, rationalised or integrated with new technologies to improve efficiency. This is out of a total of 800.

“This administration inherited a country where administrative procedures took an average of 7.4 hours per procedure, compared to a Latin American average of 5.4 hours. In this context, we are working to facilitate the relationship between the private sector and public authorities,” José Manuel Restrepo, the minister of commerce, industry and tourism, told OBG.

The passing of the 2018 fiscal reform is expected to help with competitiveness as well, as it provided a number of tax incentives targeting industrial sectors and companies investing over a certain amount via the “mega-investment” policy (see Economy chapter).

Performance

The drive to improve competitiveness over the last half decade has been hindered by the lingering effects of the drop in international commodity prices that began in mid-2014, resulting in GDP growth slowing from 4.7% that year to 1.4% in 2017, according to the IMF. Production and sales figures of industrial manufacturing struggled during those years as well. However, a recovering economy in 2018, which saw GDP growth of 2.7%, led to small improvements in the industrial sector. The sector expanded by 2% in 2018, slightly more than the 1.76% recorded the previous year, according to the National Administrative Department of Statistics (Departamento Administrativo Nacional de Estadística, DANE). Industry accounts for approximately 12% of the country’s GDP.

Out of the 39 industrial subsectors that are tracked by DANE,30 saw production gains in 2018, headed by rubber (18.6%), vehicle body frames (16.7%), other transport equipment (10.3%), and cocoa, chocolate and confectionery (8.3%). Throughout the year, domestic demand for manufactured goods grew by 3.4%. This was led by retail sales, not including fuels, with a 7% increase. Signs of economic improvement across many of Colombia’s main trading partners also supported the manufacturing sector, as exports of industrial goods grew by approximately 8.3% in 2018.

These trends were maintained in the first three months of 2019, with production and sales of industrial manufacturing goods growing by 3% and 2.5%, respectively, year-on-year (y-o-y). The beginning of 2019 also saw a strong 7.2% y-o-y increase in exports, driven primarily by US purchases that grew by 15.8%.

Government Initiatives

To help boost competitiveness and participation in international and local markets, the authorities have implemented a number of initiatives aimed at supporting private sector development throughout the years. In 2008 Colombia launched the Productive Transformation Programme (Programa de Transformación Productiva, PTP), which provides financing to drive innovation and productivity improvements through more efficient processes and technology adoption, particularly for export-oriented industries. Since its inception, the programme has participated in boosting the development of a number of industries with international reach, including business process outsourcing (BPO), avocado production, fisheries and cosmetics. It has also promoted policies to increase investment in the automotive and shipbuilding segments, while supporting increased local procurement by government entities.

Under the new administration, the policy – now called Colombia Productiva – aims to expand its impact on companies that benefit from the various programmes available, including those within the Fábricas de Productividad initiative, which provides technical support to small and medium-sized enterprises (SMEs) seeking to export abroad. Having reached 1103 companies between 2015 and 2018, the new administration seeks to increase the pace to 1000 companies per year for the next four years beginning in 2019. Its online platform Compralonuestro.co, developed in partnership with the Inter-American Development Bank, promotes domestic procurement and linkages between local companies to boost interactions among Colombian firms.

However, other programmes such as the Plan to Increase Production and Employment, launched during the administration of Juan Manuel Santos, did not live up to expectations. According to Fernando Restrepo, spokesperson for Grupo Proindustria, the plan assigned COP100bn ($34.2m) to Colombia’s manufacturing industry out of the COP5trn ($1.7bn) set aside for it.

Regional Participation

The national government has also identified the need to work with Colombia’s various regions through their respective Regional Competitive Commissions to strengthen institutional capacity and attract private sector investment across departments. “Developing the business ecosystem throughout the regions is paramount to sustained growth in all of Colombia,” MINCIT’s Restrepo told OBG. Under the current administration, the idea of Strategic Internationalisation Priority Regions (Regiones Estratégicas de Internacionalización Prioritarias, REIPs) was created to support the internationalisation of Colombia’s regions. This is done by grouping together several departments or municipalities that offer adequate conditions in terms of transport infrastructure and logistics, as well as dynamic business ecosystems with export potential, and are favourable for the establishment of industrial clusters. Incentives provided under the system include facilitation of administrative procedures and company registration, as well as targeted support. The first REIP was formed in the Caribbean region, connecting Cartagena, Barranquilla and Santa Marta, followed by one comprising Risaralda, Quindío, Caldas and Valle del Cauca.

Another initiative is the Administrative Planning Regions (Regiones Administrativas y de Planeación, RAPs), created under Colombia’s constitution and the Land Management Law. These entail the unification of departments to ensure the structured and even development of Colombia’s many regions. While the process has been slow, 2019 began with the announcement of two additional RAPs planned between Antioquia and Córdoba, and Santander and Norte de Santander. These are to join the ranks of the Central region, the Pacific region, the Caribbean region and the Coffee Axis region, which were formed in 2014.

Both the REIPs and RAPs provide substantial opportunities, as regions work in unison for the development of infrastructure and industrial clusters, giving them the ability to leverage economies of scale across wider areas. Moreover, these give the national government more confidence in assigning public funds to projects that will result in a broader regional impact.

Competing Abroad

Colombia has worked to grow its international trade, and the country now has 16 free trade agreements (FTAs). Despite this, a 2016 report by the Colombian Confederation of Chambers of Commerce found that only 0.4% of local companies exported their products abroad and that 51% of total international sales stemmed from a dozen companies. Furthermore, “The Great SME Survey” by Colombia’s National Association of Institutional Financiers found that export growth for industrial SMEs fell from 6% in the first half of 2017 to 4% in the first half of 2018. For service SMEs, the proportion surveyed that do not export grew from 91% to 94% over the same period.

During his campaign, President Iván Duque made it clear that the country would not be pursuing additional FTAs in the short term, but would instead focus on expanding and actively participating in existing ones. The first sign associated with this policy was the November 2018 introduction of textiles and apparel into the treaties signed with Mexico and Guatemala, eliminating Customs tariffs for those countries, which previously ranged from 5% to 15%. The same month an agreement was signed between El Salvador, Guatemala, Honduras and Colombia that allowed exporting companies to import products unavailable in their countries for the manufacturing of goods destined for the EU.

Additionally, ProColombia, the entity charged with promoting investment and exports, does so through trade fairs aimed at connecting local companies with foreign buyers. Its programmes also provide technical support to firms seeking to enter international markets. With all these policies, the government aims to increase non-mining exports from $14.9bn in 2017 to $27bn in 2022, according to the agency.

“With our current agreements, we have access to a market of over 1.5bn consumers, providing ample opportunity to develop our exports,” Restrepo told OBG. “What we need to do is create a link between local producers and these markets, and accompany them throughout the export process. We are creating a supplier development programme for companies that already have export activities.”

Free Trade Zones

Since 2005 the government has accelerated the development of special economic zones as a mechanism to attract industrial investment. According to MINCIT, by March 2019 there were 111 free trade zones in Colombia, split between permanent free trade zones (zonas francas permanentes, ZFPs) and special free trade zones (zonas francas especiales, ZFEs), which are assigned to a single company or entity. In 2018 exports from Colombia’s free trade zones surpassed $2.8bn, up 24.8% compared to a year earlier. The trend was maintained during the first quarter of 2019, with exports growing by 24.3% y-o-y on the back of strong demand from India, Panama and the US.

The largest ZFP is Palmaseca in Valle del Cauca, contributing approximately 7.6% of total exports during the first couple of months of 2019, followed by ZFP Cencauca in the Cauca department, at 5.5%. Their proximity to Colombia’s main export port on the Pacific coast, as well as the regions’ strong agro-industrial potential, have allowed both zones to consistently post continuous growth. Third and fourth place are held by the ZFPs in Barranquilla and Cartagena, respectively, which channel exports through nearby Caribbean ports.

In the capital, ZFP Bogotá grabbed headlines in 2018 after receiving four distinctions at the Global Free Zones of the Year 2018 awards, organised by fDi Intelligence. The zone has a strong emphasis on logistics and services. The value of exports for the economic zone reached $74.8m in 2018, up 11.5% over 2017. However, a 17.5% y-o-y decline was recorded during the first three months of 2019.

Changes in free trade zones’ dedicated fiscal regimes have sometimes raised questions about legal security in the country. Prior to 2005 companies in such zones benefitted from 0% income tax, although they were required to export over 75% of production. When a new regime was implemented in 2005, export requirements were scrapped and the income tax rate was increased to 15%. This subsequently rose to 20% with the 2016 fiscal reform, jeopardising investments that were calculated under previous regimes.

Despite the changes to income tax, economic zones still provide other advantages, including Customs duties exemptions for imported products and preferential trade tariffs. Growth of the model has been constant, with the National Association of Businessmen of Colombia (Asociación Nacional de Empresarios de Colombia, ANDI) stating that between 2005 and 2018, COP43.5trn ($14.9bn) was invested in free trade areas. In 2018 at least two new areas were launched: Zona America in Cali, dedicated to the services sector, and the Monsu industrial complex in Cartagena, which has several industrial parks including a free trade zone.

Motor Vehicles

Among the top industrial segments are vehicles, textiles, cosmetics, steel, petrochemicals, and food and beverages. When it comes to vehicles, Colombia is the fourth-largest manufacturer in Latin America. According to the “Monthly Manufacturing Survey” published by DANE, vehicle production grew by 7.5% in 2018 and by another 12.4% y-o-y during the first quarter of 2019, with production of vehicle body frames and auto parts increasing by around 70%.

The main driver behind these numbers is a strong increase in export volume due to the expansion of the FTA with Mercosur in late 2017: the deal saw a substantial increase in export quotas for vehicles to members of the bloc. As a result, vehicle exports grew by 20.3% in 2018 and vehicle body parts by an incredible 252.4%, according to MINCIT. Exports to Peru, Ecuador and Bolivia under the Convenio Automotor Andino agreement have also supported production.

Renault-Sofasa and Colmotores, owned by General Motors, are two of the largest vehicle manufacturers in Colombia. Both companies have ramped up investment in production capacity, optimisation and automation in recent times. In 2018 General Motors injected $7.7m into its Colombian factory, increasing capacity to 30,000 vehicles per year. Likewise, Renault-Sofasa aims to increase production to 76,000 units during 2019, up from a little under 70,000 in 2018, through a $5m investment in its Envigado complex.

The automotive market in the country saw a 7.7% increase in 2018 to 256,662 registered vehicles. According to the National Association of Sustainable Mobility, the biggest increase was seen in large trucks and SUVs, driven by a renewed dynamism in the oil and mining sector. Personal vehicles, which account for over half of the market, also grew by 4.3%, as consumer confidence buoyed towards the end of the year.

Given the level of traffic congestion in some cities and increased oil prices, motorcycles have progressively gained ground over cars, growing by 10.7% in 2018 to 553,361 units sold and registered. This trend was especially noticeable during the first quarter of 2019, when sales of motorcycles grew by 16.5% y-o-y compared to 0.5% for motor vehicles. Electric and hybrid vehicles, while accounting for a very small share of total sales, have also gained popularity for not only private use, but public use as well. Sales in this category are likely to benefit from ongoing government efforts to update the country’s vehicle fleet and improve public transport systems (see Transport & Logistics chapter).

Textile & Apparel

Colombia’s textile and apparel industry has a long history, with the cities of Medellín and Bogotá as its centres. The segment accounts for 8.2% of the country’s industrial GDP and 21% of industrial employment, according to ANDI.

After four years of contraction, in 2018 Colombia’s textile and apparel industry regained momentum, with production and sales of textile products growing by 2.6% and 2.5%, respectively, while the production of clothing saw a 1.3% increase and sales growth of 2.4%. Greater interest from international buyers, the depreciation of the peso and the advent of sales through digital channels have also driven strong export performance, with clothing sales abroad up by 7.1% in 2018, according to Inexmoda, a Colombian fashion institute. Production continued to climb throughout the first quarter of 2019, with textile products growing by 1% y-o-y while clothing grew by 5.4%. However, sales remained relatively flat, according to DANE.

Since President Duque took office in August 2018, a number of measures have been proposed to spur the industry’s development. Included in the National Development Plan 2018-22 is a decision to impose a 37.9% tariff – up from 15% – on the import of textile products worth equal to or less than $20 per kg. While the move is intended to protect local industry, a number of stakeholders are challenging the measure, saying it would raise the end price of clothing by up to 25%.

In addition, the government is seeking to increase industrial productivity through the creation of dedicated special districts where companies will benefit from tax incentives if they meet certain production and export volumes, as well as job-creation targets. The first such area, set to open in 2019, will be located in Itaguí in the department of Antioquia. With the loss of 600,000 jobs in the segment between 2017 and 2019, employment creation is one of the main drivers behind the renewed support for the textile industry.

Cosmetics

One of the most successful segments under the PTP is cosmetics, which has drawn foreign investment from numerous multinationals. Companies have traditionally used the domestic market as a springboard to develop a viable export business, and Colombian products now play an important role in regional markets including Peru, Ecuador, Mexico and the Dominican Republic. Most recently, Peruvian company BelCorp invested $2m in its plant and research facility in Tocancipá in 2018, while French giant L’Oréal spent $30m on a new factory in Bogotá that year. The latter is designed to develop the Vogue makeup brand and export to 13 countries in the region.

Given its level of sensitivity to economic fluctuations, the cosmetics and personal care products industry fared badly since 2016, with 2018 marking its second year of contraction. However, after production decreased by 2.2% and sales by 1.9% that year, the first quarter of 2019 saw production and sales grow by 1.8% and 3.2%, respectively. The segment accounts for approximately 1.3% of GDP.

According to Inexmoda, while Colombians as a whole spend an average of COP194,000 ($66.35) per year on beauty and makeup products, women spend COP100,000 ($34.20) per month, making Colombia the fifth-largest market for cosmetics in Latin America. The body predicts that local cosmetics sales will reach $4.2m in 2020, up from $3.4m in 2017.

Steel

Similar to other construction material segments, Colombian steel producers have been negatively affected by the slowdown in infrastructure progress. Crude steel production fell by 5% in 2018 to 1.1m tonnes, with production of long steel bars dropping by 1% to 1.4m tonnes and flat steel by 13% to 421,000 tonnes, according to the Latin American Steel Association. However, given a rebound in Colombia’s economy towards the end of 2018, consumption of laminated steel goods bounced back slightly, growing by 1%, and the category witnessed a strong 15% y-o-y increase during January 2019. During the first four months of 2019 production of crude steel rose by 17% y-o-y to 428,903 tonnes, long steel bars by 7% to 430,752 tonnes and corrugated steel bars used for concrete manufacturing by 13% to 345,220 tonnes, according to ANDI. “There are clear indications that sales will rebound during 2019, driven primarily by infrastructure projects for cities and municipalities. While projects under the Fourth Generation road infrastructure programme continue to advance, the restart of a number of them will give strong impetus to the sector,” Sebastián Castro, CEO of Ternium Colombia, a local subsidiary of Argentina’s Techint, told OBG.

The March 2018 decision by the US to impose trade tariffs on steel and aluminium products left big producers such as Turkey, China, Ukraine and Russia with surpluses, leading them to ship that volume to other markets, including Colombia. According to the Colombian Committee of Steel Producers, 2018 saw a 60% increase in the importation of steel products, posing a threat to the local industry. The trend continued into early 2019, with imports of corrugated bar growing by 22% y-o-y between January and April, to 174,958 tonnes.

Colombian authorities increased tariffs on steel products in March 2019 in an effort to slow the rate of imports, raising Customs duties from 10% to 18.5% for such goods coming from countries with which Colombia does not hold special trade agreements. “Production standards of steel mills in Colombia are high, although logistics costs are the biggest threat to the industry’s competitiveness against imports,” Castro told OBG.

Ternium is building a new steel mill close to the coastal city of Barranquilla for an estimated investment of COP270bn ($92.3m). The new complex, which is expected to be operational by the end of 2019, is set to increase the country’s production capacity of long steel bars by 520,000 tonnes per year, improving the ability to compete against imports – especially in projects on the Caribbean coast.

Food & Beverage

Following two years of limited growth and a challenging start to 2018, the food-processing industry began to show signs of improvement towards the end of the year. Gains accelerated in the first half of 2019, driven by an increase in exports, supportive public policies and simplified administrative procedures. According to ANDI, the food industry accounts for 2.8% of GDP and 21.2% of manufacturing GDP, and was worth COP21.32trn ($7.3bn) in 2018 – a rise of 3% compared to 2017. The country’s food-processing industry exported to 129 countries around the globe in 2018, with export value growing by 4.72% to $901.46m and volume increasing by 5.9%. The value of the segment’s imports was up by 8% to $1.3m that year, although volume dropped by 2.3%.

Domestic consumption of food and beverages rebounded as well, growing by 7.8% in 2018 and by another 7.1% y-o-y during the first quarter of 2019. Research by Euromonitor forecasts sales of processed food and beverages in Colombia will reach $24.14bn in 2021 – 19% more than in 2017.

Growth prospects and the availability of local inputs have attracted a number of foreign investors to the food and beverage industry over the years, with AB InBev, Aje, Bimbo, FEMSA, Heineken, Kellogg’s, Nestlé, Parmalat and PepsiCo having a strong presence in the country. Colombia is also home to local food processors with international reach, including Grupo Nutresa, Alpina and Alianza Team. These firms have been adhering to the new global consumption trends of healthier and organic alternatives, which are progressively gaining ground in regional markets, Europe and the US. While phytosanitary compliance remains challenging for exporters – especially those targeting developed markets – modernising frameworks and regulations under the National Institute for the Surveillance of Food and Medicines, and the Colombian Institute for Agriculture and Livestock, as well as efforts to improve quality standards, should contribute to improving market access for domestic producers.

The development of Colombia’s agro-industrial potential has long been considered one of the key factors to improving living conditions in rural areas. To attract greater investment in the segment and support rural development, the 2018 fiscal reform provided additional incentives for agro-industrial investors of a certain size, including income tax exemption for 10 years. While the fiscal reform does not directly impact SMEs or small-scale operations, the Agriculture by Contract programme launched by the Ministry of Agriculture in 2018 seeks to fill that gap by connecting rural farmers with food processors to increase the latter’s share of local inputs (see Agriculture chapter). The programme also aims to boost value chain efficiency and improve the formalisation of the sector by providing support to farmers through special lines of credit and incentives to acquire insurance.

Outlook

Industry got off to a strong start in 2019, as domestic consumption and exports rebounded. The national government’s policies to expand successful programmes and do away with under-performing ones, together with a focus on improving productivity and leveraging collaboration between the country’s regions, should help to strengthen industrial capacity and keep the ball rolling. However, while efforts to modernise and reduce administrative hurdles are positive steps towards improving performance, regaining momentum in infrastructure development and reducing logistics and transport costs remain economy-wide priorities.

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The Report: Colombia 2019

Industry & Retail chapter from The Report: Colombia 2019

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