HOME GROWN

Colombia 2013 | INDUSTRY | REVIEW: INDUSTRY

Manufacturing growth slowed over 2012, yet production is expected to increase over 2013 and beyond thanks to a weaker peso, lower interest rates, and fiscal stimulus.

Colombia's industrial sector is in a process of adjusting to the new free trade agreements (FTAs) the country has signed, while struggling with a strong peso. Domestic demand outstripped manufacturing output in 1Q2013, prompting fears of a longer slowdown in the sector, which recorded 0% growth in 2012. However, industry experts anticipate growth to pick up by end-2013 and into 2014 as the external environment recovers and currency conditions improve.

Manufacturing output fell by 11.5% year-on-year in March 2013 following 4.5% in February, according to the National Administrative Department of Statistics (DANE). Although partially explained by fewer working days in March of this year compared to 2012, it was a continuation of several months of contraction. Between 1991 and 2013, Colombian industrial production averaged 2.2%, with a high of 17.7% reached in March 1998. The decline over 2012 was reflected in 42 of 48 manufacturing subsectors, with the automotive and textiles sectors, two of the largest contributors to Colombian manufacturing, posting the steepest cooling. The 0% growth seen in 2012 overall comes on the back of 4.9% growth seen in 2011, although the LatinFocus Consensus Forecast predicts 3% growth in 2013 and 3.7% growth in 2014. A weakening peso should buoy exports in the coming months, while lower interest rates and additional fiscal stimulus should boost manufacturing across the board.

AUTOMOTIVE

The automotive industry, despite experiencing a slowdown in growth in 2012—in October the sector grew only 2.4% year-on-year compared to an increase of 22.4% year-on-year in the first nine months of 2011—is expected to recover in 2013. The industry represents 4% of domestic industrial output and there are currently nine active car assembly firms in the country, producing commercial, passenger, and cargo vehicles. High capacities in the sector offer much room to grow and present the opportunity for assemblers to transition to a manufacturing model in the coming years. The domestic automotive parts sector is enjoying high demand, although the limited number of buyers means local firms are at risk should imports prove more competitive. The sector currently has annual production worth $1.07 billion, of which 47% is exported. Motorcycle production is also big business in Colombia, with 515,000 units pumped out annually, putting it second behind Brazil in the region. Nine companies produce motorcycles in the country, with 89% of production coming from the four leading firms. Unlike the automotive sector, imports play a small role in the motorbike industry, representing just 3% of sales—imports represented 70% of car sales in Colombia in 2012, with approximately 315,000 units sold in total. Of the nine firms that produce motorcycles in the country, the top four represent 89% of production. The industry is focused on Antioquia, the home of brands such as Auteco, AKT Motos, and Yamaha. Pereira is also a significant exporting city and home to Suzuki in the country.

The country's assemblers sold 120,332 cars in 2012, with GM-branded cars claiming the largest market share (33.5%), followed by Renault (20.3%), Kia (10.2%), Nissan (8.8%), and Hyundai (6.6.%). The country's largest manufacturing groups are Sofasa, CCA, and GM. In 2011, the three firms posted operating revenue of Ps5.7 billion, or 0.9% of GDP, and represented 57% of the automotive and automotive parts sector. Exports also recovered in 2012 following a five-year slump after Venezuela and Ecuador enacted protectionist policies. Having only exported 13,000 vehicles in 2011, in 2012 30,700 Chevrolet, Renault, and Mazda vehicles were exported. Of this, 29,000 were Renault vehicles, which represented 40% of the total number of Renault vehicles assembled in the country. The largest export markets for Colombian cars are Mexico, Argentina, Peru, Ecuador, Chile, Venezuela, Central America, and the Caribbean. As the sector looks to the future, GM is the first player to take solid steps toward a manufacturing model by working on a new press shop that will produce 11 body parts for both the Cobalt and Sail models by 2014. Now seen as imperative in order to bolster the domestic industry against a tide of cheaper imports resulting from a growing list of FTAs, the Automotive Technology Development Center, a National Association of Businessman (ANDI) initiative, has been established to act as a tool for innovation in auto parts and vehicles. With investments of $60 million planned over 10 years to promote innovation, the end result, it is hoped, will be production capacity of close to 60,000 vehicles per year, in addition to the current, unfulfilled, assembly capacity of 320,000; 120,332 vehicles were assembled in 2012.

TEXTILES

Colombia's apparel sector accounts for 2% of GDP. The sector provides employment for upward of 800,000 people and represents over 5% of exports. Rising GDP is also being reflected on the industry, which grew by 6% in 2011 compared to 2010, although the sector was one of many to post slower growth overall in 2012. The industry is focused on the city of Medellín, which accounts for 70% of garment production and almost 40% of textile production. While the presence of several top brands, including Abercrombie & Fitch, Calvin Klein, Dockers, Gap, Levi Strauss, Polo Ralph Lauren, and Tommy Hilfiger have helped turn the country into one of the major fashion centers of Latin America, exports to the US, its main export destination, have dropped by as much as 50% since 2005 due to the challenge of Asian manufacturers. Colombian factories are now increasingly looking to fill smaller runs, which are often rejected by large-scale Asian producers due to their tighter margins. The EU also offers a fresh market following an agreement on a FTA between Colombia and the bloc. Colombian textiles currently represent only 3% of total Colombian exports to the EU, although in 2011 exports increased by 45.8% to the 27-state market.

FOOD PROCESSING

The food and beverage processing and packaging industry represents one-fifth of total manufacturing production and employment, and has performed better than the agriculture sector overall, the contribution to GDP of which has been falling in recent years. Dairy and milling are the most significant sub-sectors, with the dairy sector accounting for 15% of food processing production.

Food and beverages are big business in Colombia, with average Colombians spending almost 30% of their income in the sector. Although this is expected to fall to 27.5% by 2017 as incomes increase, opportunities are still ripe in the industry. Exports are a significant earner for the country's food processors and beverage producers, with the export of food, beverages, and tobacco (excluding coffee) valued at $2.2 billion between January and September 2012, 5% of Colombia's total exports.

There is a large foreign presence in the food processing and beverages sector, with firms such as Cadbury, Frito Lay, and PepsiCo present. The largest dairy producers include Colanta, Alpina, and Colombian firm Veygrasas. The tobacco sector is dominated by Phillip Morris, which, through acquisitions, now controls 80% of the market, with British American Tobacco the only other major participant.

The sector looks only likely to grow in the coming years, with oils and fats a promising sector—almost 40% of regional production takes place in Colombia. The country is one of the world's top four processors of crude palm oil, while sugars and syrups, canned meat, poultry and fish products, and fresh vegetable and fruit packaging are also favorable niches, according to Global Impact Consulting. Increases in beverage production in recent years has also led to the creation of a Beverages Chamber under ANDI.

While zero manufacturing growth in 2012 highlighted the economy's continuing struggles with the global economic downturn, more favorable currency conditions and increased trade ties are likely to see a return to growth in 2013 or 2014. While the creation of FTAs could threaten domestic automotive assembly in the short term, it is also likely to provide the impetus for a move into pure manufacturing that the sector has long needed. Challenges from Asian textiles firms will also lead to value-adding efforts across the apparel segment, while food processing and beverages can only continue to add to the country's diversifying export basket.