UPWARD & OUTWARD

Ecuador 2012 | INDUSTRY | REVIEW: INDUSTRY

After decades of reliance on primary and extractive industries, Ecuador is seeking to jump-start the growth of the non-oil industrial sector in order to meet growing domestic demand and build a reputation as a regional export hub.

Although Ecuador's economy has long been dominated by primary and extractive industries such as agriculture, aquaculture, forestry, and petroleum, the past two decades have seen the development of a number of higher value-added manufacturing industries, such as textiles, automotive, metallurgy, processed foods, and fast-moving consumer goods (FMCGs). These sectors now make up 14% of total GDP, and employ over 10% of the workforce. Geographically, industry remains heavily concentrated around the main urban areas, with almost 70% of the non-oil industrial and manufacturing sector located in Guayaquil and Quito. Until the 1990s, Ecuador's non-oil manufacturing industries were almost exclusively focused on production for the domestic market, and many sectors, such as the automotive sector, remain heavily reliant on imported inputs for production. These types of primary and intermediary goods for use in the industrial and manufacturing sector still make up 43% of the country's total imports.

However, the past five years have seen a concerted effort by the government to encourage growth and investment in the non-oil industrial sector and promote an increase in higher value-added exports. Over the last decade, non-oil industrial products have made up 25% of Ecuador's total exports on average. The other 75% has consisted almost exclusively of primary commodities, which has left Ecuador vulnerable to commodity price shocks. This has resulted in trade imbalances in recent years, further galvanizing the government to make the growth of the non-oil industrial sector a top national priority.

In an interview with TBY, Verónica Sión de Josse, the Minister of Industry and Productivity, explained that “we want to overcome the model that characterized Ecuador for decades, based on the extraction of non-renewable resources. Now we want to transform that model into a value-added one based on knowledge and high technology." To that end, as part of the National Development Plan, the government has embarked on what it calls the “Productive Transformation Agenda," which aims to use financial and legal incentives along with increased public investment in infrastructure to improve the efficiency, productivity, and international competitiveness of Ecuador's non-oil industrial sector. Through the Organic Code of Production and Investments, the government has implemented specific incentives for investment in 14 key sectors across the economy that have significant potential for value-added generation. Investors are exempt from paying customs duties on imports of raw materials or capital goods. In addition, any expenses for investments in green technology, or in activities that create jobs in under-developed areas, are up to 100% tax deductible. The government is also significantly increasing public investment in the infrastructure necessary to facilitate export-oriented manufacturing, with approximately 13% of GDP in 2011 dedicated to investment in ports, airports, and road infrastructure, and further increases are planned for 2012.

PROCESSED FOODS

Processed foods make up the largest portion of the non-oil manufacturing sector. In 2009, the processed food industry generated $1.8 billion, and made up more than 55% of the total value of Ecuador's non-oil manufacturing. From 2000-2010, the processed food sector generated, on average, 7.3% of total GDP. The majority of the food-processing sector is made up of shrimp processing and conserving, which accounts for 21% of food processing, meat production and processing (18%), and fish processing (mostly tuna), which accounts for 16%. In 2009, these three industries comprised 4.8% of total GDP. The sector also contains relatively small beverage, processed sugar, cereal, and bread product industries, which accounted for about 18% of all processed food in 2009. While the shrimp, tuna, and sugar-processing industries are primarily export-oriented, most other processed food products in Ecuador are sold domestically.

TEXTILES

Textiles are Ecuador's second-largest non-oil manufacturing industry, making up almost 15% of the sector in 2009. The textile industry is also the second-largest employer in the manufacturing sector after the processed food industry. The Textile Industry Association of Ecuador (AITE) estimates that the textile sector in Ecuador employs 50,000 people directly and 200,000 indirectly. One of the oldest industries in Ecuador, textile manufacturing has traditionally been a small-scale industry, and until the late 1990s, it remained highly localized and almost exclusively focused on production for the domestic market. When dollarization occurred in 2000, the textile export industry experienced a sudden burst of growth that continued through the following decade. By 2004, Ecuador was exporting $90 million worth of textiles annually. Since 2007, textile exports have seen an average growth of 30.5% per year.

One of the reasons the textile industry has been so successful in Ecuador is the high level of vertical integration. Unlike many of the textile-producing countries in Central America, Ecuador produces its own yarn and fabric, which directly feeds into sewing and garment production. However, despite the growth the industry has experienced in recent years, the textile industry in Ecuador is still primarily made up of SMEs. As Jeff Sheedy, President of Textiles La Escala, explained to TBY, this limits the competitiveness of the industry “because we lack scale." According to Sheedy, “we are very efficient as an industry, but larger companies can achieve much more competitive rates simply due to their size." However, as export numbers continue to grow and more companies continue to move up the value chain from yarn making to cutting and sewing, the future looks positive for the textile industry.

AUTOMOTIVE

Ecuador's automotive industry has seen strong growth over the past decade, with companies investing in increased production capacity to meet growing domestic demand and build their share in the regional export market. Although imports still dominate the domestic market, production grew by 37% in 2010, and the industry's share in domestic sales has risen to 45%, up from 30% a decade earlier. The largest share of the domestic market is held by Ómnibus BB, which produces and sells GM's Chevrolet brand cars, trucks, and SUVs. In 2010, over 40% of all vehicles sold in Ecuador were Chevrolet branded.

As incomes have risen in Ecuador and access to credit has expanded, cars have transitioned from being aspirational goods to everyday necessities. The government has encouraged this change, instituting policies to promote the domestic production and sale of lower-cost vehicles, such as a Special Consumption Tax on vehicles costing more than $20,000 and restrictions on imports. Companies like Ómnibus BB and Maresa, which represents Mazda, Geely, and Fiat, are responding to these changes in the market by ramping up their assembly facilities. Ómnibus BB is investing to upgrade the technology at its two assembly plants in Ecuador, and Maresa has invested in new assembly facilities that will come online in 2013. Automotive companies in Ecuador are also becoming increasingly important players in the regional export market, with 25% of all vehicles assembled in Ecuador destined for export in 2010. This trend is likely to continue as producers respond to the government's push to build the non-oil export industry.

FMCGs

Despite Ecuador's traditional reliance on imported consumer goods, the country has a growing FMCG industry, with an increasing number of international companies choosing to base their production facilities in Ecuador. Unilever, the world's third-largest consumer goods company, manufactures 75% of the goods it sells in Ecuador at the two production plants it has in the country. In an interview with TBY, Herbert Vargas, Country Director for Unilever Andina Ecuador, explained that one of the benefits of local production is the “proximity to understand local consumers." According to Vargas, Ecuador is an ideal “production base for the region" because it has competitive labor costs and access to raw materials. Yanbal, a multinational cosmetics company, has also chosen to base part of its manufacturing in Ecuador, 40% of which is for export within the region. Although incomes are rising in Ecuador, there is still high price elasticity in the market. As a result, Robert Watson, General Manager of Yanbal, explains that they key to success in the FMCG industry is to provide a wide range of products at different prices to capture the full spectrum of the market.

METALLURGY

Although the metals industry in Ecuador shows enormous potential for growth, it remains a small factor in the economy, making up just over 6% of the non-oil industrial sector. As other productive sectors have grown in recent years, most notably the automotive sector, demand for metal products—particularly steel—has grown rapidly. However, domestic steel production in Ecuador remains very small scale; the majority of the sector is made up of micro- and small enterprises, and over 75% of workers in the metallurgy industry were working in micro-enterprises in 2010. As a result, the Ecuadorean steel industry can only meet 10% of domestic demand, and businesses are forced to import the remaining 90%, leading to a large trade imbalance in the sector. In its effort to reverse the country's trade imbalance, the government is encouraging investment in the sector through the Productive Transformation Agenda. With this effort to promote the growth of a stronger national industry, the future could be shiny for the metallurgy sector in Ecuador.