NOT OIL IT SEEMS

Ecuador 2013 | INDUSTRY | REVIEW: INDUSTRY

Ecuador, having long propped up its economy on primary and non-renewable extractive industries, has been diversifying its non-oil industrial sector for future stability.

Oil continues to play a substantial role in Ecuador's economy, accounting for roughly 50% of export revenues and around a third of tax revenues. Yet, insufficient domestic refining capacity has prevented the full exploitation of high world oil prices, and Ecuador has been diversifying its economy into higher value-added manufacturing industries, such as textiles, automotive, metallurgy, processed foods, and fast-moving consumer goods (FMCGs). Ecuador's industrial production growth rate in 2011 registered at 10.1%, marking a 100% rise on 2001.

According to Ecuador's Central Bank, as of July 2013, Ecuador's exports at $2.1 billion making for a trade deficit of $13.8 million. Until the 1990s, Ecuador's non-oil manufacturing industries were almost exclusively focused on production for the domestic market, and many sectors, such as automotive, remain heavily reliant on imported inputs for production, amounting to over 40% of total imports. However, over the past 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, rendering Ecuador vulnerable to commodity price shocks. Therefore, as part of the National Development Plan, the government embarked on what it calls the “Productive Transformation Agenda," to improve the efficiency, productivity, and international competitiveness of Ecuador's non-oil industrial sector through financial and legal incentives and infrastructure investment. Investors in 14 key sectors are exempt from paying customs duties on imports of rawmaterials 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. In March 2011, President Correa put the likely figure for public investment in the infrastructure necessary to facilitate export-oriented manufacturing at $7 billion over the next five years.

WEAR THE MONEY IS

Textiles are Ecuador's second-largest non-oil manufacturing industry, making up almost 15% of the non-oil manufacturing sector in 2009. Ecuador's dollarization in 2000 sparked the notable and sustained growth of the textile export industry. Considerable vertical integration has also underpinned success. Unlike many of the textile producing countries in Central America, Ecuador advantageously produces its own yarn and fabric. Since 2007, textile exports have seen an average growth of 30.5% per year. Rising textiles imports, which grew from $500 million in 2010 to $785 million in 2011 also impact the local industry. The Textile Industry Association of Ecuador (AITE) has urged the government to pursue sector-related trade agreements, especially with the US and the EU. According to AITE data, Ecuadorean textile and apparel exports to Colombia, the largest importer of Ecuadorean textiles in the Andean Community, doubled from 2009 to 2012. Meanwhile, AITE warns that inadequate taxation and wage policy deters long-term investment by industry players, resulting in stagnation. The association notes that the employment figure for the sector grew by less than 1% to 123,044 in 2012, from 121,850 direct workers in 2011.

DRIVING DEMAND

Ecuador's automotive industry has matured over the past decade, with companies seeking to maximize their capacity utilization to meet rising local demand, and be able to export to the regional market. And while 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 lion's share of the domestic market is held by General Motors Ómnibus BB, which produces and sells GM's Chevrolet brand cars, trucks, and SUVs. In 2010, when new car sales soared 42% year on year to 132,172 units, over 40% of all vehicles sold were Chevrolet branded, at 53,429 units. This was GM's highest figure in any country.

Ecuador's economic progress has sparked increased credit consumption, including the purchase of vehicles. The government, keen to promote the domestic production and sale of lower-cost vehicles, has imposed a Special Consumption Tax on vehicles costing more than $20,000, also curbing imports through legislation introduced in 2012. Major local players, such as General Motors Ómnibus BB and Maresa, have duly invested in capacity increases. Automotive companies in Ecuador also have an increasingly significant role in the regional export market, with 25% of all vehicles assembled locally destined for export in 2010.

General Motors Ómnibus BB—directly employing 1,500 people—manufactures 80% of units sold at its own plant. The company has invested $71 million in new products, facilities, and technology over the past two years, and $9 million in third parties directly connected to its assembly work. “We export mainly to Colombia and traditionally we have also exported to Venezuela. In 2011, we exported products worth over $200 million, but in 2012 the figure fell to $140 million, due to restrictions in the Venezuelan market." Executive President Fernando Agudelo told TBY.

Corporación Maresa is the official distributor for Fiat, Chrysler, and Mazda nationwide, and for Ford on the coast and in eastern Ecuador. The automotive assembly and distribution division still represents 90% of its overall activity. The company assembles Mazda vehicles for the local market and export to Venezuela and is keen to sign with another brand to fully utilize its capacity. In 2012, Maresa assembled 12,000 vehicles, with 5,000 destined for export to Venezuela. Company CEO, Francisco Restrepo, revealed a targeted Group turnover of $350 million for 2012, with exports and rental activities driving growth.

FLYING OFF THE SHELVES

Despite Ecuador's traditional reliance on imported consumer goods, the country has a growing FMCG industry, with more international companies opening local production facilities. Unilever, the world's third-largest consumer goods company, manufactures 75% of its goods sold in Ecuador at two local production plants. Yanbal, a multinational cosmetics company, also bases part of its manufacturing in Ecuador, with 40% for regional export. Although incomes are rising in Ecuador, price elasticity remains problematic. General Manager Robert Watson explains that due to price elasticity the key to success in the FMCG industry is to provide different ranges of products at different prices to capture the full spectrum of the market.

Beverages producer Cervecería Nacional taps a wide socio-economic spectrum of consumers with its product portfolio. Around 60% of its clients are small- and medium-sized stores at the local level and supermarket chains at a national level. Since 2005, the company has invested over $400 million into local manufacturing and distribution and produces over 6 million units per year. Vice-President Vinicio Troncoso noted that, “In 2012, we contributed over $247 million in taxes, both directly and indirectly".

US personal care giant Kimberly-Clark has been in Ecuador for 18 years. In 2012, the company grew by roughly 10%, the average figure for the past five years. Adriana Gonzalez, President of Kimberly-Clark Ecuador told TBY that, “We apply innovation in our product portfolio, production lines, and commercial strategies. For example, Kimberly-Clark Ecuador has been a pioneer in electronic billing for the wholesale segment, and we apply innovative strategies to the production chain to give our products added value and make them more competitive and attractive for consumers."

ALL THAT GLITTERS

The metallurgy industry in Ecuador has marked growth potential, yet remains a slender contributor to the economy, at less than 10% of the non-oil industrial sector. In pursuit of foreign investment to better exploit Ecuador's mineral wealth—estimated by the mining chamber of commerce at $220 billion—President Correa's incentive bill setting minimum royalties and slashing red tape was passed in June of 2013. Some have claimed the law favored small- and medium-sized miners. Indeed, shortly before it passed, Canadian-based mining company Kinross Gold Corporation pulled out of a $1.4bn deal for the development of the Fruta del Norte gold mine, Ecuador's largest deposit, as negotiations stalled over a prospective windfall tax of $720 million. As at the end of 2012, Fruta del Norte had 6.715 million ounces of proven and probable reserves of gold and 67,000 ounces of measured and indicated gold resources. Its silver resources were estimated at 9 million ounces with measured and indicated resources totaling 1.412 million ounces. Chile's National Copper Corporation of Chile (Codelco), the world's number one copper producer and a likely candidate to take over from Kinross Gold at the Fruta del Norte project, is already involved in the Ecuadorian mining sector. In November 2011, Codelco and Ecuador's National Mining Company (ENAMI EP) signed a copper exploration agreement regarding a reported $200 billion in untapped deposits. Under the agreement, Codelco agreed to invest between $10 million and $30 million in Ecuador before 2015. Ecuador's annual gold production is 17.7 tons ranking it 28th in the world.

A NATURAL PROCESS

The global crisis has influenced consumer purchases of food and Ecuador is no exception. Frozen food sales have increased as families economize, and the frozen food market is expected to be worth $95.9 billion in 2013. Latin America is expected to have registered the highest growth in this segment with a CAGR of 10% in the 2008–2013 period. While the shrimp, tuna, and sugar-processing industries are primarily export-oriented, the remainder of processed food in Ecuador is sold domestically.