Paraguay's market potential for the automotive · Paraguay's market potential for the regional...

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Stuttgart, October 7, 2015

Paraguay's market potential for the regional automotive supplier industry

2 Paraguay's market potential for the regional automotive supplier industry_FINAL_mit Ansprechpartnern inkl IHK.pptx

Management summary (1/2)

> Paraguay has recently demonstrated a very stable political environment and good prospects – It can become the next rising star in Latin America:

– Paraguay is strategically located in the heart of South America, close to key consumption and production markets, a good trade hub for both Argentinean and Brazilian OEM clusters

– Paraguay is one of the few countries in LatAm that has a stable political environment that is liberal and market oriented

– Paraguay provides a stable economic environment with low debt rates and moderate inflation in past years – Furthermore, positive GDP development is expected for the future

– However, Paraguay is heavily dependent on the economic development of neighboring countries such as Brazil or Argentina – Since there are no OEMs in the country, there is hardly any domestic market for auto parts

> Paraguay offers favorable investment conditions, especially for products with high labor intensity and low logistics requirements:

– The generally positive business climate and regulatory environment are complemented by a very attractive tax scheme: the Maquila program

– Infrastructure that is sufficient for most companies in the country's two metropolitan areas, Asunción and Ciudad del Este – Only the availability and stability of electricity connections requires a case-by-case evaluation

– Labor costs are one key advantage, but the availability of skilled labor is limited and has to be checked in advance

– Logistics depend strongly on target clients and the required logistical effort for the specific product

Source: Roland Berger


Management summary (2/2)

> Many international companies have already invested in Paraguay – Their business model usually shows high labor intensity coupled with low infrastructure and logistical requirements

> Risks include the dependency on Brazil & Argentina, the limited opportunity to benefit from Brazilian incentive programs, etc.

> Roland Berger identified four key success factors companies should pay attention to when considering an investment in Paraguay:

– Consider overall Mercosur market development – Key consumer markets for automotive products are in Brazil and Argentina, with both countries facing recession

– Be clear on target clients – Frozen zone and supply chain configuration should be aligned with target clients: most OEMs accept the additional complexity in exchange for more attractive prices

– Conduct a structured location search project – The location within both Mercosur and Paraguay must be selected carefully

– Involve local experts at an early stage – Local specifics that might influence a decision can change quickly; thus companies should involve independent partners able to provide objective assessment

> All in all, Paraguay is an attractive alternative for production in Mercosur, but a case-by-case evaluation of the key decision factors for the planned investment project is required – Local experts should therefore be involved



We'd like to discuss three points regarding Paraguay's market potential for the regional automotive supplier industry


Agenda

Country overview

Is Paraguay a rising star in Latin America? 1.

2.

3.

Strategic considerations

Is the environment favorable to foreign investment?

Relevance for suppliers

For which suppliers might Paraguay be a hidden champion for LatAm production?


A. Country overview: Is Paraguay a rising star in Latin America?


Paraguay is the same geographic size as Germany but has only about 6.5 m inhabitants

Paraguay at a glance

Roads, ports, industrial and free trade zones

General information

Source: World Bank; press clippings; Roland Berger

ARGENTINA

PARAGUAY

Asunción

= Railroads

=City > 500,000 inhabitants

= National highways

= Ports (freshwater)

= Free trade zones

= Industrial zones

BRAZIL

> Capital: Asunción

– 17 departments (+1 capital district), 245 districts

> Population: ~6.5 m people

> Language: Spanish, Guaraní

> Currency: Guaraní [PYG]

– Conversion rate [Sep 2015 PYG/USD]: 5,555

> Main economic activity: Sugar, cement, textiles, beverages, wood products, steel, metallurgy, electricity

> Economic indicators

– GDP 2014 [USD bn]: 30.9

– GDP real growth 2014 [%]: 4.4

– Inflation 2014 [%]: 5.0

– Unemployment rate 2014 [%]: 5.5

Ciudad del Este


Snapshot of Paraguay and Latin America

Paraguay is strategically located in the heart of South America, close to the main consumption and production markets of Mercosur

Source: MIC; REDIEX; Roland Berger

Key figures for the region

Population [m]

GDP [USD bn]

250 ~3,000 Mercosur

120 ~1,500 Paraguay + 1,300 km

In reach within 1,300 km:

> About 50% of Mercosur GDP

> About 50% of Mercosur population

> Key LatAm automotive cluster – No local production in Paraguay

Main automotive exports destinations

Mercosur

1,300 km radius

Legend

Largest automotive OEM production clusters

Brazil

Paraguay

Uruguay

Argentina

Chile

Peru

Ecuador

Colombia

Venezuela

Bolivia

São Paulo

Curitiba

Rio Grande do Sul

Buenos Aires

Córdoba 6.5 ~30 Paraguay alone


Several economic drivers are slowing the largest economies in LatAm, Paraguay still demonstrates a good pace of growth

Latin American economic assessment

Source: Oxford Economics Database; Roland Berger

1) Real GDP, constant 2010 prices 2) Average real GDP growth

Country GDP1), 2014 [USD bn]

Ø Growth2) 2010-2014

48

31

181

521

2,403

1,178

258

349 5.0%

5.1%

4.3%

5.1%

4.3%

2.9%

2.1%

3.1%

Main challenges

0.4%

2.9%

3.3%

4.5%

-2.8%

2.4%

2.5%

3.2%

2015e2)

Brazil

Mexico

Argentina

Colombia

Chile

Peru

Paraguay

Uruguay

Political crisis

Currency develop. Inflation

Commo-dity price

Ø Growth2) 2015-2020e

3.4%

3.9%

3.4%

3.7%

4.4%

1.8%

2.7%

4.3%

No challenge/dependency Critical situation/strong dependency


The Paraguayan currency Guaraní remained stable compared to other LatAm currencies

Exchange rate development vs. USD – Monthly average [base 100 = Jan 1, 2010]

2011 2010 2012 2013 2014 2015

245.3

Sep

2015

214.3

116.6

147.0

Source: Thomson One; Roland Berger

3.8

28.7

9.3

> The desolate state of the

Brazilian economy has

seen the BRL devaluating

since January 2015

> Rating agencies recently

downgraded Brazil,

currency expected to

devaluate even further

> Uruguay devaluation also

driven by high inflation

> Argentina controls the

purchase of FX and keeps

currency stable through

parity of import x exports

5,450

FX rate Sep 16, 2015

BRL ARS UYU PYG


The stable macroeconomic conditions are the result of low debt rates and moderate inflation in past years

0

1

2

3

4

5

6

7

8

9

10

11

2004 2006 2008 2010 2012 2014

Uruguay

Brazil

Argentina

Paraguay

Source: ECLAC; Oxford Economics; Roland Berger

Government debt [% of GDP, 2014] Inflation of consumer prices [%, 2004-2014 p.a.]

Economic stability of selected LatAm countries

Brazil 58.9%

Honduras 45.0%

El Salvador 44.2%

Argentina 43.0%

Panama 38.9%

Costa Rica 38.8%

Colombia 38.7%

Uruguay 37.4%

D. Republic 37.0%

Haiti 32.1%

Mexico 32.0%

Ecuador 27.8%

Bolivia 26.2%

Guatemala 24.4%

Venezuela 21.3%

Peru 17.9%

Paraguay 16.6%

Chile 15.1% 1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

Rank


Economic climate index (ICE) [index points, July 2015]

Paraguay is high on the economic climate index among all LatAm countries – But it is heavily dependent on neighboring countries

Source: FGV/ IFO; Roland Berger

Remarks

Brazil

48

Paraguay

99

Uruguay

93

Argentina

66

Chile

68

Peru

119

Ecuador

60

Colombia

107

Venezuela

20

> Only Peru and Colombia show a higher index score than Paraguay since they are recovering slightly from the commodity crisis – Peru stood at 100 points in April, Colombia at only 87

> Paraguay is currently negatively influenced by the crisis in Brazil – Index dropped in August from 127 to 99 points

> ICE index is calculated by FGV São Paulo University and the IFO on a quarterly basis for LatAm

Germany

133

Last available report for LatAm dated July 15 – Next update mid/end of October


Intermediate summary

Paraguay provides a stable political and economic environment for investors as well as good access to the entire Mercosur market


Paraguay is one of the few countries in LatAm that has a stable political environment that is

liberal and market oriented

Paraguay is strategically located in the heart of South America, close to key consumption and

production markets, a good trade hub for both Argentinean and Brazilian OEM clusters

Paraguay provides a stable economic environment with low debt rates and moderate

inflation in past years – Furthermore, positive GDP development is expected for the future

However, Paraguay is heavily dependent on the economic development of neighboring

countries such as Brazil or Argentina – Since there are no OEMs in the country, there is hardly

any domestic market for auto parts


B. Strategic considerations: Is the environment favorable to foreign investment?


For companies interested in investing in Paraguay there are 5 key questions to be answered

Criteria for investment

1

2

4

5

3

Does Paraguay offer an attractive BUSINESS CLIMATE?

Is the INFRASTRUCTURE sufficient for our production needs?

Is there an educated WORKFORCE available at reasonable cost?

Is the REGULATORY and TAX ENVIRONMENT favorable?

Is inbound and outbound LOGISTICS feasible for us?

Source: xxx


Global ranking 2015 [index points, rank] – Ease of…

Independent indices show that Paraguay is ranked among the top countries for starting and running a business in LatAm

Source: doingbusiness.com; Roland Berger

909086858178736563

Ecuador Brazil Uruguay Chile Argentina Paraguay Colombia Germany Peru

797975706861595655

Ecuador Colombia Argentina Germany Paraguay Bolivia Chile Brazil Uruguay

7764645858575554

38

Uruguay Ecuador Bolivia Brazil Colombia Paraguay Chile Argentina Germany

…registering property …enforcing contracts

…starting a business …dealing with construction permits

Business climate 1

171 167 165 146 126 114 84 60 59

877977767665564843

Brazil Uruguay Paraguay Germany Ecuador Chile Bolivia Argentina Colombia

181 174 162 129 62 61 59 43 8

xx Rank

146 138 130 119 89 80 60 45 42 168 118 111 106 90 88 64 63 13


Especially the two metropolitan regions, Asunción and Ciudad del Este, have high standards of infrastructure

Alto Paraná

Presidente Hayes

Concepción

San Pedro

Cordillera

Central Paraguarí

Ñeembucú Misiones Itapúa

Caazapá

Guairá

Caaguazú

Canindeyú

Amambay

Alto Paraguay

Asunción Ciudad del Este

Index based on GDP, total population, population density and basic infrastructure (public facilities and services, utilities and transportation)

Roland Berger industrial aptitude index

Very developed

Developed

Acceptable

Unsatisfactory

Insufficient

Infrastructure and degree of development of selected states

Source: MIC; REDIEX; Roland Berger

Central & Asunción is the industrial heart of

Paraguay, the department is home to most of the

international companies operating in Paraguay

1

Most relevant states

1 2 3

4

Caaguazú is a transition state between the two

economic centers of Paraguay – Central and Alto

Paraná

2

Alto Paraná (Ciudad del Este) is strategically

well located for Brazil. Most land-based exports

pass through the department and manufacturing

industries incl. automotive suppliers are growing

3

Itapúa is an important entry port for exchange

with Argentina – the department sustains itself

from trading and services

4

Infrastructure 2

Boquerón


The Paraguayan workforce is young and willing to work – More than 1/3 of the population is between 15 and 24 years old

Workforce1) by department, 2013 ['000, HC]

Other

842

Asunción Alto

Paraná

Itapúa Caaguazú Central San

Pedro

167

TOTAL

3,275 1,094

297

254

228

394

Source: DGEEC; Tusalario.org; Roland Berger

5.3 4.7 4.4 2.6 3.7 6.7 6.0 Unemployment rate [%]

Workforce 3

1) Economically active population

9%

16%

55 to 64

45 to 54 0 to 14

25 to 34

35 to 44 11%

6%

15 to 24

33%

20%

Over 64

5%

Paraguay's population by age

group [%; 2012]

Potential economically active population

Total pop.: 6,672 m

5.0


Labor cost comparison

Paraguay offers very competitive labor costs – Many people with jobs in the informal sector even work for less than minimum wage

Source: FIESP; Ley 213; Codigo del Trabajo; Roland Berger

1) Minimum wage for automotive supplier in Sao Paulo; 2) Include welfare/union taxes, benefits (13th salary) and layoff expenses Exchange rates: PYG/USD 4,500; BRL/USD 2.15; ARS/USD 8.5

> Workforce is motivated to work in industry even for minimum wage

> Unionization rate is very low, especially compared to automotive clusters in Argentina and Brazil

> Labor law very "flexible", e.g. layoffs can be made easily with limited severance payments

> Usually high workforce stability due to formal jobs even at minimum wage:

– Stable income prospects of at least the minimum wage

– Legal registration of employment contract

Labor specifics – Paraguay

395609

697

Minimum wage

Social contributions2)

Argentina

1,035

426 (70%)

1,408

711

(102%)

Paraguay

494

99 (25%)

Brazil1)

Weekly shift [h] 48 48 44

Total labor costs, 2014 [USD] – Based on minimum wage (automotive)

110%

+185%

Workforce 3


Union influence in Paraguay is very limited, especially compared to neighboring countries like Argentina and Brazil

International and local judgment of union impact in Paraguay

Flexibility of wage determination1) [2012]

> Unions have limited impact in Paraguay compared to other Latin American countries

Quotes

> Entrepreneurs and officials also confirm the limited power of unions

> In addition, there are no differences between the departments – Union activities are at a low level all over the country

Source: World Economic Forum, Interviews; Roland Berger

2.3

2.7

3.7

4.2

4.3

4.3

5.1

5.2

5.5

Uruguay

Argentina

Venezuela

Brazil

Paraguay

Ecuador

Colombia

Bolivia

Chile "Unions are basically non-existent, especially under Cartes they lost even more power"

Private investor

"I always pay attention to the needs of my employees – compared to other Paraguayan companies they receive fair salary and working conditions, thus I've managed to keep unions out of my companies"

Entrepreneur in cement & meat processing

"…The third general strike in Paraguay's history took place on March 26th and passed off peacefully.…The 24-hour strike was a low-key affair…"

The Economist

1) Scale of 1 (centralized bargaining process) to 7 (up to each company individually)

"Union activities are the same all over Paraguay – on a very low level"

German entrepreneur

Regulatory and tax environment 4


For companies producing in Paraguay and then exporting, Paraguay has an attractive "tributo único" of 1% with its Maquila program

Source: CNIME; Roland Berger

Overview of the Maquila program – Benefits

Calculation scheme for "tributo único"

"Maquiladora"

> Raw material > Capital goods > Logistics

> Labor cost > Depreciation > Local raw material > Services

Sub-maquiladoras

Value added in Paraguay 1% tax: "tributo único"

Parent company

Fo

reig

n c

ou

ntr

y P

arag

uay

Exp

ort

3rd party

Invoice 1% tax: "tributo único"

Case I

> Parent company sends raw materials and receives the goods produced in Paraguay

> 1% "tributo único" applies to the value added in Paraguay

Case II

> Maquiladora receives raw materials from 3rd parties outside Paraguay and sells directly to clients outside Paraguay

> 1% "tributo único" applies to the total invoiced to 3rd parties

Case II Case I

Imp

ort

Regulatory and tax environment 4


Just-in-time delivery to key LatAm automotive OEM clusters is feasible – Delivery times range from 1 to 3 days

Map of logistics connectivity

Source: Paraguay Logistico; DINATRAN; Anuario de estadísticas y censo

1) More than 150/300 thousand inhabitants; LV: Light vehicles CV: Commercial vehicles

Ports (freshwater)

Free trade zones

Industrial zones

Railroads

National highways

Waterways

Airports

Medium/large city1)

Legend

Asunción

Brazil

Ciudad del Este

Encarnación

Argentina

São Paulo – 1,069 km

Curitiba – 646 km

Rio Grande do Sul –

1088 km

Buenos Aires – 1,256

km

Córdoba – 1,200 km

Remarks

> OEMs operate a just-in-time

system

> Therefore, outbound logistics is

crucial

> Delivery times range from 1 to 3

days, the bottleneck being the

border crossing at Ciudad del Este

> Brazil offers the "Linha Azul"

regime, which grants faster

customs dispatch for registered

companies with good control of

tributary processes in foreign trade

Logistics 5

Brazil

Argentina


In general, Paraguay provides favorable conditions for investments – A specific investment decision requires case-by-case evaluation

Summary of key decision factors

1

2

4

5

3

Does Paraguay offer an attractive BUSINESS CLIMATE? The business climate is favorable and many companies are already present – However, inefficiencies and transparency are still behind European level

Is the INFRASTRUCTURE sufficient for our production needs? In the two metropolitan areas, Asunción and Ciudad del Este, the infrastructure is sufficient

Is there an educated WORKFORCE available at reasonable cost? Labor costs are very attractive and the two metropolitan areas boast a young and willing potential labor force – Level of education to be checked case by case

Is the REGULATORY and TAX ENVIRONMENT favorable? Both regulatory and tax legislation are very investor friendly – The Maquila program offers attractive tax scheme for exporters

Is inbound and outbound LOGISTICS feasible for us? Key automotive clusters in Brazil and Argentina can be reached by just-in-time delivery from Asunción and Ciudad del Este – Higher cost to be checked case by case

✓

(✓)

!

✓

!


✓ Favorable ! Take specifics into consideration


C. Relevance for suppliers: For which suppliers might Paraguay be a hidden champion for LatAm production?


Examples of companies with installed facilities in Paraguay

Companies from various sectors have entered Paraguay to produce and export to Mercosur markets

"Thanks to reduced production costs, we can afford to compete with Asian rivals; the margin and added value of our product is low and we must try to reach their price" Luiz Saldanha (SR Productos)

"Production in Paraguay is on average 30% cheaper than in Brazil" Roberto Kaefer (Globo Aves)

"It's not as easy as doing business in Brazil, though; if you do not have enough prior information you risk falling into bribery, which is still very ingrained in the culture"

Juliano Trombeta (BIOSANI)

Source: Press clippings; Roland Berger

PROS CONS

Nañereta

Clothing Agro products Industry Automotive Others

Investors' comments


Opportunity to make use of tax incentives, e.g. high value added, internal supplier relations

Modest dependency on electric infrastructure since stability given in metropolitan areas, though blackouts can occur

Modest size and weight of products and sufficient lead time to enable >1000 km transportation to clients

As a production location in Mercosur, Paraguay should be considered if production is labor intensive and long distance logistics feasible

High labor intensity with comparatively low requirements regarding education and experience

Labor intensity

Key influencing factors

low high

Logistic dependency

low high

Infrastructure dependency

low high

Tax relevance

low high



Before investing in Paraguay, it's especially important to consider the externally induced risks carefully, e.g. developments in Brazil

Opportunities & risks for automotive suppliers investing in Paraguay

Opportunities

> Low labor costs – Labor costs incl. tax & social mark-up very attractive

> Attractive tax regime – Low overall taxation for companies

> Investor-friendly government – Stable environment compared to other LatAm countries

> Low level of unionization – Especially compared to Brazil and Argentina, there is limited union influence and activity in Paraguay

> Mercosur content – Value added in Paraguay counts as Mercosur local content

> …

Risks

> No access to InovarAuto – Production in Paraguay does not qualify for the Brazilian incentive program InovarAuto

> Dependency on consumption in Brazil & Argentina – No own OEMs, all products have to be exported, thus heavily dependent on Brazil and Argentina

> Limited experience with high-tech products – Lack of highly qualified workforce, especially with regard to more complex products

> Hardly any local supply base – Basically all inputs have to be imported, there is hardly any local production

> Limited quality of infrastructure – Reliability of utility services is acceptable but needs checking case by case

> Limited attractiveness for expatriates – In comparison to other LatAm countries, living conditions are less attractive, so good salary packages have to be offered accordingly

> … Source: Roland Berger


Companies considering an investment in Paraguay should not neglect four key success factors

Consider overall Mercosur market development – Key consumer markets for automotive products are in Brazil and Argentina, with both countries facing recession

✓


Recommendations

Be clear on target clients – Frozen zone and supply chain configuration should be aligned with target clients: most OEMs accept the additional complexity in exchange for more attractive prices

✓

Conduct a structured location search project – The location within both Mercosur and Paraguay must be selected carefully

✓

Involve local experts at an early stage – Local specifics that might influence a decision can change quickly; thus companies should involve independent partners able to provide objective assessment

✓


The metropolitan areas offer an attractive environment for labor-intensive production – Maquila program offers attractive tax scheme

Wrap-up


Economic and political stability The current government is stable and embodies liberal, investor-friendly policies 1. Favorable environment Key advantages are low labor costs and a favorable tax regime, while logistics to key automotive clusters and infrastructure requirements have to be checked case by case 2. Many companies already established Especially companies with a traditionally high share of manual production are already installed in Paraguay (e.g. clothing, wiring harness, etc.)

3. Investment decision requires case-by-case consideration Yes, Paraguay is a hidden champion for many types of production, but as always investments should be carefully considered and independent local experts involved in decision making 4.


Phone: +49 69 29924 6202

Fax: +49 69 29924 6102

E-mail: [email protected]

Dr. Thomas Schlick

Partner Frankfurt, Germany Roland Berger Automotive Competence Center

Phone: +55 11 3046 7111

Fax: +55 11 3046 7222


Thomas Totzeck

Project Manager São Paulo, Brazil Roland Berger Automotive Competence Center

Phone: +595 21 615-848

Fax: +595 21 615-844


Dr. John-Wesley Löwen

Managing Director Asunción, Paraguay German-Paraguayan Chamber of Industry and Commerce

For further questions please feel free to contact us!


Your contacts

http://mysite-eu.rolandberger.net/Person.aspx?accountname=ROLANDBERGER/thomas_totzeck

http://mysite-eu.rolandberger.net/Person.aspx?accountname=ROLANDBERGER/thomas_totzeck

Paraguay's market potential for the automotive · Paraguay's market potential for the regional...

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