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issue: January 2005 APPLIANCE Magazine

53rd Annual Appliance Industry Forecasts
Latin America: Partnering With Asia


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by BJ Spanos, Contributing Editor

Anxious to open new markets and gain access to the region’s natural resources, Asia has been paying court this year to Latin America, with promises of direct foreign investments and bilateral free trade agreements.

China increasingly is turning to Latin America to ease its supply woes by purchasing large amounts of iron ore, bauxite, soybeans, timber, zinc, and manganese from Brazil; tin from Bolivia; oil from Venezuela; and copper from Chile. A number of these materials are used to make steel and other components used in appliances.

In 2003, China became Brazil’s second-largest trading partner and is one of the few nations to have a trade surplus with China. Brazilian exports in 2003 to China nearly doubled to U.S. $4.5 billion. Demand from China comprises 7 percent of Brazil’s exports and has been the primary driver for Brazil’s iron ore and steel production.

China is also flexing its economic muscle by becoming a major investor in Latin America. In recent years, China has invested $4 billion in the region, including more than $1 billion in 2003 alone, accounting for 36.5 percent of Latin America’s foreign direct investment. While attending the annual Asia-Pacific Economic Cooperation (APEC) meeting in Santiago, Chile, Chinese President Hu Jintao called on Argentina, Brazil, and Chile and pledged $100 billion over the next decade to these countries, including $20 billion to Argentina to build mines, railroads, and other infrastructure projects. He also visited Cuba, from which China primarily procures nickel.

Argentina, Brazil, Chile, and Peru have recognized China’s full market economy status (FMES). This is a major achievement for China, but one not particularly welcomed by Brazilian industry. The Industrial Federation of São Paulo criticized the move and warned that it put “Brazilian industry in a vulnerable position.” Under international trade regulations, these countries no longer can impose anti-dumping barriers on Chinese goods, which are sold at artificially low prices. Latin American companies may feel the pinch as Chinese exports flood the market.

Not to be out done, South Korean President Roh Moo-hyun, along with a number of Korean consumer electronic company executives, also visited Argentina, Brazil, and Chile to promote bilateral trade and strengthen economic ties. Korean appliance manufacturers call these three countries the “consumer electronics triangle.”

Chile appears to be the market with the most opportunities. After the free trade agreement was reached in April 2004, the bilateral trade volume between the two countries increased by 71 percent from April to September. Both Japan and China experienced decreases in their market share, which may not last, as Chile announced that it will negotiate a similar agreement with China. Vietnam’s President Tran Duc Luong also met with Chile’s President Ricardo Lagos. They agreed on a number of measures to further expand bilateral trade, including home appliances.

Looking Back at 2004, Ahead to 2005

More good news is that most appliance makers see Latin America as a region of growth. “In most markets, appliance market growth has exceeded projections put together at the end of 2004, with particularly strong growth in Mexico, most of Latin America, Australia, and Asia,” R. Craig Breese, president of Maytag International, told APPLIANCE. “It is expected that projections for 2005 will be strong, but somewhat less than actual growth rates in 2004.”

And the numbers confirm growth. According to the World Bank, most Latin American countries have had a solid year, and growth has accelerated in several of the larger economies. Regional gross domestic product in Latin America and the Caribbean has increased by an estimated 4.7 percent in 2004, ending a 3-year period of stagnation. Regional growth is forecast to moderate, with GDP growth slowing to a still robust 3.7 percent by 2006.

The World Bank also estimates that output in Brazil increased 3.9 percent in 2004 and Mexico by an estimated 4 percent. This is the largest economic expansion in Mexico since President Vincente Fox took office in December 2000. Second-quarter GDP increased 13.6 percent in the Venezuela, 11.5 percent in Uruguay, 6.7 percent in Argentina, 3.6 percent in Peru, and 3.5 percent in Colombia, according to World Bank estimates.

“In Brazil, the economy continues to strengthen…driven by strong exports and increasing consumer spending. As a result of its overall favorable economic environment, appliance demand increased by 26 percent in the third quarter [2004] compared with last year,” said Jeff Fettig, chairman, CEO, and president of Whirlpool Corp., in a conference call with analysts. “Our export volume from Brazil continues to grow and is up over 25 percent for major appliances on a year-to-date basis.”

Brazilian bank lending, which has been brisk as consumers continue to borrow more to buy home appliances and cars, supports Mr. Fettig’s observation. Brazil’s interest rates remain high compared with other countries in the region. Home appliance retailers such as Globex Utilidades SA are keeping their borrowing costs down to foster consumer loyalty.

In 2004, Brazil agreed to limit exports of stoves to Argentina and is negotiating quotas on refrigerators and washing machines. Argentina also has restricted imports of home appliances from Brazil and placed a 21-percent tariff on Brazilian televisions. Brazilian companies have 50 percent of the market for home appliances in Argentina. Some analysts are concerned that this on-going trade dispute will strain relations between the two countries and divide the Mercosure bloc, South America’s largest trade zone.

Higher oil prices have benefited major oil exporters in the region, such as Colombia, Ecuador, Mexico, and Venezuela. Oil importers, especially countries in Central America, the Dominican Republic, and Uruguay have been hurt, but their losses were minimized by increases in other commodity prices. These include large exporters of agricultural products (Argentina, Bolivia, Brazil, Ecuador, and Paraguay) and metals (Chile, Jamaica, and Peru), the World Bank said.

Ken Goldstein, an economist with The Conference Board in New York, believes that worldwide supply chains and sources of oil worldwide face two significant threats. “First is all outsourcing in recent years has stretched the supply chain and made it vulnerable to small endogenous shocks (power outages, dock strikes, hurricanes, and the like),” Mr. Goldstein said. Second, he said, is the chance of terrorist attacks. To counteract these threats, appliance producers and distributors will need to maintain their diligence in protecting key facilities and making contingency plans in case of supply disruptions.

The most significant downside risk for the Latin American region is still its vulnerability to higher interest rates and financial turmoil. However, the World Bank reports that prudent budgetary policies in recent years, a general shift toward more flexible exchange rate regimes, and market opening initiatives have improved the financial position of many countries.

53rd Annual Appliance Industry Forecast
 
North America
 
Europe
 
Latin America
 
Asia
 
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