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Argentina’s Investment Development Agency

Beatriz Nofal (Ph.D), President


Argentina, May 2008

Advantages of Investing in Argentina:

Automotive and Motorcycle Industry

Argentina’s Investment Development Agency 2

An Extraordinary Opportunity


STRUCTURALLYCOMPETITIVE FACTORS OF PRODUCTION

KNOWLEDGE

NATURE

CULTURE

Argentina offers an extraordinary investment opportunity given the combination of high and sustainable economic growth, favorable terms of trade and a competitive base of production factors.

ARGENTINA’S SUSTAINABLE

ECONOMIC GROWTH

Five years of steady growth at an average

rate of 8.8%

Twin Surpluses: fiscal and external

Flexible and Competitive exchange rate

Prudent monetary policy

Record profitability

FAVORABLE INTERNATIONAL

SCENARIO

Favorable terms of trade and high prices of agricultural “commodities” and raw materials.

Global Integration of Value Chains and off shoring

New global consumption patterns (product differentiation)

Accumulation of foreign exchange reserves and reduction of public debt

Increasing demand for renewable energy sources

Marked reduction of unemployment and poverty

levels

Rich culture

Modern Industries

Entrepreneurial and innovative capacities

Skilled Human Resources

Abundant Natural Resources


GDP annual growth rates (%)

4

9

6

44,4

1.1

8.8

10

1.82.9

5.7

10.1

2.32.9

5.7

9.2

10.4

2.6

3.7

8.5

11.1

2.1

5.9

8.7

11.5

China Argentina Chile Brazil G7: MostDevelopedEconomies

2003 2004 2005 2006 2007

Average: 10.6%

Average: 8.8%

Average : 5.1% Average : 3.6%

Average : 2.3%

Source: ProsperAr based on IMF WEO database, 2007.

Over the past five years, Argentina ranked among the fastest growing economies worldwide. In 2007, the annual GDP growth rate was 8.7% and the average annual growth rate during the last five years has been 8.8%. For 2008, the estimated growth rate is in the order of 8%


25,722,7

-15

-10

-5

0

5

10

15

20

25

30

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

*

Primary Fiscal Balance

Current Account Balance

Growth is based on solid macroeconomic fundamentals that strengthen the country’s economy, making it more resilient vis-à-vis external shocks, and ruling out the possibility of a crisis in the mid-term. Macroeconomic sustainability results in higher predictability, a key factor for investment.

Fiscal and Current Account Surplus(in billions of pesos)

International Reserves(in billions of dollars)

Source: ProsperAr based on Ministry of Economy and Production.

50.446.9

32.028.1

19.6

14.110.5

19.4

26.527.826.524.3

19.317.617.9

0

5

10

15

20

25

30

35

40

45

50

55

Dic

-94

Dic

-95

Dic

-96

Dic

-97

Dic

-98

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-99

Dic

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Dic

-01

Dic

-02

Dic

-03

Dic

-04

Dic

-05

Dic

-06

Dic

-07

Mar

.-08

During the first quarter of 2008, tax revenues increased at a faster rate than public expenditure and international reserves continued growing steadily.


Investment has grown steadily, at higher rate than GDP, leading to robust employment growth.

*EstimatedSource: ProsperAr based on INDEC and Ministry of Economy and Production

0

20

40

60

80

100

120

140

1601

98

3

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

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96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

30%

35%

40%

45%

50%

55%

Employment rate (right axis) GDP constant prices (Index 1997=100)IBIF constant prices (Index 1997=100)

GDP, Investment and EmploymentIn % and Index numbers 1997=100


Likewise, there has been important productivity gains in the industrial sector, as the surge in production outpaces the rise in employment.

50

60

70

80

90

100

110

120

130

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007*

Industrial Production Index, volume (IPI) Employed Workers Index (EWI)Productivity Index (IPI/EWI)

+ Productivity

+ Production

+ Employment

+ Productivity

+ Production

- Employment

= Productivity

- Production

- Employment

Industrial Production, Employment and Productivity


One of the cornerstones of the current macroeconomic program is the maintenance of a flexible and competitive exchange rate.

0,0

0,2

0,4

0,6

0,8

1,0

1,2

1,4

Jan

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Jul-

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ar-

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07

Se

p-

No

v-

USA RER

EURO RER

Brazil RER

Nominal ER (US dollar)

Nominal and Real Exchange Rate (RER)EURO - USA – Brazil. Inverted Scale

Source: ProsperAr based on INDEC


11,154

55,933

44,780

-10000

0

10000

20000

30000

40000

50000

60000

700001

99

3

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

Trade Balance Exports Imports

Argentinean International TradeMillions of dollars

Source: ProsperAr based on INDEC

Argentina’s exports and imports are at record-high levels. The country has experienced a sizable and persistent trade surplus over the past eight years.


Productive Capacities

• Rich culture and outstanding cultural productions in various fields

• Distinguished international figures and works of art

• Rich Urban life with a wealth of cultural possibilities

• International destination chosen for its quality of life and tourism

• High entrepreneurial and innovative skills (ranked 10th in the GEM 2007)

• Strong industrial tradition

• Modern infrastructure and technological availability

• World-class producers of agricultural and industrial commodities

• Competitive private sector

• Preferential Access to Mercosur market at 0% tariff

• Qualified Human Resources

• High level of education and training

• Prestigious Universities

• Excellent Research Centers

• Outstanding health indicators

• Abundance of land and natural resources

• A wide variety of mineral and energy resources

• Diversity of regions, topography and climate

• High commitment with environmental protection and sustainable development

Argentina’s economic growth is supported by an attractive and competitive resource endowment base which combines a pool of talented people, abundant natural resources, a wealth of culture and significant entrepreneurial and business skills...

NatureKnowledge Culture

Cesar Milstein – Nobel PrizeFederico Leloir– Nobel Prize


Automotive Industry


AUTOMOTIVE AND AUTOPARTS MAIN INDICATORS

►Companies: 9 automotive producers (TNCs); 400 autoparts producers (mostly local producers).

►Contribution to GDP: 2.2%

►Contribution to Manufacturing GDP: 13.2%

►Share in total Manufacturing Exports: 33.3%

►Employees: 110,000

►Quantity of models produced: 18

►Inhabitants per automobile: 5.1

►Sales (2007): 565,000 automobiles – Record High-

►Exports (2007): 316,410 automobiles – Record High-

Source: ProsperAr based on ADEFA, 2006

Location of Automotive TNCs in Argentina

The automotive industry weighs heavily and remains a growth leader in the country’s overall manufacturing production

(Since 2009)


Domestic and external market are rapidly increasing

307

177

82

156

312

403460

565

2000

2001

2002

2003

2004

2005

2006

2007

136155

123108

146

182

237

121

83

36

90

203

259272

331316

2000

2001

2002

2003

2004

2005

2006

2007

Domestic Sales of VehiclesThousands of units

Exports and Imports of VehiclesThousands of units

Sales in the domestic market (locally produced and imported vehicles), have rebounded from the record-low levels of 2002. Sales in 2007 reached an unprecedented level of almost 565,000 units.

As a result of a surging external demand, exports currently represent more than half of Argentina´s production. Similarly, imports account for more than 55% of domestic sales.

Source: ProsperAr based on ADEFA


Brazil; 62.1%

C. America ; 3.6%

Europe; 2.8%

Uruguay; 1.6% Asia; 1.4%

Others; 4.7%

Chile; 5.1%

Venezuela; 6%

Mexico; 12.7%

Percent Change

2006 / 2005 2007 / 2006

Production 3.3% 9.9%

Sales 12% 22.4%

Exports -6% -13.3%

Imports 9.5% 18.7%

Argentina’s Exports of Vehicles, by CountryYear 2007

Brazilian Automotive Industrial Indicators

Brazil is by far the largest market for Argentina’s automotive exports.

Source: ProsperAr based on ADEFA and ANFAVEA

In 2007, automotive production in Brazil reached a record-high level of 2,870,000 units.


Production of VehiclesThousand of units

Increasing demand in Argentina –and also in Brazil- stimulated domestic production to its record-high levels

458

305339

236

159 165

260

545

432

320

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

+ 19%

+ 242%

In 2007, automotive production expanded at a 26% annual rate, reaching a record-high level of 544,647 units.



1.025,5

458,0

159,4

432,1544,6

780,0737,5

672,0625,0

508,2

82,3

460,5

564,9 682,6

477,6362,9

237,5

108,1

236,8316,4

0

200

400

600

800

1.000

1.200

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

(p)

2009

(p)

2010

(p)

2011

(p)

2012

(p)

2013

(p)

Th

ou

san

ds

of

un

its

ProductionSalesExports

Avg. Prod.: 345,500 un.

Avg. Sales : 419,000 un.

Avg. Exports: 40,000 un.

Avg. Prod.: 349,500 un.


Avg. Exports: 157,700 un.

Avg. Prod.: 314,300 un.


Avg. Exports: : 185,350 un.

Avg. Prod : 874,368 un.

Avg. Sales: 699,083 un.

Avg. Exports : 558,949 un.

Forecast of Vehicles Production, Sales & Exports

Source: ADEFA

Private sector estimates suggest that this growth trend will continue unabated


3.4

19.8

46.9

52.5

64.3

78.8

70.9

95.6

5.1

26.2

57.5

66.4

69.0

88.0

115.3

117.2

All automotive companies currently operating in Argentina increased their production levels to meet the ever growing local and external demand


Production of Vehicles by CompanyThousand of units


Year 1996

Automobiles86%

Year 2007

Heavy Trucks3.3%

SUV & Vans10.6%

SUV & Vans34.6%

Heavy Trucks0.9%

Automobiles64.4%

Production of Vehicles by Category

Although automobiles still represent three quarters of the vehicles sold in Argentina.

Auto production represented 64.4% percent of total production in the industry. Production of SUVs (Sport Utility Vehicles) and Vans accounted for 34.6% of total production, while heavy trucks and passenger vehicles explained the remaining 1%.



Although automobiles still are the main vehicles sold in the domestic market.

Automobiles75%

Others5%

SUV & Vans20%

Automobile sales accounted for the lion-share of the domestic market sales, with 75% of total. Sales of SUVs & Vans accounted for 20% of total sales, heavy trucks, and passenger vehicles for 5%.

Sales of Vehicles by Category2007


The production of trucks has skyrocketed in 2007

11411501

2503

2972 3003

4912

2002 2003 2004 2005 2006 2007

Production of trucksIn units IVECO was the only producer in

Argentina in 2007.

The domestic market is mostly supplied by imports. Current imports are roughly 3.5 times domestic production.

Demand for trucks has increased dramatically, stimulated by the strong economic growth of the past five years and particularly by a booming agricultural activity.

Production has grown steadily since 2002 to meet the increasing demand

Imports increased faster than production.

3,52,0

3,8

15,5

3,4

2002 2003 2004 2005 2006

Imports / Production Ratio


Argentina offers competitive labor costs…

140

100

95

82

56

46

17

11

11

5

4

12

13

Germany

USA

Japan

UK

Spain

Korea

Czech Rep.

Brazil

Poland

Mexico

Argentina

India

China

Labor Costs by Country. Index USA base = 100

Source: ABECEB based on PriceWaterhouse & Coopers

Unskilled assembly workers

US$: 2.22/hour (AR$ 7.01/hour)

Trained assembly workers


Trained welding personal


Office employees* US$: 3.03-3.31/hour (AR$ 9.55-10.42/hour)

Labor Costs in Argentina Wages per hour

*This figure excludes ManagersSource: ProsperAr based on Ministry of Labor.


… and a set of production incentives

In 2006, Argentina and Mexico eliminated all bilateral trade barriers in automobile trade and in June 2006 were eradicated hundreds of tariff items in the car parts sector.

The “Flex” Mechanism

► Cash Reimbursement

Fiscal benefits for vehicles produced domestically and that have imported parts whose value do not exceed 30% of the wholesale price of the final good (Decree 774/05). Specifically, a company manufacturing vehicles in Argentina receive a cash reimbursement equivalent to 6% of the value of the locally produced parts being purchased.

Argentina and Brazil bilateral trade flows are tariff-exempt within a ”flex” mechanism, which determines the level of Brazilian imports (US$ 1.95) for every dollar of Argentine exports. Tariffs will apply when this level is exceeded.

► The “Flex” Mechanism for bilateral Trade with Brazil

► Trade with Mexico


The largest Japanese company has settled in Argentina, 10 years ago.

Source: Toyota Argentina

Toyota Argentina Productionin units

0

10.000

20.000

30.000

40.000

50.000

60.000

70.000

80.000

97-'02 2003 2004 2005 2006 2007 e

Since it was settled, and particularly in the past few years, Toyota Argentina has expanded operations becoming a regional supplying platform of multi-purpose vehicles.

World-class Japanese companies, such as Toyota or Honda choose to produce in Argentina not only to supply the domestic market, but also to supply the region.


Toyota’s settlement in Argentina acted as a magnet for other Japanese companies

A rising number of Japanese car parts manufacturers have settled in Argentina as a response to Toyota’s steady growth.


Toyota has not only increased its production scale, but it has also developed new models, enlargening the scope and reach of its local output.

Toyota Argentina in figures

► Production per year: 75,000 units (est. 2007)

► Employees: 2,600

► Exports: 74% of the production

► Sales all around Latin America

► Investments for more than US$ 700 million since 1997


Having settled in Argentina 1978, Honda is building a new automobile production plant that will start operations in 2009.

The new Honda plant is intended to meet the ever-rising domestic demand.

The new plant will begin exporting products to other countries in South America and will play a key role in Honda’s production strategy in South America along with the Honda auto plant in Brazil.

New Automobile Production Plant

• Investment: aprox. U$S 100 million

• Start of Operation : Second half of 2009

• Annual Production Capacity : 30,000 units

• Production Model : compact passenger vehicle

• Processes: stamping, welding, painting, engine assembly and final assembly


Automotive companies are undoubtedly responding to market trends with new investments

August 2007: U$S 24 to expand capacity and to increase the integration of local parts in their domestic productionPreviously, 76 million Euros were invested to start the production of the new Citroen C4.

August 2007: U$S 161 million for the production of a new car in 2008 and a pick-up in 2010. In 2006, the completion of previous investment projects resulted in an increase in production from 300 units per day to 340 units.

March 2007: U$S 41.5 millon to increase production of parts Toyota has so far invested U$S 1 billion in Argentina

May 2007: U$S 100 million to expand capacity for the production of transmission gearOctober 2007: U$S 320.5 millon, for the production of a new pick-up.

Investment Projets in Argentina


2007: U$S 50 million for the production of a new commercial vehicle, the NCV3

May 2007: U$S 80 million for the production of a new vehicle, and to increase the production of the Kangoo and the Clio.

July 2007: U$S 200 million for the production of a new model in the plant located in Rosario

Honda is investing U$S 100 million in a new plant in Campana to start production in 2009. Two-thirds of the 30,000 units that are expected to be produced in this plant will be exported to Brazil

After an agreement between Fiat and Tata Motors, the Fiat plant in Ferreyra, Cordoba, is expected to start the production of a pick-up.In 2008, U$S 60 million will be invested for the production of 50,000 annual units of the Siena model.


Autoparts Industry


Source: AFAC.* Estimated Employment for FY2008

Main Location of the Autoparts companies in Argentina

Santa Fe

Buenos Aires City

Buenos Aires

Cordoba

AUTOPARTS MAIN INDICATORS

► Companies: 400

► Direct employment: 63,100 *

► Share of industrial employment: 3.8%

► Sales (2007): U$S 5,450 M

► Exports (2007): U$S 2,267 M

Autoparts main indicators:


1.827

5.448

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

-

1.000

2.000

3.000

4.000

5.000

6.000

19…

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20…

20…

20…

20…

20…

Var.

%

Sale

s in

U$S

Var. %

Autoparts sales have grown significantly, following trends in the auto production.

Autoparts Domestic SalesIn million of U$S

Source: AFAC


Autoparts exports have also risen significantly since 2002...

-

500

1.000

1.500

2.000

2.500

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Mil

lio

ns

of

U$S

12% compounded annual growth rate (1992-2007)

90,2%

Autoparts ExportsIn million of U$S

Source: AFAC.


-686 -774 -811-1.397

-1.904-1.176

-72-561

-1.298-1.914

-2.856

-4.120

-1.738-1.837

-2.880 -2.926

4.007

2.2671.942

253773

1.118 1.081 1.367

1.144

1.763

1.537

6.388

4.798

939

2.170

3.9993.204

2.834

3.676

1.216

-6.000

-4.000

-2.000

0

2.000

4.000

6.000

8.000

19

92

19

93

19

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19

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19

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19

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Balance Exports Imports

Mill

ions

of

U$

S

AUTOPARTS EXPORTS, IMPORTS & OVERALL TRADE BALANCE

…and imports are escalating, reaching unprecedented levels

Source: AFAC based on INDEC


Investment in the sector has shown a significant positive trend.

Investments were made by companies of all sizes

Autoparts companies are investing to improve their productivity levels, to enlarge their production capacity and to develop new products

232

302

356

416

460

0

50

100

150

200

250

300

350

400

450

500

2004 2005 2006 2007 2008*

Investment of Autoparts companiesIn millions of US$

Source: AFAC. *Estimated


Motorcycle Industry


Location of the Motorcycles companies in Argentina

Santa Fe

Buenos Aires

Cordoba

The Motorcycle industry in Argentina is formed by both world-class foreign companies and domestic firms.

Catamarca

San Juan

San Luis

The most important motorcycle producers are located in the province of Buenos Aires. Other companies are located in the provinces of Córdoba, Santa Fe, San Luis, San Juan and Catamarca.

Demand remains higher in the provinces than in the City of Buenos Aires.


Motorcycles Domestic SalesThousand of units

The domestic market for motorcycles has boomed over the past four years.

137.6 158.3119.6

12.7 25.789.3

231.6

477.6

680.7

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

+ 42.5%+ 5261%

Source: ProsperAr based on ABECEB

+ 106.2%

Demand for motorcycles increased as a result of the strong economic growth of the last 5 years, the recovery of income, employment, consumption and the widening gap between prices of automobiles and motorcycles.


Production and Assembly of MotorcyclesThousand of units

Production increased significantly to keep up with rising demand.

7.3

60.1

225.4

131.9

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007


+ 2997%


Imports of MotorcyclesThousand of units

Although, imports grew even faster than production.

634.6

60.610.810.3

93.3114.592.9

156.2

423.7

183.1

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07


+ 6090%

China, 93%

Brazil, 6%

Others, 1%

Imports by Destiny

Imports come mostly from China and are concentrated on small motorcycles


Conclusions: A Booming Automotive and Motorcycle Industry.

The autoparts industry is booming as the demand from automakers The autoparts industry is booming as the demand from automakers escalate and as automakers continue to increase their outsourcing escalate and as automakers continue to increase their outsourcing activities.activities.

New industry patterns emerged as a result of the opening of new New industry patterns emerged as a result of the opening of new markets, the focus on regional cooperation, and the country’s markets, the focus on regional cooperation, and the country’s competitive exchange rate. Large inflows of foreign direct competitive exchange rate. Large inflows of foreign direct investments (FDI) expanded production capacities and brought investments (FDI) expanded production capacities and brought technological know-how for process improvements.technological know-how for process improvements.

Rapidly growing exports and domestic sales at record-high levels Rapidly growing exports and domestic sales at record-high levels are stimulating production, which almost doubled since 2002 in the are stimulating production, which almost doubled since 2002 in the automotive industry and triple in the motorcycle industry . As a automotive industry and triple in the motorcycle industry . As a result, the automotive industry explained more than 30% of the result, the automotive industry explained more than 30% of the growth in the country’s industrial production over the past three growth in the country’s industrial production over the past three years. In 2007, the production of cars exceeded by 19% the peak years. In 2007, the production of cars exceeded by 19% the peak of 1998.of 1998.


Muchas GraciasThank you

To learn more about how to invest in Argentina, contact ProsperAr:

Florida 375, 8th Floor Suite B (C1005AAG) Buenos Aires,

Argentina

Tel: (+5411) 4328-9510

email: [email protected]

www.prosperar.gov.ar

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