The Latin American manufacturing sector, thanks largely to Mexico and Brazil, has much to look forward to in 2014 after closing out 2013 with surprising strength. Leo Rommel reports what an industry expert sees coming in the months ahead – and how the region’s continuously-expanding automotive sector will make the greatest impact.
A robust motor vehicle production sector and its supplying industries will provide continued momentum and a much-needed shot in the arm for Latin American manufacturing in 2014, according to a new report.
In fact, when the numbers are crunched, manufacturing output will have grown by 2.0 percent in 2013, the Manufacturers Alliance for Productivity and Innovation (MAPI) states in a recent analysis, titled the Latin America Manufacturing Outlook report.
The report is a semiannual analysis that examines the latest trends and provides a near-term forecast for 16 major manufacturing industries.
Growth will continue this year as well, advancing by 3.1 percent, says Fernando Sedano, MAPI economist consultant and the author of said report. His prediction seems to come directly from the region’s quickly-booming automotive industry.
“What this report shows is that the motor vehicle industry is the key engine for manufacturing in Brazil, Mexico, and Argentina,” Sedano says.
“If not for growth in the motor vehicle sector, I would say that manufacturing would have been pretty much flat, both in Brazil and in Mexico,” he adds.
Even better, 16 industries reviewed in the report are expected to report growth in 2013 while 15 of 16 are predicted to grow even more in 2014. Only medical, precision and optical instruments, showing a decline by 3.2 percent, will be the lone exception.
Three industries – food and beverages, motor vehicles, and machinery and equipment – account for approximately 45 percent of the region’s manufacturing and are therefore most important to the forecast.
Production of food and beverages – the largest industry in the region and one of the most stable – is expected to have grown by 1.1 percent in 2013 and 3.7 percent by the year’s end in 2014.
Machinery and equipment is forecasted to see growth of 4.9 percent in 2013 and 5.1 percent in 2014.
And the automotive sector, most impressively, likely will have improved by 8.9 percent in 2013. That should increase to 9.7 percent in 2014.
“Once the motor vehicles sector is doing well, then you have a number of key intermediate industries that usually follow, even if they have a lag response to the growth in motor vehicles,” Sedano says. “It took a little while probably because those intermediate industries had too high inventory levels and the first thing they did was supply motor vehicle plant with product that they had already built. Only now am I seeing these industries ramping up production to keep up with the demand from motor vehicles.”
Examples of intermediate industries for automotives, he adds, include basic and fabricated metals and nonmetallic minerals, like glass for windows and windshields, and rubber and plastic for tires.
“The response is being seen only right now,” Sedano says. “At the end of 2013, we started seeing a response from intermediate industries, which did not do well in the first nine months of the year.”
The end result, Sedano says, is that overall manufacturing in Brazil and Mexico will grow 3.9 percent in 2014. Both are good-looking increases from what’s expected to be reported for 2013, when Brazil likely reports a growth of 2.9 percent and Mexico 1.7 percent.
“The manufacturing growth picture expected in Latin America is a direct consequence of the improved backdrop among intermediate industries, which will have to expand production to satisfy the projected strong demand from auto plants,” Sedano says. “Conditions are set for faster manufacturing growth in 2014, although the expansion will be moderate. Manufacturing companies in Brazil and Mexico will lead the growth tables but Argentina’s factories will likely remain flat.”
But the reasons why motor vehicles grew so rapidly in Brazil and Mexico differ remarkably, he adds.
Tax Incentives Spearhead Growth In Brazil
Sedano says automotive growth in Brazil, a country whose total manufacturing makes up 48.7 percent of the weight in MAPI’s Latin America index – was created largely by tax incentives and more middle-class residents having access to credit, stimulating demand and increasing production of automobiles.
“The current picture of Brazil’s industrial sector clearly shows that the ongoing modest expansion is cyclical and extremely focused on key growth drivers such as automobiles, trucks, and white goods,” the report says.
According to the report, output expanded about 2 percent in the first nine months of 2013 compared to the same time period a year earlier. The auto sector expanded output by a “sizeable” 13 percent during the timeframe.
“What I am seeing now in Brazil and what I think is going to help their 2014 forecast, is that right now intermediate industries are ramping up production to keep up with the strong demand for automotives,” Sedano says. “The intermediate industries will have to continue increasing product to supply this still-growing motor vehicle sector.”
But Sedano says those generous tax incentives that helped fuel this surge in industrial activity “will be reduced or eliminated gradually.” The increased paced that factories and plants made cars, trucks, and various white goods will ease as various subsidized loans and tax incentives are rolled back.
“There hasn’t been a final decision made yet, but for sure they will be gradually reduced or eventually eliminated” he says. “That will slow down the motor vehicle sector a little bit. Slowing down does not mean they will reduce production. They will continue to increase production but at a slower pace.”
How much slower? Motor vehicle production will grow 7.3 percent in 2014, down from an expected 11.4 in 2013.
It’s a sizeable decrease, certainly, but not enough to thwart the country’s newfound manufacturing momentum, the report says.
“With inventories still well below normal, we suspect that aircraft production will continue to grow at relatively high rates,” the report explains. “Consistent with the view, inventories in key sectors remain at planned levels and suggest that production gains will continue.”
The report details that confidence levels among Brazil’s captains of industry remain “relatively high and indicate upcoming output gains.”
But the high-level of manufacturing activity will ease noticeably after the World Cup, held in June and July, passes, Sedano predicts. This will be particularly noticeable in the food and beverage sector, which comprises up to 30 percent of Brazil’s manufacturing landscape.
“That sector was very weak in 2013, but the model expects food and beverages to pick up pace and grow fairly strongly to about 3.7 percent in Latin America, partly because of the World Cup,” he says. “You are going to have a massive influx of tourists, people from all over the world, coming to Brazil, and these people will demand and consume manufactured goods, especially food and beverages.”
U.S. Demand Powering Mexican Manufacturing
Mexico’s manufacturers reported gradual and considerable improvement after a rough first start in 2013, mirroring the upturn in U.S. manufacturing output, the report says.
“Mexican factories hit bottom in the second quarter and have significantly increased activity in the third quarter,” the report says. “Most of the second and third quarter output gains are explained by a thriving motor vehicle sector.”
And considering how, according to Sedano, up to 80 percent of car production in Mexico goes to the U.S., it’s evident that American demand is spearheading Mexican manufacturing‘s noticeable uptick in activity.
“What happens in the motor vehicle market in the U.S. greatly affects Mexican factories,” Sedano says. “I see stronger production in Mexico driven by exports, and that, in turn, will stimulate key intermediate industries in Mexico.”
That’s the underlining theme behind Mexico’s sunny 2014 forecast, MAPI says: as the U.S. goes, so does Mexico, which comprises 38.7 of MAPI’s Latin America index.
“The growth in the motor vehicle sector, and therefore in the manufacturing sector as a whole, is more sustainable (in Mexico) because it’s actually not driven by government policies or incentives,” Sedano says. “It is actually driven by market forces and those market forces pretty much mean that the U.S. is demanding cars.”
A number of supplying industries – like rubber and plastics, fabricated metals, and nonmetallic minerals – have not yet benefited from the increase in auto manufacturing output, according to MAPI’s report. But strong production gains reported by basic metals manufacturers in the third quarter of 2013 suggest gains are coming in 2014.
“Although the contraction seen in early 2013 will definitely limit the growth of Mexican factories during the year as a whole, the recent data suggest that Mexico’s long-awaited recovery is starting to gain some traction,” the analysis says.
Key economic indications, from both the U.S. and Mexico, suggest that manufacturing production growth will continue to accelerate going forward, with motor vehicle plants driving a broader-based expansion.
By the end of 2014, motor vehicle production will have grown 13.4 percent, a fine-looking increase from the 7.7 percent growth expected for 2013.
“I see Mexico as the best performing manufacturing sector in Latin America,” Sedano says.
About Manufacturers Alliance for Productivity and Innovation (MAPI)
The Manufacturers Alliance for Productivity and Innovation (MAPI), founded in 1933, contributes to the competitiveness of U.S. manufacturing by providing economic research, professional development, and an independent, expert source of manufacturing information.