17/12/2012 Back to articles

Still banana republics?

Not so long ago very few companies would countenance the idea of investing in Latin America. Political instability, labour unrest and widespread corruption were fuelling rampant inflation and economic uncertainty. Even today bad press often outweighs the good - gang warfare in Mexico, Colombian drugs cartels and Argentine sabre rattling. Yet underneath the news chatter there is a quiet revolution underway which offers significant opportunities to those firms willing to get involved early.

Nearshoring and domestic demand fuelling growth

The Latin American bloc is set to grow at around 4% in 2013 with some economies, such as Peru, Columbia and Chile, moving significantly faster. Overall that compares very favourably with the US, Europe and even most of Asia. Overall industrial output is forecast to increase by over 6% in several cases. There are two key drivers:

  • The need for an agile and cost-effective supply chain to service the US market;
  • Steadily increasing domestic demand for locally produced manufactured items.

Although Asia remains the most usual choice in the US for offshore sourcing, nearshoring to Latin America potentially offers three crucial benefits: cost, flexibility and integration capabilities. Labour cost differentials between Latin America and Asia, particularly China, have been narrowing as domestic and international pressures have pushed up wages. The region offers lower logistics costs plus shorter lead times which can dramatically affect cash tied up in inventory. Nearshore manufacturing offers more flexibility and a greater degree of integration into the total process, especially as almost all the critical players in Latin America have Free Trade Agreements with the United States and Canada. High quality standards have encouraged major corporations such as Daimler and Lenovo to invest heavily in local plants.

The second major driver behind the Latin America phenomenon is the internal growth in wealth which in turn is fuelling domestic demand. This is most marked in the US-centric central and northern continental countries such as Mexico, Brazil and Colombia. 2013 GDP growth rate estimates for the leading lights are impressive:


Follow the smart money

With one or two exceptions, the old bogey of uncontrollable inflation also appears to have been banished. Investment in Peru is 30% of GDP, similarly 27% in both Chile and Colombia – the region’s new high growth economies. This is highlighted by the vast amount of foreign investment going into the leading Latin American countries – over $60bn in Brazil alone in the past year.

Now is the time to reassess investment options in Latin America, particularly for those who can provide high quality tools, components and services to fuel the growth in manufacturing.

(To download a copy of Wright Associates' white paper on Latin America please click here.)

 

Rhys Torrington