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Argentina’s E-commerce Growing at an Explosive Rate, but Not without Challenges

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Argentina is the fastest growing e-commerce market in Latin America with a booming m-commerce segment. Blessed with high internet smartphone penetration rates, the country sets stage for plentiful e-commerce opportunities. However, Argentina is still battling high inflation and low economic growth rates, a fact that bleaks growth prospects of e-commerce market. Much like its regional neighbors, Argentina is also plagued with logistics and payment issues, and resolving these challenges is the need of the hour.


This article is part of a series focusing on e-commerce in LATAM, which also includes a look into e-commerce market in Mexico and Brazil


What is pushing the meteoric growth?

Home to MercadoLibre (Latin America’s most popular e-commerce site), Argentina, is one of the most prominent e-commerce markets in Latin America, known for its outstanding growth rate – between 2018 and 2022, e-commerce market is expected to increase by 83% to reach US$ 19 billion.

Strong connectivity is one of the key supporting factors powering the e-commerce market. Argentina benefits from incredibly high internet penetration rate of more than 80% and one of highest numbers of mobile Internet users in Latin America. Further, the country’s growing young, Internet-savvy consumer base, with sufficient disposable income, is also driving e-commerce sales.

What is holding back Argentina’s e-commerce market?

Logistics

The most significant barrier restraining Argentina from becoming Latin America’s e-commerce leader is logistics. To begin with, quality of roads in certain neighborhoods of various cities, even in the capital city of Buenos Aires, is not suitable for swift deliveries. An average delivery time for packages to reach shoppers is about seven days, which is not a convenient wait time and could dissuade shoppers from ordering online.

An average delivery time for packages to reach shoppers is about seven days, which is not a convenient wait time and could dissuade shoppers from ordering online.

Most logistics companies are unable to deliver as quickly and reliably as e-retail demands. Adding to the list of logistics and infrastructure insufficiencies is the unfinished GPS mapping, owing to confusing address systems and missing postal codes, thus, making deliveries an even more cumbersome task. With the current state of logistics, Argentina secured 61st rank (out of 160) in the Logistics Performance Index in 2018, lagging behind its fellow competitors (in the e-commerce space), Brazil and Mexico.

Payment methods

Online payments can be challenging in Argentina, particularly, for making purchases on international retailers’ websites. More than 50% of Visa and MasterCard cards provided by local banks, cannot be used on international websites. This is a major operational hurdle for international e-commerce retailers, who have to set up other payment methods.

More than 50% of Visa and MasterCard cards provided by local banks, cannot be used on international websites.

Moreover, with exorbitant credit card interest rates (according to the Central Bank of Argentina, credit card interest rates lie between 36% and 111%), customers have become vary of shopping online.

Additionally, debit cards comprise a negligible share of Argentinian e-commerce spend, as they can only be used on limited e-commerce websites, thus, limiting use of this crucial payment gateway.

Distrust

Another key challenge is distrust among several Argentinians toward e-commerce websites, especially when it comes to billing and payment transactions. Some customers are also hesitant to provide card details for online transactions with protection of information being their primary concern.

With no proper legislation in place, trust in the e-commerce marketplace is hard to build. Argentina does not have a comprehensive regulatory scheme governing e-commerce, rather it has just a few regulations that are applicable to e-commerce.

The country also does not adhere to any standard international e-commerce model such as UNCITRAL model law on electronic commerce by the USA or Directive 2000/31/EC (Directive on electronic commerce) of the European Parliament. Without any robust regulation in place, consumers would neither feel protected nor be certain regarding action being taken in case of unlawful activities.

Economy

Argentina’s economy is shackled with sky-high inflation rate (second highest in Latin America in 2018) and depreciating currency against dollar, thus, dampening economic growth prospects of the country. Poor economic conditions have taken a toll on all economic sectors, including e-commerce. High inflation rate has decreased purchasing power of consumers, who have become cautious shoppers.

Opportunities still exist

Nonetheless, outlook for Argentina’s e-commerce market is quite positive, with key e-commerce players craving for attention from Argentina’s proliferating online customer base.

Argentina’s e-commerce market is endowed with opportunities arising from growing m-commerce and social-commerce segments.

Argentina’s e-commerce market is endowed with opportunities arising from growing m-commerce and social-commerce segments.

Smartphones are increasingly becoming the key mode to reach consumers in Argentina, with consumers preferring to use mobile devices for accessing internet over stationary computers or laptops. The use of mobile phones for searching products before purchase is a common habit in Argentina. To tap this opportunity, businesses are increasingly focusing on building mobile-friendly websites – as of May 2018, 74.3% of businesses adapted sites to mobile phones (compared with only 10.4% in 2017).

Another trend emerging in the market is that of social shopping (shopping influenced by social media), fueled by growing social media engagement among Argentinians – as of January 2018, about 76% of the total population were active social media users. E-retailers are now using social networks to interact with shoppers, particularly the young demographic, and also to promote products. As of May 2018, 73.5% of businesses used social media to engage with shoppers and the most preferred sites were Facebook and YouTube.

Argentina’s E-Commerce Growing at an Explosive Rate, but Not without Challenges

EOS Perspective

Argentina’s e-commerce industry has reached a stage where consumers, particularly the young demographic, are slowly beginning to embrace online shopping as part of their daily lives, however, there is still scope for a lot of development for wider adoption. While Argentina’s e-commerce market is dynamic and growing, it could benefit from certain improvements, particularly in terms of payment methods, logistics, and building consumer’s trust in online shopping.

Payment methods need to be kept up to date with requirements of businesses and consumers, and steps are being taken for its betterment. Better logistics is a requisite for online retailing to function properly. In the era of one-day deliveries, a week’s wait time in Argentina is too long, and retailers are looking to resolve this issue.

MercadoLibre, the largest e-retailer in Argentina, has taken giant leaps for betterment of both payment mechanism and logistics. The company introduced a digital wallet, Mercado Pago, through which both debit and credit card payments can be processed. The digital wallet can be used in physical stores as well. Customers can scan QR code on items using MercadoLibre or Mercado Pago apps and choose preferred mode of payment.

Further, MercadoLibre has been adopting various measures to improve logistics. Through Mercado Envios, the company takes care of package shipment and delivery, as the seller only has to take the package to nearest dispatch center of MercadoLibre, and from there onwards MercadoLibre ensures seamless package delivery. Mercado Envios ascertains that the package reaches customer in the shortest time possible and allows tracking of shipment by both seller and buyer. MercadoLibre’s another program, Mercado Envios Flex, guarantees deliver of packages within 24 hours, but it is limited to Buenos Aires for now.

Undoubtedly, customer service and shopping experience need to be revamped, which could help in building customer’s trust as well.

Undoubtedly, customer service and shopping experience need to be revamped, which could help in building customer’s trust as well. The e-commerce platforms could use foreign digital expertise to develop websites that are safe for billing and money transactions. Moreover, online merchants need to understand that a transaction is not complete when a customer purchases product online, but when the package is received by the customer. To be able to gain customer’s confidence, merchants should take end-to-end responsibility, be transparent in communication by clearly stating the delivery timelines or any additional charges that are applicable, among others, before the payment is made.

Nonetheless, Argentina is slowly making progress and is on track to uphold its position as one of the e-commerce giants in Latin America. Despite being the fastest growing e-commerce market in Latin America, Argentina is still behind the two e-commerce powerhouses, Mexico and Brazil, at least as of now. However, the country definitely has the potential to give them both a tough competition with its e-commerce and m-commerce markets growing at exponential rates.

by EOS Intelligence EOS Intelligence No Comments

Argentina Powers its Way through Renewables

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Despite having abundance of renewable resources, Argentina has always had an inclination towards the non-renewable energy in its energy mix. However, in 2016, the incumbent government announced its intentions to explore the renewable resources, especially wind, to ensure that about 20% of the energy mix is contributed to by green energy by 2025 (a shorter-term goal entailed 8% of the energy to be contributed to by renewable resources by the end of 2017). Both local and foreign players have welcomed this announcement and have started pouring in investments into related projects. However, the path to achieving the targets does have obstacles other than investment, such as lack of speedy financing and poor energy transmission.

At the time of the 2015 elections, Argentina was going through an energy crisis. Owing to a shortage of local energy generation, Argentina had been dependent on imports to meet its energy requirements post 2010. This was underpinned by lack of incentives for local and foreign investors to invest in the energy sector and the de-dollarization of energy tariffs (which prevented private, especially foreign investment into the sector, since most companies were not confident about the stability and value of the Argentina peso).

Also, despite Argentina’s abundance of renewable sources, the country’s energy mix was heavily dependent on non-renewable sources, which were imported from neighboring countries – gasoil from Venezuela and LNG from Bolivia. Thus, when pro-business candidate, Mauricio Macri, took office in 2015, his government adopted several reforms to uplift the country’s energy sector, with a prime focus of promoting the use of renewable energy. In October 2015, the Macri government introduced a new program called, RenovAr, to attract local and foreign investments in Argentina’s renewable energy sector.

argentina renewable energy

The RenovAr program aims to achieve 20% share of renewable energy in the energy mix by the end of 2025. It has also set a target of achieving 8% of its energy from renewable sources by the end of 2017 (which in absence of the government’s statements of the latter being achieved at the time of preparing this publication, it is fair to assume that the 2017 target was unlikely to have been met). These targets appear rather ambitious, considering that just recently, in 2016, only 1.8% of power demand in Argentina was supplied through renewable energy.

These targets appear rather ambitious, considering that just recently, in 2016, only 1.8% of power demand in Argentina was supplied through renewable energy.

The RenvoAr program has been designed to provide a host of fiscal benefits and financial support to companies interested in investing in the development of renewable energy projects. These include (but are not limited to) exemption of import duties for all projects commencing construction before the end of 2017; accelerated fiscal depreciation of applicable assets; early VAT refund for assets and infrastructure; exclusion from minimum presumed income tax for eight years from project commencement; exemption from dividend tax (subject to reinvestment in infrastructure); extension of income tax loss credits to 10 years; tax deduction of all financial expenses; tax credit on locally sourced capital expenditure.

However, the tax benefits were the highest for projects commencing before the beginning of 2018 and will diminish gradually up till 2025. In addition to these benefits, the government has set up a sector-specific trust fund called Trust Fund for Renewable Energy (FODER), to provide payment guarantees for all tendered power purchase agreements (PPAs) and to also support project financing. This further helps secure investors who have historically been hesitant to invest in Argentina. The government has allocated ARS 12 billion (US$860 million) to the trust fund. Also, the World Bank has approved US$480 million in guarantees to support the PPAs under the RenvoAr program.

Owing to a great deal of benefits and securities offered, the RenvoAr program has been modestly successful. In Round 1 of the RenvoAr program held in October 2016, the government awarded contracts for 1,142 MW capacity (through 29 contracts) instead of the initial plan of 1,000 MW. This was due to a great deal of interest in the auction, which received 123 bids for more than 6,300 MW. The awarded projects included 707 MW of wind energy projects and 400 MW of solar energy projects. The average prices for the projects were US$59.70/MWh for solar and US$59.40/MWh for wind.

The second round of auctions held in November 2016 (Round 1.5) witnessed equal success with a total capacity of 1,281 MW being auctioned off through 30 contracts. The 765 MW of wind energy was auctioned at an average price of US53.3/MWh, while the 516 MW of solar projects were auctioned at an average price of US$54.9/MWh, signifying a visible drop in prices over the two rounds. The auctions were expected to increase renewable energy contribution to Argentina’s energy mix to close to 6% and to bring in about US$3.5 billion in financing over the next two years.

Argentina’s Renewable Energy Potential

Wind Energy — Argentina has immense potential for wind energy generation. As per various estimates, a region that has an average wind speed of and above 5m/s has a good potential for wind energy generation. In Argentina, about 70% of its territories have an average wind speed of 6m/s, while one of the country’s regions, Patagonia, has an average wind speed of 9m/s. In fact, Patagonia is among the top three wind corridors globally.

Solar Energy — The northwest region of Argentina boasts of being among top four locations globally for having the greatest thermal solar power potential. About 11 provinces across Argentina have high potential for installation of photovoltaic panels, which is the most widely used solar generating technology in Argentina.

 

In addition, Argentina also has an immense potential to source energy from small-hydro, bioenergy, and biomass projects.

After two hugely successful auctions, the government had planned the third auction (Round 2) in summer 2017, however, the round was later pushed to November 2017 due infrastructure bottleneck. The country has limited transmission nodes in areas with good wind and solar potential and also require to boost the transmission infrastructure to go hand in hand with the RenvoAr program. About 5,000 kilometers of transmission lines would be required over the next three years to match the expanding capacity.

In addition to avoiding infrastructure bottlenecks, the government pushed back the next round of auctions to ensure there were no financial bottlenecks as well. With the winners of the 2016 auctions still seeking financing by mid-2017, the government did not wish to start another auction before the earlier projects were structured.

The Round 2 of the auction (which was held in November 2017) also saw significant success and auctioned off about 2,043 MW capacity instead of the initially planned 1,200 MW. The tender was largely oversubscribed and received 228 bids representing 9,403 MW of capacity. The auctioned bids included about 816 MW of solar power capacity at an average price of US$43.46/MWh and about 993 MW of wind energy at an average price of US$41.23/MWh. This round is expected to bring in a further US$2.5-3 billion in investment.

While the three rounds of auctions can easily be termed as success, it is important to note that most contracts were bagged by local players instead of large international players (such as Spain’s Acciona and US-based AES Corp). This was primarily because large international companies still consider Argentina to be a slightly risky market and the price quoted by them reflected this risk (whereas most local players quoted much lower prices).

Moreover, with every proceeding auction, the average price declined significantly (from US$59.70/MWh and US$59.40/MWh for solar and wind, respectively in October 2016 to US$43.46/MWh and US$41.23/MWh in November 2017). Following this trend, the ceiling for the next auction have been announced as US$41.76/MWh for solar and US$40.27/MWh for wind (however, the date of the next auction has not been announced). This raises major concern, especially for international players, that the prices have declined to a point where projects may not be economically viable. This is valid considering that the Argentinian market holds some risk as well (the country has a credit rating of B+ as per S&P and B3 as per Moody’s). Lower prices may also act counter-productive because in case the winning projects fail to get financing in accordance with the low output prices, the overall confidence in the renewables program may fall.

Lower prices may also act counter-productive because in case the winning projects fail to get financing in accordance with the low output prices, the overall confidence in the renewables program may fall.

However, international players can come into play with regards to president Macri’s another policy that promotes generation and use of clean energy. As per a new rule passed in September 2017, large power consumers are allowed to directly meet their renewable power obligations (8% by 2017 and 20% by 2025) through private supply contracts. This is expected to further pour in investments worth about US$6 billion over the next three years and also lead to the installation of close to 4GW generation capacity. Several players, such as Argentina-based Luft Energia (which has partnered with US-based PE firm, Castlelake) are focusing on this route to enter Argentina’s lucrative renewables energy market, rather than competing in a price-war in the auctions.

EOS Perspective

Generation and use of renewable energy definitely holds an important place for president Macri and his government is definitely pulling many strings to advance the cause. The three rounds of auction up till now can be termed as success by almost any measure, however, it is too early to comment if the government will be able to reach its ambitious targets. While the RenvoAr program and the FODER trust fund provide real benefits and security to investors, the smooth and timely financing of these projects, especially with declining bidding prices, still remains to be a challenging task. Moreover, the lack of transmission infrastructure leads to further uncertainties regarding the program’s success.

The government has probably remained slightly short of its 2017 target of meeting 8% of its energy needs from renewable sources, however, it is on track to achieve its goal of 20% energy-mix being contributed by renewable energy. Thus, it is safe to say, that while Argentina’s renewable energy goal may be a little too ambitious, the government does seem optimistic about achieving it on the back of a solid incentive program, the World Bank’s support, and keen interest from foreign and local energy players.

by EOS Intelligence EOS Intelligence No Comments

EU-Mercosur FTA: Old Negotiations, New Zest

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The EU and Mercosur (a trade bloc comprising Brazil, Argentina, Uruguay, and Paraguay*) free trade agreement (FTA) negotiations date back almost two decades, to 1999. After failing to seal the deal in 1999 and again in 2004, the countries initiated new negotiations in 2010 and though started out slowly, they accelerated the process in 2016 (with hopes to finalize the deal by the end of 2017). A trade deal at this moment will be of significant importance to both sides owing to substantial amount of trade between the two blocs. The EU is Mercosur’s largest trading partner accounting for 21% of the bloc’s trade in 2015, while Brazil alone is the EU’s eleventh largest trading partner. However, despite a positive framework for the agreement to happen, there is still a great deal of resistance from few EU countries regarding the opening up of their agriculture sectors. Now it remains to see whether the two blocs can reach the much needed compromises and end up with an agreement by the end of the year or talks will remain hanging once more.
*Venezuela has been suspended from the trade bloc in 2016 and therefore is out of the negotiations

While this may not be the first time the EU and Mercosur sit to negotiate the terms of an FTA, it definitely seems to be the most promising one. The main reason the earlier efforts have gone in vain was the Argentinian leftist government’s adverse stance on trading outside their own backyard. This changed with the election of president Mauricio Macri in December 2015, who unlike his predecessor (Cristina Fernandez de Kirchner), looks at international trade as a growth opportunity for Argentina. Similarly, the impeachment of the Brazilian president Dilma Rousseff in May 2016 resulted in a new political wave in Brazil. While Brazil’s former president did take small steps towards trade liberalization, her successor, Michel Temer, has accelerated this process and has made the EU-Mercosur deal one of his top priorities.

Another reason this deal has gained immense importance for the Latin American bloc has been a declining bilateral trade among Mercosur’s two largest members, Argentina and Brazil, owing to recession. Trade between the countries declined from US$36 billion to US$22 billion during 2013-2016. This has forced the two nations to soften their stance on global trade.

Considering these developments, as well as the changing political and trade dynamics between several Latin American countries and the USA, following the arrival of Trumps administration at the White House, Mercosur’s openness and renewed interest in strengthening international trade ties is fully understandable. We wrote about it in February 2017 in our article Trump in Action: Triumph or Tremor for Latin America? and again later in June 2017 in Japan Hopes to Get a Slice of Mercosur Opportunity Cake as LATAM Exports to USA Decline.

On the other side of the negotiations table, as the EU has maintained a positive outlook towards foreign trade in general, the lost prospect of a Trans-Atlantic Trade and Investment Partnership with the USA under Donald Trump has also reinvigorated EU’s interest in the Mercosur FTA. Moreover, the EU views the deal with Mercosur as a suitable counter-measure to the growing Chinese influence in Latin America.

Apart from these aspects, the main reason for renewed commitment to the deal by both sides is the significant and increasing level of trade and investment between the two blocs. In 2014, EU’s investments in Mercosur countries reached US$494 billion. The EU’s exports to Mercosur expanded from about US$24.6 billion (€21 billion) in 2005 to about US$54 billion (€46 billion) in 2015. Similarly for Mercosur, its exports to the EU increased from US$37.5 billion (€32 billion) to US$49 billion (€42 billion) during the same period. Agriculture products constituted 48% of Mercosur’s exports to the EU, while machinery (29% of exports) and vehicle and parts (17% of exports) were EU’s largest export categories to the Latin American bloc.

The EU stands to gain a great deal from the FTA. As per current calculations, EU exporters would save about US$5.2 billion (€4.4 billion) annually on trade tariffs and stand to double their exports within five years of reaching a deal.

Despite hefty trade benefits and a lot of political and economic factors being in favor of the deal, agriculture remains a sore point. Several EU countries, led by France, do not want to open up their agriculture sector to Mercosur’s exports as they feel their domestic produce (especially grains and meat) cannot compete with that of Brazil and Argentina in terms of price. In addition, they are concerned that Mercosur’s agricultural produce are not subject to the same health standards as their domestic produce.

A quick glance at the average production costs indicates that the EU farmers have a reason to worry. As per estimates, if the deal comes through, the amount of maize available in Brazil and Argentina for export by 2020 will be between 23 and 26 million tonnes. While the average production cost of cereal in Mercosur is close to US$94/ tonne (€80/tonne), it is about US$141/tonne (€120/tonne) in the EU. This is likely to result in substitution of EU-grown maize with that from Mercosur, which will most likely result in a loss of about US$2.3 billion (€2 billion) by 2020 for EU’s agriculture sector. In addition, it can be expected to result in an indirect loss of about US$1.2-3.5 billion (€1-3 billion) as Mercosur-produced maize is likely to also replace wheat for animal feed during high production and harvest months.

In case of meat products, beef produced in Mercosur is more competitive than EU’s beef in terms of pricing. Moreover, a study of the usual trend of beef quotas suggest that they are first filled with noble cuts exports (including filet, entrecote, and rump steak) followed by other hindquarter cuts (such as topside and silverside). In case the deal takes place, it is expected that Mercosur’s beef will largely substitute local beef produce with Mercosur’s export volume (keeping in mind higher quantities of noble cuts, such as Hilton beef) expecting to reach 1 million tonnes. These would be worth US$18.8 billion (€16 billion) and would directly impact the local production and sales value. To bring this into perspective, the value of Brazil’s beef exports (the largest beef exporter among the Mercosur countries) to the EU was US$485 million in 2016. Moreover, low-priced imports from Mercosur will put pressure on the pricing in the domestic EU market resulting in close to a 30% downward price revision, which in turn is highly likely to result in further losses of about US$10.6 billion (€9 billion). In case the EU agreed to 300,000 tonnes at zero duty, this would expectedly result in US$3.5 billion (€3 billion) in direct costs and US$7.1 billion in indirect costs (€6 billion).

In addition to this, there are several non-tariff related issues with Mercosur’s produce, such as lack of tagging and traceability of livestock to identify and guarantee origin. Also, several drugs, such as hormones and growth promoters, as well as few antibiotics and insecticides that are banned in the EU are legally used in Mercosur. These factors have resulted in countries such as France, Ireland, and Poland opposing the EU-Mercosur FTA.

Another source of disagreement for the EU lies in the trade of sugar and ethanol, which the European producers claim should be excluded from the list of freely-traded items. This stems primarily from the fact that the Brazilian government provides subsidies worth US$1.8 billion annually to its ethanol and sugar producers, a fact providing them with an undue advantage compared to the European counterparts.

On the other hand, Mercosur is discontent with EU’s limited concessions on agricultural imports and its stance to continue quotas on the Mercosur’s food imports. Mercosur also has some concerns regarding providing the EU with access to public tenders, which in Brazil alone are worth about US$176 billion (€150 billion), however, they are positive that they will be able to reach a consensus during negotiations.

While few points of contention remain, negotiators at both ends are keen on resolving these issues and signing the deal by the end of 2017, remaining aware of the significance of this deal for both the sides as well as of the tendency for these talks to remain unresolved if not pushed soon. Moreover, both sides want to exploit the current favorable political scenario in Brazil and Argentina. With Brazil heading for presidential elections in 2018, the chances of a leftist-government coming to power do exist, and this can again put the deal in danger if it is not completed by then. Both sides of the negotiating table want to reach an agreement sought-after for the past 20 years as early as possible, even if it means compromising on some expectations.

EU Mercosur FTA Old Negotiations New Zest

EOS Perspective

A goal of completing the deal by the end of 2017 seems like quite a gun to the heads of both the blocs, as past experience, both in the case of this deal as well as other FTAs, proves that the process is never quick nor simple. Moreover, the EU seems somewhat divided on the deal, with Spain, Portugal, and Germany advocating for it and France, Poland, and Ireland opposing it. That being said, this deal – which has been on and off again and again since 1999 – has never been as close to getting finalized as it is now. This is primarily due to the fact that both Argentina and Brazil (that were the two main factors holding the deal back all these years) are extremely keen on reaching this agreement with EU, to the extent that they may be willing to compromise quite a bit as long as the deal includes provisions that leave room for future improvements and it brings increase in trade and thus growth for local economies. However, it remains to be seen whether they will be willing to stretch their compromises far enough to agree to the EU’s terms on the agriculture produce trade. At the same time, it is not clear how much the EU is going to push for these provisions, so there is a chance that both parties will manage to reach a well-rounded deal for both the sides. The least probable scenario is that the deal will come to a stand-still once more, however till the ink dries on the deal, nothing can be considered as certain.

by EOS Intelligence EOS Intelligence No Comments

Japan Hopes to Get a Slice of Mercosur Opportunity Cake as LATAM Exports to USA Decline

In early May 2017, representatives from Japan and Mercosur, a sub-regional alliance consisting of Argentina, Brazil, Paraguay, and Uruguay, met to discuss trade and investment between the nations with the aim to promote free trade and fluid movement of goods. Over the past years, business between Mercosur and Japan has been badly affected mainly by outdated trade policies that have not been revised in a long time. To improve economic relations between Japan and member countries of Mercosur, trade policies need to be renewed and new sectors of investment should be explored.

In 2016, Japan exports to Mercosur nations reached US$3.5 billion and imports from Mercosur totaled US$7.6 billion. Both exports and imports drastically reduced since 2012, taking a hit of 52% and 42.8%, respectively.

Japan and Argentina

After a decade of slow business dealings, trade relations between Japan and Argentina are showing signs of improvement. The number of Japanese companies operating in Argentina reduced from 120 in the 1990s to 54 by the end of 2007. However, the interest of Japanese businesses in the Argentinian market has started to return since the last quarter of 2015, with 78 companies currently in operation in Argentina, and Japan aims to have a minimum of 200 Japanese companies operating in the coming years. According to Japan External Trade Organization (JETRO), in 2016, Japanese exports to Argentina stood at US$630 million, primary exports being machinery and electronics. Imports to Japan were worth US$762 million in the same year.

In order to boost Argentina’s economy, president Mauricio Macri has focused on reviving infrastructure projects in the country. Taking an advantage of this opportunity, Japanese trading companies are keeping a close watch on upcoming rail contracts. Marubeni Corporation, Mitsubishi Corporation, and Mitsui & Co., three of the largest trading companies in Japan, are interested in sales of passenger rail cars in Argentina and planning on submitting bids as part of the new proposed projects. Japanese companies plan to invest between US$6 billion and US$9 billion in Argentina during 2017-2020. The investments are likely to be made across various sectors including mining, energy, and agriculture, among others. With more sectors now open to investment, Japan hopes to boost trade in the broader Latin American market.

Japan and Brazil

Brazil is a large investment market for Japan. With close to 700 Japanese companies currently operating in Brazil, the commercial and industrial opportunities the country offers are unquestionable. In 2016, Japan imported goods worth US$6.7 billion from Brazil, a drop by 10.6% over the previous year when the imports stood at US$7.5 billion. Japan and Brazil are now partnering to strengthen trade and investment between the two countries to spur increase in trade.

Brazil offers Japan a considerable investment opportunity in infrastructure projects. After the Cooperation Agreement for the Promotion of Infrastructure Investments was signed in October 2016, investment in areas such as transportation, logistics, information technology, and energy is expected to increase. At the same time, Japan is a large market for Brazilian agricultural products such as soy, corn, and cotton, but Brazil is also interested to enter the fruit and beef market in Japan. While discussions and negotiations regarding the entry of Brazilian products in the Japanese market are still under way, issues related to hygiene and sanitary standards still need to be addressed.

Japan and Paraguay

Paraguay is one of the least explored countries in terms of trade by Japanese firms. Between 2011 and 2014, only some 10 Japanese companies established operations in Paraguay. Japanese exports to Paraguay stood at US$77.5 million in 2016 while imports from Paraguay were reported at US$41.6 million during the same year. Japanese companies plan to invest in Paraguay to improve business and generate revenue in sectors such as infrastructure, agriculture, and energy, which are seen as areas of opportunities in the future.

Japan and Uruguay

In January 2015, the countries signed a Japan-Uruguay Investment Agreement – the first investment agreement between Japan and any member of Mercosur. Uruguay has become an attractive destination for Japanese investors mainly due to the country’s economic and political stability, low level of corruption, and easy inflow of FDI in the country. Additionally, Japanese companies are provided with the same opportunities and conditions as domestic firms. Uruguay offers the benefit of being able to serve as a distribution hub and boasts of good logistical services to other Mercosur countries – Japanese companies are likely take this as an opportunity to develop an overseas base to strengthen business ties within the region. Uruguay largely depends on natural resources such as wind, water, solar, and biomass to produce energy, making the renewable energy sector in the country another attractive area for investment by Japanese companies in the coming years.

EOS Perspective

The arrival of Trump’s administration leading to USA’s withdrawal from Trans-Pacific Partnership and focus on encouraging domestic industrialization by limiting imports from countries across Latin America, have resulted in several LATAM countries’ attempts to improve and tighten friendly trade relations within their own region as well as with new partners globally, including Asia – we wrote about it in our article Trump In Action: Triumph Or Tremor For Latin America? in February 2017. Japan appears to be willing to use this situation to its advantage by renewing trade and investment policies with Mercosur nations as well.

In the past five years, exports and imports value have declined continuously between Japan and Mercosur nations, and to reverse this declining trend and to revive trade, Japan started to build new trading relationships with Mercosur countries. If successful, this initiative is likely to serve two purposes – firstly, Mercosur countries can reduce dependence on the USA and move towards new markets to look for new opportunities, and secondly, through increased investment in Mercosur, Japan can become a prominent player in the region to reap benefits from engaging in business with several emerging countries.

by EOS Intelligence EOS Intelligence No Comments

Universal Healthcare Is Needed, but Isn’t Enough – Assessment of Public Health Insurance Targeted at Vulnerable Populations in South America

Ensuring an equal access to healthcare services that are affordable and of decent quality has increasingly been on the agenda of several developed as well as developing countries across the world. Throughout 2014 and 2015, we published a series of articles focusing on the South Asian region, in which we looked into various aspects of the universal healthcare in The Philippines, Cambodia, Vietnam, and Indonesia, followed by our final article in the series presenting holistic view on bridging the health insurance coverage gap in the region. But South Asia is not the only region working to achieve improvements in the functioning of healthcare systems and the universal health insurance coverage. In South America, where universal healthcare is more prevalent and public health insurance coverage gap is narrower than in most Asian nations, several countries have shown a range of approaches to enhance the equality to access and quality of services within their public healthcare. While the approaches differ, the common focus across the region has been to broaden the inclusion of particularly vulnerable groups of populations, such as the poor, elderly, and the unemployed. We are taking a look into public healthcare systems in selected countries to asses their strength in terms of catering to these beneficiaries.

As universal healthcare systems are unrolled and implemented to include large part of the country’s population, regardless of the geography, a well-functioning public health insurance system must focus on two important components: clear classification of its beneficiaries and appropriate structuring of the healthcare services financing.

In order to ensure the right terms of access to the public healthcare system, a country’s population that can benefit from such public insurance is typically segmented into various groups, such as the working population, grey economy workers, poor population, and the senior citizens. The strength of a public health insurance system lies in its ability to effectively target these various groups with dedicated plans and schemes, as these sections of the population may have different healthcare needs.

A public health insurance system is usually financed through government funding and contributions from the employed population (which apart from the formally-employed population can also include informal sector), with most of the public funding directed at subsidizing the healthcare for poor citizens and other underprivileged groups (depending on their proportion in total population). A system with specific coverage targeted at each of these groups is likely to be more efficient in terms of generating required finances, redistributing them according to beneficiary requirements, and in channeling healthcare resources.

South American countries are known for their inclination to provide or to work towards providing universal healthcare to their citizens. While the shared focus across the region has been to improve equity in access and financing of health services, in several cases leading to tangible positive health outcomes of the populations, public health insurance systems in most of these countries have evolved over a period of time to their current state through experimentation and deliberations over various policies to achieve a system that works best in the local scenario.

South American countries adopted various models to develop and enhance their public healthcare systems and, based on respective exigencies, their public health insurance systems are unique. Despite these differences, a broad level country comparison is possible on the basis of some common parameters, to evaluate how healthcare needs of key population groups are addressed in these countries. This comparison indicates the relative strength of public health insurance systems from the target beneficiaries’ point of view.

Comparative View of Public Health Insurance

Relative Strength of PHI


EOS Perspective

As South American example indicates, the development and implementation of universal healthcare system is not a solution as such, but rather a first step to ensure that healthcare needs of all population groups, especially the vulnerable ones, are well taken care of. Universal healthcare systems with no dedicated, targeted programs oriented specifically at certain groups in terms of type and availability of services, provisions and procedures, access to healthcare facilities, and assigned funding, are likely to be able to address needs of these groups only to a limited extend.

From beneficiary’s point of view, this results in unavailability of certain health services, lower trust in the system, and might simply lead to negative health outcomes of these populations. Given their limited financial abilities, these beneficiaries are unlikely to turn to private sector where their healthcare needs would be met (unless private insurance players, looking to fill gaps, with or without government collaboration, are able to provide cost-effective health insurance coverage, again targeted specifically at these groups).

by EOS Intelligence EOS Intelligence No Comments

Biofuels: From Crest to Trough?

For the past decade biofuels have been contemplated as a sustainable source of energy that could alleviate global warming problems. The biofuel industry has experienced rapid growth driven by strong government support resulting in policy mandates and subsidies. However, the bucolic scenario of biofuels may soon be overshadowed considering the ecological toll on farm land and food crops from its production. The question still remains if we are ready to imperil food crops to grow energy crops.

The biofuel buzz sparked in the 2000s when several governments across the world offered subsidized ethanol and biodiesel to make it cost competitive with gasoline and diesel, and investors acquired lands to produce feedstock, particularly in emerging economies.

Biofuels are promoted as alternatives to fossil fuels, however, it seems that this green energy facade is impinging on our food and environment needs. Turning plants into fuel or electricity comes across as an inefficient strategy to meet the global energy demand. Irresponsible farming practices — to grow corn to suffice biofuel needs — in countries such as the USA are likely to result in adverse temperature and precipitation conditions due to climatic changes that will shrink corn and wheat yields in coming 10-20 years.

Biofuel development certainly creates employment opportunities in economies, improves vehicle performance, and reduces dependence on crude oil imports. However, this comes at the expense of higher food prices as biofuels compete with food production by using crops and lands. Moreover, biofuel production does not generally result in reduced greenhouse gases, as emissions still occur causing pollution.

Further, biofuels are less cost effective than fossil fuels. For example, biomass costs about 20% more than coal. Also, biofuels have lower energy content as compared with fossil fuels, which allows vehicles running on biofuels to travel shorter distances than on the same amount of fossil fuel. The energy content of biodiesel is approximately 90% of petroleum, while ethanol is 50% that of gasoline. Consequently, travelers would require higher amount of fuel, if running on biofuels, which will increase their expenditures. With the government laws supporting blending of ethanol in petroleum, motorists in the UK (for example) are likely to pay about £460 million annually due to higher fuel cost at pumps and lower energy content of biofuels.

While the disadvantages of biofuels has been widely known, in the past couple of years, bioethanol and biodiesel production has grown rapidly in several countries, supported by various policies and government subsidies. Currently, some of the leading biofuel producing countries include the USA, Brazil, and Argentina. It is interesting to look at the socio-economic and ecological impact of biofuel production on these countries.

Impact of Biofuels on Top Producing Countries
Biofuels


A Final Word

To choose biofuels over fossil fuels is like entering into a race between food versus fuel. Countries such as the USA use 40% of corn harvest for fuels — devoting farmlands to energy needs instead of feeding people. With crude oil extinction almost 10 million years away, it is quite inappropriate to contaminate environment to yield economic benefits from biofuels. Biofuels have not lived up to the expectation and have ceased to provide lower carbon footprint, as they cause indirect emissions by ruining the farming land and vegetation. At a time, when demand for land is likely to grow 70% by 2050 to meet global food demands, it is highly wasteful to use the same land to suffice energy needs.

In April 2015, Renewable Energy Directive of the EU announced a cap of 7% on the contribution of food crops in biofuel production. Such initiatives will help to sustain a balance in food supply chain. In order to establish appropriate carbon footprint accounting, the European Commission has approved indirect emissions to be considered as part of a holistic picture of biofuel harmful effects. Moreover, the European Commission is likely to prohibit the use of first generation biofuel post 2020.

So, what’s the alternative to biofuels, or at least another source of energy that is more sustainable?

A sustainable solution to the problem could be clean renewable fuels like cellulosic ethanol, which is manufactured from inedible parts of plants. Greenhouse gas emissions from cellulosic ethanol are 86% lower than from petroleum sources. Companies such as DuPont are investing to build bio-refineries to manufacture cellulosic ethanol. The refinery is located in Nevada, USA and will produce 30 million gallons of cellulosic ethanol annually after commencing operations in 2016. Other avenues such as energy efficient batteries, fuel cells, and solar and wind energy for powering vehicles and factories should also be pursued. Companies such as Tesla, a US-based automotive and energy storage company, have made groundbreaking progress in manufacturing low-cost solar powered batteries that discharge to generate electricity for homes, businesses, and utilities. Solar and wind energy investments are at an all-time high, both across advanced and emerging markets.

Perhaps, the need of the hour is for governments to look at diverse sources of renewable energy as a whole, and invest in a way that is most effective and sustainable for the economies and the environment. Clearly, biofuels (as was perhaps once expected) is not the ideal solution to global energy needs.

by EOS Intelligence EOS Intelligence No Comments

Is New Legislation Enough To Transform Mexico’s Telecom Market?

When Mexico’s telecommunication market is under discussion, one name is sure to pop out – that of the world’s richest man, Carlos Slim, who through his companies (America Movil Telcel and America Movil Telmex), controls majority of the market. But now, with the government determined to break open this tightly-held market, it gave a first-ever nod to game-changing reforms that can boost foreign investment and competition. The question, however, remains whether the country is mature enough to take these reforms till the finish line.

In July 2012, when after 12 years the PRI Party (Institutional Revolutionary party) bounced back to power in Mexico under the leadership of Enrique Pena Nieto, there was little hope for any reforms in the country. This assumption was based on the party’s actions during its previous tenures, which were marked by electoral frauds, widespread corruption, economic mismanagement, and its success in blocking attempts at reforms proposed by previous presidents: Vicente Fox (2000-2006) and Felipe Calderón (2006-2012).

However, remaining under a growing pressure of frustrated and agitated general public asking for reforms and solutions the widespread mafia problem, PRI was forced to offer several promises during the electoral campaign. These included addressing the problem of unwarranted concentration and lack of competition in many sectors of the economy, and post election PRI had no choice but go ahead with at least some of its promised reforms. PRI’s-led government entered into an alliance, called the ‘Pact for Mexico’, with its opposition – National Action Party and the Democratic Revolution Party, to push reforms and encourage competition. After the overhaul in the labor laws and the education system, this Pact has been pushing for reforms in the country’s telecommunication and broadcast industry. These reforms look to provide a makeover to this previously quasi-monopolistic and inefficient sector, introducing several fundamental changes:

  • Firstly, opening the market to new international players by allowing 100% foreign ownership in the telecom sector (a rise from the existing 49% FDI limit)

  • Secondly, forming two new independent regulatory commissions to regularize the industry

    • Federal Telecommunications Institute, with profile similar to the U.S. Federal Communications Commission, to have the authority to check and punish non-competitive practices to the extent of withdrawing company licenses

    • Federal Competition Commission, created to fight monopolistic practices by ordering companies that control more than 50% of the market to sell off assets to reduce market dominance

  • The reforms also encompass the creation of a specialized court to oversee all competition, telecom, and media rulings

  • The previously existing Mexican law allowed companies to file private injunctions in order to block the regulator’s rulings aimed at improving competition in the market (while appeals were in progress); this loophole in law, which was misused by companies to indefinitely freeze inconvenient regulatory decisions, has been removed under the new legislation

Recently, Mexico’s Senate approved these changes, and passed legislation aiming at improving competitiveness in the telecom sector. While few key changes brought about by these reforms still need to be ratified by two-thirds of Mexico’s 31 states in order to become a law, this seems like a mere formality considering PRI’s dominance in provincial legislatures, as well as complete support from the opposition through the ‘Pact for Mexico’. The legislation is thus expected to go into effect by early 2014.

These reforms aim primarily at improving market dynamics in this $30billion annually industry, by facilitating competition, encouraging foreign investments, pushing down prices, and increasing mobile penetration, which (currently at 85.7%) stands much lower than 100%+ penetration in its neighboring Argentina and Brazil. However, the new legislation spells trouble for the current monopolies in this sector – America Movil Telcel (that accounts for 70% of the mobile market) and America Movil Telmex (that accounts for 80% of landline market). Both these companies operate as subsidiaries of America Movil, which is owned by world’s richest man, Carlos Slim.

The reforms seem to be particularly beneficial for international telecom companies operating in neighboring lands, who have been shy of entering the Mexican arena owing to the 49% limit on foreign investments. These players can look to buy companies such as Axtel and Maxcom Telecommunications, to get their hands on the fiber-optic cables placed across Mexico, thus hinting towards a wave of consolidation activities in the medium term.

However, despite ongoing efforts by the government, the success in this industry is not guaranteed. Firstly, the fixed line market is expected to remain devoid of foreign investment, owing to the overall decline of the industry globally, and the local Telmex’s 80% share in the market. Moreover, the impact of the reform would only be assessed on how it is brought to force (i.e. if it is implemented in its current form by the legislatures of the 31-states) and also upon how well is it enforced by the independent bodies (Federal Telecommunications Institute and Federal Competition Commission), as previously the industry suffered mostly due to law loopholes and poor implementation of these laws by authorities.

Moreover, reforms similar to those in the telecom industry have been implemented in the television industry, where Televista holds 70% market share. While these reforms (in both the telecom and the television industry) are expected to weaken the hold of the monopolies in their respective markets, it provides them with an opportunity to strengthen their existing presence in each other’s market. (Carlos Slim’s America Movil is a leading player in the pay-TV sector in Latin America, having a subscriber-base of 15million viewers and Televista, along with Azteca, owns Lusacell, the third largest mobile network in Mexico.) Thus, it is feared that instead of stirring foreign investments and competition, these reforms might just result in these incumbent monopolies swapping market share among themselves.

While the majority of the nation rejoices at these reforms and eagerly awaits an influx of investment and increase of competition that could push down the prices, it is premature to predict the long-term outcome of the new legislation. The country is on a correct path to build competitiveness in the telecom sector, but considering the level of corruption and red-tapism in the nation, it seems clear that what matters even more than the reforms themselves, is the way they are implemented.

by EOS Intelligence EOS Intelligence No Comments

Mexico – The Next Automotive Production Powerhouse?

As the first of our five part automotive market assessment of the MIST countries – Mexico, Indonesia, South Korea and Turkey, we discuss the strengths and weaknesses of Mexico as an emerging automotive hub, and the underlying potential in this strategically located gateway to both North and South America.

Emergence of Mexico as a major automotive production hub is the result of a series of events and transformations over the past decade. The most important of which is the growing trend among automotive OEMs and auto part producers to have production bases in emerging economies. And the earthquake in Japan in 2011 tilted the tide in favour of Mexico just as ‘near-shoring’ was already becoming a key automotive strategy in 2011.

Automotive production in Mexico increased by 80% from 1.5 million in 1999 to 2.7 million units per year in 2011, largely thanks to a significant boost in investment in the sector.

Between 2005 and 2011, cumulative foreign direct investment (FDI) in the automotive sector amounted to USD10.3 billion. In the last year, several automotive OEMs have initiated large scale projects in Mexico; some of these projects include

  • Nissan – building a USD2 billion plant in Aguascalientes; this was the single largest investment in the country in 2012 and should help secure the country’s position as the eighth largest car manufacturer and sixth largest car exporter in the world

  • Ford – investing USD1.3 billion in a new stamping and assembly plant in Hermosillo, New Mexico

  • Honda – investing USD800 million in a new production plant in Celaya, Guanajuato

  • GM – investing USD420 million at plants in Guanajuato and San Luis Potosi

  • Daimler Trucks – investing USD300 million in a new plant to manufacture new heavy trucks’ transmissions

  • Audi – has decided to set-up its first production facility across the Atlantic in Mexico; with planned investment outlay of about USD2 billion, this move by Audi represents a significant show of trust by one of the world’s leading premium car brands

  • Mazda – building a USD500 million plant in Guanajuato; it has reached an agreement to build a Toyota-branded sub-compact car at this facility and will supply Toyota with 50,000 units of the vehicle annually once production begins in mid-2015

Bolstered by this new wave of investment, Mexico’s vehicle production capacity is expected to rise to 3.83 million units by 2017, at an impressive CAGR of 6% during 2011-2017.

Why is Mexico attracting such large levels of investment from global automotive OEMs? Which factors have positively influenced these decisions and what concerns other OEMs have in investing in this North American country?

So, What Makes Mexico A Favourable Destination?

  1. Trade Agreements – Mexico has Free Trade Agreements (FTAs) with about 44 countries that provide preferential access to markets across three continents, covering North America and parts of South America and Europe. Mexico has more FTAs than the US. The FTA with the EU, for instance, saves Mexico a 10% tariff that’s applied to US-built vehicles, thereby providing OEMs with an incentive to shift production from the US to Mexico.

  2. Geographic Access – Mexico provides easy geographical access to the US and Latin American markets, thereby providing savings through reduced inventory as well as lower transportation and logistics costs. This is evident from the fact that auto exports grew by 12% in the first ten months of 2012 to a record 1.98 million units; the US accounted for 63% of these exports, while Latin America and Europe accounted for 16% and 9%, respectively (Source – Mexican Automobile Industry Association).

  3. Established Manufacturing Hub – 19 of the world’s major manufacturing companies, such as Siemens, GE, Samsung, LG and Whirlpool, have assembly plants in Mexico; additionally, over 300 major Tier-1 global suppliers have presence in the country, with a well-structured value chain organized in dynamic and competitive clusters.

The Challenges

  1. Heavy Dependence on USA – While it is good that Mexico has established strong relations with American OEMs, it cannot ignore the fact that with more than 60% share of its exports, the country is heavily dependent on the US. The country needs to grow its export markets to other countries and geographies to hedge against a downturn in the American economy. For instance, during the downturn in the US economy in 2008 and 2009, due to decline in sales in the US, automotive production in Mexico declined by 20% from 2.17 million in 2008 to 1.56 million in 2009. Mexico has trade agreements with 44 countries (more than the USA and double that of China) and it needs to leverage these better to promote itself as an attractive export platform for automotives.

  2. Regional Politics – Mexico is walking a tight rope when it comes to protecting the interests of OEMs producing vehicles in the country. In 2011, Mexican automotive exports caused widespread damage to the automotive industries in Brazil and Argentina and in a bid to save their domestic markets, both the countries briefly banned Mexican auto imports altogether in 2012. Although, later in the year, Mexico thrashed out a deal that restricts automotive imports (without tariffs) to its two South American neighbours rather than completely banning them, it does not augur well for the future prospects of automotive production in Mexico. One of the reasons automotive OEMs were expanding their capacity in the country was to be able to cater to the important markets in Latin America, particularly Brazil and Argentina. Now the Mexican government has the challenge of trying to keep everyone happy – its neighbours, the automotive OEMs and most importantly its own people for whom it might mean loss of jobs and income.

  3. Stringent Regulatory Environment – The Mexican government, the Mexican Auto Industry Association and International Automotive OEMs are locked in a tussle over the government’s attempts to implement fuel efficiency rules to curb carbon emissions. Mexico has an ambitious target of cutting greenhouse gas emissions by 30% by 2020, and 50% by 2050. The regulations are similar to the ones being implemented in the USA and Canada, however, the association has complained that the proposal is stricter than the US version. Toyota went as far as filing a legal appeal against the government protesting the proposed fuel economy standard. Although the government eased the regulations to appease the automotive OEMs in January 2013, the controversy highlights resistance by the country’s manufacturing sector to the low-carbon regulations the government has been trying to introduce over the past few years. Such issues send out wrong signals to potential investors.

So, does Mexico provide an attractive platform for automotive OEMs? From the spate of investments in the country so far, it seems so – over the past few years, the country has finally begun to fulfil that potential and is now a key driver in the ‘spreading production across emerging economies’ strategy of companies looking to make it big in the global automotive market. However, there are still a few concerns that need to be addressed in order for Mexico to become ‘the’ automotive manufacturing hub in the Americas.

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In our next discussion, we will assess the opportunities and challenges faced by both established and emerging automotive OEMs in Indonesia. Does Indonesia continue to be one of the key emerging markets of interest for automotive OEMs or do the challenges outweigh the opportunities?

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