Move over China, Brazil challenges Aussie manufacturing

14 July, 2006

While Australian manufacturers are eyeing China and India as their main competitors in the global market, they should also be keeping a watchful eye on South America, according to a report by KPMG.

The report, Manufacturing in Argentina, Brazil and Chile: Challenges and Opportunities, which analysed the factors currently shaping the resurgence of South America’s leading economies - Argentina, Brazil and Chile (ABC), highlights their manufacturing potential against the much touted Asian giants.

In launching the report, KPMG’s Industrial Markets partner, Ian Dinnison, commented that Australian manufacturers needed to be aware of the challenge that the re-emergence of South American countries presented.

“There’s been a great deal of publicity around the threat from Asia to the Australian manufacturing industry. However, Brazil has the potential to offer real challenges to Australian manufacturers in the medium term.

“South America already attracts more foreign direct investment (FDI) than China and this is before they’ve really woken up from their slumber. Imagine what will happen when they get moving,” said Dinnison.

According to the KPMG report, when adjusted for population, the ABC countries have attracted more than four times the FDI per capita than China. According to the United Nations Conference on Trade and Development’s World Investment Report 2005, the cumulative investment stock in Argentina, Brazil and Chile stood at US$259,126 billion.

“In addition, the stock markets in Brazil, Chile and Argentina have all performed considerably better than the mature industrial economies of the G7 (excluding Japan), while the main stock index in China has fallen around 10 percent in local currency terms. The performance of stocks is by no means an infallible guide to the fate of economies but it does indicate that investors expect companies in those economies to be profitable in the near future.

“These countries pose a threat to Australian industry in two ways. First, they create greater competition in the export markets, particularly in North America. Second, they are selling their products into the Australian market. Over the past 18 months, we’ve noted an increase in local distributors who are sourcing products from South America,” said Dinnison.

Brazil was found to be the most desirable location in South America for direct manufacturing investment.

“President Lula’s business-friendly policy of reform and stabilisation in Brazil has been a major factor in making his country an attractive business destination. However, there is also a feeling from those interviewed that the continent as a whole has benefited from the difficulties which some companies have experienced in establishing themselves in the emerging Asian economies.

This is something which has prompted multinationals to look more favourably at South America,” said Dinnison.

The report also points out that Chile is easily the most attractive of the three locations purely in terms of infrastructure and regulation. However, it is geographically isolated and lacks the sheer scale of Brazil’s domestic market.

Argentina, while having made great strides in terms of offering a stable investment base, is still considered as a test case and seen with certain reservation as an investment destination.

“In the immediate post-World War II period, the entire South American region was widely seen as a coming economic superpower, much as China is today. It may be that we are now returning to that earlier view of the world. South America is once again poised to become a source of growth and innovation in the world economy and to potentially become a destination of choice for multinationals to invest,” said Dinnison.