TO READ THE BRITISH PRESS, you would think the only things worth hearing about Argentina (after its reliability in producing world-class footballers) are the political class and its preoccupation with the Falkland Islands.
But though the bickering over sovereignty comes and goes with the regularity of mid-Atlantic storms, one of the untold stories is the UK’s success in sending its goods and services to the home of Eva Perón and the gaucho.
In 2011, a year in which UK economic growth was less than 1%, and the eurozone crisis prompted economists and politicians alike to exhort commerce to find alternative export destinations, British exports to Argentina grew by an impressive 16%. The message had been heard and exporters had begun working outside Europe with gusto.
However, the success of the burgeoning UK-Argentine business relationship has been thrown into jeopardy by a dramatic change in the attitude of Buenos Aires to imports. Indeed, the country’s leaders have done their best to shut down a good deal of cross-border trade with a policy that appears to owe more to populist protectionism than it does to reasoned economic policy, resulting in a damaged economy and frustrated business people across Argentina.
Gabriela Castro-Fontoura, an export consultant working with UK businesses shipping to Latin America, says: “The whole protectionism issue is from 50 years ago. They are really contracting their growth. Argentina is suffering.”
And that’s a shame because, excepting the occasional flare-up in the ongoing Falklands row, things had been going well for Argentina. Following the economic melt-down of the early noughties and the country’s vast sovereign debt crisis, the country and its economy were back in the saddle. Between 2003 and 2011, Argentinian GDP grew by an average annual rate of 7.8%. After a stumble in 2009 when growth plummeted, it reached the heady heights of 9.2% in 2010 and 8.9% a year later. Imports have also been seen to grow at impressive levels, clocking up a 42% rise in 2011. The country’s economy was growing fast and had an apparently insatiable appetite for overseas goods and services. It is the 19th largest economy in the world, has a distinctly European outlook, and boasts a business sector that was functioning enthusiastically.
But that all came to abrupt end in October 2011 upon the landslide re-election of president Cristina Fernández de Kirchner. Faced with growing public expenditure and twitchiness over the levels of dollar reserves to settle sovereign debt,-- Kirchner and her commerce secretary Guillermo Moreno decided to clamp down on imports. Hard.
The result? Growth plummeted. Final figures for 2012 are expected to show it reached only 2.6%, though a rally to 3% is forecast for 2013.
What Kirchner and Moreno did was introduce the now notorious import permission regime, which combined a heavy-handed approach to closing down chunks of cross-border trade with an apparent arbitrary attitude to what would be allowed to cross the country’s borders. Those who experienced the period speak of a raft of new rules, sometimes unarticulated, that seemed to change what could and could not be shipped - on a whim and without reason. Some goods would get in; others wouldn’t. Shipments could be cleared by customs efficiently or they could sit waiting for months.
Rice and paper cups
The core rationale was that goods that could be produced in Argentina should not be imported and goods should be balanced by an equal value in exports when they were brought in. The approach has led to some unlikely business deals.
To keep the door open for their high-performance cars, BMW became an Argentinean exporter of processed rice. Subaru ships out chicken feed, Mitsubishi peanuts, and Porsche trades in olives and Malbec wine. Last year, Businessweek cited the case of a local bicycle maker who began exporting agricultural parts so he could import gears from Shimano in Japan. Starbucks came a cropper when it was stopped from importing its paper cups and was forced to source what some described as inferior products from local suppliers (the issue became a local PR disaster when the chain appeared to apologise for the quality of the Argentinian mugs on Twitter). Other brands simply closed the storm shutters. Both Cartier and Louis Vuitton felt forced to lock the doors of shops in the capital.
Recent communications have given reason for optimism, though. In January, Buenos Aires announced the import regime would be reformed, though how and when remain a mystery. And there are those who still see Argentina as an attractive destination, even if it is one with its own peculiarities.
“Argentina is an exciting market but not one without complications or red tape. UK companies and products are well received and the market is prepared to pay higher prices for them as they are perceived as coming along with good quality, service and longer life spans,” says Alfredo Ferreira, the deputy director of trade and investment at the British Embassy in Buenos Aires.
In some ways, a veneer of stability has settled on Argentine imports though it is still subject to a degree of capriciousness. Experts make plain that attempting to move “retail” or “consumer” goods into the country is a lost cause, unless you’re willing to follow BMW’s lead. Largely acceptable, however, are capital goods - contributions to infra-structure or services such as consultancy (it’s much harder to regulate advice).
Chief among the British exports to Argentina are pharmaceuticals, chemicals, power-generating equipment, industrial machinery and scientific instruments. Anything that adds value.
Sheffield Forgemasters ships vast steel rolls (160 tonnes) to Argentina for use in the production of aluminium sheets. CFO Neil Maskrey says the company, which exports 90% of its production, now has a flourishing market serving the country’s two largest local smelters -- Aluar and Metallurgica Oliva - with products that he says push the “boundaries of technology” and “add value”.
“Everything we do is at the high end of the market. Our customers recognise that,” he explains.
And that’s a key insight for would-be UK exporters. Adding value counts. But Maskrey observes that access to what he describes as “blue-chip” clients comes on condition. One being representation by a quality local agent. Maskrey says: “We use a number of agents and we rely on them and their local market intelligence.”
He’s not alone in that view. With such import regulations being as complex as they are, local knowledge is at a premium. According to Gabriela Castro-Fontoura, this is for two key reasons. Completion of the import paperwork has to be absolutely correct to appease pedantic local officials. And exporters need to know the market well and calculate whether it’s worth the investment. Even though the population stands at 40 million, wealth is concentrated. There may be relatively small markets for some products or services.
Castro-Fontoura calls the preparatory work “investment” because of the high cost of research. She estimates most export projects take a minimum of 12 months between first moves and shipping, and possibly a lot longer, a period that will cost in terms of travel and building the necessary personal relationships that are expected. Neil Maskrey says he travels extensively, but Castro-Fontoura stresses when talking about Argentina: “There are no quick wins” - and adds that the country is best suited to companies “with a strategic vision and the cashflow to sustain it”.
Market development costs can soon mount. Investigation into trademark and intellectual property legalities, and uncertainty around the import license arrangements, can make the cost difficult to forecast. A pricing strategy will have to be thought out too, as Argentine inflation currently runs at about 9%. Big local prices don’t necessarily mean big margins.
Import duties can be a hefty blow, charged as they are somewhere between three and 32%, and there is an additional tax of 5% of value (including shipping and insurance) on some goods. Other goods may attract punitive levies of 70-80%, depending on what they are, making the up-front research a must. “FDs get very frustrated,” says Castro-Fontoura - as calculating a return on investment can prove a moving target.
But if there is one thing that concerns some agents, it is corruption. While relationships with the private sector are considered clean and easygoing, there are warnings about the behaviour of some public officials. A survey in 2010 by Transparency International found that 12% of those polled locally had paid a bribe, 62% felt that corruption was increasing, and 77% believed that government efforts to deal with it were ineffective. This is important for British exporters that are governed by the UK Bribery Act 2010 which makes the bribing of foreign public officials a crime. Castro-Fontoura says it is one of her top five issues to be aware of in Argentina and has blogged that the country is known for it across Latin America.
That aside, Argentina remains a country open to Brits with a quality product or service to sell. Argentine business people are described as “skilfull negotiators” with great communication skills. Others describe them as genuinely creative in the way they will approach the details of deal.
Ferreira, at the British Embassy in Buenos Aires, sees the Argentine door as open to Brits: “It is a wealthy and sophisticated market that can afford to look beyond short-term costs or financial implications and will hence appreciate and recognise quality.”
Key facts: Argentina
GDP growth 2012: 2.5%
UK/Argentina exports: £414m
Argentina/UK exports: £589m
Primary imports: Chemicals, vehicles, industrial machinery, power generating equipment, beverages, professional and scientific instruments
Getting paid: Letters of Credit are recommended when starting operations; local customers may wish to move into other payment forms including advance payments
Negotiations: Be prepared to discuss all aspects of a contract simultaneously rather than sequentially; Make sure that you have a local lawyer for contract issues
Intellectual property rights: Manufacturers are strongly advised to patent their inventions and register their trademarks in Argentina.
Customs duties: Samples worth less than US$1,000 (AR$4,500) do not incur customs duty but do attract handling and storage charges. For samples over US$1,000 normal customs duties and clearance procedures apply.
Labelling: Labelling and packaging details should be agreed with the importer to avoid delays in clearing the goods.
Staffing: Wages are increasing substantially every year accompanying a real inflation of over 20% per year whilst the exchange rate remains stable
Legal environment: Foreign and Argentine companies are treated equally under Argentine law and regulations; legal processes in Argentina can be as expensive as in the UK but can take even longer
Source: UK Trade & Investment
Have similiar articles delivered to your email box
Please enter your email below to receive your profile link
Search by job title, salary, or location - we only list senior financial roles
08.45 AM, 20 Jun 2013
The FD Summit 2013 will feature some of the UK's most senior finance experts, speaking at the Intercontinental Hotel, Westminster
11am, 10 Jul 2013
This informative web seminar discusses how FDs need to proactively engage in developing employee benefits solutions for their organisations
Britain has the most competitive corporation tax regime in the G20. But is it so attractive when other forms of taxation are increasing? asks Calum Fuller...
Send to a friend