- Paraguay: Rising star in Latin America
- “Hidden champion” offers excellent economic climate for business
- Benefits for suppliers
MUNICH, 14-10-2015 — /EuropaWire/ — A new Roland Berger report entitled “Paraguay’s market potential for the regional automotive supplier industry” examines a Latin American country that is still relatively unknown in the West. Authors Senior Partner Dr. Thomas Schlick and Project Manager Thomas Totzeck take an in-depth look at “new kid on the block” Paraguay.
Paraguay: The rising star
Landlocked to the north and south by Brazil and Argentina respectively (both of which are key production locations for the automotive industry) and currently achieving extremely high rates of economic growth, Paraguay is an attractive location for foreign partners and investors. The required political and economic stability has been brought about by a new government infrastructure program and a cosmopolitan mindset with regard to tying in local and regional industry to the global supply chain. Key economic figures speak for themselves: GDP in 2014 stood at USD 30.9 billion with growth in real terms of 4.4%. Inflation in 2014 came in at 5% with unemployment at 5.5%.
According to Thomas Schlick, the potential for the automotive supply industry is enormous. As he points out, “Strategically its position within the heart of the Mercosur (Spanish: Mercado Común del Sur, or Southern Common Market) consumption and production areas makes it perfectly placed to benefit from the largest automotive production clusters to the south and east of the country.”
Of the eight Latin American countries looked at by Roland Berger, Paraguay is relatively free from the troubles plaguing currency and commodities in the larger Latin American states. Its political stability is of course a further benefit for potential investors. Financially, there are very good reasons why foreign automotives should be looking more closely at Paraguay. As Project Manager Thomas Totzeck explains, “Paraguay is second only to Chile in terms of government debt as a percentage of GDP (16.6%) – low taxes, a simple tax structure, stable currency and a flexible workforce with a relatively low level of unionization all speak in favor of investment”. Nevertheless, Paraguay remains highly dependent on neighboring countries where the automotive OEMs are based.
A favorable environment for investors?
Potential investors in Paraguay require answers to the following five questions: 1) Does Paraguay offer an attractive business climate? 2) Is the infrastructure suitable for production? 3) Is there a cost-effective, educated workforce? 4) Is the regulatory and tax environment favorable? 5) Is the logistics setup suitable?
Independent studies confirm that Paraguay ranks among the top countries for starting and running a business in Latin America, (criteria included how easy it was to start a business, register property, deal with construction permits and so forth). The infrastructure of two regions in particular is worthy of mention. Both Central & Asunción and Ciudad del Este are highly developed – the former represents the industrial heart of Paraguay, whereas the latter is ideally located for dealing with Brazil. More than a third of the country’s 6.5 million population is between 15 and 24 years old. Labor costs are highly competitive as a result. According to one German entrepreneur, union activities are at a low level all over Paraguay, having limited impact compared to other Latin American countries. The attractive “Tributo Unico” tax of 1% is universally applicable to goods produced in Paraguay by a “maquiladora” (a factory run by a foreign company which exports its products back to that company’s country of origin). Just-in-time delivery to regional OEM clusters is feasible with delivery times ranging from one to three days.
Is Paraguay the hidden champion suppliers have been looking for in Latin America?
Automotive suppliers are not alone in their search for new production locations. Many key players in a number of other industries have long since made the decision to move to Paraguay – these include clothing, agro products and general industry, and of course automotive suppliers. Reduced production costs enable suppliers to compete with Asian rivals. However, labor-intensive production coupled with long-distance logistics is, at first sight, a task description that fits the automotive supply industry like a glove. In Paraguay’s case, significant influencing factors are the high inherent flexibility of the available workforce, the modest size and weight of products with sufficient lead times to cater for 1,000 kilometer transport routes, a limited dependency on electric infrastructure despite the fact that the power provision in metropolitan areas is generally stable and, finally, the opportunity to make use of tax incentives.
Summing up, Schlick and Totzeck identified the following opportunities and risks for automotive suppliers looking to invest in Paraguay. Opportunities include low labor costs, low taxation, an investor-friendly government, limited union influence compared to other Latin American states and the ability to produce within the Mercosur region. The risks include a high level of dependency on Brazil and Argentina, a workforce not used to working with high-tech products, a lack of local supply bases, limited infrastructure and limited attractiveness to expatriates in comparison to the other Latin American states.
The Roland Berger experts made four clear recommendations: Keep the whole of the Mercosur region in mind, focus clearly on target clients, be careful when selecting new locations and, finally, get local experts on board as early as possible. As Thomas Schlick says, “Paraguay is in many ways a hidden champion – but to be a champion it pays to box clever. The prize is there for the taking.”