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Country Risk Analysis- Latin America Automobile Industry

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Submitted By nishat110
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The automobile industry is growing rapidly with the introduction of newer technologies and car models. Latin America is quite a preferable location for auto manufacturers. Countries like Brazil, Argentina and Mexico are well known for manufacturing automobiles. As a Chinese automobile company who wants to set up their operation in Latin America, several major factors must be considered while selecting the country. Some of the factors which are considered when deciding on which country to invest are as follows: A. Infrastructure: Latin America lags behind in terms of infrastructure. This is a disadvantage for Latin America since it has a negative implication on its production and foreign direct investment. The proportion of paved roads in Latin America is comparatively low. i) Brazil: Brazil, the biggest economy in Latin America is ranked 104 in 2014 according to the “Global Competitiveness Report” by the World Economic Forum. This significantly increases the set up costs for new firms. ii) Argentina: Argentina lags even further behind Brazil in terms of infrastructure according to “Global Competitiveness Report” by the World Economic Forum published in 2014. This makes Argentina unsuitable for setting up new subsidiary. iii) Mexico: Mexico is ranked 73rd in the “Global Competitiveness Report” published in 2014, by the World Economic Forum. This shows Mexico is better in terms of infrastructure than Brazil and Argentina. Hence, Mexico will be the better choice compared to the other two countries. B. Barriers to Entry: Foreign Direct Investment has increased significantly in Latin America in the past decade but it does not make it easy for foreign firms to enter in their market. i) Brazil: Foreign firms are required to register and must have separate identification numbers and accounts for each fund. This increases the cost significantly for new entrants. According to Manning “From our perspective, it adds extra cost and takes extra back office time,” ii) Mexico: In terms of FDI, Mexico is more flexible than Brazil. The Market is large and liquid and with no capital control which reduces hurdle for foreign investors. Apart from this, the government ensures clear and transparent monetary and fiscal policy to attract more foreign funding. Hence all these make Mexico more suitable for investment. iii) Argentina: Market has tightened throughout the last decade in Argentina, which makes it unfavorable for foreign firms to enter. Investors are unwilling to invest in Argentina for fear of not getting their money out. C. Vehicle Production and Sale: Country Name | 2013 | 2014 | % change | BRAZIL | 3,712,380 | 3,146,118 | -15.3% | ARGENTINA | 791,007 | 617,329 | -22.0% | MEXICO | 3,054,849 | 3,365,306 | 10.2% |
MOTOR VEHICLE PRODUCTION BY COUNTRY (all vehicles)
From the above table we can see that production of vehicles have increased in Mexico by 10.2% whereas in Argentina and Brazil it has reduced by -22.0% and -15.3% respectively.

REGISTRATIONS OR SALES OF NEW VEHICLES - ALL TYPES Country Name | 2013 | 2014 | BRAZIL | 3,767,370 | 3,498,012 | ARGENTINA | 963,917 | 613,848 | MEXICO | 1,100,542 | 1,176,305 | From the above table it is seen that sales of vehicles is much higher in Brazil than Mexico. Although in Mexico sales of new vehicles is increasing whereas in Brazil it is decreasing. Hence Mexico shows more potential in terms of market growth, making it more lucrative for new entrants. D. Corruption and Political Risk Country Name | Ranking | Brazil | 69/175 | Argentina | 107/175 | Mexico | 103/175 |
From the above table it is seen that Brazil is less corrupt compared to the other two countries.
In terms of political issues all countries have similar risk.
Hence considering all options, Mexico would be the better option for setting up a new firm. Apart from it, through Mexico it is easier to gain entry to US auto market.

Reference: 1. (BlackRock, 2015) 2. (Heaton, 2012) 3. (CORRUPTION PERCEPTIONS INDEX 2014: RESULTS, 2014) 4. (OICA, 2014) 5. (OICA, 2015)
Bibliography
CORRUPTION PERCEPTIONS INDEX 2014: RESULTS. (2014). Retrieved June 9, 2015, from Transparency International: http://www.transparency.org/cpi2014/results
BlackRock. (2015, May 14). Does Latin America’s Weak Infrastructure Present an Opportunity? Retrieved June 9, 2015, from Yahoo Finance: http://finance.yahoo.com/news/does-latin-america-weak-infrastructure-140558243.html
Heaton, C. S. (2012, March 18). INVESTMENT: Barriers to entry. Retrieved June 9, 2015, from Emerging Markets : http://www.emergingmarkets.org/Article/2996937/INVESTMENT-Barriers-to-entry.html
OICA. (2014). REGISTRATIONS OR SALES OF NEW VEHICLES - ALL TYPES. France: OICA.
OICA. (2015). Production Statistics. Retrieved June 9, 2015, from OICA: http://www.oica.net/category/production-statistics/…...

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