Latin America’s reindustrialization … will we miss this chance again?

Article Latin Trade May 2021

Latin America’s reindustrialization …
will we miss this chance again?

Ingo Plöger
Brazilian Entrepreneur, President CEAL Brazilian Chapter

After major depressions, there are strong economic upturns.
The year of 2022 indicates that we will have global and regional growth, after the pandemic, above average.
The big surprises are that currently the global production chains are unbalanced and show great fragility due to the large regional concentrations, lack of flexible options and constant shortages. The electronic components, chips, wavers, show the complete lack of predictability and balance the demand. The automotive sector so far has not recovered, due to the lack of these components. But the demand for industrial products, also surprised the production chain of machinery and equipment, which received orders higher than expected by the consumer, pharmaceutical, civil construction and agribusiness industries, generating a demand much higher than expected in supplies. At the beginning of the pandemic, auto furnaces were extinguished, production lines for processing iron, aluminum, copper, plastics, packaging, among others, were deactivated. However, the catastrophe did not happen as planned, on the contrary. There were much higher demands in several segments.
This imbalance in the production chains has led the global industry to exercise crisis management not on the sales side, but on the supply side. Prices have risen and the scarcity of productive elements has become a priority and urgency crisis management.
In the first instant, the perception was that this would be fleeting, and after normalization after the pandemic, the “normal” would again be installed.
Nevertheless, in most global companies, this is no longer the prognosis. It was not the biggest or the fastest, but the ones that best adapted that did the best.
New investments retrieved out of the drawer; others already planned become reality. However, it is recognized that these imbalances were caused by different demands, suppliers concentrated in a few countries, early production withdrawal and lack of supply options. We will be less global and digital; this recognition makes the global production chain completely revised, decentralizing suppliers again and developing more creative, sustainable and diversified options in different regions.
Everything in Asia? in Europe, Japan, USA?
Some investments went back “home” even though they have higher and less competitive costs; others are looking for new locations to increase diversity and security.
The attention of strategic investors suddenly turns back to Latin America. For all the news and the low reputation that the Region has, suddenly the results are not so bad, the productivity indicators and the rapid adaptability shows its resilience.
The stock exchanges, IPO’s, Greenfields and reported M&A show this trend.
Countries like Peru, Chile, Paraguay, and Uruguay often mentioned, in spite of any insecurity that may appear in the news. Even Argentina is reference in Agribusiness and Energy. Brazil and Mexico, two locomotives in the Region receive several of these investees. It is interesting to note that it is the Multi-Latinas companies who “lead” the choir. On the international stage, Chinese companies continue to have a large appetite, followed by American and then European ones. The focus is on long production chains. It is important to differentiate the news from the facts, we have greater notoriety than those that leave Latin America (as in the case of Ford, Walmart among others) but if we look at the sectors, the companies investing in these sectors are much larger in volume than those that withdraw. Large enterprises are anchor companies in regional development, but in the matter of innovation, employability, sustainability, medium and small companies will make the difference. 1)
It is in this aspect that the policies of industrialization and resumption of development come into play. We have seen this scene in several Latin American development films that in the end did not end with a happy end…
Will we miss this opportunity again?
Latin American nations in the past 30 years have deindustrialized their continent early. In the name of globalization, and the stability of currencies and modernity, Central Banks have left the floating of their currencies with the bias of valuing them to face inflation, adding a policy of much higher interest rates than international ones. Relevant reforms were postponed for this “comfort”. This policy has in fact stabilized currencies, and has brought the Region’s indebtedness / GDP below that of developed countries, leaving economic indicators more favorable to investments. However, due to the permanent appreciation of their currencies and higher interest rates, international competitiveness, failing to benefit their commodities. Early deindustrialization took place, increasing the area of services in GDP without having a better per capita income, which occurred in most industrialized countries 2) . The social issue most demanded by the democratic force, made the State have a greater presence with worse services. Today we have an industrial underrepresentation and the benefit is still small, leaving a population of almost 450 million inhabitants with a per capita far below what is possible.
However, it seems that we will have a more favorable scenario ahead, due to the breakdown of the chains, which offer higher prices to commodities, and the general devaluation of the Region’s currencies at competitive levels. Exporting today makes sense, we give competitiveness to processing, and with greater employment in the industry a significant improvement in quality of life.
The question asked, until when? Is it sustainable?
The USA and Europe, when they get out of the crisis, will have higher interest rates and will continue to carry out monetary easing, devaluing their currencies in relation to others. Which will pressure our currencies to appreciate again. However, commodities will not reduce their prices as quickly and the trend of diversification of supply will benefit investments in Latin America.
If we do not want to miss this chance again, public policies for reindustrialization should focus on global production chains, local synergies, and the vocation of the region. Sustainability is here to stay and is part of regional vocations, being an indisputable preference of global consumers. Regional integration has enormous potential for synergy in logistics, energy, services and sustainability. Employability, together with quality of life, is in the direct promotion of small and medium-sized companies, where new agendas are waiting to be met, such as cooperative movements (not only in products, but mainly in services) and in stimulating innovation and entrepreneurship.
Central Banks will have a Herculean task this time, to increase the competitiveness of the credit supply environment, through competition. Raising interest rates and increasing the exchange rate is poison for reindustrialization! Central Banks will have the difficult task of balancing emergency social credits with the real banking competition in the offer for small and medium-sized companies. The private financial sector has shied away from its social function during the pandemic, leaving this part more difficult and important for public banks. The results of the financial sector were, among several sectors, the best among many. The empowerment of liquidity that showed in the balance sheets and within the emergency, the Central Banks were more concerned with keeping liquidity and inflation under control. Now it is to support the positive investment environment and to make competitiveness for short and long-term credits. The new Fintec´s technologies help in this trend, to enable the intermediation of financial services at very competitive prices. Nevertheless, the Central Banks will receive a mission of greater relevance for reindustrialization. However, reindustrialization will have new characteristics, due to greater innovation, digitalization and insertion in the production chains, including small and medium companies in the best sustainability practices.
The “new industry” in Latin America, will be digital, with high international competence, flexible, sustainable and adapting to the new governance model.
Am I the only one seeing this?
If not, who should we still convince of this?

1) J. Arbache – Política Industrial https://valor.globo.com/opiniao/coluna/a-politica-industrial-do-seculo-xxi-1.ghtml
2) R. Ricupero Desindustrialização precoce https://diplomatique.org.br/desindustrializacao-precoce-futuro-ou-presente-do-brasil/