Colortex, a leading textile company in Argentina, invested nearly $3 million last year to diversify into workwear fabrics after years of making sheets and towels. Denise Karagozlu, a director, says the company can produce these fabrics competitively against importers because the process involves using local cotton and less labor than sewing sheets.

The move to diversify isn't simply to boost profits — it's about surviving in a volatile country. "Argentina is always at one extreme or the other," Karagozlu says. "If you don't change as the situations change and understand that you have to keep changing, then you won't achieve anything."

Colortex, like other businesses, has learned this after more than 80 years of economic and political crises in Argentina. Karagozlu's grandfather started Colortex in 1955 and took advantage of tax breaks to open a factory in La Rioja in the northwest. That kept its pricing competitive despite the cost of transporting finished goods more than 1,100 kilometers to Buenos Aires, the country's main consumer market with a third of the 44 million population. But an elimination of the tax incentive in 2012 squeezed margins and pushed the company to diversify. It's now looking at high-tech fibers.

Argentina wasn't always so unstable. In the late 1880s and early 1900s, ample fertile land made it a breadbasket to the world - and an economic power. Dictatorships and poor economic management in the subsequent years, however, curtailed progress. In 2001, the country defaulted on $100 billion, sparking one of its worst economic downturns ever.

Mauricio Macri, the country's president, wants to end the volatility, and much of his strategy is based on reeling in investment for long-term economic growth.

Laying the foundations

Since taking office in December 2015, Macri has ended the debt default to make capital available for companies again - and at lower rates. He has let the currency float, lifted most taxes on exports and ended the capital controls of his populist predecessors, who ruled from 2003 to 2015. Companies can import materials and parts, previously limited by government controls.

The efforts are starting to pay off. The economy has emerged from a 2016 recession to expand 2.7 percent in 2017 and is on track for 3 percent growth this year, according to the World Bank. Inflation came down to 25 percent in 2017 from a peak of 40 percent in 2016, and it should reach 20 percent this year and 13 percent in 2019, says Alejandro Ovando of economic consultancy IES Consultores. "The government is laying the foundations for solid growth," he says.

A main thrust is to reduce the fiscal deficit, which has been at the root of the country's economic woes over the past century. Macri has slashed energy and transport subsidies and got congressional approval to widen the tax base and trim pension payments. He is cutting government jobs and planning a labor reform.

The reforms are needed to make it more competitive for businesses, says Federico Mac Dougall of Buenos Aires-based firm First Corporate Finance Advisors. He estimates the corporate tax pressure at 44 percent, in line with Europe, but the government has little leeway to lower taxes until it cuts the fiscal deficit from around 6 percent of GDP.

IN THE WORKS: Textile manufacturer Colortex has invested in new factory equipment.

Eyeing the potential

Nonetheless, companies are looking at the potential. In the first two years of Macri's rule, $104 billion in investment was announced, led by projects in the oil, mining and power generation industries, according to the Argentine Agency of Investments and International Trade.

When Macri won the presidency, "It was like a switch was flipped and all of a sudden Argentina went overnight from a 'do-not-invest region' to 'we're open for business,'" says John Kanellitsas, president of Lithium Americas, which has a lithium project in the north. "Today investors want to deploy capital in Argentina."

Ovando says there are opportunities as well in the agriculture, automotive, construction, public services and steel industries, as well as in beef and pork. Serious underinvestment between 2002 and 2015 left the country with shortages, in particular of energy. There is a market to increase production by competing with imports and then exporting, including to Brazil, the country's biggest trade partner and a huge market with a population of 208 million.

Resource potential

Another attraction is the vast resources, from the high-yielding farmlands to the huge oil and natural gas resources in Vaca Muerta, a shale play under development by global majors like Chevron, ExxonMobil and Shell. Much of the country's renewable energy capacity is undeveloped, so too are mining resources.

The years of low investment have left room for growth — and the chance to take advantage of the operating techniques and technological advances already honed in other markets. Oil producers, for example, are rapidly trimming the cost of wells in Vaca Muerta by using what worked in North America, the first developer of shale resources.

It's the same with renewables. "Being a 'second mover' has allowed the country to take advantage of the large declines in investment costs, which has a strong impact on long-term energy prices," says Alejandro Lew, CEO of 360 Energy, which is building solar power plants in the north.

With lithium, Argentina has come onto the scene at a time when the increasing use of electric cars and grid storage batteries for renewable power plants is pushing up demand for the light metal. "There is a scramble and a real, urgent need to bring more supply into the lithium market to meet the demand," says Kanellitsas. His company is investing $425 million in building a plant to produce 25,000 metric tons of battery-grade lithium carbonate per year, starting in 2020, which represents 10 percent of the current global market.

In wind power, the promise is just as big. Juan Pedro Agüero, a project developer at the Argentine Wind Power Association, estimates that 70 percent of the country's landmass has winds that can be harnessed for power, with Patagonia in the south boasting some of the world's best conditions. Companies are starting to build wind parks as the government targets getting 20 percent of the country's power, or 10,000 megawatts, from renewable sources (other than big dams) by 2025. "It's ambitious, but feasible," Agüero says. "The resource is so big and widespread that there will always be projects that can be carried out."

Short-term pains

There are challenges for the ramp-up in investment. The first is that Macri's reforms have yet to trickle down to the consumer and businesses. Inflation is still in the painful double digits and the currency continues to depreciate against the dollar, putting a damper on economic growth prospects. Imports have been on the rise, keeping a lid on manufacturing output.

"The business environment is more friendly, and the government has taken the right measures, but it has been difficult for them to secure short-term results," says Germán Arango, Country Manager Argentina and Chile, DHL Supply Chain. "We have not seen consistent growth yet."

Businesses will have to tough it out, something they've become adept at in Argentina. "We've had so many ups and downs that we need to know how to bounce back," says Eduardo Iglesias, general manager of insurer Colón Compañía de Seguros. "We have to be resilient."

LONG HAUL: Argentina faces a challenge to cut transportation costs.

Costly logistics

Another challenge is to cut logistics costs. At Colortex, says Karagozlu, it costs twice as much to transport merchandise to Buenos Aires from La Rioja than it does for a rival to bring in a container from China, a competitive handicap. It's true that the long distances in Argentina, the second-largest geographical area in South America, make transport expensive. But other factors are as taxing: high labor costs and highway tolls, the wear and tear on trucks from poor roads, and a lack of competition against truckers, who move more than 90 percent of the cargo. The country's railway network, once among the most extensive in the world, has fallen into disrepair, and little is moved on the rivers.

To reduce freight costs, the government has launched the biggest infrastructure build-out in the country's history. Professional services firm EY estimates more than $142 billion will be invested in infrastructure and public works over the next decade or so, with much of it coming from the private sector. Of this, $55 billion will be spent on expanding the highway and road network, $24.5 billion on freight and passenger rail, $12.5 billion on urban mobility, and $3 billion on airports and ports. One of the largest projects, at $16 billion between 2016 and 2026, involves building airport, rail, road and other infrastructure in the north, helping to attract investment to the country's poorest region. Another project is to build a tunnel under the Andes to Chile so as to increase the volume of exports from Argentina, Brazil, Paraguay and Uruguay to the Pacific.

The additional capacity is needed. Argentina has the highest logistics costs in Latin America, according to the industry group Latin American Logistics Association. It's just as worrying that the country slipped to 66th place in the World Bank's International Logistics Performance Index in 2016, down from 45th place in 2007 - a sign of decline in the efficiency of customs clearance, trade and transport-related infrastructure, as well as of increased difficulty in arranging shipments, worsening delivery times and flagging competence in logistics services and tracking and tracing.

"Doing business in Argentina is costly," says Eduardo Rodrigues, Country Manager Argentina, DHL Global Forwarding. "There's a lot of room for improvement in logistics."

This year, the government authorized double-trailer trucks, shaving 25 percent off road transportation costs and increasing freight capacity by 30 percent, Rodrigues says. At the same time, companies are outsourcing logistics, transportation and warehousing to lower costs and improve efficiency in the supply chain, and they are automating and digitalizing processes, he says.

HELLO, GOOD BUY: Online shopping is estimated to increase significantly in Argentina over the next few years.

Online shopping

E-commerce could be a source of growth in logistics in Argentina. "The potential is there," DHL's Arango says, citing as reasons the large population and digital penetration. According to the Argentine Chamber of Electronic Commerce, Argentina has the highest penetration of online commerce in Latin America thanks to its widespread use of smartphones. EShopWorld, a Dublin-based e-commerce firm, estimates that the population of online shoppers will increase to 19.9 million in 2021 from 16.8 million currently.

Even so, the culture of shopping online still lags behind Europe and the U.S., largely because of a low penetration of credit cards, the high interest rates - 40 percent on average, according to the central bank — and excessive fees. "People would love to shop online and receive the product in their homes," Arango says, but the high cost of using credit cards is a setback.

To change this, retailers and e-commerce platforms like MercadoLibre, the country's biggest, are improving customer fulfillment by making the process of receiving, packaging and shipping orders as easy as possible. In 2013, most e-commerce deals were done in cash at the point of sale. Now more payments are made electronically, and goods are shipped by private couriers and the postal service, increasingly with tracking services.

Moderate growth

No matter the potential, the pace of investment will likely will be moderate. In 2016, companies announced plans to invest $12.1 billion in greenfield projects, or building operations from the ground up, compared with $3.2 billion the previous year, according to the latest data from the United Nations Conference on Trade and Development. But the data also shows that actual foreign direct investment shrank to $5.7 billion from $11.8 billion over the same period.

"Argentina is on the right track, but it's slow, steady growth," Arango says. "Investors are being cautious. More time is needed to consolidate the changes and demonstrate that Argentina is the right place to be." Dante Sica of economic consultancy Abeceb believes the velocity of investment will increase as Macri's reforms make it cheaper and easier to do business, putting Argentina on track to return to its European-level prosperity of 100 years ago.

"The gap between emerging and developed countries has narrowed over the past few years, and much more so in some Asian countries that have implemented policies that are much more stable over the long term," Sica says. "It may take 10 or 15 years, but Argentina has all the potential to embark on this path." —  Charles Newbery

Published: April 2018

Images: Samuel Azambuja Kochhan/Adobe Stock; Colortex S.A.; MStudioImages/Getty Images; Oliver Förstner/Alamy/mauritius images; Adobe Stock