Way down south

Meet Newsan, the company that has taken the production of consumer electronics - quite literally - further than anybody else. E&T reports on the southern-most factory in the world.

Almost at the exact point in the world map where South America dips its tail into the freezing waters that join the Atlantic and Pacific Oceans, one company is defying the laws of logistics by manufacturing a range of consumer electronics products at a place that's closer to Antarctica than it is to Buenos Aires, the nearest capital city and major centre of consumption in Argentina.

La ciudad del fin del mundo - the city at the end of the world may well be a motto that has served Ushuaia well to attract a growing number of tourists over the years. It is also a statement of fact: no other city (with the exception of the small town of Puerto Williams, located on the other side of the Beagle Channel) exists at a more southerly latitude than Ushuaia.

At 54° 48' S, continental South America has already curled its last. Ushuaia stands on the southern coast of the island of Tierra del Fuego, which is shared between Argentina and Chile and separated from mainland South America by the Strait of Magellan.

The southernmost of the provinces that form the Argentinean side of Patagonia, Tierra del Fuego has Ushuaia, its capital, and Rio Grande, located 230km to the north east, as its two main urban centres. In the late 1970s, both cities witnessed the establishment of their own industrial parks, courtesy of a law that the Argentine government passed in 1972 declaring the island a special economic zone.

Looking to boost the demographic and economic development of this remote area of the country, the government put in place a series of tax incentives that have since transformed Tierra del Fuego into the unlikely base for the production of consumer electronics goods and home appliances in the country.

Operating four of the five surviving plants dedicated to the production and assembly of electronics goods in Ushuaia, Newsan has learned to live with the many challenges that come with being the southern-most manufacturing company in the world.

Rio Grande Vs Ushuaia

The origin of Newsan dates back to 1979, when Sanelco (a company belonging to Japan's Sanyo) opened the first industrial facility for consumer electronics production in Ushuaia. In 1991 Sanelco merged with Sansei (an Argentine company that had established its own plant in the city in 1986), resulting in the official creation of the Newsan Group.

Fernando Notti, industrial director of Newsan and vice president of the main association of manufacturers of Tierra del Fuego, has played a key role in the positioning of Ushuaia as an alternative hub to Rio Grande for electronic production in the island. By the time Notti was tasked with designing and building Sansei's first plant in 1986, he had already been responsible for the setting up in 1981 of a similar manufacturing facility for Philco, an American OEM.

"Rio Grande's industrial park is actually much more important than that of Ushuaia's," says Notti. "Right from the start of this industrial promotion policy, the emphasis has been on the development of Rio Grande."

Unlike Ushuaia, which has tourism and the fact that it is the province's capital as its main drivers for development, Rio Grande has traditionally been perceived as less resourceful - and, therefore, more deserving of the lion's share of the state help package.

"The government made everything it could to make companies want to establish in Rio Grande," says Notti. "There is no specific legislation stating this or any prohibition to set up a facility anywhere else in Tierra del Fuego. But there are policies in place which tend to favour the establishment there. In Rio Grande, for example, you can acquire public land at a very low price, often also enjoying long repayment terms. This isn't the case in Ushuaia, where there is less available land and prices are higher."

Still, when Notti had to make a decision about where to locate Philco's plant, he went with Ushuaia - much to the annoyance of the company's finance department: "They all wanted to set up in Rio Grande," he recalls. "'Why pay there for something we could practically get for free here?' they would ask."

But Notti had some strong arguments in favour of Ushuaia: "In my report at the time I presented four main arguments. The first one was that Ushuaia, unlike Rio Grande, had a natural deep-water port, which I always thought was a big advantage."

With the exception of Newsan and Ambassador Fueguina (a Chinese-owned firm producing cathode ray tube TV sets, and the only other electronics company operating in Ushuaia today), all other manufacturers including Philips, Delphi and Radio Victoria (makers of Hitachi, RCA, Kelvinator and TCL products) are based in Rio Grande.

Wherever their chosen location, all of these companies need to bring the vast majority of their supplies from Asia, mainly China. But while Newsan and Ambassador Fueguina can unload the cargo containers from ships moored next to their plants, the other firms still need to haul the containers via lorry up to Rio Grande.

As for the finished products, Rio Grande-based manufacturers will normally put their merchandise in a lorry and drive it all the way up to Buenos Aires, some 3,000km away, while Ushuaian firms will - whenever possible - make the same trip by sea, thereby slashing costs.

"My second argument was that, due to the incipient, but marked tendency that could already be observed in the early 1980s of companies establishing in Rio Grande, I could foresee an issue with competition for labour." This was a prediction Notti says proved correct.

His third argument was that, with the provincial government based in Ushuaia, being next to decision-making and control institutions would be advantageous. "This was obviously much more important in the 1980s than it is today," he concedes. His final argument had to do with what he calls the "higher socio-economic-cultural level" of Ushuaia residents.

Tierra del Fuego as a commercial hub

What privileges do manufacturers producing in Tierra del Fuego enjoy? Apart from being exempt from import duties for supplies, and export duties for the finished product they are crucially allowed to introduce the manufactured goods into Argentina's mainstream distribution market and charge IVA (a VAT-like tax), but keep to themselves the profits they make from IVA. They are also exempt from gains tax.

In order for them to enjoy these benefits, they need to be able to demonstrate that a "minimum production process" has been involved in the manufacture of the goods they intend to bring to the continent.

Each manufacturing sector with a presence on the island has its own set of requirements as to what constitutes a minimum production process. As a general rule in the case of consumer electronics, if the printed circuit board (PCB) that will be at the heart of a product is to be imported, it has to be completely 'naked' when it arrives at the factory.

"The insertion of all electronic components onto the PCB - be it automatic or manual - has to be fully carried out in Tierra del Fuego," explains Notti. "Those who think of Tierra del Fuego as a location where a mere assembling process takes place are wrong."

Newsan has around US$20m of capital invested in equipment used for automatic insertion alone. The company uses both surface-mount (SMT) and through-hole technology for this initial, robotic phase of components insertion.

Following any necessary manual insertion work, the PCB is subjected to an automatic wave-soldering process before entering a phase of inspection, adjustment and verification. "Only after this phase has been completed can we take the product to the final assembly line," notes Notti.

Against the fiscal benefits that manufacturers based in the island enjoy, they face a series of added costs that must be carefully weighed when evaluating which products might or might not be profitable to build.

Chief among these costs is shipping. While a 12m container full of televisions made in China can be shipped to Buenos Aires for $2,500, bringing the same container from China to Ushuaia (as Newsan needs to do to get its supplies) will set it back $4,000. Once the product is assembled, the most economic means of transportation to Buenos Aires will add another $800 to the bill.

The second added cost is labour. "The lack of a large pool of workers, as well as mounting trade union pressure, means that salaries in Tierra del Fuego are slightly higher than those in Buenos Aires and the rest of the country," says Notti.

He adds that, with high inflation and an exchange rate that has remained virtually static for the past two years, labour costs in Argentina today are comparable to those of Europe.

Unsurprisingly, Newsan and the rest of the consumer electronics manufacturers based in this remote island are finding it difficult to justify the assembly of certain products. "What we're seeing is that some products have stopped being manufactured in Tierra del Fuego," says Notti.

Take hi-fi audio systems. Until not long ago, 50 per cent of the Argentine market for this product was supplied from Tierra del Fuego plants. Newsan was the leading manufacturer, churning out 350,000 units annually. Today, the company does not make a single audio system. "The numbers just don't add up," says Notti.

"We went from being the number one manufacturer of audio systems to the number one importer of this product. Because the company doesn't lose the business - it simply changes its source of supply."

The production of DVD players and small televisions suffered a similar fate. This has left Newsan with only four products currently being manufactured in Ushuaia: LCD/plasma screens, CRT TVs, air conditioning systems and microwave ovens.

The prospects for 2009 aren't particularly rosy, either. With the exception of LCD and plasma TVs sales, which are expected to grow this year, the three other products built by the company will see sales slide.

"From our company's manufacturing point of view, we need to have an economy of scale that could help make our costs competitive. The more products you kill, the more economies of scale you lose and the higher the incidence of your fixed costs over the value of an hour's labour cost," says Notti.

"In 2008 we ended up producing the equivalent of 1.1 million hours. This year, considering the market outlook and the fact that some products are not affordable to build any more, we'll struggle go beyond 800,000 hours," he anticipates.

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