By Luc Cohen
RIO GRANDE, Argentina (Reuters) - On a recent morning, workers wearing blue shirts and black gloves assembled digital TV set-top boxes inside one of the world's most unlikely factory towns.
Their employer, BGH SA, for nearly 40 years has been manufacturing consumer electronics here in Rio Grande, a city in the chilly island province of Tierra del Fuego, located at the far southern tip of Argentina.
Like dozens of factories that have taken root in this sparsely populated land of penguins and glaciers, BGH owes its survival to government tinkering. Special tax breaks and high trade barriers have turned this remote outpost into the source of 90 percent of the air conditioners, cell phones, TVs and microwaves sold in Argentina.
Now, it has perhaps the most to lose as President Mauricio Macri works to modernize Argentina's closed economy. The former businessman has already lifted some import restrictions and began unwinding costly subsidies for electricity and other utilities, hitting electronics sales.
Tierra del Fuego, home to just 150,000 people, is feeling the sting. Amid a deep recession, it shed 6,000 jobs last year, a 13 percent drop that was the sharpest for any province.
Output has plunged at many of the area's factories, including BGH. The Argentine company's TV set-top box business has dwindled to a single assembly line, down from five a few years ago. Its laptop unit closed last year, and the air conditioner lines run a single shift per day, down from two earlier this year.
The company's woes are emblematic of the pain rippling across Argentina's wider industrial sector, where employment shrank by 4.6 percent, or 58,000 jobs, between November 2015 and May 2017, according to Buenos Aires consultancy Elypsis.
The losses carry risks for Macri, whose 2015 presidential victory ended 12 years of populist rule. Former President Cristina Fernandez's welfare spending, electricity subsidies and industry protections were applauded by many poor and working class Argentines, but the measures generated inflation and pummeled public finances.
Macri has won plaudits from investors by winding down those distortions. But the policy shifts have generated some losers in the near-term, including factory workers left without jobs and families saddled with higher power bills. Whether Argentines feel the economic recovery that is underway will be crucial to the performance of Macri's market-friendly "Let's Change" coalition in October's mid-term legislative elections.
"The government changed the rules of the game," said Diego Teubal, executive director of BGH's consumer division.
Emboldened by trade protections under the leftist Fernandez, the company invested in new equipment and doubled its Rio Grande workforce to nearly 2,600 people. Under Macri, BGH has slashed its payroll to just over 1,000 workers and begun importing some electronics from China.
"The idea that at some point that could change is always in the back of your mind," Teubal said.
A PRICEY LABEL
Nowhere are decades of interventionist policies more evident than in Tierra del Fuego, a mountainous, wind-swept archipelago often referred to as the "end of the world."
Cut off from the mainland by the frigid Strait of Magellan, the region is divided between Argentina and Chile. Worried about the military designs of its neighbor, Argentina in 1972 turned its portion of the main island into a special economic zone free of many taxes to lure people and businesses to settle there.
(For a graphic of Tierra del Fuego, see http://tmsnrt.rs/2iqAoPp)
The region boomed under Fernandez, who slapped taxes on imported electronics and used import permit requirements to freeze trade. Foreign firms such as China's Huawei Technologies Co Ltd and Canada's Blackberry Ltd hired local Argentine factories to produce their products.
But the Made-in-Tierra-del-Fuego label is a pricey one. To attract workers, factory salaries are three times higher than the national average. Shipping costs are exorbitant. Foreign-made parts first land in Buenos Aires, where they are loaded onto trucks for the 1,800 mile journey south. Once assembled, the finished goods head back the way they came.
The upshot is that Argentines pay dearly for almost anything they buy. A Samsung Galaxy S8 smartphone made in Tierra del Fuego sells for $1,215. That's more than double what an Asian-made model sells for in the United States.
"I don't think it has much future," said Gabriel Zelpo, chief economist at Elypsis, regarding the province's electronics industry. "Industries that were completely protected are now dismantling."
But residents in Rio Grande and the provincial capital Ushuaia are fiercely attached to a way of life that some say is being threatened by Macri's policies.
"Ushuaia was a city of low unemployment, a city of opportunity where many people from all over Argentina came to find a well-paying job," said Malena Teszkiewicz, the city's secretary of social, health and human rights policies. "We're starting to feel that situation changing."
TRADEOFFS
Since taking office in December 2015, Macri has eliminated currency controls, gotten rid of the import permit requirements and lowered tariffs on some foreign-made products. All were measures his government said were necessary to boost trade and lower consumer prices.
But reforming Argentina's factory sector is one of his trickiest challenges. Nearly one-fifth of the workforce is employed in manufacturing. Powerful unions and their political allies often take to the streets to demand wage increases or protest layoffs and plant closures.
Workers were outraged in April when Macri made good on a promise to remove a 35 percent tariff on foreign-made computers. The fallout has been swift and painful. Cheap imported laptops and notebooks have flooded the market.
Lucas Silva was one of 150 workers to lose his job in December when BGH shuttered its laptop unit ahead of the tariff reduction and began importing Chinese-made machines. His salary of 27,000 pesos ($1,568) per month put him among the top 10 percent of the country's earners. Now collecting unemployment benefits, the 33-year-old said he sold his children's musical instruments to help make ends meet.
"I don't know what to do. You can't find a job anywhere, there are so many people looking for work," Silva said.
Macri's administration has launched some initiatives to help ease the pain. The government is assisting workers laid off from computer factories find jobs in other industries. It has also forged deals between unions and companies in troubled sectors such as auto manufacturing and textiles to lower labor and other costs.
Tierra del Fuego's electronics sector has begun talks with the government on reaching a similar accord, according to Federico Hellemeyer, the head of a local electronics trade group.
"The idea is for the workers to be content...but for the industry to be competitive," Hellemeyer said.
How long Tierra del Fuego's factories can keep humming remains to be seen. The province's special tax breaks expire in 2023. Dante Sica, director of Buenos Aires consultancy Abeceb, said the government should promote industries linked to natural resources, such as fishing and gas exploration, rather than prop up electronics manufacturing at the end of the world.
"There has to be a debate about whether it's convenient, profitable or efficient," Sica said.
($1 = 17.2200 Argentine pesos)
(Reporting by Luc Cohen; Editing by Marla Dickerson)
Disclaimer: No Business Standard Journalist was involved in creation of this content
