Let's make a deal: Argentine carmakers face a future of little credit, few buyers and sluggish exports.

At the Serra Lima Ford dealership in Buenos Aires, salespeople putter around the showroom, flip through newspapers and find small jobs to keep busy. People wander in to look at the Ford pickups, sedans and sports cars, ask questions and leave. Sales are few and far between. "The only people buying are those with dollars saved up," says Jorge Fazzini, a salesman in the trade for 20 years.

Across the country, dealerships are struggling. Fazzini and his co-workers sold 350 cars a month for a better part of the 1990s. These days they'd be happy to reach 40. "This is the worst that sales have been since 1960, when the industry was first getting started," Fazzini says. At least they're still employed: Forty-four percent of Argentina's car dealers have closed their doors since 1999. By mid-2003, just 467 dealerships remained in business.

That's because the potential buyer's market has fallen by half. In 2001, there were 1.87 million households in urban areas that could afford a new car, according to the Argentine Dealership Association (Acara), meaning homes met a minimum monthly income of US$360 to qualify for a car loan. In 2002, cautious lenders raised the monthly minimum to $540 a month, cutting the market to 934,000 households and emptying showrooms.

For manufacturers, sleepy showrooms mean less production. Assembly lines operate at less than 20% of capacity, some of them not at all. At Fiat's $600 million plant in Ferreyra, Cordoba, nearly 5,000 assemblers and machinists churned out 600 vehicles a day at peak production. Today, just 350 people work there. They crake engines and gearboxes, not cars, for export to Brazil and Morocco. It is one of the biggest and technologically advanced plants in Argentina, the toast of Cordoba's proud local officials when the Italian firm opened it in 1996. Now it's nearly idle.

In theory, Argentina is a good place to make cars. Infrastructure and technology are reliable and workers are well trained. Middle-class consumers are keen on pricey new wheels, unlike in Brazil, where cheaper models are more popular. Production costs have fallen threefold in dollar terms.

Even so, only two companies are investing significantly. Japan's Toyota is spending $200 million through 2005 to boost production of parts for its Hilux pickup truck and to introduce a new model. France's PSA Peugeot Citroen is investing $58 million to start making its popular Peugeot 307 car in 2004, mostly to export until the domestic market recovers.

Dark horizon. It's not clear how Latin America's oldest car industry will survive. In Brazil, the main export market for Argentine vehicles, it costs about the same to make a car and the market is bigger, with a population nearly five times that of Argentina. Leading parts suppliers, such as Goodyear Tire & Rubber Co. and Delphi-Packard, have large operations there. Moving production to Brazil would save on transportation expenses, which can account for between 15% and 18% of production cost.

Argentines 11 manufacturers, however, won't easily sacrifice the $6 billion they invested in the previous decade to build new plants and parts factories, revamp older ones, and train workers. Companies like General Motors, Renault and Volkswagen invested in Argentina partly because the fixed peso-U.S. dollar exchange rate in force for most of the 1990s provided economic stability.

The investment paid off, at the start. Car sales surged 375% to 455,372 vehicles in 1998 from a 30-year low at the decades start. A flood of new, foreign models helped fuel the rise, pushing down prices and satiating pent-up demand.

But business soured the next year. The strong peso made it hard for caretakers to ship production abroad. What would become a four-year recession and, ultimately, the utter collapse of the Argentine economy, had begun. When Brazil devalued its currency in 1999, Argentine-made cars became relatively expensive and exports tumbled. Job and production cutbacks soon followed.

Local sales must improve before automakers will invest again, says Alberto Garcia Carmona, communications director at General Motors Argentina, the biggest producer here. That'll be tough. Ask Carlos Bermejo, a banker. "Buy a new car? No way," he says.

Bermejo has a point. Consumer prices have risen 45% since 2001, though salaries on average haven't budged. The prices of gasoline, motor oil and parts have shot up 90% since 2001 while mass transit fares remained stable. The banker takes the subway to work now.

Bermejo splurged on a new car in 1999. Like many Argentines, he took advantage of a government program that allowed him to turn in his vehicle--a gas-guzzling 1971 Dodge GTX--for a $4,800 credit toward the purchase of a new car. He bought a Fiat Palio. The idea was to trade it in for a new, higher-performance model three years later. Now Bermejo says, his salary and debts won't allow it.

Borrowing is out of the question. Interest rates on car loans run at 25%, and qualifying is difficult in a weak job market. Troubled banks are hesitant to lend. Uneasy about the future of their jobs and salaries, most people wont take on new debt. Unemployment hovers at nearly 18%.

Instead, motorists are keeping their older vehicles in condition. This suits Carlos Pierotti. Business has been steady at his Citroen repair shop, despite the economy's 11% drop last year. "People that four or five years ago could afford to buy new cars now can only scrape together enough for repairs," says Pierotti.

To revive sales, the financial system needs to lend and consumers must regain the confidence to borrow money. In the middle of 2003, carmakers started offering savings plans for new cars, but buyers have to make 30 monthly payments before they can get behind the wheel. "Without credit, there is no growth," says Pierotti.

Dealers and manufacturers want the government to lower taxes on new-car purchases, now 40% of the cost. But carmakers are wary. The government still owes them $350 million from the trade-in program in 1999 and 2000.

Admittedly, auto sellers expect to get busier in the coming years. The economy is on track to grow 4.5% this year from 2002, if from a dismally low point, according to estimates by the new government of President Nestor Kirchner. But dealers aren't expected to sell more than 91,000 cars, according to Diego Portillo Mazal, an analyst at U.S. research group Global Insight. Sales will recover only gradually, reaching 200,000 in 2008, he says. That's less than half of sales in 1998 and a fraction of the sector's nearly 500,000-car production capacity.

Cost center. By comparison, Brazil can produce up to 3.2 million cars per year, while its plants now run at 45% capacity. Portillo Mazal expects Brazilian sales of 1.4 million in 2003, growing to 1.9 million in 2008.

There are some signs of improvement. After falling for three years straight, production rose 13.2% in the first five months of 2003 from a year earlier. And five carmakers have increased output so far this year, compared with only one, General Motors, last year.

But inflation hangs like a cloud over the nascent economic recovery. The government is expected to allow utilities to raise prices for the first time since January 2002, discouraging new car purchases as consumers will have to fork out more of their hard-earned pesos for gas, electricity, phone and water. At the same time, car makers will have to pay more in utilities to operate their plants, reducing profit margins or forcing them to raise prices--thus turning away potential car buyers.

Peugeot will take advantage of the steep decline in Argentine labor costs to boost production, says Carlos Gonzalez Fernandez, Peugeot's director of communications in Argentina. It's now cheaper in U.S. dollar terms to make cars at its plant in Buenos Aires than to make them in Europe for export to Argentina. The plan is to make 16,000 of the mid-range 307 models in 2004, exporting throughout the region to make up for the decline in Argentine sales.

Peugeot's competitors may not boost capacity or start producing new models here just yet, but many will stay in the country. Mostly, there are trade benefits for operating in Southern Cone Common Market, or Mercosur, the trade bloc made up of Argentina, Brazil, Paraguay, and Uruguay. The bloc's automotive regime enables carmakers with plants in both Brazil and Argentina to ship vehicles and parts in either direction duty-free so long as they comply with local-content requirements, says General Motors' Garcia Carmona. Autos built by companies without two-country operations are subject to a tariff of about 35%.

Because of Mercosur, "it makes sense to keep an Argentine operation even if it is operating at 10% to 15% capacity; says Global Insight's Portillo Mazal. To 2006, the Mercosur auto trade will be tariff free, meaning a company can move all of its production to Brazil if it wants. But a key to growth for vehicle makers in Argentina is to export "anywhere and everywhere," says Portillo Mazal.

Argentine manufacturers are diversifying their exports. In the 1990s they focused on Brazil. But sales to Argentines northern neighbor are slowing now along with the economy there. In the first five months of 2003, exports there fell 19%, while shipments to Mexico and Chile, comparatively stronger economies, rose 48% and 76%, respectively, according to the national auto dealer's association. This was helped by lower import taxes, the product of recent bilateral trade agreements between those countries and Argentina and Brazil.

That doesn't really help salesmen like Fazzini, at Serra Lima in Buenos Aires. For months, perhaps years, salespeople will likely pace the showroom waiting for customers to get over their country's shocking turn of fortune, and get back behind the wheel of a new car.