Mexico's automotive and aerospace industries remain strong amid uncertainty over government policy and trade flows

Over the last two decades Mexico has consolidated its position as the leading automotive exporter in Latin America and a major player in the industry worldwide. Automobiles are the country’s biggest single export, with the auto industry contributing 4% to GDP in 2018 and representing 20% of total manufacturing output in the country, according to the National Institute of Statistics and Geography (Instituto Nacional de Estadística y Geografía, INEGI). Mexico became the world’s third-largest exporter of vehicles in 2018, behind only Japan and Germany.

The country hosts production plants from nine major international automakers, manufacturing passenger vehicles, light and heavy tractors and trucks, in addition to plastic, aluminium and steel components. While there is some uncertainty over the impact of the renegotiated North American Free Trade Agreement (NAFTA) deal, the industry remains on track for continued expansion, particularly as the country attempts to diversify its product offering. “Mexico does not just offer competitive labour costs,” Miguel Elizalde, executive director of the National Association of Bus, Truck and Tractor Producers (Asociación Nacional de Productores de Autobuses, Camiones y Tractocamiones, ANPACT), told OBG. “The country’s plants win awards and can compete with factories in Europe and Asia in terms of quality.”

Production & Exports 

Production of light vehicles in Mexico – including both passenger cars and light trucks – has grown steadily in recent years. While there has been uncertainty regarding the future of Mexico’s trade relationship with its northern neighbours – particularly the US – vehicle production reached record levels in 2017 and again in 2018.

Indeed, exports of vehicles and automotive parts to the US totalled $93.3bn in 2018, making the industry Mexico’s most important export sector, according to figures from the Mexican Automotive Industry Association (Asociación Mexicana de la Industria Automotriz, AMIA). Vehicle production rose to 4.1m in 2018, an achievement that helped Mexico surpass South Korea to become the world’s sixth-largest manufacturer of automobiles in terms of output, according to the most recent figures from the International Organisation of Motor Vehicle Manufacturers. This places the industry far ahead of the rest of Latin America. Brazil, the second-largest auto manufacturer in the region, produced approximately 2.8m vehicles in 2018.

In 2018 General Motors – the largest vehicle manufacturer in the country – produced 834,414 cars, 97.3% of which went to foreign markets. This marked a 3.6% increase in production on 2017. Meanwhile, Nissan produced 762,408 units in 2018, a decrease of 8.1%. BMW is also set to begin production in the country, with the opening $1bn facility in San Luis Potosí in June 2019 (see San Luis Potosí chapter). The new plant will employ 2000 workers and produce over 175,000 vehicles a year. Speaking at the opening, Alexander Wehr, managing director of BMW Group Latin America, told local media; “For us, Mexico is the market leader [in Latin America], not just for its size, but also its potential.”

Diversified Manufacturing

Mexico has developed a diverse manufacturing economy that ranges from heavy industry to the assembly of electronic products. The country has emerged as the world’s fifth-largest producer of car parts and was home to more than 2600 components manufacturers as of 2017. The market is further strengthened by the presence of Tier-1 automotive suppliers, including Delphi, Nemak and Johnson Controls. Advancing technology has also boosted manufacturing, with the industry moving towards Tera Herz laser technology, which allows companies to control and monitor the quality of automotive paint. “This technique has been successfully adopted by Mexico’s automotive industry,” Leonardo Arturo Febo Romero y Maya, general manager at measurement technology developer Helmut Fischer, told OBG. “It enables the country to be highly competitive and efficient in its manufacturing processes,” he said.

Furthermore, the country is a key player in the truck and bus segment. “Mexico is the number-one exporter of tractor trailer trucks,” Elizalde told OBG. Mexico also ranks as the world’s sixth-largest cargo vehicle producer and is home to manufacturers such as Kenworth, Scania, Volvo and Freightliner. This segment is growing, with Mexico producing a record 85,695 heavy vehicles during the first five months of 2019, an increase of 42% on the same period of the previous year, according to the latest figures from ANPACT. The market, however, can present difficulties for the production of metrology equipment. “Companies do not have the experience or staff training required to meet the needs of customised client requests,” Jorge Escarcega, general manager at metrology manufacturer Mahr, told OBG.

Domestic Market 

Although luxury vehicle sales represent an important niche market, sales are dominated by entry-level sedan models. “The domestic market is oriented towards small, inexpensive family vehicles, with eight of the 10 best-selling models falling into this bracket,” Manuel Nieblas, manufacturing industry leader at Deloitte México, told OBG.

According to INEGI, the most popular car in terms of sales in 2018 was the compact Nissan Versa, followed by the Chevrolet Aveo. Nissan was the market leader, a position it has held since 2009. However, overall auto sales fell by 7.1% in 2018 to 1.4m units, marking the second consecutive year of declines, after bumper years in 2015 and 2016, according to the Mexican Association of Automotive Dealers (Asociación Mexicana de Distribuidores de Automotores, AMDA). This trend continued into 2019, with 744,387 units sold in the first seven months of the year, marking a 6.5% year-on-year (y-o-y) contraction. Experts have attributed this fall in sales to a number of factors, including rising household debt and falling purchasing power, increased ownership of second-hand vehicles, and uncertainty about the country’s economic and political future. Nevertheless, this decline in sales has not been uniform across all segments of the industry. Indeed, while Nissan and General Motor’s sales fell by 14.4% and 8.7% in 2018, Toyota’s sales grew by 3.1%, while KIA and Mazda registered increases of 8.7% and 7.3%, respectively. “In spite of the overall muted picture, there are some models that are experiencing significant sales growth,” Guillermo Prieto, executive president of AMDA, told OBG. “This is particularly the case in the 4x4 SUV and minivan market.”

During the first quarter of 2019 SUV sales increased by 1.3% y-o-y, while minivan sales grew by 20.6% y-o-y, according to AMIA. Furthermore, certain carmakers registered significant y-o-y growth in the sale of SUVs in this period, notably Peugeot (32%), Mitsubishi (29%), BMW (15.5%) and Mercedes-Benz (14.6%). One of the firms that experienced the highest overall growth in 2019 was the upmarket UK-based 4x4 maker Land Rover. The company registered a 15% y-o-y increase in sales in the first six months of 2019, according to INEGI. Furthermore, the company sales are projected to increase by 20% over the whole year.

Financing

A key driver of growth in the 4x4 and SUV markets is increased uptake of payment plans that make the purchase of such vehicles more attractive as a regular family car. Financing for second-hand car purchases has also reached record levels, with 62,467 second-hand vehicles bought with credit in the first seven months of 2019, a y-o-y increase of 13%, according to AMDA. Just over 507m new and old units were purchased using financial products during this period, marking a slight contraction, with 44,149 more units being sold during the same period of 2018.

Nevertheless, the market remains somewhat underdeveloped by global standards. “Only 70% of car sales are based on credit. Furthermore, 64% of Mexico’s financially active population have at least one financial product, while in Europe the figure stands at 94%,” Michel Kaim, CEO of Hyundai México, told OBG. “Therefore, auto companies are increasing their participation in vehicle financing in order to facilitate access to credit.” There has been a strong push by auto manufacturer-backed lenders to lower interest rates and extend repayment terms to up to 60 months, though these efforts have so far failed to sufficiently expand the uptake of vehicle finance.

Unregulated Imports 

A notable phenomenon affecting the Mexican auto sector is the presence of so-called carros chocolate (second-hand vehicles imported largely from the US without proper documentation). The practice, which was liberalised under the administration of former President Vincente Fox in 2005, has grown rapidly, at one time exceeding the number of new vehicles sold in the country. While the numbers of such imports have fallen somewhat, they remain an issue, affecting not only domestic car sales, but also law enforcement and tax collection. Unregistered imported cars have facilitated organised crime by providing a means of transport that cannot be traced by the police. In addition, the drivers of such vehicles pay no taxes, which negatively impacts government revenue. “These vehicles displace legitimate sales in Mexico,” Prieto told OBG. “The estimated number of such imported cars stands at 140,000 a year, making it a persistent issue, particularly in the border states.” Faced with these problems, President Andrés Manuel López Obrador, better known by his acronym AMLO, announced in 2019 that the government would tackle the phenomenon. While the precise policies had yet to be agreed as of September 2019, AMLO stated that the administration intended to regulate all imported units and announced that December 31, 2019 would mark the last day on which a car could be imported without proper documentation. Nevertheless, the government’s intention to enforce the registration of imported vehicles has been met with some pushback from industry players, who have expressed concern that if registration is also enforced for domestic vehicles, it could lead to a 30% drop in regular car sales, according to local media.

Hybrid & Electric 

The market for hybrid and electric vehicles (EVs) is expanding. As of 2019 there were nearly 900 charging stations for EVs. Furthermore, sales of such vehicles increased 27.1% from 8260 in 2016 to 10,501 in 2017, and then rose 68% y-o-y in the first 10 months of 2018, according to the latest available figures from AMDA. Sales have been bolstered in the country’s capital by the exemption of environmentally friendly vehicles from the Hoy No Circula programme, which places weekly restrictions on car use in Mexico City that are designed to curb emissions and reduce air pollution. Without the introduction of further incentives – such as government-funded rebates or subsidies – hybrid vehicles and EVs remain too expensive for most consumers looking for entry-level vehicles.

NAFTA 

Mexico’s automotive industry continues to be defined by its close ties with the US and Canada. Since the three countries signed NAFTA in 1994 auto manufacturers and parts suppliers in all three nations have worked to create a single North American auto market. However, the strength of these production and trade ties have been tested by US demands to renegotiate the agreement. While the three countries agreed a revised deal in September 2018 called the US-Mexico-Canada Agreement (USMCA), it had yet to be ratified by the US and Canada as of September 2019.

If enacted, the new agreement is expected to have a significant effect on Mexico’s auto industry. Under the rules of origin requirements stipulated in the USMCA 75% of the value of an automobile will have to come from within the country of origin, an increase from the 62.5% mandated by NAFTA. The implementation of this requirement would likely cause short-term supply chain disruptions and see elements of production move to the US and Canada. Nevertheless, it also potentially presents opportunities for domestic auto parts manufacturers and suppliers in Mexico.

Outlook 

Increasingly, Mexico is valued as a country with a specialised and skilled workforce and unparalleled access to the US market. Moving forward, it must continue to find ways to add value to the production process. Manufacturers are already working to prepare for the impact of the Fourth Industrial Revolution (4IR), by training the next generation of workers in new design and production processes.

In the short term the industry faces uncertainty over the impact of the USMCA, but over the longer term it is set to benefit from its strong fundamentals, well-developed supply chains and high levels of human capital. “We cannot just be an assembly country; in 4IR processes are automated, and value is generated through research and development,” Nieblas told OBG. “If we generate more value, we can increase salaries because higher-skill jobs pay better.” Long-term trends still point towards a successful future for the industry, but within the sector there remains notable uncertainty about President AMLO’s policy priorities. “There has been a lack of clear communication about the direction of public policy. This has created uncertainty and as a result, a lot of investment projects are on hold,” Nieblas added. Nevertheless, the sector is well developed, with deep ties to academic institutions, a well-trained workforce, strong public infrastructure and an expanding ecosystem of private sector companies. All this gives cause for optimism about the future of the industry, but greater clarity about the current administration’s industrial development plans will be needed in order for the Mexican auto industry to achieve its potential.

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The Report: Mexico 2019

Automotive & Aerospace chapter from The Report: Mexico 2019

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