George Magliano – Senior Economist IHS Automotive

North American Auto Production Outlook is Optimistic Especially for Mexico

Mexico appears to be headed to producing four million vehicles a year by the end of this decade – maybe sooner. George Magliano, Senior Economist, IHS Automotive, keeps an eye on the auto production and market trends.

During an interview with Mexico Now, he pointed to last year's 2.5 million unit production in Mexico, likely to jump to about 3.9 million as early as 2016. New investment by the bigger-name OEM producers enters that equation. Despite nearer-term turbulence in Europe and the Middle East, Magliano sees good things for the North American industry, especially from Mexico.

THERE WAS A DAY WHEN THE AUTO INDUSTRY WAS ECSTATIC IN NORTH AMERICA WHEN PRODUCTION WAS AROUND 16 MILLION A YEAR. WHAT DO THE LATEST PRODUCTION NUMBERS SHOW FOR 2011 AND THE PROJECTIONS FOR 2012

Our current forecast for North America (US, Canada and Mexico) just put out this month is for 14.4 million light vehicles in 2012 versus 13.1 last year. That's a nice bump up, we're really happy with the way the recovery is unfolding in North America led by U.S. sales.

What's happening now, is this year we've got some inventory rebuilding which helps production, we've got exports growing outside of North America, we've got some more sourcing here, expansion of the North American facilities and demand continues to improve, so that's all showing up in that 14.4 number.

ONE POINT YOU HAVE MADE IS THAT PROFITABILITY FOR NORTH AMERICAN VEHICLE MANUFACTURERS NO LONGER DEPENDS ON THAT HIGHER 16- OR 17- MILLION UNIT NUMBER. WHAT DO YOU SEE IN TERMS OF REPORTED OEM PROFITS AND PROFITABILITY RELATIVE TO THE PRODUCTION LEVELS THAT HAVE BEEN REPORTED FOR 2011

If you look at this cycle, we've made money. The industry made money at the depths of the recession when sales were only at 12.4 million units. I think the production level at the recession in North America was about 8.6. We've continued to make money throughout this anemic recovery. It's a function of the cost cutting going on in the industry. It's a function of taking out assembly plant capacity, the concessions from the union and the bailout from the bankruptcy for GM and Chrysler.

So essentially right now we are making money at levels we never expected to be, even break-even or basically see more bankruptcies in this industry and failures at these very low levels. So we're very pleased as to what's happened on the core structure of the profitability side in our industry.

TO WHAT EXTENT ARE YOU HAPPY WITH THE "BAIL OUT" OF THE AUTO INDUSTRY? HOW WOULD YOU ANALYZE THE PROCESS, AS WELL AS THE RESULTS

I really don't call it a bailout, I call it a loan because I still think a good chunk of that will be repaid -- and we were extremely apprehensive about it when it was occurring. But we couldn't ask for a better result. Quite honestly without the loans, without the so called bailout, the bankruptcy, one or two of the Detroit Three would probably have declared Chapter 11 anyway because of the fact they were running out of cash and the recession was so bad.

The Obama administration put all its weight behind it. They pushed them into bankruptcy and out of bankruptcy very rapidly and actually both manufacturers got on their feet long before everybody expected.

AN INTERESTING DEVELOPMENT IS THE INCREASE IN MEXICAN EXPORTS TO OTHER COUNTRIES IN LATIN AMERICA. WHAT MUST VEHICLE PRODUCERS IN MEXICO DO TO SUSTAIN THAT EXPORT GROWTH

We've always talked about Mexico building or expanding on it strengths, that's its high quality labor force. Really they've got to push value added and the upper end of the market, not the low end. We've got to really build on expertise and technical aspects and quality to continue to push that export number.

There's politics entering into this thing as well. I believe there are some issues today between Mexico and Brazil which has got to get corrected. We're seeing more in the way of some trade wars and barriers crop up in Latin America which is not good.

LOOKING AT 2015, YOU DECLARED THAT MEXICO WILL BE A "WINNER" IN AUTO PRODUCTION BY THAT YEAR. ON WHAT DO YOU BASE THAT

I've got to be pretty happy with that because I just looked at the latest forecast and in 2014 Mexico is 20 percent of a 16 million plus unit production base in North America. In 2015 the share goes up to 21.5 percent of the 17 million units. The new forecast continues to support that even more so that has to do with your expansion on the production side from Nissan, Mazda and Honda that kicks in 2015.

TO WHAT EXTENT IS THE DEBATE OVER COMPETITIVENESS BETWEEN MEXICO AND CHINA STILL RELEVANT IN 2012 CONCERNING THE AUTO BUILD AND AUTO PARTS INDUSTRY

I wouldn't call it irrelevant but it has a lot less relevance today than it did say five to 10 years ago. We're seeing the sourcing coming back into North America and the hammer that was wielded by the assemblers as far as sourcing parts in China is largely dissipating. The Chinese market has grown by astronomical leaps and bounds and it's using up all the parts there. Wage rates in China are going up. The manufacturers have found out if you are going to sell in the region locally, some in North America, you got to produce in North America and you got to produce the vehicle and the parts basically in the region. That sort of threat has been diffused.

HOW IMPORTANT WILL IT BE FOR MEXICO TO BECOME A VEHICLE DESIGN CENTER OVER THE NEXT DECADE

At one time I would have told you that it was critically important and I think it has become less so. We've got Mexico close to four million units of production around 2015 or 2020 and they are doing it without being a design base.

Is it necessary? At one time I thought it was, apparently the situation has changed, now if you want to go further, I don't know how much further you are going to push that number. Then Mexico has got to consider expanding its capabilities but right now it seems Mexico is doing fine.

AS YOU WORK YOUR ANALYSES AND PREDICTIONS, HOW MUCH WEIGHT DOES THE EUROPEAN FINANCIAL CRISES AS WELL AS THE GASOLINE PRICES AND SUPPLY ISSUES CARRY INTO YOUR FORECASTING? HOW DO THESE ISSUES AFFECT THE "WILD-CARD GENERATION-Y" MARKET STRATEGIES

Right now based on our forecasts there are threats to the recovery and to performance here, but not big threats. The way we look at Europe right now, we're getting an orderly fall from grace. This sovereign debt crisis has pushed Europe into a recession but we think the impact of that recession in Europe is going to be minimal in North America and minimal in the emerging markets and economies of the world.

The biggest threat is the unrest in the Middle East. It is pushing up the price of gasoline. We expect the price of gasoline and oil to continue to go up through the summer and continue to move up over the next couple of years. That will put some pressure on the consumer. It will probably impact the mix a little bit, favoring cars versus trucks but will it be a factor in the U.S. equation to derail the recovery? Absolutely not and it's something we should be aware of and watch the risk and be aware of it on a short-term basis as far as some of the sales numbers go -- take a little steam out of our sales numbers over the next couple of months -- but that's about it.

LAST TIME AROUND, YOU ADDRESSED CONCERNS ABOUT CREDIT WORTHINESS AND CREDIT AVAILABILITY, ESPECIALLY WHEN IT COMES TO CONSIDERING U.S. AUTO MARKET. WHAT HAS CHANGED FOR THOSE IN THE PAST YEAR

Over a year or so ago, probably 18 months, two years ago, we really got our credit worthiness back in the light vehicle market and new car vehicle financing. We got our delinquency rates way down and we've really improved on that. We've wrestled with our own sub-prime demons years ago and now we've really got that under control. We feel we are at the beginning of the credit availability cycle.

We are starting to see new vehicle financing loosen up. We've started to see the manufacturers move back in slowly into the sub-prime market. It's probably going to take a year to get back. We're never going to go back to where we were, but we're at the start of a virtuous cycle on auto credit availability.

That's only going to get better as the economy continues to recover, as we continue to create jobs to the tune of about two hundred thousand a month. More jobs, more people working, the credit will loosen up and the volume will go up. Again, this is the beginning of a good cycle here.