Mexico Auto Industry

Exports May Head in Different Direction Production May Reach 4 Million in 2017
Mexico’s auto industry exporting future reads like a compass, but the domestic side including production and domestic market must be grounded at home.
Research and production have to be kicked into a higher gear; competitive issues never leave the discussion.

Guido Vildozo has more than 10 years of experience at IHS Automotive and its predecessor companies. As the person responsible for managing the automotive vehicle sales forecasts in Latin America, Vildozo keeps an eye on the industry trends in the region and developing forecasts for the market.

Things have and will continue to change.

WHAT DO YOU SEE AS THE OUTLOOK FOR THE MEXICAN AUTO INDUSTRY AS WE ARE MOVING INTO 2013?

I think that over the last 12 or 15 months we have seen Mexico show up on the radar screen of the global automotive industry. The investment that we have seen over the last 18 months is a clear indicator of this change that is now coming to Mexico. We’re wrapping up a phenomenal year. We had roughly about 2.55 million units of production in 2011. We’re probably going to close around 2.8 to 2.85 million units for the final tally of 2012. Our outlook for 2013 is very conservative taking into account what is happening globally.

We always have to think about Mexico as being primarily a market for exports, primarily focused on one market. Despite the fact they do export to more than a hundred countries, roughly about 80 percent of exports go to the U.S. From that standpoint, if you make a model exporting country, given the behavior in the U.S. for 2013 in terms of sales, a cautious global outlook is what we have developed with the Euro crisis and the not-sosoft China landing. That drives us into looking at roughly anywhere between 50,000 to a 100,000 additional units for production for 2013. More or less Mexico will be moving out of what we have seen since 2009, which was significant growth and enter a standby pattern for 2013.

AS WE TAKE A LOOK AT AUTOMOTIVE IN MEXICO, WE KNOW THERE HAVE BEEN VERY SIGNIFICANT OEM INVESTMENTS IN MEXICO. GUIDO, FROM YOUR POINT OF VIEW, THE SIGNIFICANCE OF THEM AND WHICH ONES SEEM TO BE TELLING MORE ABOUT THE DIRECTION OF THE MEXICAN AUTO INDUSTRY?

The investments are make-it-clear statements, something that we’ve seen happening. I mentioned earlier over the last 18 months we have four new plants coming into place, 750,000 additional units of capacity was officially announced. We believe there’s going to be plenty more coming in so the direction is pretty clear for Mexico. 2013 might not be as rosy as the last few years have been. Moving outside of 2013, moving into 2014 and beyond we anticipate that the industry over the next five years will be moving toward light vehicle production of roughly four million units by 2017.

THAT IS A QUANTUM LEAP FROM THE PREDICTIONS WE SAW FOR JUST THE TURN OF THE DECADE TO 2011. YOU HAVE A STRONG PREDICTION. WHAT ARE THE CHALLENGES OR THE OBSTACLES THAT THE INDUSTRY FACES IN AN EFFORT TO GET TO FOUR MILLION BY 2017?

There are a few things that are certainly coming up ahead. The biggest one is probably going to happen in 2013 — that’s the competition for qualified labor. Many of the plants are all being located in central Mexico, in the Bajío region. That of course is a big challenge, making sure that we find all the right skill sets for these additional plants coming into place.

The second challenge that we have is we remain focused on one export destination. There has been significant push to be able to capture exports to other parts of the world, particularly Mercosur. We’re looking at an import quota presently in place between Brazil and Mexico through 2014 with the risk of possibly being extended past 2014. That could be another challenge for the volumes that are being planned in Mexico right now because that market was taken into account.

The same story applies to Argentina where initially we had contemplated volumes for Argentina for a pretrade agreement that is not in place at least until 2013. Those are some of the roadblocks that we have but despite all of this we believe that between the U.S., between other markets that we’re thinking in particular the Andean Community, Mexico should be able to offset these hurdles.

ONE THING THAT HAS BEEN POINTED OUT HERE DEALS WITH LONG- TERM TRADE, LONG-TERM PROSPECTS INTO THE SOUTH AMERICAN COUNTRIES AS YOU POINT OUT. TO WHAT EXTENT ARE YOU COMFORTABLE THAT THE AUTOMOTIVE OEMS ARE REALLY TAKING A STRONGER LOOK AT THE IMPORTANCE OF THAT RATHER THAN JUST FOCUSING ON WHO SENDS WHAT TO CHINA OR EUROPE?

We believe that that’s the way to go all around. One of the big things that is changing, and I think this is part of the rationale that has pushed some of the investments coming into Mexico over the next few years, is the fact that we’ve seen a particularly expensive Yen, we have seen a particularly expensive Euro. Many of the manufacturers, both Japanese and European, look seriously at the lack of competitiveness that they had looked at their currency and decided to put their shops down in Mexico, not only thinking about the United States as an export destination but also looking down south.

We’ve seen the important transformation in Brazil and Argentina over the last few years, particularly come 2010, where GDP per capita were about US$10,000, and we’re anticipating that something similar should happen in other countries in the rest of the region over the next five years.

Why is that particular number important? Because what we have seen historically within the automotive industry has been that as a country get close to or crosses that line of $10,000 it goes from being an emerging market in automotive demands to being a growth market in automotive demand.
It’s something that has happened over the last hundred years, we saw it in Europe, we saw it in the 50’s in the United States, we later saw it in Japan in the 60’s and more recently in Korea.
This is why some of the OEMs are betting aggressively in Mexico because they are looking down south.

They believe that this important milestone will be crossed over the next few years and Mexico is the country they can trust in to make the investment to be able to supply those vehicles to this potential growth region.

WHAT ARE THE PROSPECTS THAT YOU SEE FOR THE DOMESTIC MEXICAN MARKET: SALES, KEY FACTORS, THE CHALLENGES?

We are anticipating that 2012 will probably close around 985,000 units.
That’s a very healthy number and this is light-vehicle sales only. That’s an 80,000 unit jump from the 905,000 that we closed at in 2011.

There’s no question in our mind that we will probably, unless we have a Euro crisis that has serious repercussions globally, that we will be crossing the million-unit mark again in 2013 in terms of light vehicle sales.

What we are about to see in terms of growth for vehicle sales is not even remotely close to what we are seeing in production. It’s very marginal when you compare the two. We are probably going to grow at an average of 3 percent, 4 percent. We’re not going to take the giant leaps that we’re going to see on the production side.

Much of that is related to the fact that we have two factors that are impacting light vehicle sales right now.
One of them is the fact that we have no credit available so we are trying to restore credit into the market place so the consumer can have access to purchase a new vehicle.

Most importantly — and this is probably going to get worse over the next few years — is the fact that we have used-car imports coming in to Mexico, presently 10 years or older. But we’re going to open up over the next few years as we have to meet a NAFTA requirement and that could actually fl ood or hold back new car sales.

That is something we are reflecting in our forecast. What we anticipate is Mexico being about 1.3 to 1.4 million units by 2020. If you think about Mexico compared to some of its peers, Brazil for example or Colombia, many of these markets are going to double in size. Our economic figures currently indicate that Mexico could easily be a 2 million unit market, a 2.5 million unit market, but it won’t be able to attain that milestone as a result of used car imports.

HERE WE GO INTO 2013. PLEASE GIVE US AN OVERVIEW OF MEXICO’S GLOBAL POSITION IN THE INDUSTRY: ITS RANKING, ITS SIZE. THEN GO FROM THERE INTO THE COMPETITIVENESS OF MEXICO AS WE MOVE FORWARD ACROSS THIS DECADE.

We’re presently, if we look at Mexico production, the eighth-largest manufacturer in the world and we anticipate that it will continue to play within that band, it will probably be seventh or eighth over the next few years. Particularly we’re seeing a significant push in capacity in many of the growth markets that we have around the world, in particularly the BRIC. If we look at China which would be the largest one we are going to see additional installed capacity of roughly 12 million units over the next five years. India and Brazil are probably going to see around 2 and 3 million units of installed capacity and Russia will see a little bit less.

Mexico falls behind those countries and this is why it’s going to stay within that band of being seventh- or eight- largest player in the world and that’s from a production standpoint.
From a sales standpoint, Mexico is obviously smaller. We have a similar disadvantage when it comes to sales.
Mexico on the sales side has been 17th-largest market in the world, and it will continue to fall back as the years progress. I mentioned earlier that we are looking at 3 percent to 4 percent growth over the next few years and that’s small. So that’s a disadvantage that Mexico has.

LET’S LOOK AT THE TOTAL COST OF DOING BUSINESS FROM THE OEMS DOWN INTO THE TIER III SUPPLIERS. TO WHAT EXTENT MUST THE ASSEMBLY OPERATIONS BE INTEGRATED ALL THE WAY DOWN TO TIER III, AND HAVING SAID THAT, WHAT MUST THOSE IN THE TIERS DO TO MAKE SURE THEIR PART OF WHAT SEEMS TO BE A PROMISING FUTURE FOR MEXICO AUTO PRODUCTION?

I think Mexico needs to focus not only on assembling the vehicles for the rest of the world, which is currently what we are going to see. We’re going to see a combination of a maquila situation, if you may, over the next few years because we’re going to try to take advantage of the cheaper currency as well as very competitive labor or wages that we see now in Mexico.
We need to think about the fact that Mexico may not always necessarily be competitive in terms of wages or may not always necessarily be competitive in terms of currency and this is wher Mexico needs to start thinking about research and development.

Starting to develop some of these cars locally and that is where the biggest support is going to have to come in from the Tier I, Tier II and Tier III.

We have a very well-established Tier I sector in Mexico, there’s no question about that. All the global players are down in Mexico, we’re going to get a few more with investments that are coming in with the new OEMs. We do have a vacuum when it comes to the Tier II and Tier III and this is where we need to focus. That’s where an opportunity presents itself – to be able to bring in some of those Tier II and Tier III from the U.S. and other parts of the world. Have them play in Mexico, let them bring the know-how and then this way we can start to have the full scale operation down in Mexico and focus on being able to develop research and development for long-term opportunities for Mexico, so that Mexico is not only competing with cheaper or lower wages. It is able to compete with its know-how as well.

A NEW GOVERNMENT IS COMING INTO OFFICE IN MEXICO AND OTHER PARTS OF THE WORLD, HOW DOES ALL THIS APPLY TO SUPPLY CHAIN CONSIDERATIONS GOING FORWARD?

There’s a big challenge coming up ahead, I think we’ve already started to see the first smoke signals from different governments around the world. Energy efficiency, we have an actual resource that is highly coveted and whose price is fairly volatile; that’s oil. Many countries are pushing to become more efficient from an energy consumption standpoint. That of course is affecting the automotive industry.

We can see it in the duets where we are going not only to 36 MPG, 35 MPG by 2016 but we are already looking at 52 – 55 MPG in 2025. Something similar is happening on the European side, we have a target of 120 grams per kilometer with present standards we’re looking at moving into 90 grams of CO2 emissions in the not so distant future.

Mexico needs to take that into account. The suppliers need to take into account that they are going to have to be able to provide components that are lighter, that are just as durable as what we have. We also need to look at the next stage which is automation where cars are going to be able to or will have to be able to drive themselves in the future.
We need to start thinking about what comes after 2025 with these different energy policies and requirements coming into place that will spark the changes that the industry is already looking at, investing at.
We’ll have to see research and development grow.

WHAT’S ONE PIECE OF ADVICE YOU WOULD OFFER CONCERNING DOING BUSINESS THAT WOULD BE IMPORTANT FOR AN OEM TO MAKE “THE DECISION” CONCERNING MEXICO?

Vildozo: The big push that we would have with any OEM right now is putting pressure on the Mexican government to start to look at means of triggering the domestic auto industry.
That needs to be priority number one. We have all our eggs in one basket and that’s exporting to the U.S. and the very easy way to start hedging against that tendency would be to start to look at the domestic market and be able to grow the domestic market.