New Products and Competitive Manufacturing Drive an Optimistic Outlook
Mexico’s auto industry is on its way to achieve the country’s biggest industrial feat yet.
In the aftermath of the world’s great recession and the seemingly bottomless auto crisis, Mexico’s auto industry emerged notably strengthened to compete in the international marketplace.
In spite of a very weak domestic market, Mexico’s light vehicle production volume will beat all previous analysts’ forecasts and set new record highs in the short-term.
In this article, we will first review Mexico’s battered domestic auto market.
We will next take a brief look at the main auto global markets, followed by an analysis and forecast of the exceptional export market opportunities at hand for Mexico’s auto industry.
THE SHOEMAKER’S CHILDREN ARE THE WORST SHOD
The saying in Spanish: “En casa de herrero, cuchillo de palo” is not a bad description of the current business situation of Mexico’s domestic automotive market.
To illustrate how depressed Mexico’s domestic auto market is, let’s compare it to Brazil’s, a country with relative similar economic indicators to Mexico’s.
Consider that back in 2005, about 11 new cars were sold in Mexico for every 100,000 people, while Brazilians bought only 9 per 100,000.
Five years later, in 2010, Brazil managed to almost double its domestic new auto sales to about 17 per 100k.
In the meantime, Mexicans reduced their purchases to 7 per 100k.
Mathematically, the Brazilian domestic market outperformed Mexico’s by almost exactly 200%, in just five years! How can that be? How bad is Mexico’s internal commercial policy for domestic new car sales to be lagging behind an average of 40 percentage points every year, consistently for half a decade, when compared to a similar marketplace? Let’s assume that realistically, Mexico can aspire to reach a domestic sales level of 14 new cars per 100k people.
The domestic market would then reach 1.6 million units per year, about twice the current level of approximately 800,000.
This move alone would create about 500,000 new quality / highpaying jobs in Mexico and it would pump into the economy about US$15 billion, which would automatically increase Mexico’s GDP by 1%.
What can be done to get Mexico’s domestic auto market on the right track? One of the biggest problems is the importation of used vehicles from the U.S.
Since 2005, when former President Fox precipitated the legal importation of used cars and light trucks, almost 5 million units have been imported, severely crippling the normal consumer process or chain of buying and selling used and new cars in the market.
The used, cheaper imported cars actually created another car “class” layer for many Mexican consumers before they upgraded to a new unit.
In a 12-month period alone between 2007 and 2008, there were more used cars imported than new cars sold in the Mexican market.
Mexico’s private organizations cried foul because the imports are not sufficiently regulated for safety and environmental standards.
Unfortunately, the legal importation of used cars and the “regularization” of illegal imported units has been an old tool used by political parties in Mexico to gain the favor of voters.
The global recession and the credit crunch evidently affected the domestic market significantly as well.
Back in 2008, slightly over 60% of new car purchases were financed (About 555,000 units), but in 2010 only 47% of the operations were leveraged (Approximately 341,000 units).
Unlike other countries that quickly acted during the recession, such as the U.S., Germany and Brazil, Mexico did not implement sufficiently effective initiatives to strengthen consumer credit to keep the new auto market alive.
Nor did Mexico enact strong fiscal incentives, as did its counterparts, to spur demand for new cars.
Mexico’s version of “Cash for clunkers” (“Programa de Chatarrizacion”) was a complete flop and only managed about 13,000 takers.
Another recent program from the government, the elimination of the auto “Property tax” (“Tenencia”) is likely to follow the same route.
The federal government “eliminated” this tax (about 3%) for new vehicles but allowed the individual states to create their own “State auto property tax”.
The “Distrito Federal” (Mexico City) government already announced its own version of the tax.
Mexico’s initiatives to support its auto domestic market are neither focused nor effective.
They are complicated, somewhat imprecise and usually shrouded in bureaucratic entanglements.
Mexico’s fiscal authority needs to implement precise, effective and no-nonsense incentives to promote domestic auto sales.
For example, eliminating the federal tax (about 10%) for new auto sales for units produced in Mexico for two or three years, without strings attached, would be a significant buster.
As things stand today, IHS-Global Insight, the world’s largest business forecasting consulting firm, predicts that Mexico domestic sales will behave as shown in Exhibit #1.
Notice that Mexico’s final 2010 tally for auto sales reached 820,000 units and that the road to recovery back to pre-crisis levels will be a long and slow one.
Light vehicle sales are expected to grow at about 5% per year from 2011 to 2015.
Unless, Mexico’s auto industry hopes, the federal government does something effective to significantly increase this rate of growth.
As far as market share goes in the Mexican domestic market, manufacturers continue to jockey for position as illustrated in Exhibit #2.
According to HIS-Global Insight, Nissan closed 2010 at the top of the Mexican market, enjoying a 23% market share and is on track to achieve pre-recession sales levels as early as 2012.
Nissan is selling well because of a product lineup rich in vehicles that compete in the top-selling industry segments in Mexico, including subcompact (Tiida) and compact cars (Tsuru) and the electric Leaf.
GM is sitting comfortably in second place with 19% of the market.
Over 2010, GM increased its lead over third-place finisher VW.
GM finished the year up 13% riding the success of the Chevrolet Cruze and Sonic (formerly named the Chevrolet Aveo).
VW grew at about the general market’s growth rate of 9% in 2010.
Ford and Chrysler will continue to play aggressively and to vie for the fourth and fifth spots, respectively.
Fordiscurrently trumping Chrysler, but lost volume compared with 2009.
Now that Chrysler has allied with Fiat, it may be able to grow its market share in Mexico.
As Mexico’s light vehicle market approaches 2015, the market shares of Nissan, GM and VW will narrow closer together.
NOT QUITE A CHINESE TALL STORY
China’s successful auto market is not a “Cuento Chino”.
Neither is Brazil’s nor India’s.
Exhibit #3 shows the projection by IHS-Global Insight for the main light vehicle markets of the world.
By 2015, China will be, by f-a-r, the number one market with almost 25 million units per year, up from about “only” 5 million light vehicles sold in 2005.
This means a staggering 10- year growth of 400%! The U.S. will be at about 17 million units in 2015 in the #2 position in market size.
According to the projection, the U.S. market is expected to be flat at that level of sales for the next decade.
By 2015, Japan is expected to have position #3 at 4.8 million, closely followed by India (#4) with 4.6 million and Brazil (#5) at 4.2 million.
Mexico’s domestic market is expected to be ranked #17 by 2015 with only 1.1 million units.
The U.S. market, Mexico’s exports pivotal source of demand, rebounded from its 30-year low sales volume of 10.4 million units in 2009 to 11.6 million in 2010; it is expected to reach 13.1 million in 2011 and eventually attain its normal level of 16 million units not later than 2013.
There is probably no Hollywood business thriller rivaling the true story of GM’s meteoric process of bankruptcy, government take-over, return to profitability, new public offering in the stock market and, hopefully soon, the buy back of the U.S. government equity interest in the company.
GM was able to accomplish the previously unimaginable come back by undertaking three main strategies to cut costs: Number one, reducing the number of white collar workers by the thousands.
Number two, transferring its legacy and pension costs to the U.S. government and the United Auto Workers.
And number three, by closing inef- fcient plants in the U.S. and transferring some of those operations to Mexico.
THERE IS NOT BAD FROM WHICH GOOD DOESN’T COME
The Spanish saying “No hay mal que por bien no venga” may be a good way to describe how Mexico emerged a stronger player from the auto crisis.
Indeed, Mexico has been for a longtime a low-cost platform option for global OEM’s particularly the U.S. “big-3”.
But, in the turbulence of the global auto crisis, Mexico’s buoying cost advantage and quality labor force became even more evident as a strong competitive resource for auto assembly and auto parts manufacturing.
Consequently, Mexico improved its position in the plans of OEM’s and their supply chains.
As the auto crisis receded and the markets started to recover, Mexico was well prepared in terms of production capacity, vehicle models and supply chain support.
As a result, Mexico’s exports soared in 2010, reaching 1.86 million units, an unprecedented increase of 55% over 2009, and a record high for Mexico’s auto industry.
To put the above accomplishment in perspective, consider that in 2010 Mexico supplied 11 of every 100 light vehicles sold in the U.S. market, just a tick behind Japan exports to the U.S.
But in January 2011, Mexico already overtook Japan as the #1 light vehicle supplier to the U.S. market.
In that month Mexico exported to the U.S. about 116,000 vehicles, representing 14% of the total units sold in that market.
Is this pace sustainable? From the data we have at hand from HIS-Global Insight, it is reasonable to assume that Mexico will likely continue to be the #1 light vehicle supplier to the U.S. market, with a market share of about 11% to 12% in 2011-2012, and gradually increasing to over 13% towards 2015.
Just in case someone asked for icing on the cake, let’s recall that Mexico has been, for some years now, the #1 auto parts supplier to the U.S. market powered by its numerous exporting manufacturing plants including maquiladoras.
In 2010, auto parts total exports posted a new all-time record at US$36.95 billion with over 80% reaching the U.S. market.
This fgure is 42% higher than 2009 and about one billion above the previous record set in 2008.
We can unequivocally state, that the recent performance of Mexico’s auto industry in international markets is the best ever in Mexico’s industrial history.
Please browse through Exhibit #4 which shows the history and projection of Mexico’s light vehicle production along with exports.
Notice how exports propel manufacturing to a level of almost 3.5 million units by 2015, an increase of 54% over the already historical all-time high of 2.26 million in 2010! New products and their penetration and acceptance in the U.S.market are driving the optimistic outlook.
Nissan de Mexico production is expected to go from about 450,000 units in 2010 to 600,000 in 2012, adding the Micra to the product line on top of the Versa, Sentra and Nissan’s pick-up.
GM’s production is set to go from half a million units in 2010 to over 800,000 in 2015 riding the Sierra / Silverado, Captiva and SRX.
VW is planning to leap from 350,000 units in 2010 to almost 500,000 by 2014 on the Jetta and NCS; and add the Polo in 2015.
Ford’s success with the Fusion, and now the Fiesta and eventually the “B” cars line, will take the company in Mexico from 370,000 units in 2010 to 620,000 by 2014.
And Toyota, who has been slow in picking up production in Mexico, is reportedly set to go from 50,000 Tacomas in 2010 to almost 250,000 total units in 2015 if it starts producing the Yaris.
Exhibit #5 shows Mexico’s exports feet offensive line for the U.S. market.
All of them are in the top-20 selling vehicles in the North American market; in particular, Fusion is #5 among cars, and Silverado is #2 in the pick-up class.
In a nutshell, Mexico’s auto industry success in the export market is not a coincidence, but rather a well planned combination of competitive capacity utilization, product market acceptance, a lean supply chain and evidently a talented labor and technical workforce.