Mexico’s auto industry’s star continues to rise, and unequivocally, it is the most relevant story in Mexico’s industrial history. Mexico is already the #1 foreign supplier of U.S. light vehicles imports and auto parts.
In addition, Mexico is currently the world’s ninth largest producer of automobiles and light trucks and the sixth largest exporter. And powered by significant new investments from Japanese firms, among other auto OEMs, Mexico’s light vehicle production is set to grow to over 3.5 million units in just a few years.
THE ASSEMBLY OF AN INDUSTRY
Mexico’s auto industry is about 90 years old. A few years after the Mexican revolution struggle, in 1921 Buick became the first automobile producer to be established in Mexico. In 1925, Ford Motor Company came to Mexico and as of today remains the longest- running brand in the country. At that time, all vehicles were imported and little manufacturing took place in Mexico.
But in the early 1960’s, in an effort to develop a national auto industry and promote employment, federal government regulations forced car companies to assemble vehicles in Mexico, using local and imported components. Many brands left the country including Mercedes Benz, Fiat, Volvo and Peugeot, but the U.S. Big Three remained along with American Motors, VW, Renault and Datsun (Now Nissan).
The first auto assembly operations opened in the mid-60’s. As the Mexican and export markets developed, growth intensi- fied in the early 80’s with Saltillo, Puebla, Aguascalientes, Chihuahua and Hermosillo breaking ground on larger scale auto assembly and engine manufacturing facilities.
NAFTA and the economic expansion of the late 90’s brought new models to the Mexican assembly floor space. At this point in time Mexico’s auto industry started to mature and the domestic market and exports were both at about one million units.
But most importantly, as global competition grew and production costs pressures intensified, Mexico gained more attention as a low-cost North American manufacturing platform in the OEMs’ board meetings and company planning strategies.
Paradoxically, the economic slowdown of 2001-2005 favored Mexico’s auto industry, as more production was sent to the competitive Mexican facilities. In 2007, production hit two million units and export volume was over 1.5 million.
Then, in the turbulence of the great recession and the global auto crisis of 2008-2010, 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, assembly plants in Mexico further improved their position in the plans of OEM’s and their supply chains. As the auto crisis receded and the markets started to recover in 2010-2011, Mexico was well prepared to rip the benefits.
THE INVESTMENT TSUNAMI
George Magliano, Senior Economist for IHS Automotive, the largest global auto consulting firm, told MexicoNOW: “We look at the production base in Mexico, we are extremely pleased. The equation has changed and changed dramatically over the last couple of years, as far as the attractiveness of Mexico. This is only going to get better as the recovery continues to improve and production levels get higher in North America. Mexico is positioned very well to benefit from that.” Magliano added: “It started with the Detroit Three committing a lot of their highend value programs in Mexico and now with the issues of the Yen and the Euro, North American locations, particularly Mexico, are becoming a much more attractive place to put assembly plant facilities.” Mazda Motor, in collaboration with Sumitomo is building a US$500 million assembly plant in Salamanca in the State of Guanajuato. At full capacity it will employ about 3,000 and produce 140,000 units of the Mazda2 and Mazda3 models. Latin America is the main target market for this facility.
“Since Mazda established its sales network in Mexico six years ago, we have experienced a remarkable acceptance from the people of Mexico. Last year Mazda sold over twenty-five thousand vehicles and captured over three percent market share,” said Mazda’s President Yamanouchi at the plant’s groundbreaking. “We are excited to be constructing this new facility here in Mexico with our partner Sumitomo Corporation.
It will be vital to bolstering our expansion in Central and South America.” Honda is investing approximately US$800 million to build a new plant in Celaya, Guanajuato, which is scheduled to begin operation in 2014. It is expected to employ approximately 3,200 associates at its full annual capacity of 200,000 units of fuel-efficient subcompacts for the Mexican and other North American Markets.
Tetsuo Iwamura, president of American Honda Motor Co. said: “This new plant will further strengthen the foundation of Honda’s North American business by enabling Honda to more flexibly respond to changing market conditions from within the region.” Nissan Motor Co. also announced plans to invest up to US$2.0 billion for an all-new manufacturing complex in Aguascalientes to support the company’s Americas growth strategy. The facility, which will complement Nissan’s two existing Mexican factories, is scheduled to begin operations in late 2013. During the initial phase of its development, the new complex will support production of up to 175,000 units annually of Nissan’s ‘B’ platform products. With 3,000 additional jobs, Nissan’s total headcount in Mexico will expand to nearly 13,500.
“Mexico is a key engine for Nissan’s growth in the Americas,” said Carlos Ghosn, Chairman and CEO. “The new facility is an important pillar in our strategy to ensure our capacity to increase sales and market share in the Americas.” “These are all great moves,” expressed George Magliano. “They’re showing how they’ve stayed in Mexico with their dollars, with their investment dollars and moving down there and quite honestly we don’t see these as the last moves, we see other manufacturers moving into Mexico and we see continued growth in the production base in Mexico.” Indeed, for the last 5 years, Toyota has been entertaining plans to build additional auto assembly and engine production capacity in Mexico. Perhaps its competitors’ moves will prompt Toyota to decide soon.
China’s Geely has also been tossing plans for a 300,000 unit car assembly facility in Mexico. Geely Holding Group Chairman Li Shufu has openly talked about the project since 2008. Korea’s Hyundai, Canada’s Magna-Steyr and Germany’s Audi have also stirred rumors about new vehicle facilities in Mexico.
Bear in mind that the Asian automotive large investments come on the heels of hefty projects by Ford, GM, Chrysler and VW during 2005-2010, collectively surpassing US$3 billion in new and expanded production facilities.
THE NOTABLE NUMBERS
Exhibit #1, sourced from information by IHS Automotive, shows the history and outlook through 2015 for Mexico’s light vehicle production and exports. In 2011, Mexico hit a record total production volume of 2.55 million units. Most notably, in 2011, exports broke the two million unit mark and set a record high of 2.14 million units.
And leveraged by the new investments and the global market recovery, Mexico is set to reach almost 3.5 million units of production as soon as 2015 and exports of over 3 million vehicles! This will position Mexico in the coveted top eight global auto producers; behind China, the U.S., Japan, Germany, India, Korea and Brazil.
Exhibit #2 breaks down Mexico light vehicle production by manufacturer. While GM and Nissan jockey for the top position, VW and Ford are not far behind. Notably, by 2016, all four will be at a production level of about 600,000 units each! Chrysler’s recovery and the Asian newcomers consolidate Mexico’s impressive growth in the global auto industry.
From the perspective of North America alone, if we look in Exhibit #3 at the light vehicle production of the three NAFTA members, we can see that by 2015 the U.S. recovers to pre-recession production level of 12 million units. Canada comes out as the loser and Mexico as the big winner.
The North America production graph shows that by 2016, Mexico production share in North America will be 20.6 %, up from 19.4% in 2011, gaining substantially over Canada, whose share shrinks to 10.6% in 2016, down from 16.2% in 2011.
Mexico’s fully loaded wages in the auto industry are about US$5 per hour in assembly plants and about US$3 per hour in auto parts manufacturing facilities. In comparison, wages in the U.S. and Canada would average in the low US$20’s per hour. Foreign manufacturers save in excess of US$30,000 per employee per year by manufacturing in Mexico.
But not everything is rosy in Mexico. Higher utility rates across the board, extra freight and management costs, security and political concerns and other disadvantages play against the country.
Global auto industry investors have to consider myriad factors when deciding plant locations. So even taking into account the minuses to operate in Mexico, the new plant locations announced in Mexico, evidence not only the low-cost labor competitiveness of Mexico but also the trust in Mexican manufacturing quality and logistics to reach markets throughout the American continent.
Exhibit #4 illustrates the location of OEM auto facilities in Mexico. As of late, there is a clear preference for the “Bajio” region of central Mexico where most of the new plants and expansions are taking place.
MARKETS AND PRODUCTS
As noted in the car license plates numbers of our cover, the main export markets for Mexico were the U.S., Germany and Brazil. The recovery of the U.S. market has been fundamental in supporting Mexico’s output. The U.S. remains the biggest market for Mexico’s auto exports; it grew 6.7% in 2011 to 1.36 million units.
But Mexico’s exports are nicely finding new diversification markets in Central and South America. This was a much needed move to further strengthen Mexico’s longterm position as a hub producer for the total American Continent.
Actually, Mexican exports to Brazil are growing so fast that the Brazilian government is asking Mexico for options to balance the widening trade balance between the countries. Mexico has expanded its free trade agreements in South America and exports to that region grew 56% in 2011 to about 325,000 units.
Ford’s Fusion and VW’s Jetta continue to lead production and exports as shown in Exhibit #5. These high-volume models are near the 300,000 units mark, setting another record for Mexico’s production in one year for a single model.
After 18 years of life, the “Chevy”, one of the most popular compact entry vehicles in Mexico will no longer be in production at the GM plant in Saltillo. It will be substituted by the “Sonic”, currently in production in Korea. GM is investing over US$400 million in preparation to launching production of the new model. South and Central America, as well as Mexico, are the main target markets for the “Sonic”.
A STEEP HILL
The Achilles’ heel of Mexico’s auto industry is the domestic market. Since the turn of the Century, Mexican consumers were able to purchase about one million new units annually. Domestic sales actually peaked at 1.15 million in 2005.
But when the recession hit, Mexico’s light vehicle sales plummeted to only 750,000 units in 2009. Since, as shown in Exhibit #6, the recovery of the domestic market seems like a long and slow climb up a steep hill. Pre-recession levels are not expected to be reached until 2016.
In comparison, by Brazil’s market performance, for example, where domestic sales of new vehicles are 17 units per 100k of population, Mexico’s market size should be 1.8 million. This is twice of what it actually was in 2011! Many factors such as the lack of credit, the high taxes and the recession may be pointed at for the low domestic sales in Mexico. But undoubtedly, the main cause is the open border for importing used cars from the U.S.
There are almost six million used imported units on the roads in Mexico. In 2011 alone, the imported units exceeded 400,000. Mexico is clearly a dumping ground for U.S. used cars. Evidently, these cheap, environmentally and mechanically sub-standard units are not only a threat to the new car market but also to the public’s safety and health.
A “take it back” legacy of NAFTA, the door is open for used Canadian and U.S. old cars. Mexico can only hope to increase the NAFTA non-violating restrictions at hand for used car imports and to enforce the mechanical and environmental compliance of the used imports. A not so easy feat to accomplish at northern Mexico’s import inspection points.
THE ROAD AHEAD
Mexico is the leading auto parts supplier to the U.S. market. Auto parts produced in Mexico whether shipped loose or as part of a vehicle, reached a record high US$66 Billion in 2011.
Many auto parts projects continue to be announced in Mexico in anticipation of the new OEMs’ investments. The continuing development of the supply base, particularly Tier-2 and Tier-3 suppliers, is a fundamental condition for the long-term competitiveness of the industry. Please see Exhibit #7on page 30 for a partial list of auto projects in Mexico in 2010-2011.
Even if Mexico’s auto industry’s star is shinning like never before, Mexico must continue to correct its biggest challenge: the domestic market; and to pursue its major opportunities: the development of its supply chain and the diversification of its export markets.
Sergio L. Ornelas has 30 years of experience in international trade and direct foreign investment. He has business degrees from Babson College, Southern Methodist U. and Harvard; he was head of the State of Chihuahua Industrial Promotion Agency in 1980-5 and General Director for Intermex Industrial Parks through 2000. He is MEXICONOW’s editor. He may be contacted at: email@example.com