Mexico’s Auto Industry Goes Turbocharge
By Sergio L. Ornelas, MEXICONOW Editor
It was just about ten years ago that Mexico’s Auto Industry changed from a lethargic 1.5 million unit producer into the significant global player it is today.
With a production level of 3.2 million light vehicles in 2014, Mexico is set to reach over 5 million in 2020, courtesy of a production pipeline in process that includes the major Japanese, American and German auto makers.
Mexico’s automotive sector is unequivocally staging the greatest feat in the industrial history of the country. Nothing else in industrial Mexico comes even close in terms of volume, quality and global competitiveness to the performance and relevance the auto industry of Mexico currently has.
In 2014, Mexico leaped Brazil to become the seventh largest light vehicle producer in the world only behind China, the U.S., Japan, Germany, South Korea and India; and ahead of Canada, France, Spain, the U.K. and everyone else.
It is quite possible that Mexico will take over South Korea by 2020 and Germany by 2025, as these two countries continue to relocate capacity in their export markets (including Mexico and the U.S.). If Mexico also continues to expand it will take position #5 in a decade or so, merely behind China, the U.S., Japan and fast-growing India.
Mexico is a strong player in the global trade board and it is already the fourth exporter of light vehicles in the world right after Japan, Germany and South Korea. It will likely become #3 once it passes South Korea shortly after 2020.
The auto industry is one of the main pillars of the Mexican economy contributing over 20% of the total manufacturing sector’s GDP and employing more than 15% of the total industrial labor force in the country. It is also one of the top per capita wage employers.
Without the auto industry, the Mexican currency and the country’s trade balance would be in trouble since it is the top generator of foreign reserves, it boasted over US$80 billion in total exports and a foreign trade surplus in excess of US$47 billion in 2014.
In 2014, Mexico’s auto industry exports were almost twice as big as oil exports, five times larger than tourism income and three-fold the level of foreign remittances by Paisanos to Mexican families. Auto exports actually exceeded those of the combined three above mentioned sources of foreign exchange.
Among other benchmarks of the industry, Mexico is ranked #6 among auto parts producers in the world. And pending the final tally, it very likely already has overtaken South Korea to gain the #5 position in 2014.
And last, and certainly least, Mexico ranks #1 in the world in a category it wished it would not: Used car imports.
A major transition in the industry and the U.S. market
The global automotive business has generally recovered and it is back in growth and profitability modes, but there is unevenness in the regional markets.
While the North American market is enjoying a strong cycle, Europe is not, growth has slowed in China and sales have gone negative in Russia and Brazil.
Total global sales for 2014 reached 85.7 million units, up 3% from 2013; and most analysts predict that the 100 million world sales landmark will be likely achieved by 2019, certainly by 2020.
Other than the 2008-2009 great recession, the global economy and its impact on the auto industry is probably today at one of its most shrouded times, and forecasts are dicey to say the least.
What is certain, though, is that we are in a major transition that is already revolutionizing the global auto industry.
Consider the dramatic drop in oil prices, the swift increase in electronics and software in cars, the highly demanding gas consumption and safety regulatory requirements, the increasing competition for market share and the rapidly changes in consumer demand, all of which will influence the long-term strategies of OEM’s (Original Equipment Manufacturers).
For example, in order to reduce costs and meet consumer demand for more variety, OEMs are increasing the number of models they offer and at the same time reducing the number of platforms. VW is already moving to four modular platforms for all models, GM is going from 26 to 4 by 2025, and other OEMs are following a similar strategy.
As slow as the auto industry is in terms of product cycles, we are at the threshold of witnessing faster dynamics in the marketplace in terms of more vehicle program launches by the OEMs.
According to IHS, one of the leading consulting firms in the global auto industry, in North America alone, auto program launches will total 155 during 2014-2018, an unprecedented amount for any 5-year period in the region.
This trend evidently benefits Mexico which already has brand new assembly plants and is building more factory space to launch many of these programs.
Mexico has the red carpet extended for the Big-3, the OEMs from the rising sun and the “German Grand Prix” luxury car makers.
Fortunately, among the auto world markets, the U.S. is one of the most thriving, where light vehicle sales soared to 16.5 million in 2014, an increase of 6% or 927,392 units over 2013.
That was after piling on 1.1 million in 2013, 1.7 million in 2012, and more than a million in 2011 and 2010, up from only 10.4 million units sold in 2009.
But there is room to grow still in the U.S. market since the year 2014 ranked only ninth in the best sales years on record where the peak was at 17.4 million units in 2000. IHS predicts that this record level may be reached again in 2017 as shown in Exhibit #1.
The above is evidently very important to Mexico, since the U.S. consumers bought 71% of the light vehicles produced south of the border in 2014. In fact, Mexico supplied 11.5 of every 100 new automobiles sold in the U.S. in 2014.
Following is an unofficial, but very possible MEXICONOW prediction: If by 2020 Mexico reaches a production output of about 5 million units and exports 70% of that to the 17 million then projected U.S. market, Mexico will be supplying over 20% of all new cars sold in the US!
The coveted 5 million milestone
Mexico’s auto industry Compounded Annual Growth Rate (CAGR) in light vehicle production for the period 2004-2014 was an attractive 7.1% even after suffering a dismal volume in 2009 and having gone through the global great recession.
For the 6-year period of 2014-2020, Mexico’s auto industry growth will be operating on turbo-charge with a CAGR just shy of 9%; this is an enviable number even by Chinese standards.
At this pace, the coveted 5 million unit production year will happen in 2020 as shown in Exhibit #2constructed with data from IHS and AMIA.
According to Dr. Eduardo Solis, Executive President of the Mexican Automotive Industry Association (AMIA) the 5 million unit production prediction by 2020 is a “hard forecast” as opposed to a “soft forecast”.
He explained to MEXICONOW: “This is a ‘hard forecast’ because it is based on data that we already know from the OEMs about their real production plans and their actual installed capacity by then. It is not a forecast based on historical trends or potential projects; it is based on the projects and launches that are already in the works.”
He added: “And there might be more.”
Solis addressed the six elements that make Mexico attractive for new auto industry investments: “Our geographic location in the continent to reach North and South American markets; Mexico’s trade agreements network with major regions of the world; the strength of our auto industry supply chain; our young and eager to learn workers, technicians and engineers; our economic stability and very important, the Federal and States governments as major partners in infrastructure.”
Indeed, all of the above factors combined with Mexico’s competitive labor and engineering costs, a dollar based manufacturing platform, friendly unions and continuously improving logistics make up an ideal environment to produce light vehicles and deliver to world markets.
This is evidenced by the tide of new investments throughout Mexico’s geography as illustrated inExhibit #3. Notably, almost US$20 billion worth of new OEM plants and expansions have been built, are being constructed or have been announced in Mexico during the time frame of 2010-2014.
One thing that MEXICONOW has noticed while visiting assembly plants, and that it is seldom mentioned in particular as one of Mexico’s significant competitive advantages, is the vocational culture that Mexican workers have for the auto industry and how it translates into profitability for the OEMs.
Typically, Mexican workers, from the forklift operator to the R&D engineer are eager and proud to work for the auto industry. In contrast, in many other countries, including the U.S., workers are more likely to opt and seek the googles and apples for jobs.
This condition, call it “vocational love” for the auto industry, makes for a very fertile ground for OEMs to induct and teach their manufacturing culture to their workforce.
Actually, OEMs prefer to hire workers fresh right out of school so that they are not influenced by other work environments. As a result, OEMs of all origins, be it from Japan, the U.S. or Germany, are able to effectively and rapidly develop a viable operation, a “transplant” that fits right into their global operations and culture, a new facility that reaches productivity gains and bottom line returns sooner than later.
If Mexico’s auto industry has its way and reaches a production level of 5 million units by 2020, the light vehicle production shares in North America will have Mexico improving from an 18.7% share in 2014 to 27.5% in 2020 as shown in Exhibit #4.
So, shall we uncork the Champagne and start celebrating? Not quite, there are important issues still pending to get the auto industry of Mexico to an ideal position.
Mexico’s auto industry still has many distinct items to solve in the agenda. They are diverse, different in nature and hard to solve. We will briefly review five of the main ones in no particular order.
1) Most of the molds and tools used in the auto industry in Mexico are manufactured in other countries such as Spain, Portugal, China, the U.S. and Canada among the main ones.
Although most assembly and auto-parts facilities in Mexico have a dedicated “tooling maintenance” department for minor changes and repairs, the original molds used for metal stamping and plastic injection molding are supplied by specialized tooling manufacturers.
One hand has too many fingers to count the facilities in Mexico capable of supplying complex tooling to the auto industry.
The tooling industry is a highly specialized and profitable sector but it is a huge missing link in the auto industry in Mexico. One of the main reasons for this void in Mexico is the fact that tooling has a very close relationship with design and engineering; and traditionally, these two activities have been located physically close to each other, many times under the same roof.
Because of the competitive costs of engineers in Mexico, many manufacturers have established R&D as well as design and engineering departments but have not yet reached the necessary depth to be capable of designing complex tooling.
This is an important area of opportunity that needs to be tackled through specialized academic curricula in design and engineering and an effective promotion and incentives program to attract tool manufacturers to Mexico through joint-ventures or other means.
2) Another vacuum in the supply chain is at the Tier-2 and Tier-3 levels. Mexico is very well stashed in terms of Tier-1 suppliers, but there are many areas that lack the next level of vendors.
For example, Mexico has a large capacity for making seat covers which are used in domestic plants but for the most part are exported to U.S. facilities. But in spite of the huge volume, there is not a major Tier-2 supplier of the fabrics and textile materials in Mexico from which the seat covers are made of.
The lack of tooling facilities mentioned above is a case of Tier-3 shortage.
But there is ample opportunity in most fields for new Tier-2 and Tier-3 suppliers to come to Mexico for stamping, die-casting, machining, forging, plastic injection molding and foundries. About 70% of the total demand for materials from Mexico’s assembly and auto parts makers is still imported!
3) Since the auto assembly capacity installed in Mexico is geared for the global export markets, the OEMs’ focus for design, options and standards is precisely concentrated on the needs of the consumers in the foreign markets.
There is no local focus on the Mexican consumers. For example, the OEMs in Mexico do not have in their product lines vehicles designed for the Mexican family in terms of size, pricing and options. They supply the domestic market with “global cars” which many times do not fully fit the various customer segments in Mexico.
And although this is changing as some OEMs are already specifically targeting the sub-compact and compact segments in Mexico, only about half the units of the total domestic sales are actually made in Mexico, the other half is, of course, imported vehicles.
A local focus will hopefully keep evolving as the domestic market grows and ideally, some time in a not distant future, Mexico may reach the level of Brazil, where most of the domestic sales are supplied by local OEMs.
4) The after-market (spare and add-on parts) in Mexico is contracted and has hardly reached its US$25 billion plus potential.
The after-market is flooded with sub-quality parts from two sources: First, used parts from the millions of older and recycled vehicles in Mexico whose inventory has a huge feeding pipeline of imported used cars; and second, an enormous amount of sub-par auto parts imported from China.
This has to do with another big problem in Mexico which is its stage of infancy in regulations, even lagging most Latin American countries and some nations in Africa.
In fact, implementing and enforcing circulation, emission, mechanical and parts standards and norms would significantly revitalize the after-market and help control hazards such as pollution and accidents.
5) The domestic market represents the biggest challenge for the auto industry of Mexico. Even though domestic sales in 2014 grew at a notable rate of 6.8% over 2013, the volume is far from the real market’s potential.
The 1,135,000 units bought by Mexican consumers in 2014 equate to about 9.5 new vehicles sold for every 1,000 inhabitants. Industry leaders contend that since Argentina and Brazil, with similar economies to Mexico, have about 17 new units per 1,000 people, it follows then that Mexico’s current sales level should logically be higher.
Both AMIA and AMDA (Mexico’s Auto Distributors Association) place most of the blame for the disproportion in Mexico’s market on the likely lawlessness process to import used cars, which have inundated Mexico’s turf with over 7.5 million junk units since 2005.
Through a series of legal, lobbying and customs actions, the associations have fought the disorderly imports and have managed to lower them to about 450,000 imported used units in 2014 from over 700,000 a few years ago. Please see a more detailed discussion about this subject in the article “Used car imports plunge” in this issue of MEXICONOW.
Exhibit #5 shows that in 2014, Mexico’s domestic market finally was able to reach the level it had back in 2005 in a time period that the associations labeled as “The lost decade”.
According to AMDA, the technical forecast for 2015 is to sell 1,200,000 units. MEXICONOW gathered opinions to build the forecast shown in the graph for the time range of 2016-2020 with an average CAGR of 3.5% to achieve about 1,400,000 units in 2020.
There are other factors limiting the sale of new autos in Mexico, which include very limited loans by commercial banks and relative higher taxes compared to other countries. New car loans in Mexico account only for 60% of all sales whereas this figure in Brazil is 80%, and on top of that their new car taxes are lower as well.
Perhaps the fundamental root of the problem of Mexico’s domestic market can be traced to the fact that according to OECD estimates, 60% or more of the total working-age population is in the informal economy, meaning that they are not registered to pay taxes or social security.
As a result of their tax situation, or lack thereof, this sizable portion of potential consumers are not worthy of credit and are having to pay cash for a new car at best, repair their old one, or worst, opt to buy a cheap used import.
Hence, as long as the government continues to allow the informal economy as a way to earn a living, the domestic market will not reach its full potential even if used car imports and availability of loans are taken care of.
Bear in mind that used car imports will not stop, they are allowed under NAFTA. What will stop are the importation of junk units and the avoidance of import taxes. It is our estimate that once used car imports are compliant for all legal purposes, about 200,000 or so will find their way to Mexico every year.
Our forecast of 1,400,000 by 2020 considering a 1.0% annual population growth will put the domestic market at 11.2 new cars per 1,000 people. Discounting for used car imports, people unworthy of credit and other adjustments the full potential of Mexico’s market is probably at about 14/1000 or approximately 1, 750,000 units.
Mexico’s auto industry stands on its own. The combination of foreign OEMs and domestic labor and resources is formidably competitive at a global scale.
There are very few other high performance industrial case studies in the world comparable to Mexico’s auto industry’s success in the second decade of the twentieth first century.
All participants in the value chain of Mexico’s auto industry should be proud and willing to improve going forward: OEMs, auto parts suppliers, export markets, employees of all levels, federal and state governments, domestic consumers, trade associations, support service firms, media and even luck need all be in and aligned to bring Mexico’s auto industry to new heights.
The auto industry embodies the best set of circumstances Mexico has had since reportedly extraterrestrial Quetzalcoatl visited and settled at the Mayan peninsula. The only difference is that the alien deity left without trace and the auto industry is in Mexico to stay and amaze.