Mexico’s auto sector is on track to stage one of the most remarkable performances in the exciting global automotive industry.
Mexico’s production of light vehicles is set to reach four million units by 2017. If compared to 2010 (a post-crisis normal production year), this is an impressive annual compounded growth rate of 9 % for seven years.
The strength of the Japanese Yen, the low cost of credit in the US, new market opportunities in Latin America and Mexico’s unique geo-business conditions combine to pave the road for the country’s most relevant industrial story to date.
THE EXPORT MARKETS
The auto U.S. market captures about 70% of Mexico’s light vehicles exports. It is evidently Mexico’s main auto output driver.
After having continuously posted nine years at 16 million plus units from 1999 to 2007, U.S. light vehicle demand hit bottom during the economic recession in 2009 at 10.4 million units.
As a result of attractive loans and pent-up demand, and in spite of the slow economic recovery, the U.S. auto market is rapidly regaining its old patina. Light vehicle sales reached 14.5 million in 2012 and most analysts are predicting an increase to about 15.2 million in 2013.
The coveted 16 million sales levels are expected to be reached as early as 2015, but not later than 2016. Myriad new products are arriving in the market and the U.S. fl eet is at its oldest ever (11 years old), pointing to a very healthy consumer demand in the next few years.
In 2012, Mexico supplied almost 11% of the new vehicles sold in the U.S. Mexico actually exports more light vehicles to the U.S. than Canada, Japan, Germany or Korea. Today, one of every 4 imported units by the U.S. is assembled in Mexico.
Not later than 2019, as Mexico increases its production capacity in the next few years, it is reasonable to expect that it will have a sustained market share of the U.S. new vehicle market of at least 12.5%, meaning that Mexico would manufacture one out of every 8 new light vehicles sold in the U.S.
Europe and Latin America (Brazil and Argentina) represent by size, about 8% each, the other important export markets for Mexico. Neither of these regions currently offer outstanding market opportunities for light vehicles from Mexico in the near future.
But, in spite of the European economic woes, Mexico’s lower price-end models exports to Europe will enjoy modest growth. And, the new, revamped trade & quota agreements with Brazil and Argentina will provide more stability to these markets. Last year, both countries unilaterally reneged on their previous international trade accords with Mexico, abruptly stopping light vehicle imports from their northern supplier.
In 2012, Mexico’s auto industry had a record net foreign trade surplus of almost US$33 Billion. Total exports of assembled vehicles were US$63 Billion and imports reached US$33 Billion, making it the largest net generator of foreign exchange in Mexico for the fi rst time ever, ahead of oil, maquiladoras, tourism and remittances by Mexicans living outside the country.
Mexico is currently the fourth largest exporter of light vehicles in the world only behind Germany, Japan and South Korea.
THE FLOCK TO MEXICO
During the last few months, ten new OEM investments have been announced or launched in Mexico for additional vehicle assembly capacity.
Signifi cant projects from Japan, Germany and the U.S. will soon strengthen Mexico’s position in the global auto industry. Exhibit #1 shows a list of the projects which collectively represent approximately US$10 Billion worth of Foreign Direct Investment (FDI) in progress of deployment during 2012-2015.
Mexico simply makes sense for the new automotive investments. Among the usual reasons is the low cost of manufacturing, the mature auto industry labor and technical force, the large number of free trade agreements, the expanding landscape of suppliers and the unequaled geographic location for the supply chain logistics to serve NAFTA and South American markets.
But for the Japanese and German investors there’s also the exchange rate advantage. With the long-term rise of the Yen and the Euro against the Dollar (or rather the decline of the dollar), Asian and European manufacturers cannot afford the higher costs of producing at home and exporting competitively to the American Continent markets. They clearly need a dollar based manufacturing platform, which Mexico provides.
Ailing Mazda, citing the exchange rate as the biggest impact on its fi nancial performance expects that its 140,000 production from its Salamanca, State of Guanajuato plant will help them return to profi tability. They will also outsource an additional 50,000 units to Toyota to provide the plant with a more stable operation and help reduce the cost per unit.
In addition, Japanese and German auto OEM’s have been constrained from gaining market share among U.S. consumers because of their lack of production capacity in this region. If the retail dealerships in the U.S, do not have a reasonably large inventory of a given model, sales will simply not take off.
Honda, for example, indicated that the vast majority of its output from its new 200,000 compact units capacity plant in Celaya, State of Guanajuato would go to the U.S., in hopes of increasing its sales in North America to two million units by 2017.
VW wants its facility in Puebla to meet all demand for Gulf and GTI in the U.S., substituting the current imports from Europe, in a combined strategy of a price cut and raising dealers’ inventories. This is only possible using lower labor costs in Mexico and shortening the supply lines.
In order to understand the relative signifi cance of the new capacity investments in Mexico, it is important to analyze the composition of the NAFTA region auto manufacturing capacity.
Exhibit #2 illustrates the history and projection of light vehicle production in the NAFTA region for the period of 2000-2020 according to IHS Automotive Forecasting, a global leading consulting and information company.
Note that in 2012, Mexico represented about 18% of NAFTA light vehicle production, up from just 9% in 2004. Notably, in this forecast, Mexico is expected to produce 23% of NAFTA’s output by 2020, well above the 4 million unit mark.
North America light vehicle production capacity is shifting to the south, towards the southern U.S. states and Mexico, away from Canada and the U.S. Midwest states of Michigan, Ohio and Indiana. Beyond 2018, 50% or more of NAFTA’s light vehicle capacity will be at plants located in Mexico and the southern U.S. states.
The U.S. Big-3 continue to trust Mexico and to build and expand on their long-term industrial affair.
Ford’s US$1.3 Billion investment to create all new Fusion and Lincoln MKZ lineups at the Hermosillo Stamping and Assembly plant is an important milestone in Ford’s efforts to gain the favor of increased demand for mid-size sedans. The signifi cantly upgraded products will roll out of the assembly line in 2015.
GM also started to fund US$420 Million in new projects, including the capacity increase in San Luis Potosi for the assembly of the 5-passenger Trax SUV and a new pick-up generation in Silao, Guanajuato.
Chrysler Group US$500 Million expansion of its Saltillo, Coahuila plant will accommodate the production of the Fiat Ducato commercial van under the Ram brand.
And the most recent announcement of a new Audi 150,000 unit capacity plant in San Jose Chiapa, in the State of Puebla will bring a top luxury model to Mexico, the Audi successor to the current Q5 SUV. The facility is expected to be up and running by 2016.
On the heels of the VW plant in Puebla, Audi is expected to provide a steady supply of product to the U.S. market and introduce Mexico to high end vehicles with new materials, joining techniques and electric mobility. The Audi plant is “the cherry on the cake” for the recent wave of new auto investments in Mexico.
Exhibit #3 has the IHS history and outlook for Mexico’s light vehicle production which continues to grow at a rapid pace. Total annual volume is forecasted to increase by more than 1.2 million units between 2012 and 2019. The number of vehicle programs in production will climb from 35 in 2012 to 59 in 2019. The pace of new vehicle program launches peaks with 12 in 2015.
Nissan alone, with its US$2 Billion investment in Aguascalientes’ third facility, will be producing one million units by 2016 to feed its 25% sales market share in Mexico and 8% in the U.S.
Nissans’ one million production in Mexico in 2016 will outpace the expected, and also impressive, levels of Ford, VW and GM at 600,000 units per year each.
Guido Vildozo, IHS Automotive Director for Latin America said: “Recently, 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 the change that is coming to Mexico.”
Vildozo added: “Our outlook for 2013 is not as rosy as the last few years have been, taking into account what is happening globally. But moving into 2015 and beyond, we anticipate that Mexico’s auto industry will be moving toward light vehicle production of roughly 4 million units by 2017.”
But Vildozo warns: “Since most of the plants are located in central Mexico, the competition for qualified labor is a big challenge, making sure that we find sufficient skill sets for everyone.”
Look closely at Exhibit #4 for a more detailed description of Mexico’s auto OEMs’ manufacturing footprint. While Ford, VW-Audi and Chrysler have their own niche labor and technical pools, the Bajio region will likely experience the most competition for talent.
THE LOST DECADE
Mexico is currently the 8 th motor vehicle producer in the world, behind China, the U.S., Japan, Germany, South Korea, India and Brazil.
In the global auto production race, in the last few years, Mexico overtook Canada, Russia, Spain and France.
But from here on, the race gets a lot tougher, mainly because the two contenders in sight, Brazil and India are moving faster than Mexico. They are adding capacity on the heels of their domestic markets.
In spite of Mexico’s great prospects in the global auto industry, its success is built on an export markets focus, particularly the U.S. market. Mexico has done a good job in trying to diversify its export markets, but import quotas in South America and economic doldrums in Europe have limited its success.
The main opportunity for Mexico to get to the next level of production (5 million units per year in 2020) is to unlock its domestic market.
Indeed, Mexico could have twice (at least) the level of light vehicle domestic sales it currently has, really. Let’s review how.
Exhibit #5 lays out Mexico’s domestic sales for the historic and outlook period of 1998-2020.
Mexico’s final tally of domestic sales for 2012 reached about 987,000 units, just about the same level Mexico had in 2002-2003. Dr. Eduardo Solis, President of Mexico’s Auto Industry Association (AMIA) refers to this period as “The lost decade”.
Solis explains: “The economies of Mexico, Brazil and Argentina are very similar with about US$10,000 per capita income. But the South American markets move at a pace of about 19 or 20 new light vehicle purchases per 1,000 people per year, Mexico’s number is only 8. Clearly our domestic market has the potential to be close to two million units per year.”
Solis blames the legal and illegal used car imports from the U.S. as the main factor limiting sales of new units: “Mexico is the backyard of used vehicles from the U.S., which are mostly trash and a fraud for Mexican consumers. Used car imports depreciate the overall fleet of vehicles in Mexico and interrupt the natural consumer chain that leads to purchases of new vehicles as it happens in every country in the world.”
“In addition”, Solis continues, “they represent an environmental threat and a safety menace because of their poor mechanical conditions.”
For many years, auto industry leaders have urged federal and state governments to control and regulate the importation of used vehicles, which average close to half a million units per year. And although some progress has been made, there are still legal and illegal loopholes that keep them crossing the border.
Another factor limiting the domestic market is the lack of availability of loans. Currently, only about half of the purchases of new vehicles are through credit means, in comparison to 75% in most countries. Also, there are fiscal obstacles to buying new vehicles, such as the highly limited deductions from depreciation and interest expense for companies and individuals.
According to Solis, if full legal emissions and mechanical compliance are established to clean all the trash, and effective control over the imports under NAFTA regulations is exercised, eliminating the loopholes, Mexico’s domestic market would rapidly approach the two million unit per year level while creating, at the same time, close to 350,000 new direct jobs in the auto industry.
With almost 20% of Mexico’s manufacturing national product and over one million direct jobs, Mexico’s auto industry is the leading sector of the economy.
The leading motor vehicles associations of Mexico AMIA (OEMs light vehicles), INA (Auto-parts), AMDA (Dealerships) and ANPACT (OEMs commercial vehicles) have recently structured a strategic proposal (Mexico’s Automotive Agenda 2012- 2018) to improve the competitiveness of the sector. The document includes specific suggestions for public policy and actions to further develop the domestic market, enhance the total cost competitiveness of manufacturing, broaden the access to foreign markets and expand the industry’s innovation capabilities.
The Federal Government, through proper public policies, enforcement and incentives can further support Mexico’s auto industry and turbocharge its performance.