Mexico’s Auto Industry Roars

Electronics Disrupts Auto Sector
By Sergio L. Ornelas, Editor MEXICONOW
Blurred industries.

Our recent visits to the two most important trade shows held in January in the U.S. revealed the growing convergence of the auto and the electronics industries.

Ironically, during CES, the annual electronics event held in Las Vegas, automobiles stole the scene, while electronics were paramount at the Detroit motor show.

Electronics have been present in operating vehicle systems since the 70’s, but in the past few years we have all witnessed the “invasion” of whizzing electronic options and gadgets in vehicles: Bluetooth, infotainment, navigation, apps, touchscreens, voice recognition, Wi-Fi and satellite communications, phone integration and myriad others.

But the advent of driverless automobiles and car-sharing trends are taking the convergence of cars and electronics to a new and higher level, which might threaten and disrupt the auto industry as we know it today.

Consider that while most auto OEMs are working on developing driverless vehicles, Google’s maps, robotics, test vehicles and R&D integrate the current leading platform and technology of self-driving cars.

And while some automakers are experimenting with car-sharing, companies such as Uber and Lyft are light years ahead of the game.

Also, did you know that in theory, Apple, with its cash reserves of US$190 billion, could purchase Ford, GM, Chrysler and Tesla… together? Alas, Google’s cash reserves of US$60 billion and Microsoft’s US$95 billion are only good to buy the package of Ford and Chrysler or the bundle of GM and Tesla.

Uber does not have the giant techs’ deep pockets, but its valuation of almost US$65 billion is impressive and higher than Ford’s and GM’s, each at about US$55 billion.

Industrial convergence, as in marriage, is simply the union of two parties, hopefully usually in harmony…until one side becomes dominant.

More on this later after we review the current and thriving state of Mexico’s production of light vehicles.

Top 5?

The arrival in Mexico of the “German Grand Prix” of luxury vehicles (Mercedes Benz, BMW and Audi) on top of the significant expansions by Detroit’s “Big-3” (GM, Ford and Chrysler) plus the recent investments and announcements by the “Rising Sun” companies (Honda, Mazda, Nissan and Toyota) and South Korea’s KIA are propelling Mexico upward in the ranks of light vehicle producing countries.

Country rankings for 2010-2020 are shown in Exhibit #1. Please note, that Mexico with a 2015 production of 3.4 million cars and light trucks leaped over Spain and Brazil since 2010; and most analysts predict it to reach the sixth position with 5 million units, and overtake South Korea by 2020.

On the heels of about US$25 billion investments by the major global OEMs during 2010-2015 as illustrated in Exhibit #2, Mexico has managed to produce the most remarkable achievement of its industrial history.

Beyond 2020, the only catchable competitor within a few more years is Germany with a very stable annual production of about six million units. There is a strong possibility for Mexico to make it to the top-5 if its production grows at about 5% per year during 2020-2025.

China, the U.S. and Japan are in another league and projected to be at approximately 30, 12 and 10 million units respectively by 2020. India is a statistically elusive player, but with its huge population it will handily run away from Mexico’s reach.

Light vehicles world total production will be slightly above the 100 million units in 2020 and Mexico will be center stage.

A worker tests the shock absorbers for a new Ford Fiesta at the Ford Motor Co. plant in Cuautitlan<br /> Izcalli, Mexico
The President of the Mexican Automotive Industry Association (AMIA), Dr. Eduardo Solis told MexicoNOW: “Mexico’s auto industry has a tremendous impact on the country’s trade balance, it is the top generator of foreign exchange with a net trade surplus of over US$50 billion in 2015; one of every four dollars that Mexico exports is from the auto sector.” 

He added: “Mexico is the fourth largest exporter of light vehicles in the world and the sixth largest global exporter of auto parts. And notably, Mexico was the #1 supplier of light vehicles and auto parts to the U.S. In 2015, 11.5% of all new light vehicles sold in the U.S. came from Mexico, just shy of two million units: 1,993,162 to be exact, representing a 6.3% increase from 2014.”

Road bumps ahead

But as the speed of production and exports increases for OEMs and their suppliers in Mexico, drag starts to appear in the value chain.

Guido Vildozo, Latin America Manager for IHS, a leading auto forecasting consulting firm told MexicoNOW: “Overall, the global auto industry still grows, but not at the same pace we were anticipating 12 months ago. Since then, we have seen the weakening of commodity prices and the weakening of emerging markets”

“We were expecting double digit growth in Mexico in 2015, but production grew 5.6%. The local market and the U.S. market did fine but exports to South America and other emerging markets decreased.”

Exports to Brazil in 2015 fell 42% from 2014’s 103,000 exported units, and China was 41% down for Mexico last year as well.

Vildozo said: “Now I think reality is starting to settle in, there is a realization that this is not going to be a walk in the park and that realization has left the industry in Mexico with a more cautious stance today than what we had a year ago.”

Another potential Achilles for Mexico is the infrastructure for logistics. Mexico is currently exporting 2.76 million units (72% to the U.S.) and many of the logistics resources are already saturated. Most in the industry worry what it will be like when Mexico reaches the coveted production landmark of five million units with an estimated four million vehicles going to foreign markets. 

Keishi Egawa, President and CEO of Mazda Motor Manufacturing of Mexico told MexicoNOW: “We face logistics constraints in Mexico. We have a concern about the capacity of the railroad, the rail track and the capacity of the rail wagons specially designed for the auto industry. There is a lack of rail wagons at the moment so we have to use trailer and truck to reach the ports of Veracruz and Mazatlan.” (Read the related story in this issue “Rail and ports cause auto companies concern”).

Agustin Picado, UPS Country manager weighed in on the subject: “There are capacity issues, road condition issues and there is congestion. Yet at the same time there are more projects underway. My point is there is tension in the process, it can’t happen fast enough for all of us.”(Related story in this issue: “Customs and infrastructure challenge”).

Another area where there are ample opportunities is the supply chain. Oscar Albin, Executive President of the Mexican Auto parts Manufacturers Association told us: “The supply chain is moving ahead in Mexico. Tier-1 suppliers are well-established including flat steel production for vehicle bodies, which we were behind for many years. But we need to bring more Tier-2 suppliers.”

He added: “Mexico still imports billions of dollars of auto parts mainly from the U.S. followed by Asia and Canada. The vast majority of our Tier-2 auto parts are still imported. Seat parts, airbag parts, axle and engine parts, even components for harnesses.”

Mexico’s competitive advantages of location, free trade agreements, quality and cost of labor and engineering, favorable government and unions, demographic and vocational bonuses among other positive traits, have positioned the country in an enviable position.

Nevertheless, to reach the next level of strength in the global auto industry evidently Mexico needs to fill in the value chain with Tier-2 and Tier-3 suppliers by luring more foreigner manufacturers as well as promoting the domestic medium and small companies.

A lot of work remains to be done as well in developing and regulating the after market, currently flooded with substandard parts and components.

Mexico is also in an infancy stage as far as design and manufacturing of molds, dies and tools is concerned. This critical deficiency is related to the lack of advanced English language skills among Mexican engineers and their ability to move higher in the innovation and design areas of expertise.

As the domestic market grows, as we will see later in this piece, OEMs should also focus more on the Mexican consumer and develop platforms and models suited for locals utilizing domestic engineering resources for research and product development.

The NAFTA Express

Strong creation of jobs, a robust housing market and a delay in the increase of interest rates provided momentum to a strong auto market in the U.S. where consumers bought 17.47 million vehicles in 2015, an increase of 5.7% over 2014.

In general, analysts expect the U.S. market to inch a bit higher during 2016-2017 and level off if not slightly contract in 2018-2020; notwithstanding that general economic volatility is pulling the rug from under many forecasters.

Workers assemble parts for cars at the new Honda plant in Celaya, Mexico
Mexican production has a 60% direct lifeline dependency on the U.S. market and based on that fact IHS produced the forecast shown in Exhibit #3. Note that light vehicle production in Mexico is predicted to reach almost five million units by 2020 growing at a Compounded Annual Growth rate (CAGR) of almost 8% during the five years of 2015-2020.

Exports in the 5-year forecast will be about 82% of production in the highly export oriented auto sector of Mexico.

Exhibit #4 provides a detailed annual production output by OEM. Notice that Nissan and GM are expected to exceed 850,000 annual units each by 2019, along with Ford, Fiat-Chrysler and Volkswagen in a strong half-a-million plus pool; Asia’s Honda, Toyota, KIA and Mazda are in a 200,000 plus tier, and the four luxury builders are projected to contribute half a million high value units together by 2020.

Production of all brands and models are set to grow during the upswing period, but notably Sedans and SUVs are expected to grow very fast while pick-up trucks will remain flat. The “C-Segment”, the bigger compact cars, are also set for very strong growth.

Exhibit #5 lists the Top-10 light vehicles produced in Mexico in 2015. Jockeying for the top position in recent years are Ford’s Fusion, Nissan’s Sentra and VW’s Jetta.

Canada is Mexico’s second largest export market with 290,340 vehicles shipped in 2015, an 8.6% increase from the prior year.

Unfortunately, as Mexico star rises, the sun sets for Canada whose North America production share actually shrinks by -4.3% during 2014-2020 as illustrated in Exhibit #6.

As Mexico reaches the five million-production mark, Canada will be capped under two million units and the U.S. will level off at about 11.7 million. By 2020, Mexico will produce approximately 27% of all vehicle output in the NAFTA region.
Assembly line at the Nissan plant, Aguascalientes
Please see the full-page map in this piece showing the location of OEMs in Mexico, along with the date of establishment and the models in production (Exhibit #7).

In the Canada-Mexico export race to the U.S. market, it was a photo finish in 2015 as some tallies gave the advantage to Mexico and other sources disagreed.

Canada is launching the new Pacifica (the former Town and Country) and this will allow it to keep head to head with Mexico in 2016, but expect the latter to clearly get ahead of this race in 2017.

Powered by Google?

Let’s shift gears and expand our discussion of how the innovation megatrends of safety, the environment and communications might alter the global auto industry order.

Ford Motor Co. was founded in 1903, BMW in 1916, Mercedes-Benz in 1926, Volkswagen in 1937, Toyota in 1937 and KIA in 1944. The vast majority of existing OEMs are pre-World War II start-ups and in the course of a century or so, they have shaped the auto industry, as we know it today.

But in 2003, born in California (Where else?) Tesla Motors hit the auto industry with a wave of innovations: A powerful, ecological and luxurious electric car, which is actually a self-updating computer with wheels, with plenty of space and available at your favorite shopping mall.

Traditional automakers are well aware that a technological revolution is already well in the works to reshape the industry and besides working eagerly on the development of hybrid and electric vehicles (and some in autonomous cars) they are taking steps to further dive into the world of electronics.

For example, Ford is joint venturing with Amazon to connect cars to smart homes; the three luxury German OEMs jointly bought “Here”, a mapping service to avoid dependency on Google maps; GM recently announced a US$500 million investment in Lyft, a taxi and ride-sharing service. These are just a few among many other recent alliances between the auto and the electronics industries.

In a nutshell, as a result of electronics blitzing the auto industry, incumbent OEMs face the following threats:

+ More competition if the giant techs develop their own vehicles.

+ Less sales as consumers adopt car-sharing habits.

+ Obsolescence, hostile take-overs or death if left behind in the innovation race.

Rumor has it that Apple is deep in investing in the ICar and Google’s progress on a self-driving vehicle is well known. 

Considered fiction just a few years ago, mass marketed driverless vehicles by tech firms is a plausible event; and these two companies, among others in the electronics industry, have plenty of money to develop and launch an automotive division of their own.

Imagine also, in a not too distant future, the app-based Uber taxi and car-sharing businesses operating with driverless vehicles at such a competitive cost that owning and driving your own car becomes inconvenient and costly. 

And there are the app-based car clubs where users can reserve a vehicle for short periods of time. The successful Avis’ Zip-Car and Daimler’s Car2Go operations are already in the plans of their competitors.

The new business models, made possible by the innovative technologies and the blurring of the auto and electronics industries will reshape, a lot sooner and more profoundly than anyone ever imagined, the century-old automotive sector.

Finally!

With a fantastic 19% year-on-year increase in 2015 for light vehicle domestic sales, Mexico’s auto market finally has strong vital signs.

The ending tally for 2015 showed Mexican consumers bought 1,351,648 vehicles, up from 1,135,409 in 2014. The month of December 2015 was the best sales month ever in Mexico with 160,663 units, 20.6% more than sales in December 2014. 

Final assembly line for the Golf 7 at the Volkswagen plant, Puebla
AMIA and Mexico’s Automotive Dealers Association (AMDA) need be commanded for their perseverance and effective lobbying with the Mexican authorities to lastly cap and control the importation of used vehicles, most of them having reached Mexico through illegal schemes and without complying with basic emission standards.

An incredible amount of almost eight million used cars and light trucks reached Mexican territory in the last 10 years as shown in Exhibit #8. The information in the graph is for the months of January through November of each year.


By getting rid of these cancerous imports, Mexico’s new auto sales finally broke out of the “lost decade” that Mexico’s domestic market suffered.

Credit sales certainly also helped the cause as financed units jumped to about 62% of total sales from only 48% back in 2010. The current level of credit though, is still below the potential of 75% to 80% financing of total sales, which occurs in other countries with similar economies to Mexico’s.

Exhibit #9 depicts the market share of brands in Mexico’s domestic market. Nissan, GM and VW are the leading marketers, together they represent over 60% of total sales.

Bear in mind that domestic sales are integrated by both locally made units as well as imports. In 2015 for example, only about 47% of the new units sold in Mexico were actually assembled in Mexico, the balance or 53% were imported new units distributed through the local dealerships.

But Mexico’s domestic market has a much higher potential. Consider that in 2015, there were about 11 new units sold in Mexico for every 1,000 people. In comparison sales per 1,000 inhabitants in 2014 reached 16.5 in Brazil, 19.2 in Chile and 20.8 in Spain.

By this token, Mexico can certainly aspire to 17 per 1000, or about a domestic sales level of two million units.

Based on an AT Kearney study, AMDA’s potential market forecast of two million units by 2020 is explained in Exhibit #10

According to AMDA, expanding credit to 80% of sales would yield 250,000 more units; continuing regulation of used imports will contribute another 200,000 new vehicle sales and the increase in the economy and consumer confidence would add another 200,000 units. 

Reaching 2,000,000 units by 2020 represents a CAGR of 8% from today.

We say this is doable but in seven years, by 2022 at a CAGR of 6%, and given the strengthening of the Dollar versus the peso there will definitely be an important shift to lower cost, made in Mexico vehicles and away from imports and higher end cars.

The critical variable now is financing. Mexican consumer will buy cars and light trucks if they can get credit.

Conclusion

There will not be driverless vehicles in Mexican streets or highways any time soon. But app-based taxi and car-sharing services will prosper, as well as electronics options in vehicles for those who can afford them.

The fact that line workers, technicians and engineers are proud to work in the auto industry in Mexico is a “vocational bonus”, this is a tremendous advantage over developed economies such as the U.S. where workers prefer to seek jobs in the ranks of the giant high-tech firms.

Ironically, as the lines differentiating the electronics and auto industries blur, they might end building the ICar.

But just as Mexico manufactures IPads, the ICar or its competitors will eventually find their way to be made in Mexican factories, as long as Mexico remains globally competitive.

And slowly, Mexico is finally learning not to be its own worst enemy.

For now, let’s enjoy this moment when Mexico’s auto industry is firing in all cylinders and is taking off with a roar.