The Jewel in the Exports Crown

Mexico’s OEMs automotive and auto parts industries roared into the final months of this year operating at record levels and seemingly ready and positioned for still more growth dynamics for quite a few years to come.

In the recent past, definitely starting in 2010, these two industries have proven to be the jewels in Mexico’s manufacturing and exports crown. They have also been the pacesetters in new direct investment and skilled employment creation.

All of the macroeconomic statistics for both sectors are thumbs up, with year-to-date growth in double digits-in production and export sales.

And as can be seen in the tables in this article, 2012 to date has been a year of strong new foreign direct investment (FDI) for both industries. Several other major new FDI projects are pending, formal announcement.

Fiat, Ford, General Motors, Honda, Mazda and Nissan have all confirmed mega-investment plans for new plants or substantial plant expansion programs with called for FDI exceeding $4.9 billion dollars.

Still in the wings as this article was written are official new plant announcements for Andi, BMW and Mercedes- Benz. That should add some $3 billion to the FDI total.

These latter three plants would produce almost exclusively for the North American luxury vehicle market, where they already enjoy the lion’s share of this segment. That is certainly true for Mexico, where new car sales for the three have risen by nearly 16% so far this year.

For Mercedes-Benz, it would mean a reentry into Mexico`s automobile production/ assembly system. Back in the early 1960s, it had a knocked down unit assembly plant in Leon, Guanajuato. But at that time, the company and its Mexican partners decided not to follow the dictates of the August 1962 Automotive Integration Decree. 50 years ago! At present, the company does produce trucks and passenger buses at two plants in Mexico.

Fiat is a similar case. Back in the early 1960s, Diesel Nacional was assembling knocked down Fiats at its Ciudad Sahagun, Hidalgo plant. But Fiat balked at going the automotive integration route and left the market. Now it has returned with a megainvestment at its new plant in Coahuila.

Nissan’s proposed $2.2 billion dollars investment at Aguascalientes(plant expansion and a second plant) will enable it to boost production from a programmed 670,000 units this year to one million annually when the dual projects are completed. Of that one million total, Nissan expects to export 80% to some 100 countries, according to Jose Luis Valls, president of Nissan Mexicana.

On the other hand, a much anticipated new plant project, that of Toyota, still has not “landed” due to non-Mexico factors.

Mexico may just get another automotive player in the near future. In late August, the president of Infiniti Motors was quoted in Automotive News as expressing “serious interest” for putting an assembly plant here for the Japanese luxury car. “If we export to Europe from Japan, we pay high duties. But exporting from Mexico we don’t”, stated Infiniti’s newly-named global operations president Johan de Nysschen.

But domestic demand is also growing and this year is expected to exceed one million units since 2008. New car sales to the domestic market have been very good so far this year, with producers and dealers promoting heavily and offering more attractive rebate schemes.

And credit has become more available, and somewhat easier to get. According to the Mexican Automotive Dealers Association (AMDA), new car purchase credits approved by banks, specialized auto financing houses and dealers rose by 15% in the first semester of the year.

For the full year, veteran industry analyst Armando Soto is forecasting sales of just under 1.06 million units, a 13% jump from 2011.

Soto, president and CEO of the Mexico City-based KASO y Asociados consulting group, also expects light vehicle exports to reach a new annual high (third year in a row) of 2.59 million units. That would represent a 15.4% upturn from last year.

THE GROWTH PROSPECTS

All lights for continuing growth in the automotive industry seem to be flashing “go”. While it may not be double digit every year, growth will be quite healthy.

“With the exception of Western Europe, global demand is expected to gather momentum, and there is a promising outlook in the U.S. for sales and production”, reports auto industry forecaster Guido Vildozo.

In terms of growth, Vildozo, the auto industry specialist of the IHS Automotive consultancy group, expects total Mexican light vehicle output this year to reach above 2.7 million units, a new record. Production in 2011 was 2.47 million units. That figure encompasses cars, SUVs and light trucks.

By 2016, the total will reach 4 million, of which more than 80% will continue to be for the export market.

Of that 4 million, based on the current projection, Nissan alone will count for one million units.

New light vehicle sales in the domestic market should expand, Vildozo believes, despite “(greater) used car imports and credit availability that continue to limit growth”. This year, domestic sales “should reach more than 1.1 million units, then rise to above 1.2 million in 2016”.

What is significant will be the continued growth of Mexican production In the North American (NAFTA) light vehicle total, as forecast by the IHS Automotive analyst.

Back in 2000, before the more recent dynamics of the regional automotive industry, Mexico’s annual vehicle output was just under 4% of the North American production total. (Canada’s on the other hand was 11%). For this year, Mexico’s production share should reach above 19%, then move further up the scale to 21.8% in 2016. In the same years, Vildozo forecasts, Canada’s share will be 9.9% (2012) and 10.8% (2016).

IHS Automotive expects total North American light vehicle production this year of nearly 15 million units, up a healthy 2 million from 2011. For 2016, the prospect is for output totaling almost 18 million.

The current forecast for 2013 is optimistic.

Production of new vehicles is expected to reach almost 3.30 million units (+18.8%) vs. an anticipated 3.03 million this year (+13.0%), according to Soto. Exports (despite Brazil and Argentina-the deal-breakers-plus the Euro-zone) should reach close to 2.8 million units, whereas Soto’s latest forecast for 2012 is 2.59 million (+15.4%).

He expects domestic sales to hit around 1.15 million units. (+10.8%), whereas the year-end 2012 figure should come in at 1.06 million (+13.0%).

All told, there were 30 makes of automobiles and SUVs participating in the domestic market through July, including imported vehicles.

In July, the 11.9% y-on-y increase in new vehicle sales in the Mexican market represented the 29th consecutive month for increased domestic sales.

AND THE EXPORT MARKETS?

The U.S. market will continue as the biggest and most logical for Mexico’s automotive exports. All forecasts are that new car demand in the U.S. will remain at least fairly strong, despite the overall back of dynamics in the U.S.economy.

There are no prospects for any growth in the Western European market, given the Euro-zone’s severe economic and financial woes. And the Asian market is likely to remain small.

The outlook for Central and South America could improve, but without Brazil and Argentina. The volumes are not likely to be great. But those “emerging markets” which for Mexico’s auto industry can not be overlooked-Colombia, Peru, Costa Rica and Panama are examples, based on July 2012 countryby- country unit export statistics. But in July, exports to those four nations totaled 3,541 units, a small fraction of total shipments of 208,151 units.

For the next few years at least, Brazil and Argentina will continue as important -but very restricted-markets, with no possibility for growth. Earlier this year, Brazil (with heavy hand) renegotiated its Economic Cooperation Agreement (ECA) with Mexico, covering bilateral automotive exports. Argentina meanwhile unilaterally backed out of its auto exports ECA.

Mexico can still export vehicles to both markets, but paying a hefty import duty. Last year, total exports to those two nations surpassed 200,000 units.

 

Under terms of the Brazilian-dictated “revised” ECA, Mexico’s exports to Carioca-land will be capped through 2014 (best case scenario). ECA exports to Brazil this year could not exceed 93,500 units-and that ceiling was reached in July.

For next year and 2014, the cap is 100,000 and 104,500 respectively.

Recently, there has been talk of promoting Venezuela as an export market.

Mexico’s auto industry at present has virtually no presence there. But Venezuela frankly looks “iffy”, given that nation’s weakened economy and pending Presidential elections.

Mexico never has had a free trade agreement with either Brazil or Argentina. Nor does it have one with Venezuela.

The exports market did slow a bit in July, according to data from the Mexican Automotive Industry Association (AMIA), the OEM’s industry trade organization. In the month, exports totaled 208,151 units, up 5.8% from July of last year. For the period January-July, exports amounted to 1,382,770 units, up a very healthy 14.0% from the first seven months of 2011, according to the AMIA.

This would seem to put Mexico’s automotive industry on track for a full year’s exports total of at least 2.37 million units, vs. 2.14 million last year, according to Soto.

Mexican-made light vehicle exports to the U.S. totaled 881,853 through July, a record for the period, and accounted for 10.5% of U.S. market new vehicle sales. U.S. total sales for January-July were 8.39 million units, including 1.15 million in July (+8.9%). This was much better than what had been expected back in January, and reflected pent-up demand and much better credit terms in the U.S,

Overall, the U.S. market accounted for 63.8% of Mexican vehicle exports in the January-July period.

In the first seven months, the leading vehicle global exporters were (in descending order): Nissan, VW, Ford, GM, Chrysler and Fiat.

THE PLUSES AND THE TAKEAWAYS

The automotive industry currently has an outlook of upsides and downsides, aside from international considerations.

Soto of KASO y Asociados lists the following pluses: Strategic “geographic location for both NAFTA and NAFTAtype agreements; comparable production costs; and the continuing potential of the export market.” Vildozo of IHS Automotive is basically in agreement on those points. So is virtually every other analyst and observer of the industry.

But to the above, there are takeaways. Soto notes Mexico’s continuing infrastructure gaps and “the need for greater competitiveness”. In this regard, he comments that in attracting new automotive investments, especially FDI, there is a glaring lack of statutory ability by the various states to offer incentives. Because of Federal law, states have little maneuverability in this regard. Soto comments that “states in the U.S. have a hundred times more (incentives) flexibility to compete for and attract new plants”.

Also decried are shortcomings in credit availability, especially for middle to upper lower income population segments – “those are the target markets”. Without being in a position to really reach those markets, along with most other industry executives and analysts, Soto feels “we will not be able to get to the true potential market”- 1.8 million units a year in new car sales, “we have to conquer this market”.

Soto is a staunch foe of the more open government policy for imports of used vehicles, primarily form the U.S. but more recently reportedly also from Guatemala. These used (“junker”) imports oftentimes “have no quality, no emission controls, no safety”.

AUTO PARTS: ANOTHER BRIGHT SPOT

Along with the automotive sector, the auto parts industry has continued to be a bright spot in terms of direct investment, employment and exports.

The growth of the auto parts industry was re-emphasized recently in the report by Vildozo of IHS Automotive consulting group.

Among various salient sections, the report forecast that the gross production value (GPV) of the industry will reach $68 billion dollars this year, up $2 billion from 2011, and will then increase by an additional $2 billion dollars in 2013. Auto parts industry GPV has nearly tripled since 2000. Exports of auto parts meanwhile should reach $13 billion, according to IHS, vs exports for $10.98 billion in 2011 and for $3.59 billion back in 2000. The figures include Maquiladora Industry exports.

The report points out such positive factors for the auto parts industry (and of course, the OEM industry) as investment stability, geographic location, production costs and productivity and relatively low transport costs. These factors all have converted Mexico into the world’s fifth most important exporter of automotive vehicles.

Mexico’s automotive vehicle output is seen by IHS as reaching above 4 million units in 2016, this compared with last year’s output total of 2.5 million. And the auto parts manufacturing sector will be moving upwards at roughly the same clip. Exports will continue to be the driving force in that growth.

The auto parts industry continues full engine with new plant and expansion plans. New investment projects seem to be announced on an almost monthly basis. One recent example: always expanding Delphi Automotive this year inaugurated new wire harness and electric circuit plants in Durango and Tamaulipas, which will employ a total of 5,600 persons. Investment amounted to $37 million dollars.

Delphi, which sank into Chapter 11 just a few years back and then very successfully rebounded, has been in Mexico since the early 1970s. At that time, its predecessor companies -Packard Electric and Delco-set up their first maquiladora plants in Ciudad Juarez and Matamoros respectively.

Still Mexico’s largest Maquiladora Industry operation, Delphi with its two latest plants now has 46 in different cities in northern Mexico.

Another recent example came in mid-August when Japanbased Koito Manufacturing announced plans to invest $28 million dollars in a new plant at San Luis Potosi City. Production/ assembly at that facility will focus on automotive headlight and directional signaling systems, according to Koito president Masakiro Ohtake. The firm is a supplier to six OEMs. Koito incidentally is the fifth Japanese auto parts company this year to announce new plant plans for Mexico.
Previous announcements were made by NSG Group (a veteran Maquiladora Industry stalwart), Ahebono, Nishikawa Cooper and Unipres (see table).

The automotive industry, including auto parts, can very accurately be described as the jewel in Mexico’s manufacturing, exports, technology and skilled employment crown.
Despite the international uncertainties, this will continue to be the case. Growth may be a bit reduced from the pace of 2011 and the first semester of this year, but it will still be the pacesetter.