Pumping up: North American automotive production shifts to Mexico, while tyre production is drawing attention

The post-North American Free Trade Agreement ( NAFTA) manufacturing boom has been particularly attractive for the Mexican automotive industry. According to Eduardo Solis Sánchez, president of the Mexican Automotive Industry Association, Mexico will see a fifth consecutive year of increased motor vehicle output. The auto industry now brings in net earnings of some $50bn a year, more than the oil and gas or tourism sectors.

Solid Foundation

Solis listed five key reasons for the boom. First, Mexico is ideally located to serve the US car market; second, the country’s network of 11 free trade agreements with 46 countries makes it an open economy and an ideal export platform; third, it has developed a skilled and highly trained labour force with many engineering graduates; fourth, it has a robust auto-parts supply chain, with many world-class parts producers operating locally; and fifth, the government is committed to macroeconomic stability and to ensuring a supportive operating environment. In the first eight months of 2015 a total of 2.27m vehicles were produced. “We are going to close 2015 with production of over 3.4m units,” Solis said, adding that new investment inflows will probably take output as high as 5m units or more by 2020. A report by BBVA Bancomer supports that outlook, suggesting total production will grow by 10.8% during the course of 2015. The last new US automobile plant was built in 2007, while Mexico will see a total of five new plants coming on-stream between 2016 and 2019.

Since the 2008-09 global economic crisis, which saw significant reductions in automotive capacity in Detroit, the centre of gravity of North American auto production appears to have been shifting south. It is estimated that 40% of North American auto manufacturingjobs are now located in Mexico. In 2014-15 more than $23bn of automotive investments have been announced in the country. Importantly, the auto-parts manufacturers have followed the large car companies. While Mexico is the seventh largest car producer in the world, it is also the sixth-largest auto-parts supplier.

Free Trade Issues

One of the challenges for the industry and the government is to retain and develop those linkages between assembly plants and a wide range of engineering companies and equipment and parts suppliers. The industry has a good record of moving up the value chain. A desire to maintain this may explain the relatively tough position Mexican negotiators adopted in talks to join the Trans-Pacific Partnership (TPP), a nine-country free trade agreement which includes Australia, Chile, Brunei, Malaysia, Peru, New Zealand, Singapore, the US and Vietnam. With Mexico, Canada, and Japan among the potential new entrants, TPP is described as potentially the world’s largest free trade agreement. But the terms of accession could raise challenges for the auto industry. In talks, Japan has insisted on reduced local content rules, which would allow Japanese-made vehicles to be sold in the North American market with lower local content. NAFTA states that 65.2% of cars and 60% of auto-parts must be locally produced (meaning within North America). Mexican negotiators, supported by Canada, said they would be prepared to accept 50% local content, but the Japanese auto industry (which relies on auto parts produced in non-TPP countries such as China and Thailand) has been pressing its government to seek a lower 30%. Oscar Albin, the executive director of Mexico’s National Industry of Automotive Parts, recently warned that a low TPP local content rule could mean “we’re going to lose what we have gained under NAFTA”. While the outcome remained uncertain, it was clear Mexico would lobby hard to protect its industry and interests.

Tyres

Alongside car manufacturing, the production of automotive-related products, such as tyres and auto parts, has been a focus for investors. Prior to NAFTA, Mexico produced about 6m tyres per year. According to the National Tyre Dealers Association (Asociación Nacional de Distribuidores de Llantas y Plantas Renovadoras, Andellac), more than 25m units were produced in 2014, an increase of over 400%. The National Institute of Statistics and Geography (Instituto Nacional de Estadística y Geografía, INEGI) estimates that the tyre industry was valued at MXN9.9bn ($666.3m) in 2008 (the latest year for which data was available), comprising 1.4% of the automotive industry. Mexico has nine large tyre manufacturing plants: three belong to JK-Tornell, two to Bridgestone, one to Continental, one to Cooper tyres, one to Michelin, and one to Pirelli. Of the 25m tyres produced, 18.9m are car tyres, 5.6m are light truck tyres, and 194,000 are heavy truck tyres. The entire tyre market, however, manages even larger numbers. In addition to the 25m units produced, 24.8m are imported and 12m are exported, bringing local annual consumption to 37.7m. Mexico’s trade agreements and automotive clusters, in combination with a skilled workforce, technology and geographical location, have propelled the automotive and auto parts sector to grow. “One of the sectors with the greatest potential in the country is the automobile industry,” Jaime Loredo Rubio, marketing manager at Goodyear Mexico, told OBG. “This causes all related sectors, such as tyre manufacturing, to become relevant since it is an important portion of the auto industry. Mexico has become an important destination for investment for automotive manufacturing.”

Since the opening of Pirelli’s tyre manufacturing plant in Silao Guanajuato in 2012, the Mexican tyre market had been quietly growing, with rising revenues but no major planned expansions. This changed in April 2015 when Goodyear announced its plan to build a $550m plant. The facility, which is scheduled to be in operation by the first half of 2017, is expected to add 30% to the country’s automobile tyre production capacity with the ability to produce 6m tyres per year, creating an estimated 1000 jobs. “Selecting San Luis Potosí as a location had a lot to do with labour,” Loredo told OBG, explaining that certain educational opportunities in the region created a workforce with particularly appropriate skills. “The region has universities and technical schools to provide qualified personnel.”

Challenges

While NAFTA has brought about significant economic growth in Mexico, it has not had a positive impact on all sectors. Issues with the significant amount of both legal and illegal used car imports from the US, amounting to more than 460,000 in 2014, have caused the in-country sales for automotive industries to slow down since 2006 (see analysis). This has had a direct impact on local sales in parallel industries, such as tyres. In addition, the tyre industry has had to face a similar, but more direct, challenge: used tyre imports. Figures from Andellac point to up to 2m used tyres being imported each year, mainly coming from the US and sold in tyre repair shops. “Many of these come through illegal imports, without any quality control or safety checks,” Loredo told OBG.

The future seems to be paved for the Mexican tyre industry. With challenges such as used car imports being tackled by legislation changes and more rigorous controls, and with the automotive manufacturing sector growing constantly, more and more investment is being directed towards the supporting sub-sectors and developing automotive clusters (see analysis).