San Luis Potosi's automotive industry analysis

San Luis Potosi's auto segment plans for long-term growth

San Luis Potosí’s automotive industry could hardly have asked for a worse start to 2017, but the state’s strengths have not changed, and optimism returned in a matter of weeks. Ford Motor’s withdrawal from San Luis Potosí in January 2017 meant the cancellation of a $1.6bn investment and the loss of up to 2800 jobs. However, the US company was several years from opening its doors when it pulled out, and both San Luis Potosí and the surrounding Bajío region already hold pivotal positions as providers of vehicles globally. In some ways, by withdrawing so early, Ford lessened the blow.

Investment Flows

Some 35% of the 2500 automotive suppliers in Mexico are based within 300 km of San Luis Potosí’s capital, according Gustavo Puente, undersecretary of economic development. “Even without Ford, San Luis Potosí remains a major provider for the automotive industry,” Raúl Martínez Jiménez, president of the San Luis Potosí branch of the National Chamber of Industry, told OBG. “Our state is in a strong position and well placed to open up to the world.”

Some companies in the sector, such as Robert Bosch and Cummins, have been in San Luis Potosí since long before the North American Free Trade Agreement, with the former arriving in the mid-1970s and the latter in 1980. Robert Bosch continues to invest in its local operations, with the announcement in October 2016 of an $80m plan to add 25,000 sq metres to its existing plant, bringing the total number of employees to 2700. The investment includes a new engineering centre that will be focused on petrol systems.

There is also a new BMW plant, where construction is progressing well and generating high expectations for the company, according Carlos Gutiérrez, BMW México’s head of government and external affairs. The German original equipment manufacturer (OEM) will produce the 3 Series there, assembling up to 150,000 units annually beginning in 2019. Puente told OBG that at least 10 more suppliers could arrive in San Luis Potosí over the next two years as a result of BMW’s investment. Meanwhile, tyre manufacturer Goodyear remains firm with its $550m investment in a new factory that will produce 6m tyres and create up to 1000 jobs. The plant is set to open by the end of 2017.

New investment also continues to be made. Most recently, Chinese company Ningbo Asiaway Machinery said in March 2017 that it would install a new plant in the state, according to Puente. Ningbo is a specialist producer of aluminium and zinc components for the automotive segment. In addition, in early January 2017, just as Ford was cancelling its investment in the state, Japanese plastic auto parts maker Nidec Sankyo announced plans for a $15m factory there, and in February 2017 German auto interiors firm Benecke-Kaliko said it was going ahead with a MXN400m ($24.1m) investment to expand its existing plant in the region.

Cluster Emergence

Collaboration between the public and private sectors in developing the automotive industry in San Luis Potosí became concrete in 2015 with the establishment of the Automotive Cluster of San Luis Potosí. The cluster aims to create a public policy for the sector that outlasts political administrations. With the goal of “strengthening the orderly, harmonious and sustainable growth” of the sector, the cluster has formalised the link between the government, the private sector and educational institutions. Héctor Soto, director-general of the Automotive Cluster of San Luis Potosí, which already has 42 members, told OBG the aim is to build bridges between industry, the government and academia to find solutions to common problems and, in the medium term, undertake high-impact projects. There are already examples of tangible results. Soto told OBG that when General Motors identified the need for a training programme in lean manufacturing – a method used to eliminate waste – the cluster went into the company’s installations, carried out a review and helped implement improvements.

Where clusters can really come into their own is with longer-term projects. Soto highlighted ongoing work with the Tangamanga University and Universidad Potosina to create a degree programme specific to automotive engineering. “Projects like this will not bear fruit for a few years, but rather are part of a longer-term strategy,” he told OBG. For the cluster itself, the next challenge is to incorporate Japanese firms.

Japanese Cooperation

There is one area were San Luis Potosí’s cluster is taking a leading role. It is coordinating a project, set to launch in July 2017, through which the Japanese International Cooperation Agency will send experts to Mexico for five years. These experts will educate local providers and try to incorporate them into the supply chains of OEMs and tier-1 firms in the Bajío region. “We will be working with small and medium-sized enterprises from the top level, trying to change the mindset,” Soto told OBG. The first step of the project will be to identify suppliers, and then discover companies’ needs. Although the initial programme will focus on Japanese firms, it aims to create the skills and knowledge that should strengthen the local supply. “There are huge opportunities on a national level to increase the local content ,” Soto told OBG

Supply Chain Opportunities

Another benefit of the cluster is its ability to tackle issues that are a problem for the Mexican industry more generally. According to Soto, as tier-1 providers tend to swarm around the famous brands, around 50-60% of the parts used by OEMs are produced locally. Yet, as you move down the scale, tier-1 manufacturers tend to use local suppliers for just 15-30% of their materials. Indeed, a December 2016 report prepared by the Automotive Cluster of San Luis Potosí showed that although seven tier-1 providers and 11 tier-2 players were already members, there are 26 potential tier-1 members, but just nine potential tier-2 associates and two tier-3 providers. Looking to tackle this problem, the cluster has formed a tier-2 subcommittee. “It is good practice and a great opportunity to encourage tier-1 companies to buy from local tier-2 and tier-3 providers, rather than import,” Soto said.

National trade and investment promotion agency ProMéxico argues that tier-2 and 3 providers have a great opportunity in the country’s automotive industry, and the group has been promoting links between these kinds of suppliers and OEMs and tier-1 providers through seminars and business meetings. Yet, this requires higher-quality processes, too. ProMéxico points to the example of Eastern Europe as a region that has been able to take the path to highly specialised manufacturing processes. “The strategy is focused on tier-2 and 3 providers dedicated to processing materials that, due to their specialisation and quality, add value to the national product,” according to ProMéxico’s 2016 automotive report, “The Mexican Automotive Industry: Current Situation, Challenges and Opportunities”. Therefore, ProMéxico is also looking to attract foreign companies to this segment of the supply chain, via alliances or co-investments, so they can transfer their knowledge and technology to Mexican companies.