Mexico's auto industry poised for growth despite bumps in the road

While renegotiations of the North American Free Trade Alliance (NAFTA) have led to an environment of uncertainty for Mexican industry, the automotive sector remains solid and on track for further development driven by rising vehicle production, local sales and export demand. As the world’s seventh-largest manufacturer and the third-largest exporter of light vehicles – behind Japan and Germany – the sector has maintained its position as one of the top drivers of the national economy, contributing over 3% to GDP in 2016 and representing 18% of all manufacturing output. Mexico is home to 24 carmakers, with manufacturing facilities in 24 states, producing cars, light and heavy trucks and tractors, as well as component parts.

Production & Exports

Mexico’s light vehicle production, which includes passenger cars and light trucks, has registered solid growth over the years. From 2013 to 2016 production grew by 18.4%, from 2.93m to 3.47m units, according to figures from the Mexican Automotive Industry Association (Asociación Mexicana de la Industria Automotriz, AMIA). Despite the unclear future surrounding the renegotiation of the NAFTA deal, vehicle production hit record levels in 2017, with 3.77m vehicles – an increase of 8.6%. Auto production growth tapered off over the first quarter of 2018, registering a 0.4% quarter-on-quarter (q-o-q) decline, however, industry analysts expect this dip to be short-lived, with AMIA estimating annual vehicle production to reach approximately 5m vehicles by 2020.

Exports rose by 14.5% from 2.42m to 2.77m units, between 2013 and 2016. This trend continued in 2017 with exports hitting 3.1m vehicles, an increase of 11.9%, worth some $410bn and representing the sharpest growth rate since 2011. The first quarter of 2018 saw 835,023 vehicles exported, an 8.1% rise on the first three months of 2017, which itself was a strong year. Major export markets include the US, which accounted for 71.6% of the total in the first quarter of 2018, followed by Canada with 7.4% and Germany with 4.9%.

Due to the country’s dependence on long-haul trucking to move goods, with around 85% of freight transported by road, demand for the manufacture of heavy trucks is also strong, encouraged by major players including Germany’s Daimler, US firms Freightliner and Mack Trucks, and Sweden’s Scania and Volvo. In 2017 heavy truck production rose 1.3%, to 152,903 units, a trend that has continued into 2018, with figures for January showing a 4.6% increase year-on-year (y-o-y).

According to the National Association of Bus, Truck and Tractor Producers, Mexico also stood as the world’s fifth-largest manufacturer and exporter of heavyduty construction and agriculture vehicles in 2017, supported by industrial equipment companies such as US firms Caterpillar, John Deere and Massey Ferguson. Exports of tractor-trailers totalled 114,251 in 2017, up 7.6% on 2016. The first month of 2018 saw increases of 15.5% y-o-y from 7083 to 8179 vehicles.

Parts Manufacturing

Driven by the expansion of vehicle production, the growing number of original equipment manufacturers presents a strong opportunity for investors. German firm Bosch announced in April 2018 it will build a $117.1m electronic components plant in Celaya, in the central state of Guanajuato, a key automotive manufacturing centre. The plant, which is set to come on-line in 2020, will be Bosch’s 11th facility after opening a safety systems plant in Aguascalientes in 2016 and a steering systems factory in Querétaro.

Also in April, Canadian manufacturing firm Magna International opened a body and chassis plant in San Luis Potosí to produce components for brands including BMW and Mercedes-Benz, bringing the company’s total number of facilities in the country to 32. Another project in San Luis Potosí is a specialised paint facility built by German firm Dürr AG to supply BMW. Meanwhile, Japanese automotive safety systems manufacturer Ashimori has opened a second plant in Guanajuato to supply a range of Japanese automakers, including Honda Motor Company, Mazda, Suzuki and Toyota.

Indeed, parts manufacturing will provide an integral service by strengthening value chains. “The fact that 70% of the parts in the domestic automotive industry are imported shows that there is an urgent need for capacity development in tier-2 and tier-3 firms along the value chain,” Gunther Barajas, vice-president at software firm Dassault Systèmes, told OBG.

Commenting on Mexico’s manufacturing strength, Mayra González Velasco, CEO of Nissan México, told OBG, “Mexico’s industry has allowed for the development of not only manufacturing, but also of the supply chain. The country has many global advantages, including its geographic location, a high level of communications and, of course, the solid quality of manufacturing. Mexico is seen as a vital market for suppliers.”

Indeed, car manufacturers are well aware that sourcing components locally is beneficial. A $1.3bn Audi plant in San José Chiapa in Puebla state began producing the Q5 model SUV at its new facilities at the end of 2016. The factory has a capacity of 150,000 units per year and sources two-thirds of its component parts locally.

Domestic Sales

Nissan has been the market leader in domestic sales for the last eight consecutive years, and reported a 23% market share in 2017, followed by General Motors with 16.9% share and Volkswagen with 15.3%, according to figures from AMIA. However, a number of newer carmakers, such as Japanese firm Mazda and South Korean companies KIA and Hyundai, are gaining market share from the traditional leaders.

Indeed, many of these brands continued to see sales increase in 2017 despite an overall drop of 4.6% in the market, the first fall in purchase levels since the 2008-09 global financial crisis. Sales began to decline towards the middle of the year, with December registering a drop of 17.6% y-o-y. The top three traditional leaders all experienced decreases of between 5% and 16%. The first quarter of 2018 saw this trend continue, with sales figures falling by 13.4% q-o-q, according to the Mexican Association of Automobile Distributors. Stubbornly high inflation has been cited as the primary reason behind slowing sales. However the ongoing slowdown also suggests that the sharp increase in petrol prices, which started in January 2017 as a result of an end to government fuel subsidies, is having an impact on purchases as potential buyers weigh not only the cost of the vehicle, but also of driving it. Sales may increase as the year progresses, however, according to Fernando Zapata Guizar, senior vice-president of sales and marketing at local vehicle dealership group Zapata Corporation. “The Mexican automotive market is a hard-fought one, but sales are expected to increase by 2.5% in 2018,” he told OBG. Other segments in the auto sector are also expected to expand, according to Zapata. “Mexico’s after-market demand is forecast to expand 6.4% annually through 2021 to $5.8bn, reversing the decline experienced over the 2011-16 period.”

Hybrid & Electric

The end of fuel subsidies could bode well for hybrid and electric car sales, however. While the market for such vehicles remains small, it is growing rapidly. In 2015, 2016 and 2017 domestic sales totalled 1842, 8260 and 10,501 units, respectively. Meaning that purchases increased by 448.1% in 2016 and 27.1% in 2017, according to figures from AMIA.

The private sector has taken note. Local manufacturer Zacua announced in April 2018 that production of its fully electric two-seater Zacua Coupe models had begun at its Mexico City plant located in the Puebla 2000 Industrial Park. The plant, which cost MXN80m ($4.3m), is expected to double its output within one year adding a four-seater model to the line-up. Meanwhile, BMW said in March 2018 that it will install a production line with the capacity to manufacture its hybrid 3 Series Sedan by April 2019. US firm Ford announced in December 2017 that it would be moving its electric and hybrid car production from Michigan to Mexico.

The authorities are also working on various federal and local incentives to promote the use of hybrid and electric vehicles. On top of tax rebates and deductions offered for the purchase of such cars, MXN25m ($1.4m) was allocated in 2017 to the installation of 100 recharging stations in Mexico City, Monterrey and Guadalajara, bringing the total number of stations added that year to 1000, according to the Ministry of Energy. As a further incentive, drivers of electric vehicles receive a 15% discount on local toll roads in Mexico City.

NAFTA

Market diversification for the sector is important given the environment of uncertainty since Mexico, the US and Canada began renegotiating NAFTA in 2017, the latest round of which had stalled at the time of publishing. The US has demanded changes to the trade bloc’s regional content laws, a modification of which would affect the profits of carmakers. Vehicles manufactured within the free trade area must currently have 62.5% regional content, a share the US government wants to increase to 75%. The US has also pushed for the removal of international arbitration panels and the creation of a “sunset clause” requiring the deal to be explicitly renegotiated every five years – a move which had proved unpopular with both Mexico and Canada. Further complicating NAFTA talks, the US imposed tariffs of 25% for steel and 10% for aluminium in June 2018, impacting automotive manufacturing costs. The stalemate has applied added pressure in the lead up to elections, with Mexico voting in a new president in July and mid-term US congressional elections in November.

AMIA director Eduardo Solís issued a warning to local media against modifying rules of origin to ensure that North America’s auto industry remains competitive, especially as content rules play a key role highlighting the contribution made by each country as well as the potential opportunities to fill domestic manufacturing gaps. Sharing similar views, Manuel Nieblas, partner and head of industrial products and manufacturing at Deloitte México, told OBG, “North America functions as a cluster, in which Mexico contributes low-cost auto manufacturing, parts and products. Imposing a tariff on parts made in Mexico would put US automakers at a competitive disadvantage, and the final consumer would pay the final cost,” he said.

Another issue that may be affected by a new NAFTA is the entry of Mexican truckers into the US. Since winning a dispute resolution in 2015, Mexican truckers have been allowed to deliver cargo across the US. However, US negotiators have proposed reintroducing limits on the geographical range incoming trucks can traverse.

Outlook

Since the introduction of NAFTA in 1994, Mexico has successfully developed globally competitive auto manufacturing centres and moved into value-added products. While the country’s low-cost labour pool first attracted big industry to the country, the development of skilled human resources has encouraged them to stay and invest in more technologically advanced manufacturing. This is especially noticeable as the government, academia and international firms continue to promote innovation, contributing to growing vehicle production, local sales and export demand. While the ongoing negotiations mean that the nearterm outlook for manufacturing remains uncertain, its success over the past 25 years demonstrates an ability to navigate the changing tides of international trade.