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Automotive Sector

With nearly a century of auto production history, Mexico has risen through the ranks and become the world’s eighth largest car producer in 2011. In addition to the presence of […]

With nearly a century of auto production history, Mexico has risen through the ranks and become the world’s eighth largest car producer in 2011. In addition to the presence of multinational car producers, local manufacturers alike are finding a niche in the market, which has become powerful enough to challenge regional rival Brazil on the global stage. Automotive production is not the sole factor, however, as domestic demand is on the rise as consumers continue to seek models that are both affordable and energy efficient. Local suppliers, developers, and multinational manufactures have risen to the challenge.

HISTORY

The car manufacturing industry began with the arrival of General Motors in 1921. Ford, Dodge, Chrysler, and Volkswagen were the next to begin operations in Mexico in 1925, 1928, 1929, and 1954, respectively. Although suffering a decline in the 1960s, the industry has been progressing strongly since the early 1990s, when the Mexican economy began experiencing record growth. In 2005, with the arrival of a handful of new manufactures in the country, automotive producers sold a landmark 1 million units domestically.

Although many car manufacturers were up and running in Mexico by the 1960s, Mexico’s economic decline, coupled with government-imposed tax regulations, forced a variety of companies such as Mercedes-Benz, Fiat, Citroí«n, Peugeot, and Volvo to leave the country. Although the vehicular tax has been eliminated at the state level, the Senate approved a decision to devolve decisions on the tax to local government, with the exception of the state of Querétaro, where President Calderón repealed the law in 2011. In some areas, Mexican car-owners continue to pay annual fees based on the features and value of their car. Abolishing the vehicular tenencia tax is one of many steps the government has taken to boost sales and attract manufacturers to the country.

ECONOMIC IMPACT

In 2011, the auto industry provided 137,00 jobs and comprised 3% of the country’s GDP. Automotive manufacturing made up 17.6% of the industrial sector, largely contributing to the country’s domestic production capacities and revenue.

In total, 2.7 million vehicles were produced in 2011, marking a 40% increase over the past decade, and year-on-year growth of 14.4%. Mexico exported 2.1 million vehicles, showing growth of 53%, over the past decade. In 2011, Mexico’s automotive export industry was valued at $27 billion for light commercial vehicles and $18 billion for heavy vehicles according to Global Trade Atlas.

In addition to reflecting and encouraging Mexico’s success, automotive manufacturers are opening up social and technological possibilities for the country. The President and Managing Director of General Motors Mexico, Ernesto M. Hernández, told TBY that the auto industry “is critical in terms of employment generation, exports, the creation of human wellbeing in society, and the generation of taxes.” He continued, “the automotive industry is bringing technological innovation and the taxes positively benefit government revenues, which are then spent on improving living standards.” Indeed, with an export value of $45 billion in 2011, the auto industry is second only to the food industry in terms of attracting investments to the country and producing national wealth.

THE PLAYERS

Seven automakers have historically dominated the scene, producing 40 brands at 20 factories and plants throughout Mexico. These manufacturers are grouped into two sections of the country: the Northern and Central clusters.

The Northern cluster includes Ford, which sold 85,988 units domestically and exported 449,925 vehicles in 2011, and GM, which sold 168,503 units in Mexico and 443,237 units abroad in the same year. Toyota also established a plant in the Northern cluster, launching operations in Tijuana in 2004.

The Central cluster is home to Volkswagen’s factory in Puebla, the largest car manufacturing plant in North America. In 2011, Volkswagen sold 126,831 vehicles on the domestic market, and 429,987 were exported. Nissan also established a plant in the Central zone, and the company’s $1.3 billion investment in Aguascalientes has led it to be the leading producer in the country, manufacturing more than 636,000 units in 2011, of which 35% were sold domestically. Another notable producer located in the economically strategic center is Chrysler. The company’s Toluca Car Assembly plant required over $1 billion in investments, and the company sold over 350,000 units both in Mexico and abroad in 2011.

These clusters are designed to create jobs and shorten the supply chain, as many tier 2 and 3 companies move in to be closer to the multinational manufacturers of the north and central regions.

DOMESTIC FACTORS

As more players enter the market, domestic demand for new cars has begun to stagnate. In 2011, 906,000 new cars were purchased, a marked decrease since 2001. With more Mexicans preferring to buy used, auto manufacturers are looking to make products more attractive with lower prices and increased efficiency. Moreover, Mexican consumers have demonstrated their concern for the environment by looking toward hybrid and electric cars.

Accordingly, the industry is adopting new technology to mitigate environmental effects, and many suppliers are following the trend. In an interview, Luis Alejandro Moreno, the Managing Director of Continental Tire de México, assured TBY that the company is “working together with every car manufacturer dealing with electric vehicles, as they will have some special needs. One of those needs is to reduce the rolling resistance of an electric vehicle, and another is to reduce the total weight of the car. We have to make the most out of a less-powerful engine.” Suppliers such as Continental are experiencing high levels of growth as companies seek the most fuel efficient and lightweight materials.

ADVANTAGES

Well known for its affordable labor force, costs in Mexico are discounted by as much as 25% when compared to those of the US. However, the competitive advantages are more than just low costs. “Mexicans are very well educated, and it is very easy to get high-quality labor to operate the plants,” Gabriel López, President of Ford Mexico, told TBY. “A second factor is that labor costs are very competitive. As a result, Hermosillo has been used as a business model for the new plants that are being constructed by the company around the globe.”

Other factors leading to Mexico’s competitiveness are the low cost of aluminum in the country and the logistics of the North American Free Trade Agreement (NAFTA), which has allowed Mexico to sign agreements with most major global automotive manufacturers and 44 countries in total. The proximity of Mexico to the US also plays a large role, as more and more international companies see the benefits of shortening their trade routes and enjoying free trade benefits.

According to GM chief Hernández, the elite production base of Mexico is based on several factors. In an interview with TBY, Hernández said, “In terms of access to distribution centers, government and community relations, and market coverage, Mexico is in a good position.”

MAIN MARKETS

While the export of automotive units and supplies has historically been geared to the US, larger corporations are targeting a variety of markets in Mexico and across the globe. According to Andreas Hinrichs, President of Volkswagen Mexico, “Cars also go to South America, Europe, and Asia. For the Golf Variant, the main market is Europe. We also build the Clásico, a fourth-generation Jetta. The main market for this car is Mexico, and it is currently number one in the market here.”

Mexican exports have branched out to a variety of different markets in Latin America over the past year. In 1Q2012, exports to Latin America registered an increase of 43.7% over same period in 2011. Although the advantages of production in Mexico and the increasing number of exports have continued on a path of success, competitors such as Brazil have looked on with concern for their own producers. In 2011, Mexico’s $1.7 billion trade surplus and increase in exports—25,000 units in 2007, and 145,000 in 2011—rang alarm bells in Brasilia. To avoid any further complications, a sales quota was agreed upon on March 19, 2012, leading economists to believe that sales figures and plans for expansion in Mexico could be affected. Brazilian automotive producers and suppliers may also face challenges as the quota is observed until 2015, when trade is expected to resume normally.

SUPPLY CHAIN

There are over 1,100 companies manufacturing auto parts in Mexico, 30% of which are domestic brands. These components suppliers, such as Bridgestone, Michelin, Goodyear, ThyssenKrupp, and Siemens, provide a large quantity of parts that meet international standards. According to Moreno, “Continental Mexico represents the production of 5 million tires annually, and we are fifth in the world in terms of volume…in Mexico, we are supplying parts for every car manufacturer operating here, such as Ford and Volkswagen.” However, there is a distinct shortage of tier 2 and 3 companies supporting the larger OEMs, as demand increases and production capacities expand.

NATIONAL CAR

One manufacturer that has capitalized on the existence of the expanding supply chain is Mexican-based Mastretta, which has produced the first sports car developed and designed in Mexico. Carlos Mastretta, General Director of Mastretta told TBY that, “Many large manufacturers are not coming to Mexico exclusively to assemble cars—they are beginning to develop and design the models here. This shift will allow Mexico to develop a more sophisticated car industry in the future.” The highly customized Mastretta MXT model is a reflection of the industry’s evolution since the 1970s, and could well be a hint of what’s to come.