Going Places

Trends in automotive demand

Now that USMCA is finalized pending ratification, Mexico's automotive industry needs to adjust itself to the realities of the global car market in 2020.

The history of car manufacturing in Mexico has not been without its ups and downs. By the 1960s, big automakers from across the world had been drawn to Mexico, which was establishing itself as a vehicle assembly hub in the Americas. But many industry players also left the country in the early 1960s due to regulatory reasons.

Unlike top European brands of the day such as Peugeot, Citroí«n, and FIAT, the three big American car makers, Ford, GM, and Chrysler never left, but notably reduced their annual output.
However, the industry experienced something of a renaissance in the 1990s during Mexico’s economic boom. As a result, many European car makers reopened their assembly lines, while Asian brands such as Honda also decided to set up shop in the country.

Challenges of 2018-2019

Since then, the automotive industry has become almost synonymous with the country’s manufacturing sector and a major talking point in Mexico’s business negotiations with the rest of the world. As a car maker in the Western world, Mexico is now only second to the US.

In 2018, the Mexican automotive industry was a central issue in the renegotiation of the NAFTA deal with the US—which is understandable as many of the 400 different models manufactured in Mexico end up in the US market.
Indeed, in recent years, approximately 75% of the Mexican car industry’s output has been bound for the American market. Approximately 2.7 million new vehicles sold in the US market in 2018—worth USD52 billion—were manufactured on an assembly line in Mexico, says the US Commerce Department.

There is no denying that over the process of renegotiation, the country’s automotive sector faced some uncertainty regarding its future, but the sector never experienced a real existential threat. With a production capacity of 4-4.5 million units in plants owned by over 40 carmakers, the industry is simply too big to disappear.

Beside uncertainties to do with the future of NAFTA—which are now almost gone with USMCA, pending ratification—the sector was also under the shadow of the country’s 2018 presidential election and López Obrador’s consequent presidency. However, the most serious challenge that the sector needs to deal with is something else: a change in global demand.

A shifting landscape in the post-2020 world

Much has changed in the global automotive industry since those simpler times in the 1960s or even 1990s, when Mexican assembly lines were busy around the clock, putting together light vehicles and trucks of various sizes and descriptions.
The dynamics of auto-making have also undergone more changes between 2010 and 2019 than over the three decades separating Mexico’s two automotive production highpoints. For one thing, hybrid and electric vehicles are becoming an important market driver, to say nothing of more futuristic enterprises such as self-driving automobiles. According to McKinsey’s Electric Vehicle Index, the sales of electric cars will experience four-fold growth between 2018 (1 million units) and 2020 (over 4.5 million units), provided that present growth trends continue.

Many parent companies with plants in Mexico such as Ford have noticed the shift in demand across the market. The American carmaker has decided to spend over USD11 billion by 2022 on the promotion and marketing of electric cars.
Auto part manufacturers across Mexico will have to adapt themselves to this new market reality. Mexico’s internal market will be the first to benefit from the birth of such a value chain and the manufacturing of zero-emission vehicles, as the country suffers from pollution and traffic congestion. For this to happen, however, the federal government’s support and the installation of infrastructure such as charging points is essential.

As for the private sector, Mexican auto parts makers need to upgrade their product mix and technological know-how, though the production of certain components is already localized in the country. Ostensibly, Mexico’s shortcomings are not limited to high-tech items such as electronic control units and electric-vehicle batteries (EVB); according to Roland Berger, a German business consulting firm, the sector currently relies on the import of “body, powertrain, and chassis,” as well. Local manufacturing of these items will lead to more profits per unit for the sector given peso’s present exchange rate with other world currencies.
Another new trend in the sector is the growing demand for high-end automobiles, coming from Mexico’s sizable internal market as well as foreign markets. In the early 2019, Mercedes-Benz Mexico announced the production of A-Class sedans in the company’s plant in Aguascalientes.
Other big German automakers, such as Audi and BMW, will follow suit by introducing new high-end models, although they already manufacture a few luxury cars in Mexico. This, however, will not be possible in the long run without a revamping of the sector.