Auto Parts: Mexico’s True Automotive Engine

You can watch the video of this presentation here.

While vehicle manufacturing may be seen as Mexico’s flagship activity, auto part production is what will drive the country’s development as an automotive hub. During the first day of Mexico Automotive Summit on Wednesday, Mar. 24, Oscar Albín, Executive President of INA, presented an overview of the sector and the opportunities ahead for the country to reach and surpass auto parts production levels.

“Mexico is already on the vehicle production map but the country still represents less than 5 percent of the global production. Regarding auto parts, 90 percent of our production ends up in North America, which means it is crucial to understand what is happening in the region,” said Albín. In 2020, the region reached production of 13.3 million vehicles and the expectation for 2021 is 16.29 million. Albín highlighted this was revised to 15.9 million due to semiconductor shortages in the first half of 2021. However, by 2021, the association expects production to bounce back to 16.7 million units and 16.6 million in 2023, mainly driven by demand in the US.

Where Does Mexico Stand in Terms of Auto Parts?

Mexico is the fifth-largest auto parts manufacturer with a production value of US$78 billion, which surpasses that of light and heavy vehicle production combined, said Albín. But why is the country so important? According to him, in the Asian region, there are many low-cost manufacturing hubs like the Philippines, Malaysia and Thailand. In Europe, Eastern European countries like Tunisia, Morocco and Turkey offer similar benefits. Auto parts manufacturing in those regions is divided among 10-15 countries. “In North America, Mexico is the sole low-cost manufacturing country,” he said.

How Competitive Is Mexico?

According to Albín, before ProMéxico was terminated, this body carried out a research project that determined that an average manufacturing plant with 700 employees in Eastern Europe offered wages of approximately US$6-7/hr in 2019. In China, the average would be around US$5/hr, while in Mexico wages were around US$4/hr. Southeast Asian countries remain the cheapest in this regard.

INA figures show that in Mexico there are 600 Tier 1 companies serving OEMs in Mexico and abroad, along with 900 Tier N companies. Approximately 35 percent of these 1,500 companies are Mexican, while the rest come from the US, Japan, Germany, Canada, France, Korea and other countries. “Very few countries have this great diversity, which has allowed us to learn about different manufacturing techniques. When a worker goes to a US company and then to a Japanese company, he acquires knowledge that a Japanese worker does not have. If we take the best of each world, we will reach excellence in automotive manufacturing,” said Albín.

Regarding supplier distribution, while developed countries form a triangle-shaped supply chain with more suppliers as we go down the supply chain, in Mexico, the industry is rhombus-shaped with a lot of opportunities in manufacturing processes, raw materials and tooling. The way to change this, according to Albín is through FDI and by linking Mexican companies with foreign players already established in the country. 

Future Expectations

In 2019, Mexico produced US$98 billion in auto parts and INA expects to reach US$97 billion in 2021. Further growth will be spurred by USMCA’s new rules of origin, said Albín. “In the next seven years, we expect an increase of 10 percent in production value thanks to the agreement.” 

A big challenge, however, is to develop R&D centers. The only way to achieve electrification and vehicle autonomy is through research and development, Albín said. “Efforts in this area need to be doubled. Companies have to migrate this activity to low-cost countries and we have a great opportunity there.” Investment in education is also vital. Currently, 25 percent of university graduates are engineers. However, Albín stressed the need for them to be better prepared. “We need better engineers. One of the things we are doing is working with CONALEP to incorporate technology into academic plans so students can be more competitive. In this way, companies save money and time when training new Mexican hires.” Aptiv in Ciudad Juarez, Chihuahua, and Continental, in Queretaro, are great examples of investment in R&D, he added. 

Regarding electrification, Albín said he is confident that the country will be able to adapt. “In an internal combustion vehicle, the powertrain, the cooling system and the exhaust disappear but everything else, including the suspension, safety systems, interiors, brakes, glass and chassis will still be there and will have to be manufactured.” As for the raw materials, whether steel, aluminum or copper, Albín believes there is a trend towards rising costs in other countries due to the trade war, something that Mexico can take advantage of to attract more foreign investment. 

"USMCA will bring great opportunities to the supply chain. In addition, there is still no end in sight to the trade war between China and the US, which opens the door to nearshoring,” Albín added. Mexico's biggest competitor in terms of incentives is the market in southern US, which offers large tax incentives to companies that decide to set up production there. “With the departure of ProMéxico, no one is properly promoting the opportunities that the country has to offer. Currently, a group of industrial park companies is looking for representative offices in other countries to capture that investment,” he said.

Through the different automotive chambers and associations, Albín says it is necessary to keep fighting for a competitive country in the generation of low-cost energy, with public policies that favor fiscal incentives for investment, security, as well as labor stability to comply with new rules in USMCA.