Automotive Industry Requires Greater Integration

In 1994, the North American Free Trade Agreement (NAFTA) began. This treaty diversified the economy of our country, which was highly dependent on oil. Very soon, Mexico became a manufacturing hub: car manufacturing, auto parts, household appliances, electronic equipment, etc. North America took advantage of the better costs in Mexico to become more competitive as a region. However, NAFTA did not favor national integration. Small and medium-sized Mexican companies cannot compete with their counterparts in the US and Canada, production chains have been broken and transnationals have chosen to import components. NAFTA created many sources of employment and development in large areas of the country, especially in the north and after 2009, in the Bajio. However, it did not create business for SME entrepreneurs in the regions. For example, we have auto parts companies that after 25 years of being here still do not  buy even 10 percent of the content of their products locally.

The USMCA, which replaced NAFTA, has increased the regional content for light and heavy vehicles but has also introduced regional content rules for auto parts and for Tier 1s. This is forcing transnationals to look for suppliers in Mexico. At the automotive supplier event that CLAUT organized last June, we had more supplier demand than supply. There are especially certain commodities that are sought-after but there are not enough suppliers in the country: forgings, aluminum injection, extrusions, for example.

Along with the opportunity that the USMCA offers today for the growth of the automotive supply industry, the phenomenon of nearshoring is taking place, with the understanding that today there are many North American companies that are returning production from Asia, especially China, to the region. A significant part of this supply is seeking to develop in Mexico, and it is not only automotive: other industries are also bringing their supply, including tools, toys, furniture and electrical equipment. The Inter-American Development Bank has calculated that Mexico could capture some US$35 billion of supplies due to nearshoring.

To address this problem, which can also be a great opportunity, the CLAUT supplier development committee has formed work teams with the buyers of the cluster companies. The intention is to take advantage of the current supplier base in Mexico and support their growth.. The other alternative is to attract suppliers from Asia or Europe to meet the requirements of the transnationals established in Mexico. With these synergies, we hope to be able to strengthen the automotive chains in Mexico, ensuring the Mexican Tier 2 grows and that cars in North America finally have much greater Mexican contentir.

One of the biggest challenges we have in developing the national supplier base is that most of them do not have the financial support to capture the business that is being presented to them. Many Mexican Tier 2 companies are family businesses that have developed over the last 25 years and are as large as they have been with the same resources they have generated. However, the combination of the automotive requirement due to the USMCA and the demand that nearshoring is generating requires a more forceful response from suppliers. But they need new and better sources of financing, since the response of commercial and development banks in Mexico is also inadequate. The cost of money in Mexico is expensive, and with such high interest rates, growth via financing from these sources is unfeasible. Investors are needed who want to bet on the Mexican Tier 2 segment, so that they are able to obtain new contracts and support the growth that the industry is demanding.

Another element that we require is a clear and determined public policy to take advantage of this moment of opportunity, both at the national and subnational levels. Respecting the rules agreed between the three countries, there is an opportunity to create conditions that favor Mexican suppliers, especially SMEs, so that they can grow with this opportunity. There may be support for them to have automotive, specialized consulting or technological development certifications so that they are at the necessary level to support the demands of transnationals. It would help a great deal if customs procedures or VAT refunds were streamlined, so that these companies can have sufficient cash flows for their operation. The incorporation of young talent from our universities is also required to finish supporting the development of these companies. In these areas, there could be active collaboration between automotive industry clusters and governments, both state and federal. In this way, united we grow.