AUTOMOTIVE LEGISLATION NECESSARY TO MAINTAIN GROWTHSat, 09/01/2018 - 11:54
Q: What are your projections regarding the NAFTA negotiations and the possible changes in regional content regulations?
A: IHS Markit does not make assumptions on where things are headed regarding the NAFTA negotiations. We are waiting for the end of the current talks and, for the time being, our baseline forecast says negotiations will be resolved favorably and we will move forward with a new version of NAFTA.
Q: What do you see as the biggest risks for Mexican production?
A: Growth in Mexican production over the past five years has been easy due to the growth in the US market of approximately 1 million units per year. However, 2017 was the first year since the Lehman Brothers’ crisis in which the US market entered a stabilization cycle. The market closed at 17.2 million units sold, which was a small contraction compared to 2016. In due course, the US market will continue stabilizing to an end figure of 16.5 million units. As a result, Mexico will have to compete against the rest of the world to maintain its share in a relatively flat market.
The US market is also becoming light-truck intensive, while Mexico is passenger-car intensive. All new investments that came to the country were following Corporate Average Fuel Economy (CAFE) standards that favor passenger cars but this is not necessarily ideal for what the US market is demanding. Some companies are realizing this and shifting their operations accordingly. Ford, for example, canceled its manufacturing investment in San Luis Potosi because it saw there was no point in producing 400,000 passenger cars if the US would not take them. Honda, Nissan and FCA have also introduced larger models to their production portfolio in Mexico and Toyota has changed its investment plans in Guanajuato to focus on its Tacoma pickup truck instead of the Corolla.
All these changes have originated within the private sector and, from our perspective, there is no awareness from the government regarding the transition that is unfolding in the US market. SUVs are the future not only in the US but in the rest of the world, which means a government support program that helps companies participate in this transformation should be considered.
Q: How likely is it that Mexico will diversify its exports outside the US?
A: Mexico is ready, willing and able to compete in the global market. The country has been capable to export to the US, which has been one of the most competitive markets in the world along with Europe for more than 30 years. The challenge we have is that the trading partners we expected to tackle, mainly Latin America and Mercosur, have contracted considerably, especially Brazil. Mexico has not been quick enough to consider other destinations such as Africa or Eastern Europe and to find ways to compete against manufacturing hubs like Morocco, Turkey, Romania, Poland and Hungary. Understanding how these countries export to other regions is critical for Mexico to be more competitive and diversify its operations beyond NAFTA.
Q: What do you see as the main advantages the Mexican industry has over the rest of the world?
A: Mexico’s two main assets as a manufacturing hub are its versatility and the quality of its production. The country can build anything from an entry vehicle to a premium or luxury model and any model in between, following the most stringent quality standards. In a growing and changing environment, this allows Mexico to produce whatever the global industry may require and it presents an opportunity for the country to continue building on its capabilities.
Q: How can the government support the industry’s transformation?
A: We still see the absence of an automotive legislation as the biggest obstacle for the industry’s growth. All new plants coming to Mexico have been the result of companies expanding their operations in North America, trying to localize their operations or exporting out of the country. None of them were the result of a true automotive policy from the Mexican government. The industry is evolving rapidly and a change in vehicle motorization is imminent, pushing aggressively toward electrification. Although part of this transformation has permeated the Mexican industry from a private-sector standpoint, nothing has been done from a legislative or an R&D standpoint. Mexico is playing to its strengths — manufacturing, labor and trade agreements — and if another country offers better conditions in any of these fronts, we will see significant negative pressure on local manufacturing operations.
If we look at the industry from an operations point of view, we have deficiencies in infrastructure and human capital. Both the port and the rail network have capacity issues and there are not enough people with the right skillset to run manufacturing plants the way they should be run. Labor turnover levels are increasing considerably in both OEM and supplier operations, which clearly shows we need more people working on the frontline of the automotive industry.
Q: How important do you consider R&D operations to be for the future development of the national industry?
A: The government must establish clear priorities for where the country should be in the coming years and R&D operations must be among them. R&D is a critical pillar in the industry’s development. Looking at Toyota’s strategy, for example, the company is investing very little in electrification yet it is aggressively focusing on fuel cells. Companies are realizing that electrification is just a stepping stone to the true goal. Therefore, the only way to participate in these changes is by embracing R&D and understanding manufacturing, logistics, emissions, legislative and market transformations. Assuming electrification and vehicle automation continue growing at the current pace, the endgame ideally should be for the country to meet the rest of the world by 2030.
Q: Do you think the government should keep offering incentives to boost FDI?
A: Because of our geographical position and the fact that Mexico competes first in the NAFTA market and then internationally, Mexican states compete not only against themselves but also against US southern states. These regions have historically provided an incentive of approximately 30 percent on investments that are over US$1 billion. If that is the benchmark against what Mexico needs to compete, then the government should keep playing a role in attracting investment.
Q: What are your projections regarding the development of the domestic market?
A: We have revised our outlook downward and it seems domestic sales will probably be somewhere around 1.7 million light-vehicle units by 2020, according to IHS Markit sales forecasts. There are elements that could distort that projection but so far, interest rates are going up, hindering the availability of financing which is crucial for sales growth. On the bright side, the country is still holding back used car imports from the US, maintaining an opportunity for further growth.
We think the automotive market will grow at a pace comparable to the country’s GDP. Regarding 2017’s results, with sales of 1.53 million units, it signals moderation in the market. We are still facing headwinds derived from the peso devaluation that resulted in higher prices.
Conditions will remain the same in 2018 given that it will be a year full of uncertainty. On the one hand, we will be dealing with NAFTA negotiations, interest rates will continue to go up and inflation will still be an issue. On the other hand, the presidential elections on July 1 were another disrupting factor
Q: What will be the impact of the federal elections by the end of 2018?
A: From a manufacturing standpoint, there is not much that can hold back the industry’s progress. Investments have been announced, expansions are taking place and that is not likely to change. The domestic market, however, will definitely be impacted in the short term considering its development is closely tied to consumer confidence. We saw a significant decrease in sales during 1Q17 after the presidential elections in the US. Similarly, consumer confidence was shaken in 1H18, affecting the market dynamics for the automotive industry.
Q: What would be your main concerns regarding the coming change in administration?
A: One of the main pillars for growth in the country has been the automotive sector, which today contributes more to the national GDP than remittances. Ignoring the role that the industry plays would be extremely detrimental to the economy as a whole.