Luis Lozano
Legal and Tax Services, Partner and Lead Partner of the Automotive Industry
PwC
/
Insight

Creating Economic Momentum

Tue, 09/01/2015 - 17:42

In recent years, Mexico has been consolidating as one of the world’s top countries for both vehicles exports and vehicle production. Since the nation recovered from the 2009 global recession, which sent significant shockwaves throughout the automotive industry, Mexico has been rapidly becoming a permanent leader in the manufacture and export of light vehicles. This growth is mainly the result of recent investments to increase the production capacity, particularly from companies like General Motors, Ford, Nissan, Honda, and Mazda in the Bajio region, and Volkswagen and Audi in Puebla. Additionally, Toyota recently announced a US$1 billion investment for the construction of a new car assembly plant in the state of Guanajuato, where more than 2,000 jobs will be created. These dedicated OEMs have been manufacturing several of their well-known models here at high volumes, helping them to target the largest and most rapidly growing markets without leaving the others behind.

The level of new car sales in Mexico at the end of the 2015 fiscal year is estimated at around 1.4 million units, the highest level in the last ten years. If we analyze the size of the market and consider that more than 40 brands are present here, one of them having a 25% market share, this fierce competition can actually attract new players, which generates even larger market growth. In 2014, Nissan was the market leader with annual sales of 291,729 units, a 10.7% increase over the previous year, with which it gained 25% of market participation. General Motors sold 216,958 units, with the resulting year-on-year growth of 7.6% and a market share of 19%. Last year, Volkswagen’s sales grew by 2.8% to reach 195,332 units, representing a 17% market share.

The arrival of OEMs and their supply chain was responsible for the rescue of electromechanical contractors in the Bajio region, which previously saw little to no activity in this segment. The construction industry also saw benefits, namely in the development of new industrial parks, which are greatly increasing the importance of nearby cities for foreign investors. Similarly, other regional vocations, such as food, glass, steel, oil, and chemicals are growing in a significant way. In this sense, it is no surprise that all industries are reacting to the urgency that automotive is generating, as it is the engine driving the manufacturing industry of Mexico. AMIA has mentioned that steel is a key component for automotive production and that pressure from steelmakers could endanger its competitiveness. The automotive industry accounts for 10.6% of Mexico’s total steel consumption, with demand growth estimated at around 7.1%. As a result, the National Chamber of the Iron and Steel Industry (CANACERO) announced last year an investment of US$3 billion between 2014 and 2016 to expand steel production capacity and meet the growing automotive demand. Even so, estimates show that domestic steel production currently supplies only 30% of the requirements for automotive manufacturing, while the rest is imported from countries such as China, Sweden, France and Germany. This has led to Mexico becoming the number one buyer of steel in Latin America. In terms of auto parts, by 2020 the industry is expected to have a production value of US$100 billion, which would make Mexico the fifth largest producer globally, according to projections by INA. The North region recently received 20 new auto parts companies as part of the KIA supply chain. Additionally, Canadian auto parts suppliers have recently been coming to invest and start their production in Mexico in order to maintain profitable operations. Auto parts companies have had to refocus and reorganize their production processes, standardizing many of them in order to comply with the demand of different clients.

The increase in R&D centers in Mexico will result in a significant increase in local content. Therefore, growth in auto parts production and exportation will be higher than expected for the light vehicles segment. The forecast is to achieve sales above US$90 million by the end of 2015. To meet this goal, ProMéxico has developed a number of investment projects, 100 of which are already underway, with many more under evaluation. The use of alternative propulsion technologies for vehicles has opened a new chapter in the industry. Sales of hybrid or diesel technology cars are increasing, and Electric Vehicles (EVs) have been available since the end of 2014, when they were introduced by companies such as Nissan, BMW, Renault, and GM. This forward momentum is creating significant expectations for sustainable transportation in Mexico. There have been innovative proposals to increase the autonomy of vehicles in order to minimize the use of fuel and the generation of pollutants. Nevertheless, those technologies pose great challenges, such as their adaptation to a society that has always been gasoline dependent, not to mention making technology prices accessible and competitive in the current vehicle market. The first challenge would seem easier, although the autonomy of EVs continues to be one of the key factors to bear in mind, as well as the establishment of a charging network in the main cities of Mexico. In conclusion, the Mexican automotive industry is one of the most important sectors in Mexico. It generates favorable foreign exchange, economic growth, direct and indirect employment, training program investments for workers, and many other benefits, and with each new step comes new objectives for maintaining this growth in the competitive worldwide automotive market.