Image credits: Deloitte México. (Left: Manuel Nieblas, Manufacturing Industry Leader Partner, right: Alberto Torrijos, Automotive Sector Leader Partner)
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Analysis

Deloitte: Let’s Not Forget That Crises Are Opportunities

By Alejandro Enríquez | Mon, 09/07/2020 - 06:00

Q: What were the highlights for the Mexican automotive industry in the past decade?

MN: The automotive industry consolidated itself in terms of historic amounts of Foreign Direct Investment (FDI). The sector became the pillar of the manufacturing industry in the country. Thanks to the industry’s performance over the last 10 years, the country is in a solid position to face the current pandemic. Once the pandemic is over, we expect the sector to push the economy forward.

Opportunity areas for Mexico remain in the development of the domestic market to lessen our dependence on foreign markets, which receive more than 80 percent of Mexico’s vehicle production. 2020 is an atypical year and will result in a historical low for vehicle sales.

AT: One of the biggest achievements of the automotive sector over the last decade is Mexico’s emergence as an important pole for development, which represents a unique opportunity for the country to transform itself into a global platform for advanced manufacturing and innovation. This should motivate the entire ecosystem to take advantage of existing capabilities in the coming years.

Q: What should vehicle brands do to strengthen their sales performance?

AT: Transparency and visibility remain key. An adequate flow of information between dealerships and brands should create greater levels of assertive communication to make demand visible. This is a gap that has yet to be filled.

It is indeed an important moment to foster online sales and digitalization strategies. A customer-centered focus has, on the one hand, an important research element. On the other, it requires a more personalized experience through digital channels. Brands must understand their customers; we are in a time when customization is leading the way; a general focus is not enough anymore. 

MN: It should all be about teamwork. Apart from the dealerships and OEMs, the government should get involved to promote vehicle sales. Having said that, brands should be focused on the customer. There should be greater awareness of the seasonality of demand and the current needs of customers amid the pandemic, taking as an example experiences in markets such as China. The more dealerships and brands understand the customer, the faster their recovery will be. Mexico is in a peculiar position when it comes to the pandemic, sitting third in the world in terms of the largest number of infections, which is having an impact on the consumers’ decision to purchase a vehicle. Deloitte’s consumer surveys show that Mexico is more sensitive in terms of how external elements affect purchasing decisions, mostly due to insecurity. That is why reactivating the industry should be based on teamwork.

Q: How will EVs and autonomous vehicles influence the future of mobility?

MN: Electrification, autonomous and shared vehicles will have a great influence. The automotive industry in Mexico should get involved in this regard, possibly through R&D operations. These trends will take time to fully land in the Mexican market, so the next step for the country’s automotive hub is to create the value needed for those trends to ramp up. Electrification will arrive faster and autonomous vehicles will rely on the development of other technologies, such as 5G networks. The country should advance its manufacturing capacity toward research and development skills.

AT: Although there have been delays, there is no turning back from these technologies. There are numerous examples of important partnerships in this regard. At Deloitte, we believe that corporations will need to innovate in their business. Tech companies and even some Tier 1 companies are already building vehicle prototypes, thus it is a chess game between OEMs and the entire ecosystem to assure success. Increased connectivity will also foster digital sales, which implies partnerships for brands to implement an omnichannel strategy.

OEMs should also look into the development of new business units besides manufacturing. For instance, what about content creation or data generation? These represent an immense opportunity. If OEMs fail to adapt their business in this regard, they might lose market focus. Japanese and German companies, for instance, are creating partnerships with large technological companies or smart cities. Mexico should take advantage of the technological wave and advance its traditional manufacturing footprint.

Q: What important consumer trends do you see in the Mexican market?

MN: Important mobility trends can be seen among younger generations because they are choosing not to buy vehicles. Shared mobility is becoming a thing, given that Generation Y and Generation Z are strongly focused on sustainability and experiences. We will see how this consumer trend impacts vehicle sales in new schemes such as expanded fleet purchases and more EVs on the streets. If companies fail to understand the new scenario the pandemic is leading us to, they could be left behind. At Deloitte, we help our customers understand where these trends are leading to, including digital trends.

Q: How will USMCA benefit companies in the country in terms of Industry 4.0 capacity?

MN: An interesting scenario has emerged from the USMCA’s rules of origin, particularly the labor value content rule that establishes a salary increase. In reality, very few OEMs can affirm that as of this moment they are complying with the rules. The opportunity for Mexico lies in developing local suppliers that help OEMs meet the new standards. The manufacturing industry in Mexico is world-class. According to our last Global Manufacturing Competitiveness Index in 2016, Mexico was ranked eighth.

In the automotive sector, the opportunity area is in the development of local suppliers for both components and raw materials. Rules of origin set additional requirements regarding special steels and companies have started to act accordingly. The industry needs to make an effort. The key word is investment, as large companies need to invest in developing local capacities. Clusters have played an important role in this regard but government, academia, Tier 1s and OEMs should participate as well.

AT: The country seems to be in a risk-averse environment but the opportunities are there. Mexico has a great number of components that are imported and OEMs and Tier 1s are actively looking for those components locally. However, the quality and costs of such components are not adequate. For instance, there is a clear need for molds and dies.

Q: Manufacturing GDP faced a 26 percent reduction in 2Q20. What does this mean for the Mexican manufacturing footprint?

AT: A GDP reduction affects the available amount for investment. The market is now prioritizing the money it has. FDI in the past decade built manufacturing plants that still have room to expand operations, but a new wave of investments will require macroeconomic stability and demand recovery, particularly in the US and China, which will not arrive in 2020.

MN: GDP performance can be worrisome but if companies continue to focus on the customer and other players participate in sales recovery strategies, recovery will come sooner. Looking at the sector’s trends, the US market will recover faster than Mexico, which is relevant since 80 percent of vehicle exports go to the US.

Q: What are your views on what is to come for the automotive sector?

AT: There are fears in the industry that the crown jewel of the manufacturing GDP will be permanently affected. We see concerns among our customers regarding not only the pandemic but Mexico’s certainty for long-term investments. What companies can do is look at the customer while taking advantage of the certainty USMCA provides. These are interesting times and there are interesting opportunities.

MN: Crises are opportunities. We are living the worst crisis in economic history. These processes can be complicated but this moment provides the opportunity to think about what companies are doing right and where they can improve. The more focused companies are, the better their results. The sector will increase the speed at which companies adopt Industry 4.0 capabilities to eliminate bottlenecks in production processes.

 

Deloitte is one of the world’s leading audit, consulting, tax, financial advisory and risk advisory brands, with about 245,000 people working at member firms in 150 countries and territories.

Alejandro Enríquez Alejandro Enríquez Journalist and Industry Analyst

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