Eduardo Solís: Mexico is Ready for Coming ChallengesBy Alejandro Enríquez | Wed, 07/15/2020 - 11:00
Q: What should be the industry’s priorities as it resumes operations?
A: The main priority for companies should to be to implement the appropriate health and safety measures as they resume operations. To protect the life and the well-being of our employees is our priority, which will imply following all required sanitary protocols.
Of course, we are part of the global supply chain. Mexico is the No. 1 auto parts supplier for the US and we are the fifth-largest auto parts exporter and fourth-largest vehicle exporter. Mexico is a really important, relevant player in the industry. For this reason, resuming operations will be fundamental to our trade partners as well, including the US and Canada. We will experience a gradual, safe restart, with all collaborators aware of the required protocols. At the beginning of June, production levels will be at 10 percent for most companies, while others will work at around 20 or 30 percent capacity.
Players agree that June will be the month when production escalates, taking into account new vehicle demand levels. The sector needs to acknowledge that demand will be different from pre-pandemic levels. In Mexico, production dropped by about 4 percent in 2019. For 2020, I forecast a fall between 25 and 30 percent annually, similar to the US market’s decline, which will mean that in the coming months we will have production declines of 40 percent or more compared to 2019. Everyone should bear in mind that in the short term there will be a need for OEMs to refill their inventories. Beyond those peaks, demand will drive the industry to lower levels than those in 2019.
Q: Will the post-COVID-19 scenario be the perfect moment for Mexico to strengthen its local supplier base?
A: Absolutely. The new rules of origin established in USMCA are stricter in terms of obligations to centralize supply manufacturing in the region. Stricter rules of origin indeed could bring new opportunities under a de-globalization effect in North America. Both, USMCA and the COVID-19 pandemic will take Mexico to nearshoring practices, which is contrary to the offshoring practices seen in previous years. We must not confuse the decrease in demand caused by COVID-19 with the strengthening of the North American region through USMCA. Although both will foster the transfer of operations to closer locations, USMCA’s new rules of origin will imply a restructuring of OEM operations.
USMCA’s rules of origin are really complex, which could make it difficult for OEMs to comply given the short transition times. There are two elements about USMCA that need to be put on the table. First, we need uniform regulations. These will be published at the beginning of June given that the three countries are still negotiating. Having uniform regulations at the beginning of June will mean having less than three weeks to understand them and to apply them. These regulations are the guidelines under which rules of origin will be applied. This really short amount of time will put OEM purchasing and strategic planning departments in a difficult spot.
Given these conditions, OEMs will have to face the second element that needs to be put on the table: transitional regimes. These particular regimes will give OEMs a waiver on the immediate application of the rules of origin. This will have to be analyzed on a case by case basis where each OEM will have to negotiate its plan to comply with the incoming rules. I am confident that many OEMs will abide by these transitional regimes in certain specific models.
Q: How can the industry foster collaboration with the federal and state governments?
A: Having been president of AMIA during the administrations of both Peña Nieto and López Obrador, I can say we need to assure the conditions for OEMs to comply with USMCA’s new rules of origin. This includes reviewing the particular needs of each company, while working with them to develop local supply chains. There are new rules for steel and aluminum, components that need to be purchased in Mexico, the US or Canada, and components purchased in Mexico that must have parts produced in the US or Canada. Labor value content (LVC) must also be observed to fulfill the required percentages.
It will be difficult for OEMs to comply fully with the new rules, which means there will be opportunities to relocate operations to Mexico. This provides a really interesting opportunity that will require the participation of the government to support OEMs and Tier 1 suppliers while promoting investments. The participation of federal and state governments, as well as local ministries of economic development and automotive clusters is essential for these opportunities to come to fruition.
Q: How should automotive players foster the skills needed in the labor force?
A: Education will remain a challenge but we are already familiar with that. CONALEP is a really good example of this partnership. This high-school level educational and technical institution has allowed us to open plants while developing the talent needed to operate them. Other relevant technical institutions also have helped the industry to thrive across the country. Mexico has managed to properly train its workforce in classrooms and under dual-education initiatives.
Naturally, there are challenges ahead. OEMs are demanding new skills, which puts Mexico in a very interesting situation to assure them that the country is able to embrace the technological transformation we are experiencing. Advancing Big Data, Internet of Things, human-machine interactions and virtual reality will drive students to learn about different subjects and develop the particular skills they need. Under Industry 4.0, Mexico will overcome this challenge by working hand in hand with the industry, academia and the government. As head of AMIA, I held a meeting every two months with CONALEP’s president and other middle and higher education institutions. Communication is key. There is room for improvement but one of Mexico’s strengths is that it is full of qualified talent.
Q: As a key player involved in making the automotive industry one of Mexico’s economic drivers, where do you think the industry is heading?
A: It is clear that we are all on a train moving into a new digital era, new production methods and a new generation of vehicles that include hybrid, electric and autonomous models. Mexico is already there. We manufacture hybrid models at different facilities in the country and starting this summer, an EV will be produced in the State of Mexico. The transition has been really smooth, so much so, that some are even surprised that Mexico is already participating in these advances.
On the one hand, Mexico needs to secure its talent. On the other, the industry needs to get its suppliers ready to embrace these new technologies. Suppliers have been quietly adapting to the new requirements set by OEMs and Tier 1 suppliers.
Eduardo Solís was Executive President of the Mexican Association of the Automotive Industry (AMIA) for 12 years, contributing to the development of the national automotive footprint. Now, he is an international consultant on economic affairs