German Knowhow Grows as Investments Flourish

Mon, 09/01/2014 - 16:48

Mexico was the emerging market most extolled at the 2014 World Economic Forum in Davos, with some US$7 billion in investments being announced by global conglomerates including PepsiCo, Cisco, and Nestlé. Along with Japan, much of the automotive investment into Mexico is coming from Germany. A significant chunk of the US$10 billion in automotive industry investments projected to enter Mexico in the coming years is set to come from German entities such as BMW and Daimler as well as major suppliers. The President of the Mexican-German Chamber of Commerce (CAMEXA) Johannes Hauser explains that “there has been a long history of German companies investing in Mexico, and today the automotive sector in the country is the most important as far as Germany is concerned.” CAMEXA is part of a three-pronged German investment promotion drive powered by the German Embassy, Germany Trade and Invest, and CAMEXA.

A CAMEXA survey released in the last quarter of 2013 reveals that the investment intentions of German automotive industry players in Mexico remain strong, as 61% of interviewed German companies currently in Mexico have further investment plans for 2014. In addition, 43% of these plan to increase their workforce in the coming year. These positive expansion projections come despite a general market slowdown seen in 2013. 75% of companies surveyed in 2012 reported profit increases, whilst only half of these reported growth in 2013. Of those companies that did see growth in 2013, only 19% reported an increase of more than 10%. Hauser stipulated that the survey highlights a consistently positive trend in the development of German industry in Mexico. “Most companies want to invest in the country and many plans to hire new staff. But we know that companies with a focus on the domestic market have had a much more complicated time than those with export-minded activities.” The survey also revealed that the security perception of Mexico in Germany is improving. Over half of survey respondents indicated that the security situation was having a diminishing impact on their business operations, with just 39% reporting that insecurity affected their business compared to 49% in 2011.

Hauser’s reference to Germany’s long history of investment in Mexico is clearly evidenced by the celebration at the beginning of 2014 of Volkswagen’s 50th year of operations in the country. The OEM’s production levels in Mexico have increased in the last five years to over 600,000 cars and 500,000 engines. Marking the commencement of its sixth decade in Mexico, the OEM giant simultaneously announced the onset of production of the seventh-generation Golf in Mexico, demonstrating its confidence in the country as a long-term automotive production hub. Volkswagen’s 50-year operations in Mexico have seen the company invest a total of US$8 billion. Its plant in Puebla, one of the largest in the world, employs a work force of 17,000 employees, and has so far produced more than 10 million cars for the global market. Mercedes-Benz also has its production sights set on Mexico, with the company’s Mexico President Pedro Tabera saying that “the existing automotive industry and the number of cars being produced are a few of the great advantages in Mexico. The supply chain is also robust and there is a good labor force with low salaries.” The premium OEM has identified opportunities in the local market and is planning to branch out into the market for new generation compact cars through its A, B, CLA, and GLA classes. Whilst MercedesBenz has not yet produced vehicles in Mexico, whisperings of an imminent investment have been confirmed. Daimler will produce small Infiniti and Mercedes-Benz luxury vehicles in collaboration with Nissan in Aguascalientes.

The hype surrounding the impending announcement of a production plant investment by another premium German OEM, BMW, paid off and those that placed their bets on the Bajio as the location of choice were only slightly off the mark. At the start of July 2014, BMW finally confirmed a US$1 billion investment in Mexico’s state of San Luis Potosi. BMW’s first plant in Mexico is scheduled to begin production in 2019 and will employ some 1,500 staff. The announcement of a production plant by one of the most technologically advanced OEMs can also only mean good things for Mexico’s future as a contender for R&D. Indicating that technology development within Mexico by notoriously meticulous German OEMs is perhaps not such a far off dream, BMW’s Marketing Manager Hernando Carvajal reveals that “BMW is currently only industrializing products in Mexico that have been developed by our headquarters. However, this is an area that will certainly present long-term opportunities in terms of generating more local R&D, not only for BMW but also for the whole industry.”

Suppliers themselves have seen no shortage of opportunity brought about by the influx of German OEMs, with many Tier 1s following their clients to establish plants in Mexico. Even before BMW has made a single car in Mexico, it is already contributing to the country’s supply chain development. “BMW is providing an example of how you can integrate local companies into the supply chain. It has actually developed a dedicated program for Mexican suppliers as it is purchasing almost US$2 billion a year for production sites all over the world. Audi will be the first company to produce premium cars in Mexico, and will increase the quality and technological capabilities of local suppliers,” explains Hauser.