How Automotive Clusters Are Protecting SuppliersBy Alejandro Enríquez | Mon, 07/06/2020 - 06:00
Q: What spurred the creation of an automotive cluster network?
A: The Mexican Automotive Cluster Network has its precedent in the Automotive Cluster of Nuevo Leon (CLAUT), which was created in 2007 as a civil association following a model from the Basque country. After consolidating our operations, we helped other emerging clusters like Guanajuato, Queretaro, the State of Mexico, Puebla and San Luis Potosi. After that, presidents of the clusters started getting together informally from time to time, at the events organized by AMIA, for example. About three years ago, we started formally sharing our experiences and information on what was happening in every state. We started implementing strategic planning in December 2018, which is when we realized we needed an inclusive entity for all clusters in the country. Finally, on July 28, we formally constituted the Mexican Automotive Cluster Network.
We agreed to create a management board to help us ground the ideas that come up in meetings, just like we do in every cluster. Companies come together because there are common issues that need a solution, so the cluster tries to manage those ideas objectively.
Q: How has COVID-19 disrupted automotive supply chains in North America?
A: Since it started in China, there was concern about the effects of COVID-19 on the automotive supply chain. Plants started to stop operations in China and some suppliers in North America might have faced some difficulties that were eventually solved. When COVID-19 arrived to Italy, again some suppliers faced some issues but they were handled. The worst impact from COVID-19 began in North America when OEMs chose to stop operations at the behest of several governments. In Mexico, the automotive industry was not considered essential. In the US, some parts of the industry continued working but in most places the industry ceased operations.
In North America, sales in March plunged 40 percent. People are not buying cars, which is also affecting the supply chain. The main issue is that plants have suspended operations. Some states in the US have not yet granted OEMs permission to operate and the Mexican government itself has not openly granted the industry permission to operate. We are working in that regard but disruptions to supply chains between Mexico and the US, which are greatly co-dependent, will not allow the industry to operate properly. Today, it seems there is no coordinated effort, not only between the US and Mexico but also among US states. Supply chains must be synchronized, otherwise it will be impossible to operate.
To restart formal operations, the industry needs government approval, which we expect might come soon. Some OEMs are expecting to resume operations on May 18 but we have yet to receive an official government announcement. Whether it is on May 18 or not, the fact is that the industry needs to restart operations. Mexico itself needs the automotive industry. Out of the four pillars of the Mexican economy, only one, the automotive sector, is somehow still standing. Remittances are declining, while tourism and oil remain at a standstill. Which sector will able to reignite the economy? It is the automotive industry. In fact, the Mexican government shares this view and has used the sector as a pilot to start implementing health measures at different plants so that people can resume work safely. Other industries will follow but the automotive industry remains a model sector.
Q: What strategies have been implemented to protect Tier 2 and Tier 3 companies in Mexico?
A: Local suppliers and smaller companies have the least resources. There have been companies, as I can tell from the Nuevo Leon Automotive Cluster’s experience, that have indeed taken care of their supplier base. Some have advanced their payments, while others have designed billing strategies to maintain cash flow. Tier 2 companies have also taken care of their own suppliers. Overcoming this situation is a joint effort.
SMEs in Mexico have been hit the hardest as there has not been any financial support from the government. Some states in Mexico have implemented programs but they can be insufficient. Sustaining our weakest link is a challenge the automotive supply chain is facing. Developing a supplier takes years and we could lose it in a matter of months if we do not take care of it.
In legal terms, companies have their own contractual commitments. It would be a shame if a large multinational company lets its suppliers die. Social corporate responsibility is not just about the external community but also about your suppliers. Companies must be committed to all stakeholders involved, namely customers, employees and communities. Any company that takes pride in being socially responsible needs to take care of all stakeholders, including suppliers.
Q: Some players have pressed for a delay to the enforcement of new rules of origin. How likely is that?
A: The treaty calls for enforcement 90 days after the last country signs, which will be on July 1. Pressing for a delay of six months is simply a strategy to gain more time. What is certain is that USMCA outlines its own timing. Companies are not expected to increase their regional value content (RVC) all at once on Day One. The period in which companies must increase their RVC starts on July 1. I personally believe that USMCA must be enforced as soon as possible.
USMCA has benefits for Mexico as a country. The treaty aims to increase RVC and Mexico offers the best conditions for investment, including imports from Asia and Europe. Components made in those countries will have to be regionalized. That brings new investment opportunities and new opportunities for local companies to increase their business.
The original NAFTA helped the industry to thrive. However, it also allowed a great number of imports. Today, we have the opportunity for Mexican companies to gain business. This should be a priority for state governments. The difference between a local company creating business and a foreign investment landing in the country is that, while the latter creates formal employment, the former creates wealth for the country. Priorities should be set first on local business, then on attracting foreign companies that want to come to Mexico to generate employment and business for local players.
The Mexican Automotive Cluster Network was established in July 2019 and includes the clusters of Chihuahua, Coahuila, the State of Mexico, Guanajuato, Laguna, Nuevo Leon, Queretaro, San Luis Potosi, Puebla and Tlaxcala