EDUARDO SOLÍS
Executive President
AMIA
/
View from the Top

INTERESTING TIMES AHEAD

Sat, 09/01/2018 - 10:53

Q: What is Mexico’s best opportunity to take advantage of the new conditions established by a NAFTA 2.0?

A: This treaty looks to modernize trade rules in North America. Considering that the automotive industry is the main success story stemming from the original NAFTA, our hope is that the new agreement maintains conditions to ensure growth and progress in all three countries. There is a good opportunity to reach an agreement. However, the aspirations put on the negotiating table by the US government push us away from reaching a consensus that could ensure Mexico’s ongoing success.

Q: What has been the main achievement of the current federal administration regarding investment attraction?

A: A key element was establishing the right conditions to do business in our sector. Investment in the automotive industry demands long-term certainty and the structural reforms implemented by this administration have been crucial in ensuring this. The government has also been successful in maintaining a stable economic environment, with sustained macroeconomics and a relatively stable exchange rate.

Promoting access to international markets has also been a success of this administration, along with constructing a strong supplier base and boosting the development of a capable world-class labor force.

Q: What should the industry prioritize to ensure continued growth?

A: One priority should be to strengthen the domestic market. We need a healthy domestic market to keep boosting the industry and so far, 2018 has seen a deceleration in sales of almost 10 percent. Just like Chile and Argentina, what we need is to sell 20 new vehicles per 1,000 inhabitants and today, that rate is at 13 vehicles per 1,000 inhabitants. Controlling used-vehicle imports from the US is also critical because it has been one of the main contributors for domestic sales growth. Even though this has not been an excellent year, for the past three years domestic sales have thrived thanks to strict controls at the border and a strong financing strategy.

The Mexican industry must advance its position in the value chain. We must also bet on local engineering by investing more in R&D activities. Today, we are the industry that demands the most resources from CONACYT.

Q: What would you say to investors to assure them about Mexico’s position in the global automotive industry?

A: Mexico is ranked fourth in light-vehicle exports and we are tied with South Korea in sixth place in light-vehicle production. The country has demonstrated its capabilities as a competitive automotive hub and now our goal is to define the best way to face the current trade challenges including the possibility of new tariffs that could be implemented by the US on vehicle imports, similar to those the country slapped on steel and aluminum following Section 232 investigations on national security. These are interesting times and particularly now, many changes are coming. Whatever we can tell investors today could change in the following months and they must be aware of that. Nevertheless, we are optimistic about the future.

Q: What diversification opportunities will the CPTPP agreement create for the Mexican industry?

A: We must recognize the real opportunities that this agreement will create for the automotive sector. Our biggest commercial relationship with the existing CPTPP members is with Canada and Japan at the moment and we already have a pre-existing agreement with the latter. Australia or Malaysia could present interesting opportunities but we are talking about countries with markets of between 1 million or 1.5 million units where we have no presence. Whatever sales we can generate will not solve our dependence on the US market. It is interesting to open new markets but these will not be substantial, at least in vehicle production.

Q: What will be the impact on the national industry considering changes in preference toward SUVs and crossover models?

A: Mexico will be flexible enough to face changes in international demand. If the market wants us to 

manufacture hybrids, medium-sized cars or SUVs, we will be there. Demand is changing and we will not cling to our production model if there is no market for it. Otherwise, we will face the same fate as Kodak. We are quite flexible regarding future changes in demand.

Q: Today, how attractive is it for companies to bring production of electric and hybrid units to Mexico?

A: That is for companies to decide but today, there are companies finalizing their production plans for Mexico and they are also considering production of electric and hybrid units. All production sites from a company compete to integrate new models and I hope Mexico is a strong contender for new technology production.

The country is ready to participate in this process and its supply chain is flexible enough to cater to new market needs. Companies must learn to adapt to the changes introduced by new technologies, so axle and other transmission component manufacturers will have to find ways to participate in a new industry. The challenge for Mexico will be to get ready to supply essential components for electric-vehicle production. Today, no company in North America manufactures batteries for automotive use. The current providers are focused on lead-acid products and have not made the switch in North America to the lithium-ion batteries used in these vehicles.

There is an excellent opportunity to grow our participation in the industry, not only with electric vehicles but also with self-driving technology. All control units, radar and LiDAR sensors are imported from Asia, so there is still a gap to fill not only in Mexico but in North America.

Q: What role will local design and engineering centers play in the development of the national industry?

A: These centers will participate as technology developers that will shift the industry toward the most advanced technology and as tropicalization agents for vehicle components. Engineering is crucial to the successful introduction of a new vehicle in Mexico and in Latin America in general, where environmental and physical conditions are different than in other parts of the world.

Q: How can Mexico bolster its local supply-chain and grow its global production presence?

A: Mexico has a strong and capable Tier 1 supplier network, with practically 95 percent of all companies in the world already present in the country. However, at a Tier 2 level, 85 percent of the needs of Tier 1 suppliers can only be met through imports. Machining, forging, foundry, plastic injection, stamping, molds and tooling are among the gaps that the national industry must fill.

Therefore, to strengthen the local supply chain and grow our competitiveness as an automotive hub, we must promote investment from Tier 2 companies and support growth of local family-owned companies and SMEs.

Q: What are your overall expectations for production and export results?

A: It is difficult to make a forecast given the complicated global scenario we are facing. As of June 2018, US President Donald Trump was still threatening to close the border and slap tariffs on vehicle imports from Canada and Mexico. We are on the brink of a pointless trade war that clouds whatever prediction we might make.

If no Section 232 measure is implemented, we still see a possibility to reach production of 5 million light vehicles by 2020 and exports of over 4 million units. So far, we are producing over 4.1 million vehicles yearly, both light and heavy, and exporting over 3.3 million.

Q: Regarding domestic sales, how sustainable it is to maintain an aggressive financing strategy with elongating terms?

A: Financing must remain a pillar for the industry, mainly in the number of units that are financed out of total sales. Leasing also presents an opportunity for the domestic market, considering that this product represents only 10 percent of the total financing solutions offered. So far, we have not reached a 70 percent rate of financing, considering we have oscillated between 65 and 68 percent. The rate has undoubtedly increased, considering that years ago we were at 50 percent but our goal is to reach an 85 percent level, which is the international benchmark.

There is a clear growth opportunity but regulations must also change to offer more certainty to credit institutions in countries like Mexico and ensure recovery.

Q: How ready is the Mexican market to ditch its stigma regarding Chinese vehicles?

A: The world has changed and good and bad vehicles come from many countries. Mexico has built a reputation as a quality automotive manufacturer and now China will have to make that same effort. It is the same process that Korean companies followed when they arrived to the country. They had to build a reputation but they have succeeded.