Key trends in the Mexican Light Vehicle Market

Moderator: Ricardo Haneine, Partner at A.T. Kearney
Panelist: Gabriel Lopez, CEO of Ford de México
Panelist: Pedro Tabera, Director General of Mercedes-Benz Mexico
Panelist: Manuel Padrón, Partner at Baker & McKenzie
Panelist: Eduardo Solis, President of AMIA

In a panel tracking the key trends influencing the Mexican light vehicle market, moderator Ricardo Haneine, Partner at A.T. Kearney, began by stating just how much of an overhaul NAFTA had provided for the Mexican automotive industry. It achieved in installing a level of dynamism that national policies, implemented for decades, had failed to do. Essentially, in Haneine’s eyes, the opening of the Mexican market through NAFTA is what made the automotive sector the key economic driver it is today. This is evidenced by the automotive industry now accounting for 4% of GDP, 25% of Mexican manufacturing activity and awaiting US$10 billion in FDI for the next few years.

Gabriel López, CEO of Ford de México, agreed, stating that Ford had come to Mexico to export to the US. He described waves of automotive FDI to Mexico as pre and post-NAFTA, and said that the post-NAFTA phase had allowed the entrance of billions of dollars in investment to the country. “The efforts made by successive administrations to attract investment have been crucial to the sector, as they have maximized economies of scale,” said López. Pedro Tabera, Director General of Mercedes-Benz Mexico, echoed his counterpart, praising Mexico’s market openness as key to its automotive success. The 45 countries with which Mexico has FTAs make it much easier for multinationals to decide to settle here, while the country’s close ties to the US dollar provide a large measure of economic certainty. Finally, the quality of suppliers and the cheap labor in Mexico has combined with the country’s proximity to the US to provide an irresistible combination for investments.

Manuel Padrón, Partner at Baker & McKenzie, jumped on the issue of Mexico’s geographical advantages. “Location is key for automotive companies, because of demand from the US. The government has taken advantage of its geographical location and enhanced it through proper regulation and polices. OEMs and suppliers alike can now enjoy specific and adequate regulation to foster their development,” he explained. Eduardo Solís, Executive President of AMIA, sought to add a layer of nuance to the concept that geographical location was Mexico’s main tool. He said that Mexico’s commercial agreement were the second-most important argument and that its skilled labor pool had allowed automotive projects to go from scratch to operational in just 18 months.

Looking to the future, the panellists dwelt on what they felt would allow Mexico to bring even more automotive investment. López felt that investments by OEMs would reflect investments made in the local Mexican supply chain. He stated that to further detonate growth, the presence of reliable Mexican Tier 2 and 3 firms was of the utmost importance. He called upon Tier 1 suppliers to develop their domestic supply chains, especially at a time when international sourcing and logistics costs them 10-15% of a finished product. He provided the example of Ford, whose Mexican plants have a productivity match that of plants in the US and China, despite have less experience and technology.

For Tabera, Mexico needs to take a qualitative leap in production toward R&D. Developing a local supply chain will reduce costs and push the industry but it is not the only issue. The quality of diesel available in Mexico is poor and unsuited for sophisticated engines. He explained that problems such as this pushed companies to source abroad, despite the high logistical costs.

Padrón chimed in to say that the academic sector was largely at fault for the lack of R&D centers in Mexico, and which hindered the ability of the many Mexican engineers graduating each from entering the workforce. Solís also noted the importance of working with universities to ensure graduates are armed with the right skill. He called on the government to provide fiscal credits to R&D centers, as do many of the countries Mexico competes with. “Previously, Mexico had a 30% tax break for R&D, but this was seen as a fiscal hole by the previous administration. As a result, Mexico has good programs but no longer has incentives that allow it to compete with other countries in terms of R&D,” he concluded.