Andrés Lerch
Partner, Advisory Services / Performance Improvement
Ernst & Young México
Marcellus Van Eck
Marcellus Van Eck
German-speaking Business Network
Ernst & Young México
View from the Top

Logistics in Spotlight as Production Rises

Thu, 09/01/2016 - 16:54

Q: How modern is Mexico in terms of automotive environmental regulations compared to international standards?

MV: Changes to the No Drive Day program in the second quarter of 2016 promoted the growth of the used vehicle market. The government now has to mitigate these negative effects. Several European countries have tackled comparable problems to counter any damage caused by fossil fuels by offering incentives to buyers of electric and hybrid vehicles. Germany has set a goal to switch 15 percent of its vehicle park to electric technology by 2020. This is supported by a strong charging infrastructure throughout the country, which is one of the main areas of opportunity in Mexico. The domestic economy still needs to grow to give the population broader access to electric and hybrid vehicles.

AL: Mexico may not be ready for a high percentage of electric vehicles but neither are many other countries. This is not due to a lack of technology or economic barriers but acceptance of this technology. Culturally, we still prefer gasoline cars for various reasons and without significant incentives that is not likely to change.

Q: What does Mexico need to do to be ready for upcoming production increases?

AL: It is vital to expand the logistics network with roads and railroads, ports and dry ports. Existing infrastructure is barely enough and many highways are already showing signs of overcapacity. Several investors are worried about a lack of human capital to satisfy the production demand that exists across the country. If we consider the total number of engineering graduates minus the number of people leaving for specialized positions abroad, there is a considerable deficit to address.

Legitimate interest is evident from universities and other academic institutions to organize and prepare the engineers needed by the industry. Nonetheless, companies are becoming desperate to contract teams. Many entities are approaching students in the early stages of their education, training them in anticipation of a permanent contract after graduating. Competition is fierce and turnover from one company to another is considerable. Uncertainty fueled by desertion rates and talent exports is palpable even within the companies themselves.

MV: Nonetheless, companies like Audi are now introducing training centers in Mexico to prepare their workforce before starting their operations. Those pioneering in this area are finding all the talent they need with surprising ease. These companies are open to working with universities to develop human capital adapted to their specific situations.

Q: How have industry developments boosted or hindered Mexico’s attractiveness to foreign investors?

AL: Companies keep investing in Mexico because of advantages including its privileged location and its specialized and qualified labor. Regional incentives are an attractive bonus but only a few states can offer these types of benefits. The success that large OEMs and suppliers have enjoyed in Mexico has also been a defining factor in this process. Automotive companies have registered stable operations throughout the years without any major resistance from unions and their products have been well received both in the domestic and the international market. There may be problems to address in terms of incentives but ultimately very few countries give away land to new investors.

MV: More than 500 German companies have made the most of Mexico’s competitive advantages as a host country for their manufacturing and assembly operations. Its proximity to the US and commercial relationships afforded by free-trade agreements top the list. There are concerns in terms of security but a shared expectation for additional growth in Mexico outshines these uncertainties. Volkswagen, has been in Mexico for more than 50 years, which was sufficient encouragement for Audi to invest in its new plant in San Jose Chiapa, Puebla. The company will export its products not only to the US but also to a host of international destinations as it benefits from competitive production and logistics costs. Investment is also flowing into human capital development. German companies, for example, are implementing a similar dual-education system to that used in Europe.