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Analysis

Mexican Automotive Industry: SWOT Analysis

By Alejandro Enríquez | Mon, 03/22/2021 - 06:00

The automotive sector has experienced tremendous changes while setting the stage for a new generation of vehicles and industry standards. At the global level, the sector is moving toward sustainability; at the regional level, supply chains are consolidating; at the national level, companies are adapting and at the micro level, experts insist customer experience should be the key driver toward success. "The industry will change more in the next five to 10 years than it did in the previous 100 years," said David Adams, President of Global Automakers Canada, to MBN.

After interviewing more than 150 leaders in the sector over the last year, Mexico Business News presents a SWOT analysis of the sector, both for vehicle production and for vehicle sales. Strengths and weaknesses refer to internal circumstances, while opportunities and threats deal with external elements influencing the sector directly.

Strengths

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Production capacity of 5.5 million vehicles. IHS Markit estimates the country's production capacity between 5.5 million and 6 million units. Mexico hits its light vehicle production peak of 3.9 million units in 2017. At the time, neither Toyota nor BMW had started operations. Thus, it is feasible Mexican production could easily surpass the 4-million-units production mark by 2024. “One of the biggest achievements of the automotive sector over the last decade is Mexico’s emergence as an important pole for development, which represents a unique opportunity for the country to transform itself into a global platform for advanced manufacturing and innovation,” said Alberto Torrijos, Automotive Sector Leader Partner at Deloitte.

Development of local suppliers for specific components and materials. The spillover effect of growing production will only be possible through strong partnerships with local suppliers that help OEMs meet more efficient costs in component manufacturing and material sourcing. Automotive clusters focused in 2020 on identifying the strengths of each region and the potential areas to focus on regarding supplier development. USMCA and the new rules of origin require an increase in OEM regional value content. Unlike NAFTA, this new treaty also imposes rules for Tier 1 suppliers. This is also pushing companies to relocate their production,” said Manuel Monotya, President of the Mexican Automotive Cluster Network.

Expansions and new investments in auto parts manufacturing. Long-standing players and newcomers – mostly from Asia and Europe – continue to invest in strengthening auto parts manufacturing capacity. FDI in motor vehicle part manufacturing has been above US$3 billion yearly, although 2020 saw an almost US$2 billion decrease due to the pandemic. “Mexico has recently surpassed South Korea as the sixth-largest vehicle producer in the world. The opportunity is to strengthen the lower levels of the supply chain. There is room for the country to grow auto parts production while adapting smoothly to electric and hybrid vehicle production,” said Oscar Silva, Partner Leader Global Strategy at KPMG.

OEM and supplier commitment to a smart, safe and sustainable supply chain. A major strength of the sector is that OEMs have a clear vision of how the supply chain should look and are encouraging suppliers to follow suit. Companies at the lower levels of the supply chain are actively focusing on stricter environmental standards and greater levels of digitalization, while walking the extra mile to ensure employees' safety against COVID-19. "The environmental trend is gaining strength. Our customers used to focus greatly on auditing our operations and quality systems but now, all of them are asking about the environment, sustainability and green energies,” said Felipe Villareal, CEO of Alian Plastics.

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Extensive partnerships between dealerships and e-commerce players. AMDA has led efforts toward greater collaboration between dealers of all sizes and e-commerce and digital data giants. Training programs and certifications are strengthening dealerships' capabilities toward an online sales channel. “Our partnership with Mercado Libre is focused first on training. However, our goal is to enable more useful tools to make the most of that marketplace. We are also creating partnerships with JATO Dynamics and other companies to strengthen dealerships’ capabilities through relevant data and analysis to improve customer experience,” said Guillermo Rosales, Director General of AMDA.

Dealerships’ focus on content creation rather than just selling vehicles. Industry leaders have told MBN that dealerships are increasingly more aware of their role beyond vehicle sales. Companies are now content creators and providers of unique experiences for their specific kinds of customers. This is a great strength for the sector to accelerate its sales recovery. “The circumstances require companies and dealerships to attract unique talent because the sales profile is now unique, as it must include customer service, content creation, social media marketing, among many other skills,” said Antonio Pascual, CEO of Masare Motors.

Weaknesses

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Idle vehicle production capacity. IHS Markit also reports that there is a lack of production capacity for SUVs and pickups. Much of the installed production capacity is focused on compact and subcompact models, when foreign markets are demanding more SUVs and pickups. “Mexico has a problem of idle capacity. Mexico’s installed production capacity is around 5.5 million units. There is a lack of production capacity for SUVs and pickups,” said Guido Vildozo, Main Partner at IHS Markit.

Lack of cohesive strategies for supplier development that address the financial element. Although clusters are identifying key areas in which suppliers should develop, interviewees agree that the financial element is critical, either to acquire a credit line or for companies to invest their own revenues in additional capacity. “Having a healthy economy is complex in these times, although it is necessary when the company has to make use of a line of financing. Naturally, some companies are vulnerable and will surely be transformed after this crisis,” said Elisa Crespo, President of Automotive Cluster of the State of Mexico.

Lack of qualified labor for advanced engineering or R&D processes. Some specific regions, such as Queretaro, Jalisco and Nuevo Leon, enjoy qualified labor that takes part in research and engineering operations. However, some interviewees claim there is still room to grow when it comes to industry-specific knowledge. “We do not have enough qualified people to operate technology such as ours. To overcome this, we agreed with our users to develop and train their people over a three to six-month period,” said Jorge de Jesús Olivares, Country Manager of Autoform, a leading engineering design software developer.

Low levels of automation and smart manufacturing beyond direct suppliers. Although OEMs and Tier 1s have a clear vision of a more automated and thus efficient production line, companies at lower levels of the supply chain still operate with manual processes. The pandemic has accelerated digitalization. According to the International Federation of Robotics, 62 percent of robots installed in Mexico are for the automotive, plastics and chemical sectors. However, experts agree there is still potential as Mexico has only 44 robots per 10,000 employees when in the US the figure is 228.

Downstream

Not enough training on key aspects of the digital sales process. A titan of e-commerce, Mercado Libre, points out that critical elements of the online sales process are immediacy and transparency. Dealerships should be aware of how they can effectively respond to a customer that has an almost 24-hour schedule, while generating trust through clear information regarding the vehicle and the sales process. “Dealerships must be open to learn new things and relearn others,” said Jorge Dávila, Head of Automotive Segment at Mercado Libre Marketplace.

Stock availability. Due to production disruptions as a result of the pandemic and semiconductor shortages, stock remains limited for some brands. “We expect production to remain at two shifts, but if only one shift is possible, the sector could face shortages at a time when stocks in the US are at very low levels, with an almost 700,000-unit inventory shortfall,” said Vildozo.

Opportunities

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USMCA's rules of origin. Leaders from clusters, associations and major OEMs agree that the enforcement of USMCA's rules of origin for automotive goods will strengthen the role of vehicle and auto parts manufacturing in North America, a unique opportunity for Mexico to seize. This also means the need for strategies to foster steel and aluminum production processes in the region. “Without a doubt, USMCA will bring more opportunities for Tier 2s. We will also identify potential suppliers that can increase their production capacity,” said Carmen Hernández, President of Jalisco Automotive Cluster.

5G connectivity for industrial and vehicle applications. 5G technology has the potential to reshape manufacturing operations and serve as a solid base for more interconnected and autonomous vehicles. Low latency and reliability open new opportunities for industrial parks to establish in-house networks for smart manufacturing applications, while suppliers can start exploring components alongside OEMs that enhance vehicle's connectivity. “We are running tests alongside Ericsson to make robots for 5G networks, which enables a faster communication speed, low latency and ultimately smarter and more connected manufacturing," said Sergio Bautista, Robotics and Discrete Automation Director at ABB.

US vehicle demand. Demand in the US is recovering faster than expected, according to KPMG, Deloitte and IHS Markit. At the beginning of 2020, sales were expected to be at 18.3 million units and the year ended with a little less than 15 million. Should recovery accelerate, this could help Mexican vehicle and auto parts production and exports to recover, thus fueling the industry.

Nearshoring trends. Alongside USMCA, the pandemic influenced suppliers to establish manufacturing facilities closer to major consumer markets. Turkey and Eastern Europe, Southeast Asia and Mexico have benefited greatly from nearshoring, a trend that is expected to continue in the midterm. “We are seeing a lot of renewed interest in relocating from China, Europe and US to Mexico. Ten years ago, many suppliers arrived, following the OEMs, and we believe there is going to be another wave focused on Tier 1 and Tier 2, which we greatly need because we are lacking that strength in the Tier 2 segment,” said Silva.

Electrification policies in major consumer markets: EU, US and China. President Joe Biden's administration in the US – Mexico's top export destination – is strongly focused on promoting a sustainable mobility, which includes electric and hybrid vehicles. IHS Markit already expects Mexico will electrify its industry aggressively. “We will probably see the implementation of more environmental policies that will motivate the North American automotive industry to reduce its carbon footprint,” said Montoya.

Downstream

E-commerce. The major boost e-commerce experienced globally is creating an opportunity for companies and dealerships to quickly adapt their business models. Those who adapt faster will see greater returns. “We now design the digital process so the sales floor acts as an extension of the digital environment. I believe the process will continue to evolve. The first contact and the down payment will be through digital channels, such as Mercado Libre, and the deal will be closed at the dealership,” says Dávila.

Interest among younger generations in greener vehicles. Leaders from major OEMs and brands agree that although younger generations do not necessarily look forward to owning a car, if they do, they prefer it to be an electric or hybrid vehicle. This is a major opportunity for dealerships to offer attractive financial schemes to young professionals.

Threats

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Semiconductor shortages. A global shortage of semiconductors and chips is influencing greatly not only the automotive industry but other productive sectors. The situation is expected to be solved between 2Q21 and 3Q21 but the problem could create vehicle stock issues when coupled with production shutdowns.

Government policies to address the impact of the pandemic on suppliers. Among G20 countries, Mexico has the second-lowest support programs for private companies. Mexico has destined just 0.3 percent of its GDP to support companies and individuals, according to the IMF. This is a threat for a sector that is cost-sensitive. “Only 7.8 percent of surveyed companies confirmed having received some kind of support, while the rest (92.2 percent) did not receive any help whatsoever,” said Guillermo Prieto, Executive President of AMDA.

Troubling government signals regarding sustainable energy production and consumption. Recent reforms to Mexico's electricity and energy laws can hinder companies’ potential to source their energy from sustainable sources. In the long term it would be highly problematic for suppliers since OEMs are already drafting new environmental requirements for suppliers that consider sustainable energy sourcing, among other aspects. 

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Government policies to support dealerships. As mentioned, dealership groups were particularly affected by the pandemic since sales floors remained closed in major cities throughout most of the year. The lack of government programs at the federal and local level to support dealers is a threat to the sales recovery. “Apart from dealerships and OEMs, the government should promote vehicle sales,” said Manuel Nieblas, Manufacturing Industry Leader Partner at Deloitte.

Dwindling purchasing power due to the pandemic. IHS Markit and other firms highlight that due to the economic impact of the pandemic, consumers are in a weaker position to take on car debt, hindering the sales of cheaper subcompact models both in the US and Mexico. “Deloitte’s consumer surveys show that Mexico is more sensitive in terms of how external elements affect purchasing decisions, mostly due to insecurity,” said Nieblas.

Photo by:   BMW AG
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Alejandro Enríquez Alejandro Enríquez Journalist and Industry Analyst