Oscar Albin
Executive President
View from the Top

Mexico Holds Advantage in TPP for Now

Thu, 09/01/2016 - 16:47

Q: How has the dollar to peso exchange rate affected manufacturing and sales of auto parts?

A: The elevated exchange rate presents a convenient situation in the short and medium term, as manufacturing costs in pesos are reduced and opportunity arises to sell in dollars. But these perquisites only last as long as it takes the market to stabilize, which is why the auto parts sector in Mexico does not rely on these interim opportunities. On the other hand, since the manufacturing processes are linked to the domestic aftermarket, this situation presents a serious problem. Approximately 70 percent of the resources used to produce Mexican auto parts are imported or priced in dollars such as aluminum, copper and other materials that are produced abroad. Similarly, high dollar prices affect the depreciation costs of all manufacturing equipment as well as the acquisition of new machinery. As a result, all products present a 15-20 percent price increase that no one wants to absorb, leading companies to resort to importing goods.

Q: What is your growth outlook for the industry?

A: During 2015, the auto parts industry contributed 1 percent of the country’s GDP and represented 8 percent of the manufacturing sector. This was mainly due to manufacturing and distribution of auto parts valued at US$81.8 billion, US$68.3 billion of which were exported. Of these exports, 90 percent were delivered to the US. By 2017, we expect approximately 4-5 percent growth throughout the country, building on the strength of the US car-manufacturing segment and new plants constructed in Mexico.

Q: What challenges might newly arriving companies face due to excess human capital demand in certain regions?

A: While many young people are willing to enter the automotive industry as engineers, technicians and operators, their skills are not specialized. Most workers need six to 18 months of training to be adequately prepared to enter the sector. This is an industry-wide issue, and we are working with the Ministry of Education to find a solution. The English language is a continued area of opportunity as well, although President Enrique Peña Nieto has already established it as a priority for elementary and secondary schools. Regarding challenges in logistics, transport of newly manufactured cars to export destinations by truck is reaching maximum capacity. This situation will become more complicated once new plants start manufacturing their products. Therefore, we will need to improve rail infrastructure and expand port capacity. Veracruz, Lazaro Cardenas and Manzanillo are being expanded in response.

Q: How will the TPP agreement affect the auto parts sector’s foreign trade operations?

A: The TPP allows all of its members to begin trading with the US, which means that Mexico loses its exclusivity as this market’s provider. Nonetheless, Mexico has the advantage of 20 years of experience trading with the US and can negotiate under its own terms to maintain its competitive edge. Vietnam, Malaysia and any other country wishing to exploit the US market will have to invest to ensure their operations reach minimum local content requirements to trade as a regional manufacturer. Japan and the US had already negotiated a minimum of 30 percent local content, which would be detrimental to Mexico’s operations, so we pushed hard to lift this to 45 percent. Ultimately, the TPP was unavoidable but we have managed to enter with the minimum requirements that ensure our advantage as an auto parts manufacturer with decades of experience. At the same time, Mexico will start selling cars to Australia, Vietnam and New Zealand under much better tax conditions.

Q: What sparked the union of PAACE Automechanika and ExpoINA?

A: Other automotive countries like Brazil, Germany and the US have a large expo for the aftermarket segment but Mexico had fallen behind. While four or five mediumsized events touch on this topic including ExpoINA, most companies do not have the resources to invest in all of them. We started the ExpoINA project to gradually merge several entities to create one large auto parts event. For now, PAACE Automechanika was the best candidate to fuse with ExpoINA but one day we hope to unite all the events together into one unmissable exposition.