News Article

Mexico Plays Quite a Relevant Role in the Industry: Eduardo Solís

By Alejandro Enríquez | Wed, 07/22/2020 - 10:00

Mexico is the sixth-largest vehicle manufacturer, the fourth-largest vehicle exporter in the world and the No.1 manufacturer in Latin America. Before NAFTA, México contributed 7 percent (1.08 million) to North America’s vehicle production, Canada 15 percent (2.2 million) and the US 78 percent (10.9 million). In 2019, Mexico’s share is now 23 percent (4 million vehicles), Canada’s is 12 percent (1.9 million) and the US’ is 65 percent (10.9 percent). The region contributes 18 percent of the world’s vehicle production. Reviewing the US’ vehicle trade, 52.2 percent of total imports come from Mexico and Canada, while 48.3 percent of all US vehicle exports go to Mexico and Canada, said Eduardo Solís, former Executive President of AMIA during the webinar, “Leadership Tools to Successfully Navigate Uncertain Times,” sponsored by Seraph and hosted by Mexico Business News.

"The automotive industry has generated a record-high surplus of US$89 billion in 2019 for Mexico. Production and exports grew quite nicely coming out of the 2009 crisis but the effects of COVID-19 were evident during April and May,” said Solís. He mentioned that compared to May 2019, light-vehicle production fell 93.7 percent in May 2020 and exports fell 95.1 percent. Between January and May 2020, production registered a drop of 43.2 percent and exports a drop of 42.4 percent.

The impact of the pandemic was not only seen in production figures, as sales forecasts were also adjusted. “We expect that by the end of the year, the US will see a drop in demand of 25 percent while in Mexico demand for new vehicles will drop accordingly. As companies resume operations, production will not ramp up to pre-pandemic levels. We are going to see 2019 numbers by the end of 2022 or 2023,” he mentioned.

After USMCA’s enforcement on July 1, NAFTA’s 62.5 percent of original content increased to 75 percent over a three-year period and included specifics for core parts, complimentary parts and other auto parts. Stricter still, according to Solís, is the requirement of 70 percent of steel and aluminum purchases that have to come from North America. USMCA’s labor value content (LVC) rule establishes an initial 25 percent LVC for heavy vehicles, increasing to 40 percent in a three-year period, and an initial 30 percent increasing to 45 percent in the same period for light vehicles. “LVC refers to places where salary is US$16 per hour, which is another way to say the US and Canada,” said Solís.

“Rules of origin are quite stringent. But there is a temporary waiver according to the treaty as OEMs can negotiate with the authority of the importing party a temporary transition regime. For instance, OEMs aiming to export to the US will have to sit with the USTR and explain how they will arrive to the stablished percentages. The original three-year period could be extended up to five years. Many companies have done that with specific models,” said Solís. Alternative regimes to the rule of origin are applicable in a case-by-case basis and can be presented only by OEMs. Tier 1 companies cannot make use of this mechanism.

As the new rules of origin will promote relocations to Mexico, Solís affirms that when an investment is landing in Mexico it is recommendable that companies establish a contact with the local academic sector.  “Talent has always been a key element for the automotive industry in the region. All of the companies that land in Mexico work together with the automotive industry. Employees in Mexico have been able to meet the demands of the sector, especially in the Bajio area which is a relevant automotive hub,” he says.

Download the webinar's presentation here:

Alejandro Enríquez Alejandro Enríquez Journalist and Industry Analyst