Mexico To Remain an Attractive Automotive Investment Destination

Experts predict that investments into Mexico’s automotive industry will continue in 2021, despite the COVID-19 pandemic increasing production costs. Milenio reports that these investments will likely go toward expanding production lines and platform changes for new models, rather than new production plants.

Director of Light Vehicle Forecasting at HIS Markit, Guido Vildozo, told Milenio that quality of workmanship and low logistical costs boosted automotive investment in Mexico during the past five years. Before COVID-19 hit, vehicle production costs in North America were expected to increase as a result of the USMCA, which sets new rules and standards for the sector. Consumer prices can increase between 1 and 2 percent as well, but these costs would need to fall on the automotive companies or its suppliers. The pandemic changed this scenario drastically: “the manufacturing cost is much higher, since COVID adds a special element to all this... There is no way to get US$400 million to develop an engine or build a plant,” Vildozo said.

Deloitte highlighted the automotive industry’s dependence on Asia for its supply chain. Investment in Tier 2 supply, which concerns raw materials, is harder to achieve in the Latin America. Investment in Mexico’s automotive sector in general had slowed down after 2017, following a five-year long boom, and levels this decade will likely not reach those between 2010 and 2020.

FDI reached US$1.81 billion in 2Q20, US$673 more than the same period in 2019, the Ministry of Economy reported. Volkswagen recently invested US$433 million in its Puebla production plant and spent a further US$233.5 million to assemble a new engine in Guanajuato. Ford invested US$420 million to adapt the production line of the Cuautitlán Izcalli plant to assemble the new Mach E electric car. Nissan spent US$244 million to the production of the new Sentra model, plus US$278 million to produce the new Versa.

General Director of the Mexican Association of the Automotive Industry (AMIA), Fausto Cuevas, commented that production and export levels favor the segment of utility vehicles, pick-ups and sees a slight recovery of compact vehicles. Towards the end of 2020, the expectation of the AMIA is that the decrease in vehicle production and exports will be between 24 and 26 percent.

As for future drivers, Albrecht Ysenburg, Partner Leader of Automotive Industry at KPMG argues that the USMCA will be a main factor: “The main driver will be USMCA, followed by production relocation projects due to Mexico’s unique investment opportunities and the stabilization of its macroeconomic environment,” he told MBN.

“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. Certainty will play a major role in consolidating investments as well,” added Oscar Silva, Partner Leader of Global Strategy Group at KPMG.