Óscar Albin
Executive President
INA
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View from the Top

Mexico's Competition Lies Beyond the Americas

Fri, 09/01/2017 - 12:25

Q: What are the main challenges that members of the local supply chain will have to face during 2017?

A: Companies in the original equipment segment will face two main challenges during 2017 and the coming years. First, they must address the topic of human capital availability. Suppliers are facing a lack of skilled talent and the industry is demanding more workforce, particularly in the Bajio region and the north of the country. This gap between supply and demand is creating high staff turnover and a need for better talent attraction, development and retention plans. We think this situation will force companies and new investors to look at new cities and states where the industry is less developed than in Guanajuato or Queretaro. Several locations have strong potential, such as Tlaxcala and Hidalgo in the center, as well as Durango and Zacatecas in the north.

The second challenge suppliers will face is renegotiating the NAFTA agreement. This is a key component in Mexico’s success because 90 percent of our exports go to Canada and the US. We are certain that we will leave these negotiations with better conditions for the automotive market. Both countries need Mexico’s lowcost manufacturing because it is the only way for North America to remain competitive internationally. Europe has low-cost partners such as Turkey, Tunisia and Morocco, while Japan and South Korea are supported by Thailand, Malaysia and the Philippines. Powerful European and Asian countries are not going to give up their cost-competitive advantages and their tariff restrictions to enter the NAFTA market are capped at 2.5 percent. The US government knows this and the country is trying to figure out how to protect the region against imports coming from outside the NAFTA market.

Currently 80 percent of all imported raw materials come from the US so most auto parts exported within NAFTA contain US components. Meanwhile, auto parts coming from Europe and Asia are unlikely to have any NAFTA content. If the US imports something from anywhere but Mexico, it misses out on 100 percent of the regional content it could have contributed to this part’s production.

Q: Which regions are the biggest threat to the NAFTA region’s original equipment manufacturing?

A: Imports from Germany, Japan and South Korea are understandable, considering the number of OEMs from these countries that have moved into Mexico. Although many suppliers have followed them with local installations, automakers still need to import certain components like engines and transmissions from their home countries because order volumes do not justify local production efforts. China, however, does not have any manufacturing presence in the NAFTA region, which means that 100 percent of its exports are destined to non-Chinese OEMs. This is a great opportunity for regional suppliers, as long as Chinese companies respect standards of fair play, and it does not matter if components are manufactured in Mexico, the US or Canada.

Q: What are your expectations regarding Chinese companies as potential investors in Mexico?

A: Right now, 80 percent of Mexico’s supplier network is made up of Mexican, American, German and Japanese companies. Korean players are just starting to grow their presence and we welcome all potential Chinese investments. Chinese companies are interested in bringing vehicle production to Mexico and targeting the NAFTA region. To this day, China is the largest automotive manufacturer in the world, producing approximately 25 million vehicles per year, 95 percent of which stays in China.

For these companies to conquer other markets they must invest in those regions and outsource their production, just as Japan did when it wanted to target the US market. It took Japan many years to be successful but today, no one can deny the relevance of Japanese brands in the NAFTA market. Similarly, China’s presence in the NAFTA region will not be short-lived once it secures its place.