Mexico's Exponential Automotive Prosperity Continues as PlannedTue, 09/01/2015 - 14:52
Q: Following record OEM investment in Mexico, what is your perspective on how the automotive landscape has shifted over the last 12 months?
A: Mexico exports 82% of its manufactured products, making it the fourth largest exporter in the world. In 2014, the country became the largest producer of vehicles in Latin America for the first time, and the seventh-largest producer of vehicles worldwide, overtaking Brazil. When NAFTA was negotiated in the early 90s, Mexico was producing around 6-7% of the total vehicles in the region. Today, that figure is closer to 19%, exceeding Canada’s production of 16%. In six years, around 27-28% of total NAFTA vehicles will be produced in this country. Mexico will definitely continue to be a key automotive player, and will perhaps scale one or two more positions in terms of global production, depending on what other countries do.
The overall light vehicle production figures for the country will certainly exceed 5 million units by the end of 2020. 2014 was a year in which new plants were established in the country, by OEMs such as Mazda and Honda. The growth rate from the beginning of 2014 to the end of 2020 will reach nearly 70% as a result of higher investment in existing plants in Mexico, combined with the greenfield investments that we have been witnessing over the last few years. We are going to see the arrival of new brands over the next 4-5 years, ensuring that AMIA’s forecast of 5 million units is a sure bet.
Q: To what extent are major OEMs collaborating on initiatives to boost the Mexican automotive industry, or is there a predominant focus on competition?
A: The OEMs are absolutely at a level of competition. Our domestic market is growing, but it is still at least 600-700,000 vehicles below the level at which it ought to be. We are going to end 2015 with a domestic market close to 1,280,000 vehicles when it should be closer to 1.9 million. With those kind of statistics, it is clear that competition will be fierce, with those same brands competing all over the world. In terms of exports, 71% is directed toward the US market, which reaches 82% when combined with the Canadian market, so all the brands located in Mexico understand that this is one of the single most competitive industries in the world.
Q: What must be done for Mexico to become the number one light vehicle exporter to the US?
A: If Mexico is able to continue its double-digit growth, we will of course meet that goal, but the key element to analyze is how Canada performs. Currently, Mexico is the number two supplier of new vehicles to the US thanks to us passing Japan on the charts in 2014. Of all the vehicles sold in the US, 11.5% were manufactured in Mexico, which is a huge increase in volume. The country is growing at more than twice the pace of domestic sales growth in the US. Incidentally, our volume of exports to Canada has grown at a pace exceeding 11% from January to July 2015, making this country our second largest export destination.
Speaking of other markets, Mexico consolidated its Pacific Alliance in 2014, including the markets of Peru, Chile, and Colombia. Colombia has become Mexico’s second largest export destination in Latin America, as well as our fifth largest global export destination. Given the extensive volume of Mexico’s exports, entering into new trade agreements is a vital part of the country’s DNA, so expanding preferential access to other countries will remain key.
Q: The first half of 2015 has seen the best domestic sales figures since the same period in 2006. What are the main factors that have allowed Mexico to achieve this sales success?
A: This statistical success during the first half of 2015 has been influenced in some way by the comparison with more depressed figures. For example, Q1 2014 was a terrible period for domestic sales; we even saw negative growth in some of those months. The other aspect of this success has been our work with the government to mitigate the import of used vehicles into Mexico. A decree that is part of NAFTA allows Mexico to prevent the importation of used vehicles that are restricted or prohibited from circulation due to their technical or physical condition, as well as those that have been reported stolen, while it also regulates emission standards of imported vehicles. The applicable legal provisions set by the Mexican federal government define which vehicles qualify for importation, but injunctions were used as a way of circumventing this decree. In the years prior to 2015, 95% of the units were imported through injunctions, but during the first six months this year, the importation of used vehicles dropped 69.6% after the Supreme Court (SCJN), in October 2014, gave its jurisprudence to establish the decree as being constitutional. This also paved the way for fighting the current injunctions that were in place, as well as preventing new ones from being filed. It took some months for the federal government to fight the injunctions that were already in place, but the last one was dropped by mid-March 2015. As a result we no longer have imports taking place through injunctions, meaning that everybody now has to comply fully with the decree. This development is tremendous good news and will jumpstart the movement of Mexico’s secondary vehicle market, reinvigorating the renewal chain all the way up to new vehicles. Even with this good news, we have to continue to focus on expanding the domestic market.
According to NAFTA regulations, starting from January 2009 the Mexican government could not outlaw the entry of used vehicles older than ten years. Since then, every two years the regulation is updated, reducing the age of cars that cannot be blocked from importation by increments of two years, until in 2019 all age related import restrictions will be removed. In 2015, vehicles that are older than four years can enter the country, only requiring a 10% duty payment and 16% value-added tax (VAT).
Q: How has the Fiscal Reform helped to accommodate the increasing demand for new car financing, and how are companies beginning to capitalize on the resulting new opportunities?
A: There are two areas that need to be worked on in regards to this subject. One is the substantial amount of informal jobs in Mexico. More than 60-65% of the active economic population is informal today, making it very difficult to reach them, and even more difficult to offer credit to them. With this huge chunk of the population not being part of the formal banking system, we need to do something to allow us to offer them credit when they need it. Once we have worked on improving this, it is a question of how we then deal with those who default on their payments. Mexico is not very efficient when it comes to returning vehicles to the creditors. It can sometimes take up to a year to repossess a car, working against the financing companies and the banks. These companies are not as prone to expanding credit to a certain segment of the population when this challenge is a reality, so we must continue to push for changes that will allow creditors to operate under a little more security and haste.
Q: How successful has AMIA been in convincing companies of the value of Mexican Research & Development (R&D)?
A: This is more a result of Mexico’s success than AMIA’s. Mexico has a demographic pyramid that translates into opportunities because of the youth of the population. Mexico has more engineering graduates than countries like France or the US. The average age of research center employees in the US is 55 years old, while in Mexico it is 27. The problem for the US is that within the next five years 20% of the country’s engineers working in engineering centers will retire. This gives Mexico a tremendous opportunity to grow in the R&D area, which is why we created a national group of higher education and research centers in Mexico called Grupo Nacional de Instituciones Academicas y de Investigacion de la Industria Automotriz.
We believe that if we work together on an agenda that would better prepare Mexico to grasp these opportunities, we are going to better position ourselves in areas like human resources, infrastructure, and the linkage between global and national universities. These are common areas that higher education centers and research centers ought to be discussing together. The group is open to any universities and research centers that are currently related to the automotive industry and want to be involved, and currently consists of higher education institutes, such as the National Autonomous University of Mexico (UNAM), the Monterrey Institute of Technology and Higher Education (ITESM), and the National Polytechnic Institute (IPN), as well as research centers from OEMs, Tier 1 companies, and the National Council for Science and Technology (CONACYT). The creation of this group represents the first time that these institutions are working on a common agenda, and it will allow us to assess what we need to do to develop research and innovation activities in Mexico.
Q: Within the ProAuto program, how can AMIA utilize its resources to help bolster SMEs within the Mexican supply chain?
A: There are certain aspects that will need to be in place if the ProAuto program is going to succeed. Any companies that are working to further expand the supply chain will need to coordinate within a single-window operation that will enable this to happen. There also needs to be enough budget to develop the automotive supply chain, especially in the Tier 2 area. Tier 1 suppliers are currently importing close to 90% of their needs from Tier 2 companies in other parts of the world, so we have to translate that into opportunities for Mexico. The ProAuto program will of course help to develop more suppliers, but they do not have to be Mexican. It would also be beneficial if ProMexico could bring the right investors into the country, as this would further develop Tier 2 suppliers that were already importing products.