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Analysis

NAFTA Vehicle Production Backs Mexico’s Auto Parts Success

Sat, 09/01/2018 - 11:10

OEMs need thousands of components to assemble a finished car or truck and car owners eventually need spare parts to keep their vehicles on the road. This demand coupled with the advantages that Mexico offers as a manufacturing hub for world-class component suppliers translates to a top-flight domestic auto parts industry that supports domestic and international demand.
The auto parts sector received the most foreign direct investment between 1999 and 1Q18 and it is the second most-important automotive segment in Mexico in terms of production value. According to data from the Ministry of Economy, Mexico’s auto parts sector was the recipient of 63 percent of the total investment in Mexico’s automotive industry between 1999 and 1Q18, totaling US$38.074 billion, which highlights the importance of Mexico’s auto parts production capabilities for foreign automotive companies.
In 2017, the total value of Mexico’s automotive production, including heavy vehicles, light vehicles and auto parts, amounted to MX$2.28 trillion (US$119.7 billion) compared to MX$1.93 trillion (US$101.4 billion) in 2016. Light-vehicles accounted for 48.5 percent of that amount (US$58 billion), followed by auto parts at 38.7 percent (US$46.4 billion) and heavy vehicles with 12.8 percent (US$15.3 billion). Between 2016 and 2017, the production value of Mexico’s auto parts sector increased 12.1 percent, from US$41.4 billion in 2016 to US$46.4 billion in 2017.
Growth in Mexico’s auto parts production value is not only related to an increment in local OEMs’ demand for original equipment and in the Mexican aftermarket but in North America as a whole. “Mexico’s auto parts competitiveness is based on the 17 million vehicles produced in the NAFTA market rather than on the 3 million produced in Mexico,” says Óscar Albin, Executive President of INA. He highlights that in 2017 the Mexican automotive industry accounted for 3 percent of total GDP and around 20 percent of the country’s manufacturing GDP with auto parts contributing half of these percentages.
As in other automotive sectors, Mexico’s auto parts production is largely export-oriented. In 2017, 83.7 percent of the total auto parts production value was destined to foreign automotive markets while only 16.26 percent catered to the domestic industry, according to data from INEGI. Still, the production value oriented to the domestic market increased 71.06 percent between 2016 and 2017 from US$8.3 billion to US$14.25 billion. This sudden growth is likely related to the arrival of new OEMs to Mexico, coupled with increasing vehicle production from already established players.
Although a wide variety of parts and systems ranging from tires to gasoline, diesel engines and mufflers are produced in Mexico, the country stands out in the production of electrical automotive components. In 2017, that subsector held the largest share of the country’s auto parts production value with 22.4 percent of the total, followed by carpets and automotive seats (16.2 percent) and transmissions, clutches and other drivetrain parts (10.1 percent). Mexico also has significant production of engine components, complete engines and stamped components, among other subsegments.
ASIAN IMPACT
All the Top 25 automotive component suppliers that Automotive News lists in its Top 100 global OEM parts suppliers supplement have at least one manufacturing facility in Mexico and some already engage in component design and engineering operations locally. Among the key companies with R&D and product development operations in the country are Germany’s Bosch and Continental, France’s Valeo, Japan’s Tachi-S and Mexico’s Katcon. While in most cases local design operations focus mostly on adapting products designed abroad for the Mexican market, some companies such as Continental are working on cutting-edge technology development and engineering solutions for new trends such as self-driving vehicles in Mexico.
A wide network of free-trade agreements including NAFTA, direct access to the US, cost-competitive and qualified labor and a manufacturing industry with high-quality standards are only a few of the advantages that have attracted OEMs as well as their suppliers. Mexico’s Tier 1 supplier base is composed in its majority by US, German and Japanese companies supporting their conational clients present in Mexico. However, there is also a smaller participation of Mexican, UK, Chinese, Italian, Swedish, Canadian, Indian and Korean players among others that cater both to domestic demand and to OEMs and aftermarkets abroad.
The arrival of Asian players such as Hyundai Group to Monterrey or BAIC to Veracruz has enticed larger Korean and Chinese investment to establish new ventures or increase their local presence. Hankook Tire, for example, has taken advantage of Kia’s growth to increase its presence in the country, according to Sergio Álvarez, the company’s Commercial Director in Mexico.
Similarly, Vinod Miranda, COO of Cheersson México, says the Chinese Tier 2 supplier of precision stamped components and tooling systems was attracted to Mexico because of the presence of most of its international Tier 1 customers, which prompted the company to open a manufacturing plant in Queretaro in 2016. “Mexico’s automotive industry is growing, which results in opportunities for us to jump in and provide the goods and services in which we specialize,” he says.
Going forward, there will be several opportunities for more parts manufacturers to jump in and increase their supply of original equipment to OEMs, for both global and Mexican players. According to IHS Markit, slightly under 17.23 million light vehicles will be produced in 2018 globally and this figure is projected to increase to 17.38 million by 2022. However, to take advantage of the opportunities this might create, the Mexican supply chain must increase its competitiveness.
FILLING GAPS
Two key gaps that exist in Mexico’s automotive supply chain are tooling systems and specialized raw materials. “Mexico needs to grow its supplier base at the second and third levels of the value chain, prioritizing providers of raw materials and tooling components,” points out Ildefonso Guajardo, Mexico’s Minister of Economy. By procuring raw materials like engineering resins, steel, aluminum and electronics locally, automotive companies could increase their cost competitiveness since they could avoid importing costs when shipping these commodities.
Luis Palomé, Managing Director of Belgian exhaust-system manufacturer BOSAL México, underlines that while the country offers competitive labor costs, raw materials are between 5 and 10 percent more expensive than in Europe. The main issue is the absence of suppliers. “There are not enough (raw material) suppliers and the existing ones find it difficult to supply the volumes the industry needs,” says José Carrera, Purchasing Director of Japanese auto part manufacturer Calsonic Kansei Mexicana. Albin adds that semi-finished components and raw materials are the segments that offer the most areas of opportunity in Mexico’s supply chain. “This is the segment that could improve the most either from a national-development or from a foreign-investment standpoint,” he suggests.
At the same time, the absence of companies focused on producing or repairing molds, dies and other tooling systems forces metal-mechanic companies to import these systems from abroad. Mexico’s automotive industry could substantially increase its auto parts competitiveness by ensuring local procurement of the materials used in operations such as metal pressing or component welding operations, reducing tariffs levied on imported tooling systems or supporting the growth of a domestic tooling industry. Armando Cortés, Executive Director for Industrial Development at ProMéxico, says Mexico imports around US$2.6 billion worth of tooling systems per year and is the second-largest importer of molds worldwide. “Producing these molds in Mexico rather than importing them offers a great opportunity,” he says.
Several organizations have taken steps to fill the gap. The Nuevo Leon Automotive Cluster (CLAUT) is in the process of launching a tooling cluster in the state to reduce the dependence of Mexico’s automotive industry on imports. Meanwhile, in Aguascalientes, Grupo Sypeisa addresses this demand through the production, maintenance and repairing of tooling systems and molds used to produce auto parts. “Our goal is to substitute imports of these products to deliver a better cost-benefit balance for the automotive industry,” says Sergio Andrade, Executive Director of Grupo Sypeisa.