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Insight

NAFTA's Stewardship of the Automotive Industry

Mon, 09/01/2014 - 16:14

If any evidence is needed as to how much the automotive industry in Mexico has been a true beneficiary of NAFTA, its performance during the economic crisis does not lie. While the globe was battered, the automotive industry stood firm and weathered the storm, as Eduardo Solís, Executive President of AMIA states. “When placed on a line graph, you can see that despite the two crises of 1995 and 2009, the automotive sector grew continuously after the 1980s and then exponentially after NAFTA.” Mexico, now an automotive manufacturing powerhouse occupying the 8th position worldwide, producing almost 3 million units in 2013, marking a 61% growth since the treaty went into effect.

NAFTA did not only open borders to encourage production and a higher complexity of manufacturing processes, it broadened the very mindset of key automotive players by showing them Mexico was a competitive option. Solís explains this phenomenon. “We have witnessed a great transformation. For example, when Audi decided to come here, it sent a different message to the world about quality. Audi is not ashamed about their vehicle being ‘made in Mexico’.” The key here is that NAFTA became one of the stepping stones upon which Mexico could continue expanding its free trade agreements. With the automotive industry having become one of the clear winners since NAFTA, its future in Mexico is carved in stone. Unimpaired entry to the biggest automotive consumer market, the US, has been secured.

Spurred by Mexico’s ambitious plans and its competitive advantages, top multinational suppliers are now increasing their presence here. One of the major attractive qualities of Mexico for FDI is its degree of openness seen through its many FTAs. It is important to note that FTAs like NAFTA are one of the pillars that have stimulated the industry’s expansion, “Mexico has FTAs with 45 countries, but it needs to continue looking for new markets,” Solís comments. As a country that exports 80% of its production this is critical and FTAs like NAFTA have not only enabled Mexico to surpass Japan as the main exporter to the US, but have consolidated Mexico’s position as the 4th exporter of vehicles worldwide. The transformation to become a global reference for the auto industry paints a positive future landscape. Luis Lozano, Mexico Automotive Leader at PwC, says that “with regards to the evolution of the automotive industry in this country, I predict we will go from the 8th production country in the world, to being 6th in the next two or three years.”

While consolidating the opening of its economy through NAFTA shaped Mexico’s automotive industry, it also opened the doors to the indiscriminate importation of used vehicles from the US. For Lozano, “this is the biggest issue facing the Mexican automotive sector right now.” He attributes the stagnation of the domestic market by used units to cultural differences, “the US has this culture in which they use a car for a couple of years and then replace it. Millions of cars are being replaced every couple of years. Mexico does not behave this way, people keep their cars for much longer.” While NAFTA has benefited the industry in countless ways, according to Lozano, “NAFTA states that the US will export more to Mexico, so the situation will actually worsen.”

The impact has been reflected on the domestic sales of both light and heavy vehicles. “Dealers are severely affected; many of them cannot sell more than 100 cars a month. Toyota has reduced its number of dealers here, and the American OEMs are following suit,” Lozano adds. Mexican internal automotive sales reached their highest point in six years in 2013, with 1.06 million cars being bought nationwide, 7.7% higher than the figures for 2012. However, this uptick has not quelled fears, with experts stating figures would be far higher if adverse market circumstances could be resolved. According to Lozano, solutions have been considered “but the real issue remains that we are so close to the US.”