Sat, 09/01/2018 - 12:42

Mexico's automotive industry developed successfully between 2013 and 2018, achieving consecutive record levels of production, exports and sales, while maintaining a steady flow of foreign investment. However, there are still areas of opportunity to strengthen Mexico’s position as an automotive destination

During President Enrique Peña Nieto’s administration, the automotive industry enjoyed unprecedented and undisrupted growth in both production and sales in the domestic market, the latter until the second half of 2017. Peña Nieto has been a champion for foreign investment attraction and incentivizing Mexico’s position as an open economy for trade and manufacturing operations.

In 2012, the automotive industry represented approximately 3.5 percent of the national GDP and 20.2 percent of Mexico’s manufacturing GDP according to the Ministry of Economy. By the end of 2017, the industry’s participation in the national GDP had risen to 2.9 percent, while contributing 18.3 percent of manufacturing GDP. The industry is now the second-most important contributor to manufacturing GDP, only behind the food industry, which represents 22.4 percent of the country’s total manufacturing revenue. In terms of production facilities, the administration of former President Felipe Calderón ended with 27 assembly plants of light and heavy vehicles. Peña Nieto’s administration will end with 40 manufacturing facilities, including BMW and Toyota’s operations that will be operational by 2019 and 2020, respectively.

As mentioned, Peña Nieto was an active supporter of foreign direct investment in the country, which was one of the goals established by his administration in the National Development Plan 2013-2018. Peña Nieto’s goal was to make Mexico the leader in Latin America regarding trade and commercial agreements. During his administration, investment only in the automotive industry grew by 125.6 percent, totaling US$32.1 billion between 2012 and 2017, according to the Ministry of Economy. This represented approximately 12 percent of the total foreign direct investment received by the country. At the beginning of his administration, the country received US$3.5 billion in new projects. Meanwhile, 2017 was the most successful year with US$7.1 billion in investment.

Although NAFTA was and still remains Mexico’s most important trade agreement, during Peña Nieto’s administration the country entered negotiations for the Transpacific Partnership Agreement that could have opened the doors to the Asia-Pacific market with Australia, Brunei, Malaysia, New Zealand, Singapore and Vietnam. Negotiations were advancing favorably until Peña Nieto’s fourth year in office when Donald Trump was elected US president. Trump pulled the US out of the agreement, which put negotiations on hold until the member countries decided whether or not

to move along with the treaty without the US. The decision was favorable and a new agreement was negotiated known as the Comprehensive and Progressive Agreement for Transpacific Partnership. Mexico was the first to ratify the agreement, followed by Japan and Singapore.

The Peña Nieto administration is also renegotiating the NAFTA agreement with the US and Canada and Mexico has maintained a position in favor of open trade and doing what is best for the industries in all three countries. Although the agreement was expected to be finalized by the end of August, the task will most likely fall to Peña Nieto’s successor Andrés Manuel López Obrador, who has already designated Jesús Seade as Chief Negotiator to replace Ildefonso Guajardo, Minister of Economy.

In terms of domestic policies, Peña Nieto's administration was also an active supporter of the development of the automotive industry albeit not as successfully in some areas as expected. According to Rogelio Garza, Deputy Minister of Industry and Commerce, the goal of this administration was to enforce a “light” industrial policy that ensured the government’s intervention only in matters where the market demanded it. “Our focus has been on four pillars: generating world-class talent, promoting innovation, supporting supply- chain development and creating synergies between clusters.”

In the National Development Plan 2013-2018, Peña Nieto established a goal to invest 1 percent of national GDP in science, technology and innovation to align with the minimal standards outlined by the OECD. “Our goal is to design more cars and more auto parts locally and have more prototyping and testing centers,” said Garza. The country’s current expenditure on R&D activities amounts to 0.9 percent of GDP, although R&D center directors from CONACYT-led facilities say there have been cuts to CONACYT’s budget of up to 30 percent. The National Development Plan 2013-2018 also considered education a priority for industrial development, highlighting that academic institutions were not in line with what industries demanded from local talent. Although there has been communication between the public and private sector, Mexico still faces a lack of talent availability that is expected to worsen as more projects arrive to the country.

Looking at projects with a more successful outcome, together with the National Bank of Foreign Trade (Bancomext), AMIA, INA and the automotive clusters across the country, the government developed the ProAuto Integral 2014-2018 program to offer support for SMEs looking to participate in automotive production chains. “ProAuto is the specific program we have developed for the automotive industry, aligning several public policies to help SMEs develop in the automotive sector,” says Garza. “This administration implemented a ‘precise-shot’ strategy to give priority to companies that focused on areas of opportunity for the country. We no longer hold massive events hoping to find one or two suppliers to develop. Instead, we go directly to OEMs and large Tier 1 suppliers and ask them to identify potential local suppliers.”

Through ProAuto, the government established seven main areas of development for the local supply chain: forging, stamping, machining, plastic injection, molding, pressing and die forming. After identifying companies that can offer an added value in any of these sectors, the ministry helps them pinpoint what they need to improve to become part of the production chain. “We are encouraging supplier development and we are in touch with all the OEMs and Tier 1 suppliers coming to the country,” says Garza. “We have already approached FCA, GM, Bosch and Continental with this strategy.” According to Eduardo Muñiz, Head of Automotive, Aerospace and Logistics Financing of Bancomext, by the end of 2017, the bank had already channeled approximately MX$100 billion (US$5 billion) in funding to the automotive industry, providing liquidity and enabling capital expenditure for investment projects in the sector. “Bancomext has achieved an average annual growth of 9.8 percent in the last five years in its automotive-oriented credit portfolio,” he says.

Peña Nieto’s administration also addressed the advanced age of the domestic vehicle park. In the light-vehicle segment, stricter measures were implemented regarding the restriction of used-vehicle imports, which led to a significant reduction of these units’ participation in total domestic sales. In 2012, 458,114 used vehicles were imported from the US. In 2017, that number fell to 123,638, a reduction of 73 percent. In the heavy-vehicle segment, the government’s vehicle- renovation programs were not as effective considering the reality of the market. The government implemented the scrappage scheme to incentivize vehicle renovation mainly among owner-operators and to combat the average age of 21 years in the heavy-vehicle market. Owners could take their old unit for scrapping and receive a monetary incentive of up to MX$336,000 (US$18,970) to purchase a newer unit. The program, however, allowed only 6,000 units to be scrapped per year due to budget restrictions. “It is not enough to scrap 6,000 units per year. At that pace, it would take us 30 years to replace the 180,000 vehicles of 21 years of age or older,” says Miguel Elizalde, Executive President of ANPACT. “To reduce the average age of the fleet, we should be scrapping up to 20,000 units yearly.”