Miguel Jáuregui
Founding Partner
Jáuregui y Del Valle

Proper Policies for a Thriving Industry

Mon, 09/01/2014 - 10:17

Looking back at the development of the Mexican automotive industry, it becomes evident that its success can be attributed to an early start. “If we put the pieces together, there has been an evolution in the automotive industry that did not happen overnight. It started over 40 years ago,” comments Miguel Jáuregui, Founding Partner at Jáuregui y Del Valle. He highlights the long-established presence of companies like Delphi and Volkswagen, and the joint venture between Chrysler and Automex as factors that shaped the national automotive industry. “Mexico was a large vehicle importer, which became evident when the country was flooded with American Cadillacs during former president Miguel Alemán’s administration. If we follow history, it becomes clear that there was a need to establish an industry. Its current track record shows an industry designed to grow and increase productivity, quality, and innovation; and it is already proving itself.”

Jáuregui notes that public policy has been engaged in enhancing the automotive sector’s presence in the Mexican economy over the past decade. The signing of NAFTA twenty years ago had a favorable impact, nudging Mexico firmly on a path of free trade, which caught the attention of OEMs worldwide. The entrance of large companies from Japan, Germany, and other nations over the last ten years has also had an enormous impact. For Jáuregui, this demonstrates that a tangible evolution will continue to take place as the Mexican automotive industry matures to become a real global player. However, he points out an area of concern. The sustainability of the Mexican market will depend on the availability of financing. “For the moment, the Mexican market has a lack of access to financing and has not shown the need for a domestic OEM. However, as Mexico evolves, its strength in manufacturing, design, technology, and capital could allow for such a creation. A Mexican OEM would be welcomed if it made quality, safe cars at the right price for the right type of consumer,” Jáuregui explains. “But instead, the Mexican market is harming itself by importing used cars from the US. This is a failure in the rule of law, and has benefited organized crime.” An alternative Jáuregui proposes is a scrapping program, a government-funded initiative to replace old vehicles for new ones. “If Mexico implements a scrapping program that is affordable for the people who need to participate, then the situation is going to change.” He does warn that if action is allowed to be taken outside the realm of public policy, then organized crime will gain control over the situation, as in the case of discarded American automobiles that have come here through the black market. “An affordable car could also provide an alternative to combat illegal imports. I am sure international OEMs would love to have a car that sold like bread here while simultaneously suppressing the number of clunkers hitting Mexican roads. It is a daunting issue, but a feasible one too,” Jáuregui notes. This would obviously require an interested manufacturer, although Jáuregui opposed the idea of founding a parastatal company like Dina and says such a car should be made with private and foreign investment but produced in Mexico. He points out that this has been tried before, as Grupo Salinas flirted with the idea of building cars in partnership with a Chinese company. This initiative failed due to high costs and a lack of interest from Chinese manufacturers. Jáuregui praises how Volkswagen eventually filled a gap that had lasted decades, giving people access to a locally-made vehicle. In contrast, he mentions the Chevrolet Spark as an example of a car that is not filling a much needed gap in the market. According to Jáuregui, the Spark could be a popular car for the masses, yet it is in the MX$135,000- 150,000 (US$10,400-11,500) price range. This is a problem as a car costing more than MX$100,000 is not an affordable option for most Mexicans, as the Beetle was back in the day. Yet, OEMs are not selling anything below this price.

Jáuregui believes that the right public policies, such as bringing in subsidies or financing assistance, could mitigate this situation, and he poses the question of how a solid domestic market in the absence of enough available capital. Many in the regularized economy do not have enough money to buy a car after they cover their expenses. A second-hand car would be viable, but the proper second-hand car market is dwarfed by illegal imports. This brings about the option of introducing attractive financing models, which could be an effective policy to boost the sector while haltering the importation of used cars. This alternative would pull Mexicans from the informal economy into the formal economy through the incentive of buying a car. “People would be able to buy a proper car and the price of entry is to become a formal citizen, that changes the whole scenario through public policy. This angle is of great importance because it lures people into regularity,” shares Jáuregui, adding that the right policy governing this aspect of the automotive industry could be a major turning point.

On the manufacturing side, there is competition between state governments as not all states are home to an OEM, or have a large automotive industry presence in general. Jáuregui notes that a lot of state governments offer land as an investment incentive but fail to provide the necessary urbanization levels needed for companies to access and use the land. “This comes down to a federalization of public policy, combined with local rule of law, to establish compliance with verified obligations at all levels of government. In other words, attracting newcomers to the automotive industry requires the creation of a legal framework that is accessible, understandable, and applicable nationwide. In Mexico, legislators create many cross-purpose laws and many regulations that remain unknown and unfollowed. A system’s success lies in its simplicity. For instance, if we had a simpler tax system, people would pay taxes. Similarly, people would adhere to a simpler automotive promotion program.” Jáuregui believes that coordination needs to take place at the federal level to enable the creation of support infrastructure for the application of the law and regulations for inspections. “This should be done in conjunction with the reforms that are on the way. If it is done right, the implementation will be easy as this is not a constitutional change but simply a market adjustment.”

According to Jáuregui, the success of states such as Guanajuato, Chihuahua, and Sonora comes from the fact that they did not compete against federal regulations but followed and enforced them. “These states created an environment of legal protection for companies that wished to establish themselves there. By this, I mean they enforced the law, which makes companies want to invest in these states as the land use conditions are clear, the roads are safe, and there are good public services.” Jáuregui says that a secure rule of law is the answer to attracting companies that can boost the economy, as opposed to an environment where businesses are harassed and threatened. “This is the case for some states that, despite their advantageous proximity to the US, are avoided by companies coming to Mexico. Mexico is working on restoring the rule of law nationwide, but has not achieved it yet.”

Beyond these concerns, Jáuregui says it is common for his clients to ask about Mexico’s fiscal framework, importation quotas, distribution networks, and financing schemes. “Even though some companies ask what to do in case of extortion, they tend to underestimate the extent to which politics play a large part in the automotive industry,” says Jáuregui. “For instance, a change in administration could alter the way in which a company is taxed. These things are impossible to predict, but they happen. The most effective way to protect yourself from this is to adhere to best practices and demand that the government should respect your practices.” He adds that in these cases, entities like AMIA and a distributor network following the same best practices could help a company overcome such challenges. He also exhorts companies to verify their land rights, particularly in places where the rule of law is weak, and to ensure they have clear and well-defined agreements for utilities like power.

“Companies looking to enter Mexico need good counseling, and to have staff that have foresight and dedication to indentify possible obstacles. The problem is that sometimes project developers, construction companies, and permit obtainers do things that are beyond their remit by cutting corners,” notes Jáuregui. The issue is prevalent in many industries but he believes the situation to be more delicate in the automotive industry given the explosion in the amount of factories that are currently at various stages of development. Regardless of the possible obstacles, Jáuregui believes the automotive industry has benefited from mostly positive policies. “I think the appropriate policies have been well-applied over all, unlocking possibilities for the automotive industry. Otherwise, the Mexican automotive sector would not have reached this level.”