Albrecht Zu Ysenburg
Partner, Industrial Markets and Audit
KPMG
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View from the Top

Realities of a Growing Industry in a Free Trade Environment

Tue, 09/15/2015 - 19:05

Q: The Mexican automotive industry is highly dependent on the US market. How do you see this dependence evolving as companies in Mexico look to other markets?

A: The Mexican automotive industry has always been dependent on the US market, as have many other industries in the country. In times of economic boom in the US, the Mexican economy thrives and vice versa. This dependency will carry on for the foreseeable future, especially since the US automotive market is flourishing. However, the next time car sales dip in the US, Mexico will be affected, and given the sheer capacity that is being installed here to cater to the US market, any drop will hit the country hard. As for other markets, Mexico has progressed greatly, now having the most free-trade agreements (FTAs) in the world. It has continued to make important strides in its automotive sector, such as finalizing a deal with Brazil to increase exports there. This will also depend on the strategies of individual OEMs in terms of plant specialization for a particular model, which leads to manufacturing plants being established according to production, investment, and logistical benefits before cars are eventually exported. Most other OEMs maintain a geographical approach, which sees their strategies being tailored regionally. Therefore, they might feel it does not make much sense to export cars from Mexico to Germany or Asia when the US is much closer.

Q: While certain solutions are now beginning to help, the influx of used vehicles has continued to be a problem in Mexico. How do you see this evolving?

A: Mexico cannot expect to continuously sell new cars to the US without importing old ones. This is one of the consequences of having FTAs. The solution must come from within the Mexican economy and as people earn more money, they will naturally prefer to buy new cars than used cars. Another major issue is human capital in areas where competition is fierce, particularly in the Bajio region. There is large staff turnaround due to competition based on salary. The scarcity of talent must be readily addressed and automotive companies have to work hard to create a sense of loyalty among their workforce. The future solutions to this problem lie with the employers, not the employees.

Q: Many new OEMs have announced their arrival in the country. What does this mean for the Mexican supplier base?

A: All the OEMs are concerned about finding more local sourcing. They are still importing too many materials and they want this capacity to be built up in Mexico. Despite these demands over the last couple of years, the supplier base has not caught up. While the Audi plant in Puebla will ask a number of foreign suppliers to set up a base nearby, the real Mexican supplier base has not yet truly increased. The automotive industry is not easy to enter as it is capital intensive and volatile. The quality standards expected by the likes of Ford and Volkswagen are immense, so if suppliers cannot meet them, they will fail to enter these OEMs’ supply chains. Mexican companies have to invest time, money, and capabilities to reach that level.

Q: The market for alternative forms of fuel is slowly growing in Mexico. What have been the opportunities for these technologies to take hold in the Mexican market?

A: The opportunities for alternative fuels are the same in Mexico as in the US. The only difference is that the Mexican public has not yet accepted electric or hybrid cars. The Mexican market is still not ready for alternative fuel vehicles, which I do not anticipate to change in the short term. In the next five years, the sale of electric or hybrid cars will reach a maximum of 3%. The fact that gasoline prices are now higher in Mexico than in the US will help somewhat but, in the past, prices were too low for such products to enter the Mexican market. Another challenge is that the infrastructure for electric cars is not in place. However, once real demand is in place, infrastructure will naturally follow.

Q: What are KPMG’s strategies to increase its presence within the automotive industry?

A: When companies enter Mexico, their needs can range from anything such as tax and legal advice, M&A advice, audits, creating business plans, or setting up operations. Approximately 50% of our business remains based on audits. We service more than 30% of the OEMs present in Mexico, with many of the new ones entering the country already featuring among our clients. We are experienced in helping OEMs and suppliers alike set up their operations in Mexico and guiding them through whatever needs they have.