Ricardo Haneine
A.T. Kearney
View from the Top

Seeking Integration for Automotive Supply Chain

Mon, 09/01/2014 - 16:39

Q: How is Mexico positioned in the global automotive industry?

A: We look at how Mexico is positioned to participate and compete within North America, Europe and Asia, based on the development of the global automotive supply and value chains. Mexico is fairly well positioned in terms of the level of productivity combined with the cost of labor. China was historically more competitive but the trend in the last three or four years, with the revaluation of the yuan, has made Mexico more competitive. That is why Mexico is now in the top two for exports to the US, which is the only sector where China has not displaced Mexico. Our focus looking ahead is on how to bring more added value to the Mexican automotive sector. One important factor in this is the human talent aspect. Are enough engineers graduating? Are they graduating with the right skillsets, or do OEMs have to train them from scratch?

Q: How can this added value be brought to Mexico’s automotive supply chain?

A: We look at whether Mexico has evolved from a maquiladora industry into more sophisticated manufacturing processes. 80% of our production goes to exports but how much value added is generated in our country? The automotive sector accounts for 3.5% of GDP and around 20% of Mexico’s exports, but the contribution to GDP should be much higher. The other aspect to ensure value added is to have more suppliers. In many instances OEMs have arrived to Mexico with their own pre-established group of Tier 1 suppliers. These Tier 1 suppliers often feel the Mexican supply market is too fragmented and fear that the production of scale they require cannot happen here. We need to understand how to build up our Tier 1, 2 and 3 suppliers to overcome the stagnation this leads to.

The strength of the local supply chain is key to bringing more OEMs to Mexico. Profit margins are very small in the auto parts industry and we have looked at specific projects to address this. We identified that high-resistance steel is key for the development of cars, but that the steel that is manufactured in Mexico is more of a commodity. The sort of steel needed for the automotive industry has to be imported from the Midwest of the US, and transportation costs are high. Several large global steel manufacturers have announced the creation of new plants for that type of steel in Mexico, and this shows the value of a deeper supplier base. Another aspect would be to build up the local Mexican car market. We used to sell around 1.5 million new cars in Mexico every year but this has dropped to around 800,000 because of used car imports from the US, which has created a distortion in the prices of cars in the country. However, the slowing down of the new vehicles market in Mexico has not only been due to the importation of used cars. The penetration of financing for cars by banks and lenders has been low. In the US, 90% of cars are obtained through financing, and this figure is between 50 and 55% in Mexico. Increasing financing will increase the number of new cars being bought, as will regulations controlling used car importation. NAFINSA has been giving guarantees to the banks in order to encourage them to finance cars. To date, the lack of a national registry has made it risky for banks to engage in automotive financing here, but that is being addressed. The local market should eventually pick up to its full potential of 1.3-1.4 million new cars being sold a year. Right now, the local market accounts for 20% of production, and showing OEMs that this could increase to 30-40% should provide a nice incentive for future investment.

All our projects have led us to one question. Should Mexico’s strategy be to continue being the producer and exporter of car parts and components, or should it seek to export fully integrated cars? Many OEMs see that Mexico has the potential to increase car exports, which allows the integration process to happen and begin building the needed talent, technology, and suppliers to generate much more added value. Mexico has been selected by many OEMs above other emerging markets that are centers for production, manufacturing, and design within the automotive industry, such as Brazil, China, and Eastern Europe. The integration of the supply chains within NAFTA has been a huge help but suppliers and providers still need to fulfill the conditions and requirements that the OEMs demand, in terms of the quality and service levels in their supply chain.