Supply Chain Short on Local Development

Mexico’s development as an automotive manufacturer gave way to a strong supplier base with national and international experience. But many raw materials and specialized components are still imported, leaving a gap in the chain that is an open opportunity for local players, if they can rise to the challenge

According to ProMéxico, there are approximately 345 Tier 1 suppliers in the country, plus more than 1,000 lowertier providers. Analyzing the Ministry of Economy’s FDI figures for each state shows that Nuevo Leon, Puebla and Guanajuato stand out as the regions with the highest investment received in automotive and auto parts-related operations in 2016 with US$798 million, US$664 million and US$587 million, respectively. At the end of 2017’s first quarter, however, the leaders were Aguascalientes, San Luis Potosi and Nuevo Leon with US$287 million, US$169 million and US$162 million. By the end of 2016, the auto parts production market represented US$79.3 billion, 3.6 percent below the market value in 2015, which stood at US$82.2 billion

Óscar Albin, Executive President of INA, is not concerned about this decrease. He says the variation was mainly due to the volatility in the dollar-peso exchange rate and that production values had not only maintained but increased. “Auto parts production remained stable in 2016, increasing approximately 1.5 percent compared to 2015,” he says. “This was mainly due to stronger light-vehicle production in the US, which fueled our exports there and to Canada.” Albin expects the local production market to keep growing, reaching 2 to 3 percent by the end of 2017. Early figures from January to April 2017 already show an increase of 4.8 percent in auto parts production for a total of US$27.4 million.

While it is true that the country has gone a long way in strengthening its supplier base, there are still opportunities to tackle. According to Alejandro Calderón, President of the National Association for Representatives, Importers and Distributors of Spare Parts and Accessories (ARIDRA), almost 80 percent of the national auto parts production is exported, while more than US$40 billion worth of components are imported to complement the national offering. Airton Cousseau, Vice President of Dongfeng Motor Co. and former President and Director General of Nissan Mexicana, in Mexico Automotive Review 2016, addressed the impact of most raw materials being imported, including electronics, plastics, steel and chemicals, which represents the largest proportion of total cost per car produced. “Mexico is competitive in terms of labor and energy prices among other aspects but these only represent 8 percent of a vehicle’s cost,” he said. 

The country has been slow to develop a local supplier base that can address the most basic needs of large Tier 1 and 2 suppliers. Investment research and analytics platform Market Realist states that approximately 47 percent of the production cost for any vehicle is related to raw materials. However, 43.6 percent of the Mexican production is oriented toward electrical parts, carpets, seats and transmission and clutch parts, leaving much room for development in the Mexican industry. ProMéxico also outlines the market opportunity that exists in several auto parts and system markets, highlighting electric and electronic engine components, electric and electronics systems and exhaust parts as segments with over 70 percent market opportunity.

With the last OEMs arriving to the country by 2019, more suppliers are expected to enter the market and complement the existing supply chain. Nevertheless, participation from local companies is imperative to ensure a healthy and competitive operation, although technology advances may hinder many local entities. “Mexican companies are not ready to face the technological challenges presented by the industry; they are more focused on surviving,” says Alberto Torrijos, Partner and Consultant at Deloitte Consulting Group. “If these companies do not offer an added value, their products will be commoditized, which will be a huge problem in the next five years due to the extreme competition in the market.”

Government participation is paramount to take Mexican companies to the next level. To address these concerns, the government launched the ProAuto program in 2014 as a financing aid for companies wanting to participate in the automotive supply chain. Managed by the development bank Bancomext, ProAuto focuses on financing plans of up to MX$40 million (US$2 million) for small and medium enterprises (SMEs), particularly in areas the government sees as having the most potential for the development of the local production chain. Priorities include forging, stamping, machining, plastic injection, molding, pressing and die forming. The project has been successful in promoting growth among national SMEs and according to Eduardo Muñiz, Automotive, Aerospace and Logistics Financing Director of Bancomext, by the end of 2016 the bank had already granted 220 loans reaching a total of MX$200 billion (US$11.3 billion) in financing.