Andrés Lerch
Advisory Partner and Leader of the Operations Transformation Area
EY Mexico’s Automotive Center
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View from the Top

Technology Gap Not a Risk at the Moment

Fri, 09/01/2017 - 09:19

Q: What factors will help Mexico rise to sixth place globally for light vehicle production and when will this happen?

A: That will likely not happen in 2017. Mexico could be the sixth-largest automaker, overtaking India, but many factors must first fall into place. Uncertainty between Mexico and the US must be eliminated. US President Trump’s politics might be less aggressive now but they are a constant source of uncertainty. Some OEMs are taking their investments to other countries, which in the end might result in less investment in Mexico. The domestic market must also expand to boost Mexico’s manufacturing capabilities. Both 2017 and 2018 will be difficult years due to Mexico’s presidential elections. Periods such as this normally generate much uncertainty, which keeps people from buying new vehicles. Our forecast is that Mexico will take India’s place in the automotive manufacturing rankings between 2018 and 2019.

Q: How tangible is the risk of Mexico losing its competitive edge against other manufacturing hubs?

A: The risk is always there. Though we normally focus on currency volatility, we must also consider changes in consumer preferences. Companies make huge investments in a certain brand or vehicle model but if clients start losing interest, the project might lose its value. As a country, the risk is that vehicles produced in Mexico suddenly lose ground in the international market, particularly in the US, which is our biggest export destination.

However, I do not see a significant number of companies exiting the country in the short term because the cost- benefit ratio does not justify that. It is one thing to relocate an investment that has not been finalized and another to expatriate an entire project. For the time being, labor costs and Mexico’s other advantages outweigh the country’s lack of manufacturing technology. Yet, sooner or later, OEMs will want to increase their productivity and that will create new complications for Mexico. Robotization could become a real threat for many direct jobs.

Q: According to EY, companies are ill-prepared to face technological disruption. Where does that leave Mexico?

A: The local branches of global companies established in Mexico cannot decide which technologies they will integrate into their manufacturing or sales processes. Those are corporate decisions that are made at company headquarters in Japan, Germany or the US. In the next five years the automotive industry will change more than in the last 25 years. Powertrain technology will evolve from internal combustion to hybrid and electric systems and although electric cars will never make up 100 percent of the global vehicle park, we think they will represent 30 percent of it in about 15 years. Companies will gradually integrate autonomous and self-driving solutions into their portfolios. The evolution of this technology will depend on how regulations and infrastructure evolve, together with incentives from the government. According to an EY survey, local C-level executives recognize that these changes are coming but they do not know when or how to capitalize on them.

Q: How do you expect new trends such as connectivity and autonomy to shape the future of the industry?

A: Autonomous technology can be a viable option for Mexico. However, without a Smart-City infrastructure to support connected cars, any effort will be worthless. I expect this technology will first permeate small Mexican cities and small areas of larger cities where pilot programs can be implemented. We are currently proposing a mobility plan in Santa Fe to test how we can take advantage of digitalization and the city’s infrastructure. We intend to promote carpooling between neighbors and local workers while enticing companies to implement staggered working hours. This would reduce traffic and alleviate people’s stress levels. We are developing this initiative with the private sector, the government and the schools in the area, forming an advisory council that can align the priorities of each