Testing Mexico’s Automotive Resilience Toward 2019

The Mexican automotive industry performed well in 2017 despite the momentum lost in the first months of 2018. The sector now needs to demonstrate its resilience against troublesome macroeconomic factors that are weighing on Mexico’s automotive future. Vehicle sales continue on the low side and production faced stagnation in 1H18, although vehicle exports are on the rise. All in all, however, the industry is maintaining a positive yet sober outlook for the road ahead.
Considering that 2016 marked an all-time high in terms of annual sales for the Mexican automotive industry with 1.6 million units marketed, a contraction in sales could be expected due to the nature of economic cycles. All that goes up eventually comes down and the Mexican automotive market is no exception. Total vehicle sales fell by 4.6 percent in 2017 compared to 2016 to 1.53 million units. The downturn continued in 2018, totaling a decrease in sales of 8.4 percent between January and June 2018 compared to 2017 according to data from AMIA.
In terms of production, growth rates have been meager throughout 2018 due to a variety of setbacks that OEM operations in the country have faced. Volkswagen has cut back its Jetta production in Puebla, the flooding of Honda’s Celaya plant put production on stand-by for a while and Ford stopped assembling for three days in February in Cuautitlan due to a component shortage.
Despite this, several industry leaders agree that the country’s automotive industry is on its way to reaching its objectives provided some challenges are overcome. According to Ildefonso Guajardo, Mexico’s Minister of Economy, the government is maintaining a positive outlook for the future performance of the Mexican automotive industry. “Our forecasts show that by 2020, light vehicle production could reach 5 million units per year,” he says.
Guajardo underlines that the establishment of assembly plants in Mexico during Peña Nieto's administration will increase demand for auto parts. This growth can translate into opportunities to attract more foreign component manufacturers and the strengthening of the local Tier 2 and Tier 3 supplier base. “It is necessary to develop the supply chain by type of process, boosting growth of all kinds of suppliers while promoting quality certifications and specialization among players,” he adds.
Eduardo Solís, Executive President of AMIA, agrees with the ministry’s production estimate but warns about the difficulty of forecasting in the face of the complicated scenario that the Mexican automotive industry faces. “If no Section 232 measure is implemented, we still see a possibility to reach production of 5 million light vehicles by 2020 and exports of over 4 million units,” he says. Section 232 of the Trade Expansion Act of 1962 determines whether vehicle imports are a threat to US national security and allows the US president to impose tariffs or quotas on vehicle imports from Mexico or elsewhere.
“These are interesting times and particularly now, many changes are coming.” Solís points out that Mexico has proven its capabilities as a competitive automotive hub and now must define the best form to sail through trade challenges, such as the possibility of new US tariffs on vehicle imports similar to those on aluminum and steel. “We are on the brink of a pointless trade war that clouds whatever prediction we might make,” he warns.
In terms of domestic sales, Guillermo Rosales, Director General of AMDA, says the downturn is related to inflation impacting the population segments that drove market growth in previous years. “We hope the second half of 2018 will yield better results considering the base of comparison set in 2017 is lower,” says Rosales. “Inflation has started to recede while interest rates remain relatively low, which could help the demand curve stabilize.”
To prevent an ongoing sales contraction from taking a toll on their profits, OEMs and dealer groups need to ensure they are supplying what the market demands, according to Guillermo Prieto, Chairman of AMDA. Mario Hernández, Leading Partner of the IMMEX Segment at KPMG Mexico, says comprehensive financing products and the entrance of younger generations will play a key role in vehicle sales bouncing back to the levels of 2015 or 2016. “Competitiveness is key for the automotive industry to overcome the challenges it faces and to continue being a strong pillar of the Mexican economy.”