UK Sees Opportunities for Automotive Investments in MexicoBy Alejandro Enríquez | Thu, 10/15/2020 - 11:58
“USMCA will bring new opportunities for UK companies for local manufacturing of automotive components,” said Alejandra Rodríguez, Head of Trade and Investment Automotive and Advanced Engineering at the UK Department for International Trade (DIT) in Mexico. UK DIT organized the online conference Why Mexico? Outlook on the Opportunities for the Automotive and Advanced Engineering Sectors, where industry experts addressed the opportunities the sector represents, particularly for the UK.
The State of the Mexican Economy
Daniel Zaga, Economic Analysis Leader at Deloitte Mexico, painted the picture of the Mexican economy and where it stood just before the pandemic. Mexico is the 15th-largest economy in the world. The country ranks 48 in the Global Competitive index and it ranks number 60 in World Bank’s ease of doing business report. It is the No. 10 in population and No. 6 in FDI destination according to UNCTAD. “Through its free-trade agreements, Mexico accesses 60 percent of the global GDP and 55 percent of global trade, yet USMCA region is Mexico’s main market,” said Zaga.
According to Deloitte Mexico, in the 2015-2019 period, FDI in the center region, namely the states of Mexico City, State of Mexico, Hidalgo, Puebla, Morelos and Tlaxcala, accounted for a combined US$56.8 billion, followed by the northern border region with US$50.4 billion and the Bajio area with US$25 billion. In all of them, FDI was mostly concentrated in transport equipment. In fact, for that period, 49 percent of FDI went to the manufacturing sector alone.
Despite these results, the Mexican economy had “its second or third” worst economic performance in 2020. This was not solely caused by the pandemic. “Different elements have led to a decrease in FDI numbers,” mentioned Zaga. Some of these elements are López Obrador wining the elections, NAIM’s cancellation, oil bid rounds suspensions and then their indefinite cancellation along with special economic zones, credit rating cuts to PEMEX and CFE, Carlos Urzúa’s resignation as Minister of finance, the use of extraordinary funds due to lack of resources, the cancellation of the Constellation brands plant and eventually the pandemic. “Our forecasts estimate that the economy will decline around 9.6 percent this year. We are expecting a 4 percent grow for 2021,” said Zaga.
The State of the Industry
Experts agreed on the undisputable role Mexico plays in global automotive and auto part manufacturing. “In the automotive industry, Mexico has great expertise in three areas: heavy vehicles, light vehicles and auto parts,” affirmed Rodríguez. IHS Markit reported 12 light-vehicle OEMs with 23 plants and a 6 million production capacity. In fact, total production capacity increased 95 percent in the past 10 years, from 3.1 million to 6 million in 2019. The country has also 10 heavy-vehicle OEMs and 2,500 suppliers according to UK DIT and IHS Markit.
For a closer look at the automotive supply chain, Fernando Trujillo, Principal Consultant at IHS Markit, detailed where production is currently focusing on. “About 40 percent of production are SUV/CUVs that will meet global demand,” he said. According to figures he shown, the Utilization Rate (UR) of the Available Production Capacity (APC) has diminished while the latter has grown. With a 6-million-vehicles production capacity reached in 2019, utilization rate declined to around 64 percent in that year, whereas the highest utilization rate of 90 percent was reached in 2012 when APC was around 3.5 million vehicles. Mexico’s record production took place in 2018 with almost 4 million units at around 70 percent utilization rate.
Taking a closer look, powertrain is a key subsector for the industry. “About 50 percent of the engines produced in Mexico are exported while hybrid technology production is increasing its foundation with about 83,00 hybrid engines for domestic production and about 194,000 hybrid engines for exports. In addition, nearly 65 percent of transmissions produced in Mexico are exported,” stated Trujillo during his presentation.
Some of the strengths of the supply chain, according to IHS Markit, are “the strong presence of Tier 1 companies, FTA export volumes and low labor costs, which may change with USMCA.” While some of the weaknesses include a high dependency on the US market at around 42 percent, the fact that most Mexican suppliers are Tier 3 and or below and a large percentage of raw material imports, despite having high-quality raw material.
USMCA will definitely drive new opportunities due to stringent rules of origin. However, Zaga pointed out that most OEMs have plead for alternative regimes that will delay the time in which these new rules should be met.
“With USMCA, we have the alternative regime that will require OEMs to get to 75 percent of regional value content in five years, instead of three. Almost all OEMs requested their adherence to the regime that makes the transition period more flexible and extended. The alternative regime also enabled labor value content to be delayed. Instead of 40 percent for cars and 45 percent for light trucks in three years, it has been reduced to 25 percent in five years,” mentioned Zaga.
The UK Department for International Trade acknowledged Mexico’s manufacturing role and how it can lead to new opportunities for UK companies. “Mexico is a manufacturing hub, with manufacturing plants for automotive, aerospace and home appliances, making it an important market for advanced engineering. Over 80 percent of machines and manufacturing technology are imported from other countries. Consequently, machinery for any manufacturing process is one of the main business opportunities in Mexico for UK companies,” said Rodriguez.
Battery-electric vehicle (BEVs) and hybrid-electric vehicle (HEVs) manufacturing may present a unique opportunity for the Mexican market, even though most of production will be aimed at foreign markets. “There will be opportunities to fill BEVs and HEVs supply chains. This includes electric motors, batteries and housings, DC-AC converters, electronic control units, charger ports and more. It also important to note that there is no battery production currently in Mexico as batteries are being imported from US and China,” said Trujillo.
Rodríguez also adds the opportunity for UK companies looking for international partners to develop new products. “This will represent many opportunities to establish in Mexico, advance engineering or expand access to clients,” she mentioned.
Another important element Rodríguez noted is the pandemic effect on triggering digitalization. "We also believe that the pandemic is a wakeup call to generate more flexible production systems and a more digital mindset. Mexico will offer new opportunities in many subsectors including digitalization of the industrial processes, robotics, smart technologies, as well as fintech.”
Trujillo agrees. “Automotive technology continues to move up the technology curve and demand for electronic components will continue to grow. As demand for Level 3 features develops in more mature automotive markets, OEMs will begin producing vehicles with more advanced autonomy levels in Mexico, primarily for exports,” he says.
At the event, partners of the UK Department for International Trade also presented the different solutions to invest in the country. These included Diego Folino, Country Head Mexico/LATAM of UK Export Finance; Emma Fitton, Business Development Manager at Tuscor Lloyds UK, Paul Brooks Head of Manufacturing and Automotive from Stander UK, and Mathew Rose Director of TISS.
“COVID-19 has generated crises all over the world across different industries, including automotive. But we remain positive and believe that from all crises also emerge new opportunities,” said Rodríguez.