The Year in Review

Record sales and production marked the latter half of 2016 but a slowdown set in during the first half of 2017, marked by shrinking sales of light vehicles in the key US market. Uncertainty marked the previous 12 months, with the renegotiation of NAFTA spurring the country to cast an eye at alternative markets for growth

As 2017 headsinto the final stretch, Mexico retains its position as the seventh main light-vehicle manufacturer in the world but it has now climbed up the ranks in terms of exports. In 2016, the country moved up one position to become the third-ranked light-vehicle exporter globally, behind Germany and Japan. The automotive industry represents approximately 3 percent of Mexico’s GDP and 18 percent of its manufacturing GDP. Breaking down these numbers, the auto parts sector contributes 1 percent to national GDP and 8 percent to manufacturing activities.

Data for 2016 show Mexico achieved record numbers in terms of production, exports and sales of light vehicles. By the end of the year, production accounted for 3.47 million vehicles, representing a 2 percent increase compared to 2015. Of these, 2.77 million were exported, a rise of 0.3 percent year on year. With the arrival of Kia and Audi, not only did the country move up the international rankings, it also became the main vehicle exporter to the US.

In the domestic market, sales jumped 18.6 percent to more than 1.6 million units. Numbers from January to July 2017, however, suggest a slowdown is in progress. Production and exports are exhibiting the strongest growth at 10.8 percent and 13.1 percent, respectively. Kia continues to ramp up its production and according to Eduardo Solís, Executive President of AMIA, other automakers have finalized platform updates that were the main cause of moderate production growth in 2016. Meanwhile, sales have only grown 1.4 percent between January and July 2017 compared to the previous year when they reached a total 853,620 units. Solís and Guillermo Prieto, Executive President of AMDA, agree that the most likely outcome for the domestic market will be moderate single-digit growth for 2017 of no more than 5 percent.

Unlike its lighter counterpart, production in the heavyvehicle segment plunged 21 percent in 2016, totaling 150,889 units, due to lower demand in Mexico’s main export markets, which Miguel Elizalde, Executive President of ANPACT, expects will continue, leading to a further 20 percent production decline in 2017.

PRODUCTION

The Mexican automotive industry comprises 23 lightvehicle and 15 heavy-vehicle production plants in operation, distributed across North Baja California, Sonora, Chihuahua, Coahuila, Nuevo Leon, Aguascalientes, San Luis Potosi, Guanajuato, Jalisco, Queretaro, Morelos, the State of Mexico, Puebla, Hidalgo and Veracruz.

After two years of planning, Mexican innovator VUHL opened its MX$65 million (US$3.7 million) plant in Queretaro, where it plans to manufacture 25 cars per year. Grupo Bimbo’s subsidiary Moldex is also expanding its vehicle production outside Bimbo’s borders and will now produce electric vehicles for the national market in collaboration with billionaire Carlos Slim’s Giant Motors at its plant in Hidalgo. In terms of foreign investment, along with the entrance of Kia and Audi, Mexico attracted Chinese OEMs looking to target the Latin American market and eventually the NAFTA region.

In collaboration with Giant Motors, in which Slim’s Grupo Inbursa is a 50 percent owner, the Chinese brand JAC will begin manufacturing two SUVs at Giant Motors’ plant in Hidalgo. JAC has invested MX$4.4 billion (US$249 million) and production is expected to begin in 2018. A collaboration between Grupo Picacho and the Chinese maker BAIC also resulted in a new manufacturing project. Originally a distribution deal, Picacho and BAIC’s relationship transformed into a production venture. BAIC started manufacturing its vehicles at truck manufacturer Foton’s plant in Veracruz in April 2017.

Three more light-vehicle plants are expected to start operations no later than 2019. The Renault-Nissan Alliance in collaboration with Daimler is now building the COMPAS project in Aguascalientes, which is scheduled to begin operations by the end of 2017. The project will start with production of INFINITI models and will integrate MercedesBenz vehicles into the production line in 2018. BMW’s venture in San Luis Potosi is projected to start in 2019. The project is under construction but the company expects to have an annual production of 150,000 units of its Series 3 model when the plant comes online. Toyota also has a new plant in the works, scheduled to begin producing in 2020. The company’s facility will be located in Guanajuato and will focus on production of pickup models.

Mario Hernández, Leading Partner of the IMMEX Segment at KPMG Mexico, says the country’s economic and political stability have been key selling points. “Our demographic distribution is perfectly centered and the domestic market is equally strong. The country offers a great opportunity to target North America and it has now become the main entry point to the Latin American market. Brazil is undergoing political, economic and social problems, making Mexico a sound alternative for investors as our fiscal environment is far simpler.”

AMBITIOUS GOALS

Despite an expected slower growth pace in 2017, Mexico has ambitious goals regarding production and development of the domestic market. According to Solís and Prieto, the country’s target for 2020 is to achieve production of over 5 million vehicles and domestic sales of 2 million units. Mexico seems to be on track for both targets although there are factors that could potentially present a risk to meeting these goals.

The first consideration is the evolution of the international vehicle market. Due to the plunge in oil prices starting in July 2014, the market began favoring larger vehicles thanks to lower gasoline prices. In July 2014, the prices of a barrel of WTI mix peaked at US$102.4 but then reversed fortunes until reaching its lowest point in February 2016 at US$30.6. Since then, the mix has regained strength but it is still below half of what it cost in 2014, sitting at around US$45 at the end of June 2017. According to Solís, Mexico’s production is highly dependent on the behavior of the US and Canadian markets and in both markets, demand is intricately linked with oil prices. These two countries have seen a decrease in demand but compact models took the hardest blow. Since most Mexican production is oriented to these types of vehicles, the industry’s growth has decelerated.

Solís does not seem concerned, however. “Although there is currently a preference toward larger vehicles and SUVs in the US, I would not expect Mexican plants to shift their production toward these models,” he says. Nevertheless, the country has already tasted its first disappointment due to receding demand for compact vehicles in the US. After canceling its investment in San Luis Potosi, Ford announced that its projected production of the new Focus would be relocated to its existing plant in Hermosillo. However, the company issued a statement in June saying that the company would transfer its production to China in an effort to further reduce costs. According to a statement from Joe Hinrichs, President of Global Operations at Ford Motor Company, the company will save US$1 billion by moving its operations to China, liberating budget to invest in its light-truck plant in Kentucky and new projects related to autonomy and electrification.

TRENDS

Advanced technology trends are another concern for the national industry. Mexico has developed as a global manufacturing hub but its operations are mostly oriented toward low-cost production. Meanwhile, the industry is moving forward in terms of technology integration and without any added value to its operations, Mexico risks losing competitiveness in the near future. “Our whole industry is based on a product that will cease to be relevant in 10 or 15 years, involving enormous investments in manufacturing capabilities and infrastructure,” says Guillermo Rosales, Director General of AMDA. “Rendering our industry obsolete will have a natural and enormous impact on employment generation and revenue. What the world saw in Detroit between 1990 and 2000 is an example of what could happen to Mexico unless we move toward value generation instead of simple manufacturing.”

In terms of sales, the forecast is much more favorable but there are clear areas of opportunity to enhance Mexico’s chances to reach the 2 million-vehicle yearly sales mark. Financing is growing and now represents 68.2 percent of all sales in the country. OEM financing arms remain the leaders in this market, although banks such as Scotiabank and Banorte have shown interest in its development. Growth in financing needs to be maintained, while also boosting the opportunities that leasing presents for the domestic market. “Mexico’s domestic market could easily grow to 4 million vehicles per year thanks to leasing but we still have many legal and fiscal issues to address before this can happen,” says Gerardo San Román, Head of Latin America for JATO Dynamics. Solís also highlights the importance of maintaining a strict regulation in usedvehicle imports coming from the US. “The domestic market is still recovering from a decade of imported used vehicles plaguing our roads,” he says. “These units had a terrible impact on new vehicle sales and we did not see any recovery until 2015. The situation is somewhat under control and each month we see fewer cars enter the country.”

THE TRUMP CARD

Since 1997, Mexico’s inflation rate has dropped steadily, maintaining below 5 percent since 2010 and hitting an alltime low of 2.72 percent in 2015. According to estimates from the International Monetary Fund and the World Bank, Mexico’s GDP grew 2.2 percent in 2016 to US$1.17 trillion. In its report The World in 2050, PwC forecasts that Mexico could grow at an inter-annual rate of 3.8 percent up to 2050, becoming a driving force for the global economy. “We project new emerging economies like Mexico and Indonesia to be larger than the UK and France by 2030 (in purchasing power parity (PPP) terms),” the report says. While the long-term outlook remains relatively unchanged, the economy in the short term has been hit by uncertainty in the wake of Donald Trump’s rise to the US presidency.

Trump started targeting the Mexican manufacturing industry in the second half of 2015, declaring that Mexicans were stealing jobs from the US. The rhetoric intensified in the last quarter of 2016 when prior to the US elections, Trump began to attack automotive companies directly via Twitter.

The real estate billionaire's premise was that given Mexico’s unfair trade balance with the US, the ideal measure would be to slap a 35 percent tariff on vehicle exports coming from Mexico. The result was a wave of uncertainty and hesitation among companies with manufacturing operations in the country. Ford’s case was the most well-known in the automotive industry after the company canceled its US$1.6 billion investment plan for San Luis Potosi. However, as a renegotiation of NAFTA moves forward, the Mexican government has stood its ground against Trump.

According to a survey conducted by Mexico Automotive Review 2017 with 184 executives of the national industry, uncertainty remains the main factor hindering companies’ competitiveness. Still, growth projections for Mexico are positive. According to Fitch Ratings’ latest review on Mexico’s perspective, the ratings firm has awarded the country a BBB+ mark, with an upgrade to “stable” from “negative.” According to a statement from the firm, “the risk of a negative scenario that could affect the competitiveness of Mexico’s exports is reduced now that the US seems to be taking a moderate position regarding the renegotiation of NAFTA.”

The economic and political landscape has been less than ideal for Mexico but it has forced companies and the government to re-evaluate potential diversification opportunities outside the US. Although the Transpacific Partnership Agreement negotiations fell through once Trump took office, companies see Asia and Latin America as regions that could boost their business in Mexico. Approximately 86 percent of light-vehicle exports destined for Canada and the US show that NAFTA is the main FTA for most players but there are many other agreements to choose from.