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Analysis

The Year in Review

Thu, 09/01/2016 - 15:01

The auto industry in Mexico continued its run of favorable news in the first half of 2016, with new OEMs coming in, fresh investments in existing facilities, soaring domestic sales and optimism for the future. Production totals suffered a setback as tastes in the US, Mexico’s key export market, changed in favor of bigger vehicles following a drop in oil prices, but the road appears set for greater growth ahead.

As the year progressed, manufacturers were on the move, agglomerating predominantly in the Bajio region of Mexico, filling the central-western industrial zone with auto parts and assembly plants. The presence of FCA, Honda, KIA, Mazda, Nissan, Toyota and Volkswagen in Mexico pushed vehicle production to almost 1.7 million in the first half of 2016. The industry is projected to close 2016 with 3.4 million assembled units, matching the record set last year. Figures and investments from suppliers are boosting expectations that Mexico could reach AMIA’s target of 5 million units manufactured for 2020.

There will likely be bumps along the way, as the first half of the year illustrates. Mexico relies heavily on the US market and is intrinsically linked to its northern neighbor’s economy and demand for vehicles. Low oil prices have allowed light trucks and SUVs to become more popular for personal transportation in many markets, primarily the US. “(Light vehicle) sales have fallen in the US ... which has been attributed to the drop in oil prices," says Eduardo Solís, Executive President of AMIA. "As gasoline and diesel prices go down, the market fosters a suitable environment for larger vehicles.” Mexico mainly produces compact or mediumsized light vehicles. This dichotomy has led to a drop in exports and consequently production.

Mexico’s automotive industry hinges on the export market, as 80 percent of vehicles produced primarily target the US, followed by Canada, Germany, Colombia and Argentina. The shift in preference of the biggest consumer in the NAFTA region toward vehicles that are assembled less frequently in Mexico explains the country sidling over to Colombia and other Latin-American countries to increase exports and reduce dependence on the US market. That being said, overall vehicle demand in Latin America is also lower, making it harder for the country to counter the negative effects of a shifting North American market.

Adrian de la Garza, Macrofinancing Analysis Manager of Banco de México, points out the newly signed TransPacific Partnership (TPP) deal is a potential light on the horizon. “The TPP gives Mexico a window of opportunity to access the biggest market in the world, including 800 million potential customers in 12 countries that account for close to 40 percent of global trade.”

MANUFACTURERS BROADEN BASE

Global conditions have impacted production but companies are keeping their foot on the accelerator when it comes to expansion. Ford is extending its operations, originally located mostly in the north of Mexico, south to San Luis Potosi, supplementing its Cuautitlan plant also in the center of the country. This investment was announced in 2016 for production to start in 2018. Only months earlier, it announced a new transmission plant in Guanajuato in collaboration with Getrag. Ford will shell out US$1.6 billion on its San Luis Potosi project. Nissan pulled an extra US$150 million out of its pockets in A1 to manufacture the new Kicks crossover and Volkswagen’s original investment of US$1 billion grew by US$100 million in its Puebla plant as preparations for the new Tiguan continue. KIA started production in 2016 of compact vehicles at its plant in Pesqueria, Nuevo Leon and Audi will launch operations in Q4 2016 producing the Q5, bucking the compact car trend along with Nissan and Volkswagen.

LIGHT VEHICLES SALES, PRODUCTION & EXPORTS ( LIGHT VEHICLE SALES IN MEXICO (THOUSANDS) thousand of units)

Audi and Nissan’s crossover’s production reflects a trend in preferences toward SUVs on a car platform. Toyota cites its SUVs as top sellers together with subcompacts but attributes this result to prices. Hyundai incorporated the Creta, its smallest SUV, to its offering in July 2016, reinforcing the trend. The body-on-frame platform that light trucks and the original SUVs used has evolved alongside the population’s changing needs. “We have seen that the segment evolution pattern has departed from its traditional course,” says Miguel Luz, Marketing and PR Director of Hyundai Motor Mexico. “Customers with subcompact vehicles are now upgrading to a mini SUV and compact car owners can now choose among a variety of small SUVs.”

BRP, previously a Bombardier Group affiliate, ventured from Canada to just south of the US border with a second plant in Ciudad Juarez, Chihuahua to complement its previous operations. Meanwhile, Tier 1s such as Bosch, which invested in its Aguascalientes and Queretaro plants, support the local supply chain and provide the foundations for OEMs to build on. Goodyear is on the cusp of opening its new plant in San Luis Potosi and competing tire supplier Michelin also announced a US$510 million investment for a new plant in Guanajuato.

GKN Driveline showed its confidence in Mexican engineering abilities, opening a new plant to cater to allwheel drive vehicles. This compliments its Technology Center and exemplifies the industry’s interest in Mexican R&D, further supported by American Axle’s announcement of a Training, Innovation and Technology Development Center in the same state. Banco de México’s Adrián De la Garza reiterates the confidence in Mexico implied by ongoing investment. “The macroeconomic environment has clearly been attractive to renowned multinationals in the automotive industry, as new and significant investments have taken place in the last few years while others are expected in the near future.”

THE ROAD MOST TAKEN

Challenges in infrastructure are the industry’s Achilles heel. Andrés Lerch, Partner, Advisory Services/Performance Improvement at Ernst & Young Mexico, explains: “It is vital to expand the current logistics network with roads and railroads, ports and dry ports. Existing infrastructure is barely enough and many highways are already showing signs of overcapacity.”

Logistics costs represent 10-40 percent of a product’s total overhead in Mexico but represents less than 10 percent of the overall cost of a product in developed countries. This will be either a curse or a blessing. Expensive goods transportation could hold the manufacturing industry back, or it could refocus attention on design and engineering developments that rely less on logistics and more on talent. Still, logistic advantages remain one of the main attractors for foreign investors, potentiated by Mexico’s free-trade agreements. NAFTA has proven to be one of Mexico’s strongest bets and once the TPP deal is finalized, more companies will take advantage of the country’s connectivity to target the South Pacific. As production ramps up to a goal of 5 million vehicles by 2020, infrastructure will have to be adapted to the industry’s needs.

AUTOMOTIVE INVESTMENT TIMELINE

MORE HANDS ON DECK

The industrial sectors rely on several variables that determine their peaks and troughs, including employment and available talent. As the US reports jobs moving south to Mexico, Ford’s future move having been the most notable in 2016, the local workforce benefits from expanding employment opportunities. Demand for technicians and engineers is projected to exceed supply in the short term. Suppliers and OEMs alike refer to the need to develop human talent to continue consolidating the manufacturing hub. “The market is behaving strangely as there is a lack of human capital to cover the large demand that resulted from five years of booming industry growth,” says Eduardo Melón Lagos, Plant Manager of Inaumex.

Automated companies like Inaumex do not need large volumes of employees but rather staff with specific skillsets. As automation becomes commonplace and Mexico takes on more complex processes, technicians and engineers are in high demand and the governing bodies of the most densely populated automotive clusters are rushing to catch up. Universities, technical institutions and private companies are collaborating to create curriculums in local universities that prepare students for real world applications and to adapt professionals to the specific engineering assignments carried out in Mexico. “The German dual-education system was the key to CONALEP’s triumph in Irapuato and now other Abasolo technical schools are interested in replicating this system in their community,” says Gilberto González, Director General of Grupo Marabis, referring to the success of preparing technicians in Marabis’ industrial park in Abasolo, near Irapuato in the state of Guanajuato. Preparing students for practical careers with a vocational emphasis is becoming a popular trend.

INNOVATION TAKES THE STAGE

Developing a skilled work force goes hand in hand with efforts to branch into R&D. The boom in automotive manufacturing has encouraged companies to install design and engineering centers, and the government to fund initiatives that indulge youth interested in vehicle innovations. “There are many industries that have remained constant throughout the years but companies in the automotive sector require perpetual innovation to continue being competitive,” says José Luis Díaz del Castillo, Director General of DC Gaskets. Chrysler, GM, Nissan and Delphi all run research and engineering centers in Mexico. These are backed up by CONACYT’s efforts and ITESM’s own R&D centers focused on automotive applications.

Companies are beginning to demand engineers that can man R&D centers and to continue attracting investment, agrees sound system manufacturer Harman. “Harman has R&D operations in the center of Queretaro, where 50 engineers are creating software and designing products for the company,” says Alejandro Osiris García Mainou, Vice President North America Operations of Harman. Mexico needs to evolve to a more advanced manufacturing hub with human capital that is much more than cheap labor. As automation alternatives progress, the advantages of relatively low labor costs are diminished and countries that used this as an edge must evolve to compete.

SHIFTING GEARS, CHANGING ATTITUDES

The issue of alternatives to private vehicles is inherent to Mexico, especially in its capital and large cities across the country. Infrastructure has stinted the penetration of natural gas-fueled vehicles for public transport and electric technology is faltering. Volvo’s Electromobility division has presented innovative mass-transport solutions to the federal government and the mindset is shifting, albeit slowly. “The paradigm change we are facing since Mexico City’s Mobility Law was published in 2014 placed the individual as a priority in terms of public policy decisions,” says Laura Ballesteros, Undersecretary of Planning at SEMOVI. BRT Technology is a focus for the town-planning departments of several cities while electric buses and trams have yet to dominate the market. “A Bus Rapid Transit system can replace 250 cars. Integrated transport systems not only reduce pollution but also traffic,” Ballesteros says.

Contingency legislations to stem pollution in Mexico City slightly boosted electric vehicle sales in early 2016. Schneider Electric, BMW and Nissan among others have installed charging stations in various locations. This supports the commercialization of the Nissan Leaf, Chevrolet Volt and Spark EV, Toyota Prius, Renault Twizy, BMW’s i3 and i8 models and Tesla’s Model S in Mexico. Domestic hybrid and EV sales saw no more than 0.11 percent of the 230,463 units sold in the first two months of 2016. From these 255 vehicles, the market sector blossomed in March 2016 to 632 hybrids and electric cars sold in just one month.

A significant market share for these models is a long way off and electric models remain a niche segment. There is also the cultural factor to be considered. “We still prefer gasoline cars for various reasons and without significant incentives that is not likely to change,” says Lerch.

FINANCED VEHICLES (jan-jun thousand of units)

CATALYZING DOMESTIC GROWTH

To further elevate domestic sales, financing has been tagged as key. Car loans facilitated 67 percent of sales in the market, rising 23 percent in the first half of 2016 compared to figures from 2015. Offering the population new alternatives to owning a car outright is taking off but slower than expected. Vehicle ownership remains stitched into the cultural fabric. “In Mexico, car ownership remains a status symbol so leasing struggles to carve out its place in the private market,” says Tjahny Bercx, CEO of LeasePlan. This, coupled with a lack of fiscal benefits for private customers has limited the evolution of alternatives to ownership such as leasing. Nevertheless, the corporate sector has made good progress on this front and companies are transferring their assets to their own operations instead of focusing on vehicle purchases.

Financial institutions are stepping in with extended loan periods and lower monthly payments to encourage financial penetration. Mayra González, President and Director General of Nissan Mexicana, highlights financing's importance to the company’s efforts. “We have ambitious goals for the Mexican market and our financing arm will be a vital factor to make this happen. We see financing as a growth opportunity that will allow us to explore new markets and reach demographics that have not yet been targeted by Nissan.”

Aftersales services have developed toward personalized contact to retain Mexican clients who are no exception to increased technological dependability around the world. Both in retail and wholesale operations, sales and service strategies have evolved around the customer. MercedesBenz Vans, for example, wants to optimize its service efficiency to fleet managers to enhance customer retention with specific tools that inform users in real-time about their vehicles. Companies have to participate in a new paradigm where the digital market is as strong and important as traditional physical operations. New entrants to the market have this distinction clear but longstanding players have had to adapt to keep customers happy and incentivize future repurchase.

DRIVING FORWARD

A healthy domestic economy is intrinsic for the automotive industry to continue flourishing. AMIA estimates the Mexican market will close 2016 with 1.5 million vehicle sales, showing the remaining room for growth. “The domestic new vehicle market is presenting more encouraging figures than previous years,” says Solís. As every month sales to the public have surpassed 2015’s vehicle purchases, domestic demand should reach its true potential of 1.8 million by 2020, according to AMIA.

The automotive industry represents 3.2 percent of Mexico’s GDP and is the fourth most important export industry. “With such impressive growth, the big questions now address the true potential of the domestic market,” says Guillermo Prieto, Executive President of AMDA. One key to encouraging new vehicle sales lies in keeping used car imports down, untangling loopholes being used by importers to elude the legal stipulations for this type of imported product. “We are working with the authorities to counter the increase we saw during the first months of 2016,” says AMIA’s Solís.

Despite the hurdles, high expectations reign as carmakers place their individual bets on different states and with strong domestic sales foreseen for 2016. The industry seems primed to close in on AMIA’s objective of 5 million vehicles manufactured by 2020.

USED-CAR IMPORTS (thousand of units)