USMCA: Springboard to Tech Development

Q: What are the business community’s main sources of uncertainty in terms of investment and how can they be addressed?

A: Issues such as the cancellation of NAIM are impacting investment certainty, so we expect 2019 to be a complicated year for the country. At the same time, there are obstacles that must be tackled for the industry to grow effectively. Infrastructure in areas such as telecommunications, ports, railroads and roads must be improved to ensure medium and long-term growth. Security concerns are also impacting the automotive industry, since companies can see their assets threatened by possible criminal activity. 
The automotive industry is the sector with the most employers nationally, so it is important to preserve it. Hogan Lovells has been in talks with the Ministry of Economy and the federal administration and we have been assured that the development of Mexico’s automotive industry will be safeguarded and even boosted. This is a strategic area and will be treated and sponsored as such.

Q: What opportunities will USMCA’s rules of origin bring to Mexican automotive suppliers?

A: The new rules of origin may not be ideal for some but they ensure continuous development of the automotive industry in the face of political uncertainty. Moreover, new wage requirements will create opportunities for Mexico to participate in added-value manufacturing and design activities. Overall, USMCA will help the country transform from a manufacturing country to a technology investment destination, which is crucial for Mexico to remain a leader in the industry. While companies like Rassini or Nemak are great examples of Mexico’s automotive capabilities, the country still needs to improve its local supplier base by promoting investment in R&D operations and persevere to really collaborate with big players in the industry. 

Q: What advantages can carmakers find in collaborative development of components and systems for EVs?

A: Gaining the ability to supply such components is both a race against time and a matter of survival for automotive companies. Vehicle electrification will shake the automotive industry to its very core. In the 20th century, engine size and power output were the main differentiators for vehicles. In the 21st century, the number and quality of added-value services that vehicles can offer, including connectivity, autonomy and efficiency, will be the most important factors in the customer’s decision-making process. The market has understood the importance of collaboration to shorten times and enhance technological developments.
Several world-class OEM groups, including Daimler and BMW, have announced their willingness to collaborate to develop technology for EVs, while others, such as Ford and Volkswagen, are on it already. This is a matter of efficiency. The more companies, resources and people are involved in the development of electrification technologies, the less time it will take to come up with innovative solutions to not only survive but grow in a fiercely competitive market. Technology companies are also key elements in these partnerships. Some are helping to develop smaller battery packs that have greater storage capacity to improve autonomy. 

Q: If demand for internal-combustion vehicles plummeted, where would that leave Mexico?

A: Certain regions in Europe and the US are projected to ban these vehicles in the next 10 to 20 years. This will be a turning point for the industry and manufacturing companies will need to migrate toward EV components rapidly. For many companies, this would mean an imminent end to their business, which is why some are investing aggressively in the development of new components for the EV market. Having said that, internal-combustion vehicles will remain part of the mainstream, especially in developing countries where it is difficult to develop electrification infrastructure. Most exports from Mexico target the US and there are also shipments to European markets to a lower extent, so demand for electrified vehicles in those markets will set the pace for Mexico's migration toward electrification.