Mexico’s Accelerating Auto Industry

By: Robert Wagstaff

Mexico’s automotive industry continued a pattern of steady growth into 2014, surpassing Brazil as Latin America’s top automobile producer for the first time in over a decade. During the first nine months of the year, Mexico produced 2.4 million vehicles, a 7.5% increase when compared to the same period in 2013. Meanwhile, vehicle exports grew 8.7% during the January to September period to nearly 2 million units, up from the 1.8 million exported in 2013. Mexico currently ranks as the world’s seventh-largest automaker and the fourth-largest automobile exporter.

Mexico’s low-cost, yet highly skilled workforce, ample free trade agreements, prime geographic location, and solid infrastructure network have positioned the country to carry its auto industry boom into 2015 and beyond. Struggling auto markets in Brazil and Argentina, as well as increased demand in the United States (the world’s second-largest auto market), have also contributed to Mexico’s automotive rise.

Auto production in Mexico is expected to reach 3.2 million units by year-end 2014, doubling from a low of 1.6 million units in 2009. In September alone, Mexico produced and exported a record number of vehicles: 267,674 and 220,239 units, respectively. This success has made Mexico a prime assembly and production base and has led to roughly US $19 billion in announced new investment from major global automakers, such as: Kia, Nissan, Honda, Volkswagen, Mazda, Audi, BMW, Daimler AG, Ford, GM, and Fiat-Chrysler. In the next five years, Mexico is projected to boost current vehicle output levels by 60% to 4.5 million units per year.

Main Growth Drivers

For years, global automakers benefited from Mexico’s lower labor costs in comparison to those of other major markets around the world, such as the U.S., Canada, Germany, Japan, and even Brazil. Currently, there are over half a million people working in Mexico’s auto industry. The average Mexican automotive worker earns approximately US $7.79 per hour (including benefits), significantly less than the US $37.38 and US $39.04 hourly rate made by workers in the U.S. and Canada, respectively. In Germany and Japan, labor costs have risen to US $40 per hour. Even Chinese wages, traditionally some of the lowest and most advantageous in the industry, are now 20% higher than those of Mexico.

Aside from cost, the country’s quality labor force is attracting the attention of high-end manufacturers. Although Mexico traditionally focused on the production of low-cost compact sedans, foreign companies are opening the nation’s first luxury-car plants, partly due to increased confidence in Mexico’s skilled labor force (which produces more engineers than Germany, Spain or Brazil). In June, Germany’s Daimler AG, the automaker of Mercedes-Benz, and Japan’s Nissan Motor Corporation revealed they would jointly invest US $1.6 billion in a new plant in Aguascalientes to produce Nissan Infiniti luxury cars and Mercedes models. Soon after, German automaker BMW announced plans to invest US $1.0 billion to construct a new luxury-car assembly plant in San Luis Potosí.

Mexico’s free trade agreements (FTAs) also led to greater output in its auto industry. The country has 12 free trade accords involving more than 40 nations, making it the perfect production base from which European, Japanese, Chinese and American automakers can export duty free to various countries. The U.S., on the other hand, has FTAs with just 20 countries; Brazil has even less, with 8 free trade accords. Of Mexico’s bilateral and regional FTAs, the North American Free Trade Agreement (NAFTA) has been especially instrumental to Mexico’s auto market. Since the introduction of NAFTA in 1994, motor vehicle and parts exports in Mexico have risen an average of 12% per annum, and auto production has increased 6% annually.

Additional factors driving auto companies to invest in Mexico are the nation’s geographic location and its well-developed transportation infrastructure. Mexico’s proximity to the U.S. and Canada, the world’s first- and sixth-largest auto importers, respectively, allows for lower transportation costs to those two countries. Having South America nearby is another plus for foreign carmakers considering capacity expansion. With over 65 international ports located on the country’s Pacific and Gulf coasts, Europe and Asia are also easily accessible. Given that 80% of the vehicles built in Mexico are exported out of the country, a solid infrastructure network is crucial. Transporting vehicles for export has proven successful because Mexico’s highways and railways are in good condition. Currently, the nation has over 230,000 miles of roads and more than 16,700 miles of railroads. Mexico also boasts over 60 border crossings.

Mexico’s evolving consumer market holds promise for the industry. In 2013, Mexican consumers purchased approximately 1.06 million new cars, the first time since 2008 that the country’s car sales surpassed one million. By contrast, consumers in Brazil and the U.S. purchased roughly 3.8 million and 15.6 million vehicles, respectively, in 2013. September marked the second consecutive month of solid growth, whereby domestic new-car sales in Mexico rose to 80,116 units, up 14% from 2013. The recent growth in Mexico’s domestic market has been aided by increased access to consumer credit.

Auto Market in Brazil & Argentina

Mexico’s soaring automotive industry coincides with production declines in the Brazilian and Argentinian auto industries. Vehicle production has taken a hit in both South American countries, hampering sales for foreign carmakers and shifting the leadership of Latin America’s auto industry to Mexico.

Traditionally, Brazil has been Latin America’s largest automobile producer and a top market for foreign-based automakers, with local operations including Germany’s Volkswagen, Italy’s Fiat, and U.S.-based Ford Motor Co and General Motors Co. However, reduced consumer demand, a weakened economy, high shipping costs, poor transportation infrastructure, automobile tariffs, and economic woes in neighboring Argentina (its main export market) have led to Brazil’s decline in output over the past 12 months.

During the first nine months of 2014, vehicle production in Brazil reached 2.38 million units, falling 16.8% from the same period last year. Brazil’s exports have also taken a hit due to tariffs and the high cost of transporting cars, which is nearly double the average cost of other LatAm countries. As of early October 2014, 262,000 vehicles were exported, down 38.5% from the 425,900 units shipped in 2013. Only 15% of all vehicles produced in Brazil are exported, with the majority share going to Argentina — its Mercosur trading partner. However, Brazilian auto exports to Argentina have suffered, as it faces declining production and weak car sales of its own.

Dollar shortages, double-digit inflation, and crumbling consumer confidence within Argentina, have diminished output levels and driven away investment. Argentina’s auto industry is the third-largest in Latin America; however, vehicle production and car sales plunged during the first nine months of 2014. Production in the January to September period dropped 24% to 461,291 units, while car sales fell 26% to 561,000 units. Government spending has inflation levels reaching nearly 40%, reducing consumer demand and scaring off global carmakers. In September, General Motors stopped vehicle exports to Argentina from its Brazilian factories until President Cristina Kirchner’s government provides more dollars to pay for the imports. Even if cars were available, increased taxes on imported components are driving up the prices for foreign and Argentinian-made vehicles.

Impact on U.S. Market

The U.S. market captures roughly 66% of Mexico’s vehicle exports, making it the nation’s main automotive production driver. With the U.S. auto market regaining momentum thanks to recovering consumer demand, Mexico’s production levels have benefited. Currently, Mexico produces one in five cars sold in North America. As global carmakers capitalize on Mexico’s open access to U.S. and Canadian markets through NAFTA, an interesting shift in the U.S. auto-manufacturing landscape has taken shape.

Historically, most of America’s auto output has been concentrated in the “Auto Valley,” which extends from the Great Lakes to the Gulf Coast. However, auto production is expanding further southwest into what is being called the “Auto West Corridor,” which runs from Illinois to Texas and includes 10 auto assembly plants. NAFTA and cross-border regional economic development proponents believe Mexico’s proximity to the Auto West Corridor will spur production growth for both Mexico and the U.S. Since 1998, Mexico has been the largest auto parts exporter to the U.S., and currently makes up 34% of total U.S. auto parts imports. On average, a car made in the United States has over US $4,000 worth of Mexican-made parts.

That being said, some see Mexico’s proximity and rapidly growing auto industry as a threat. As vehicle production expands further to Mexico, some states fear this shift will translate into fewer jobs and production plants in the U.S. Looking ahead to 2018, 50% or more of NAFTA’s vehicle capacity is slated to be located in plants in Mexico and U.S. southern states.

Despite these fears, a successful auto market in Mexico is beneficial for the U.S. Ford, GM, and Chrysler have trusted in Mexico to build growing partnerships, investing billions of dollars to construct assembly plants. U.S. companies working together with partners in Mexico will be better positioned to compete with low-cost manufacturers in Asia.

Conclusion

As an ideal point of distribution with access to multiple global markets, automakers are fixed on Mexico for capacity expansion. By 2020, no less than eight vehicle assembly plants are expected to come online in Mexico from German, Korean and Japanese manufacturers, adding over 2 million units of capacity. Moreover, with the U.S. just north of its border and consumer demand accelerating, Mexico’s auto market success should extend into next year and beyond.

 

Sources: Area Development, Bloomberg, CCTV, Coatings World, Detroit Free Press, Forbes, Fox News Latino, International Business Times, Just-Auto, MarketWatch, McKinsey Global Institute, Mexico Auto Conference, Money Beat, Plastics Today, Reuters, Scotiabank, SCT, The New Yorker, The State, WSJ