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MEXICO’s AUTOMOTIVE INDUSTRY by Pat Shaw TABLE OF CONTENTS Subject Page PROLOGUE 4 - Mexico : a country of contrasts - Mexico’s automotive significance - About this report ECONOMIC INDICATORS 8 - General economic indicators - Automotive industry trends - Reasons to be cautious - Local business sentiment VEHICLE MANUFACTURING IN MEXICO 14 - Cars and Light Trucks – the key players - Commercial Vehicles – the key players - The vehicle parc in Mexico - Newcomers - Recent investments THE COMPONENT SECTOR IN MEXICO 26 - Overview - Key global players - Key domestic players - Business opportunities - Employment and wage levels in the component sector - A note on the Mexican aftermarket - Diversification into aerospace - Recent investments INTERNATIONAL RELATIONS 41 - USA - NAFTA - Latin America - European Union - Asia 2 INVESTMENT IN MEXICO 45 - The importance of FDI to Mexico - Current patterns of investment - Automotive investment clusters - The Maquiladora programme LOGISTCS & INFRASTRUCTURE 49 - Overview - Typical transit times - Typical transportation costs - Customs clearance procedures - Special Economic Zones - Infrastructure Plans CONCLUSIONS & BUSINESS OPPORTUNITIES 51 - Key conclusions and recommendations - Generic business opportunities - Specific business opportunities ACKNOWLEDGMENTS 58 USEFUL CONTACTS 60 3 PROLOGUE MEXICO : A COUNTRY OF CONTRASTS Mexico presents a series of contrasting, and sometimes confusing, images to the outside world. Geographically, at 1.92 million square kilometres, Mexico is the 14th largest country in the world, equivalent in size to Western Europe and stretching from the dry deserts in the North to the tropical rain-forests in the South. It has the bulk and power to be a dominant force amongst the countries of Central and South America. But Mexico itself remains dominated – economically, politically and increasingly culturally – by its giant northern neighbour, the United States of America. Financially, it is home to the world’s second richest man – telecommunications tycoon Carlos Slim Helu – whilst 40% of the population live on or below the poverty line. Whilst the economic statistics show an overall increase in personal wealth, there is a persistent feeling amongst middle-class Mexicans that their disposable income is declining. In global commerce, Mexico boasts more free trade agreements than any other country. But more than 80% of its trade – both export and import – is still conducted with the USA. Economically, some projections anticipate that Mexico could be the world’s fifth largest economy (in terms of GDP) by 2040. But the current reality is that Mexico is both failing to achieve the standards of a “developed” nation and is being overtaken by the rising giants of Asia. Culturally and linguistically, Mexico is closely tied to its southern neighbours in Central and South America. But these historical links are not matched by current trade volumes, and once again the dominating influence in modern Mexico is from the north. It is a relationship with which many Mexicans feel uncomfortable. 4 MEXICO’S AUTOMOTIVE SIGNIFICANCE There can, however, be no doubt that Mexico has attained a significant position in the global automotive industry, and that the automotive sector will continue to be a major engine of growth for the Mexican economy in the foreseeable future. In 2007, Mexico produced just over 2.1 million cars and light commercial vehicles, plus over 86,000 heavy trucks and buses, to confirm its place amongst the top ten global producers. Over 75% of the production total was exported – the vast majority to the USA and Canada. All production comes from plants owned and operated by international vehicle makers – Ford, GM, Chrysler, VW, BMW, Toyota, Nissan and Honda for cars and LCV’s, with Mercedes Benz, Navistar, Volvo, Freightliner, Kenworth, Scania, MAN all represented in the commercial vehicle sector. Vehicle production continues to expand in Mexico, whilst it is declining elsewhere in North America. Between 2000 – 2007, Mexico’s output grew by 18%, whilst the USA and Canada recorded falls of 16% and 14% respectively. The figures for the component sector are also impressive. Automotive components produced in 2007 were worth around $30 billion, with a substantial proportion again exported to the USA. Unlike the vehicle manufacturing sector, the component industry in Mexico is not wholly controlled by international players. Alongside the American, European and Japanese tier 1’s, there are a number of indigenous Mexican companies who have established themselves as first-rank suppliers to the automakers. Overall, automotive production’s current contribution to the Mexican economy is calculated to be approximately 18% of total manufacturing GDP and 22% of total exports. The opportunity presented by NAFTA has, in twelve years, boosted production levels by almost 250%, and given Mexico an internationally significant auto industry. It has not, however, been an ever-upward curve. Between 2001 and 2005, there was a period of relative stagnation, with fewer investments, unfavourable exchange rates and costs outstripping inflation. Thereafter, the industry has enjoyed a resurgence, with new investments and models, and rising production figures. A key challenge now facing the Mexican industry is to maintain the current levels of growth in the face of a downturn in sales in their most important market, sluggish local demand, and new competitors emerging from Asia. 5 ABOUT THIS REPORT Recognising the fact that Mexico is simultaneously a significant player in the global motor industry and at the same time a country of contradictions, SMMT has undertaken this study to offer UK-based companies a clearer view of the automotive sector in Mexico, the conditions under which it operates, the opportunities which it may offer, and the sources of help/information that may be available. The report is based upon a series of interviews conducted in Mexico in March/April 2008, and supported by supplementary desk research. The figures quoted are accurate at that time. By its very nature, the report can present only general advice and information. However, during its compilation, SMMT developed contacts with a range of key players in Mexico, both inside and outside the automotive industry, who may be able to assist with specific questions and enquiries. Whilst every care has been taken to ensure the accuracy of the report, SMMT cannot accept any responsibility or legal liability for the accuracy, completeness or value of the information that it contains. 6 7 ECONOMIC INDICATORS GENERAL ECONOMIC INDICATORS Mexico currently presents a number of positive economic indicators : Inflation Inflation is now running at just below 4%, and has been relatively stable for some time. This is a substantial improvement since the mid- 1990’s, when it peaked at 52%, and considerably better than the average figure for Latin America (predicted at 7.1% for 2008) GDP In 2007, GDP grew at 3.2%, down from 4.7% the previous year. It is expected to fall further – to around 2.8% - in 2008. This is a positive figure when compared with the 1.5% - 1.6% forecast for the USA and Europe. However, it is eclipsed by China’s continuing growth at between 8 – 9%. Mexico has the highest per capita GDP in Central and South America. Exchange Rates The Mexican Peso generally fluctuates in line with the US Dollar. In the last four years, it has remained stable within a band of 10.8 to 11.2 Pesos equals $1. As a result of the Dollar’s current weakness, Mexico has gained a significant cost advantage over manufacturing bases in Canada (whose currency has appreciated by 40% against its US equivalent), or, further afield, Brazil and China. Furthermore, the current strength of the Euro against the Dollar makes Mexico-produced components potentially attractive for European buyers. Comparative Exchange Rates against US Dollar Jan 2005 Jan 2006 Jan 2007 Jan 2008 Chinese Yuan 8.27 8.07 7.77 7.24 Indian Rupee 44.29 44.29 44.15 39.20 Mexican Peso 11.25 10.57 10.83 10.94 8 Debt Levels Levels of external debt have been declining steadily, and national reserves are reportedly at an all time high. The country has achieved investment grade status with Moody’s and other international credit agencies. Foreign Trade Mexico’s combined import and export figures totalled $610 billion in 2007, representing a ten-fold increase over the levels in 1990. These economic indicators are backed up by a new sense of political stability. After decades of “dictatorial democracy”, Mexico has now demonstrated an ability to hold elections and change governments without unduly disrupting either commercial business or public order. Annual Inflation Rates 30 27.5 25 20 18.6 15 15 12.32 10 8.96 5.7 5 5.1 5.19 3.98 4.05 3.33 3.71 0 1996 1997 1998 1999 2000 2001 2002 2003 20042005 2006 2007 GDP Growth (Annual Rate %) 2008 (est) 2.8 2007 3.2 2006 4.8 2005 3 2004 4.4 2003 1.7 2002 1.9 2001 -0.3 2000 7.1 1999 3.7 -1012345678 9 AUTOMOTIVE INDUSTRY TRENDS The automotive industry is a key cog in Mexico’s manufacturing-based economy. It accounts for around 18% of manufacturing GDP and 22% of manufacturing exports, as well as providing employment for 18% of sector’s workforce. The sector is Mexico’s No 1 foreign exchange earner, ahead of the oil and petroleum industry. In contrast with the downturn currently being experienced in Canada and the USA, trends in the Mexican industry remain largely positive : • Vehicle production continues to rise. Having passed the 2 million mark last year, it is expected to continue growing to around 2.7 million by 2014. (These projections, from leading industry analysts, contrast markedly with the 4 million units predicted by the Mexican government, and may suggest that local economic estimates tends to be on the optimistic side !) • Investment in increased production capacity is buoyant, with at least 20 projects, worth $4.4 billion, in the pipeline.