Tax & Accounting Blog

Global Trade Trends with Taneli Ruda: Mexico’s Auto Plan

Blog, Global Trade, ONESOURCE June 14, 2016

The automotive industry is the engine—the V8, 440-horsepower manual transmission engine with overdrive—of Mexico’s industrial growth, and this looks to be the new state of play for the famously export-dependent country.

The relationship that the auto industry has with Mexico’s economy is strikingly balanced: There is a mutual dependence that exemplifies what free trade and global markets are meant to accomplish. The automotive sector represents 25 percent of Mexico’s manufacturing exports and more than 3 percent of its GDP. The country ended 2014 with an auto trade surplus of nearly $50 billion.

The numbers point to Mexico soon becoming the automotive capital of the world. Its share of NAFTA’s auto production grew from 7 percent in 1994 to 19 percent in 2014. Ford, Chrysler, General Motors, Volkswagen, Toyota, Nissan, Mazda, and Honda are already in Mexico, and significant growth is on the horizon. Kia and Audi, along with Ford and Toyota, announced plans to soon construct new plants in Mexico, with a total commitment of $4 billion. Infiniti (a Nissan brand), Mercedes Benz, and BMW plan to follow with new plants in 2017, 2018, and 2019, respectively.

There are many reasons why automakers are moving more resources and production into Mexico, but four stand out: a stable economy, an advantageous location, a capable workforce, and a network of trade agreements.

Economically, Mexico has been a bright spot compared to other countries in Central and South America. It is competitive globally and increasingly accommodating to democracy. NAFTA has acted as somewhat of an insurance policy, keeping its economy close to that of the United States throughout the Great Recession.

Sharing a border with the world’s most voracious consumer of goods has long been one of Mexico’s greatest assets. It offers many maritime ports and railway infrastructure potentially capable of moving auto parts and finished products quickly and efficiently. While friction at the borders still creates logistical difficulties in moving goods across the U.S.-Mexico border, this is beginning to change.

Mexico has more engineering, manufacturing, and construction graduates than Germany, Brazil, Spain, France, Italy, or the United Kingdom, according to data from the United Nations Educational, Scientific and Cultural Organization. Mexico’s population is one reason why its manufacturing capabilities are successfully progressing to higher-value components and finished goods.

With the passage of the Trans-Pacific Partnership (TPP), Mexico is a party in 13 trade agreements that extend outside Latin America and into Europe and Asia, making it one of the most globalized countries in the world. These agreements include 45 countries collectively, representing 60 percent of global GDP. Trade with 32 of these countries falls under Reciprocal Investment Promotion and Protection Agreements.

If there is one soft spot in Mexico’s appeal to auto companies, it is the country’s poor infrastructure. It ranks near the middle in the World Bank’s Logistics Performance Index for infrastructure. Mexico does have existing railways and an abundance of ports, but the infrastructure itself tends to be old and unreliable. Moving parts up, down, and across the vast country, and moving finished goods out of it, is still a logistical headache.

The auto industry’s growth in Mexico is driving a renewed focus on logistics. Declining oil prices have drained revenue from the government’s coffers, which has made infrastructure investments more challenging. Case in point: A crucial rail project in Celaya, located in central Mexico, that is of importance to the automotive industry is now years overdue and effectively out of funding. The hope is that public-private partnerships will fill this gap.

Aside from its geography, all of these advantages are variables that Mexico’s political establishment can control. The automotive sector seems to portend Mexico’s economy becoming stronger, its schools continuing to churn out capable workers, its infrastructure becoming better, and its trade policies becoming yet more liberal.

There are just as many reasons why Mexico is welcoming the automotive industry with open arms.

While it is true that global auto sales have been sluggish in recent years, the mature markets continue to outperform. Analysis from IHS revealed that global auto sales grew 1.5 percent from the previous year, but this lackluster rate was primarily attributable to very poor sales in the world’s emerging auto markets.

“The U.S. auto market has been powered by a combination of low interest rates and low gas prices, allowing for market momentum to remain strong. IHS estimates there is still strong upside potential as a strengthening U.S. economy and stronger employment takes the U.S. market to 18 million units over the next two years or so,” the firm said.

According to the Mexican Auto Industry Association, Mexico’s light vehicle production was 3.2 million units in 2014, and it expects that output to increase to 5.3 million units in 2020 to meet this demand. That would be 27 percent of total auto production in the NAFTA region if production in the U.S. and Canada remain consistent.

Moreover, Mexico’s manufacturing hubs have matured into more complex types of production and become more integrated with global supply chains, as we observed in American Shipper’s June 2015 issue.

As more capital flows into Mexico, its manufacturing zones move up the value chain into services and intellectual property creation. Auto parts manufacturer Delphi, for example, has a technical center in Juarez working on design, development and research projects. The new auto facilities coming online in Mexico aren’t just for assembly.

By using free trade agreements and its Maquila program, there is an opportunity for Mexico to draw in significant investments from automotive companies outside of North America by 2020 if it can solve its infrastructure woes. It seems to be on a path to do this and become the leading manufacturer of the world’s cars and trucks.

This article originally appeared in the June 2016 issue of American Shipper.

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