Mexico - down but certainly not out

President Trump’s attacks on the North American Free Trade Agreement, the prospect of a US-Mexico border wall and protectionist policies have caused ripples in the Mexico auto industry over the last year but its low production costs and improving logistics links means it remains an attractive location says Simon Duval Smith.


While domestic sales may have dropped in the country, and there is considerable uncertainty over how far the Trump administration will carry out its various threats, damage to the region as a centre of low cost and efficient carmaking is far less than some economic analysts on both sides of the border have feared. At present, Mexican trade negotiators are in a better position than even they expected as talks to renegotiate NAFTA headed into their eighth round in the Spring of 2018. It seems that the economic uncertainty engendered by the US government has affected domestic Mexican sales much more than it has dented the confidence of the many transplants in the region. This uncertainty is founded in moves such as Trump proposing the raising of NAFTA content in autos to 85% and securing 50% of the total for the United States. Under the present NAFTA policy, at least 62.5% of the material in a car or light truck made in the region must be from North America to be able to enter the marketplace tariff-free.

It is often the way that consumers pick up on ripples or even storms in a market more than experienced business people. The combination of Trump's threat to exit NAFTA and the prospect of a leftist Mexican president taking power in December after elections in July seems to have left Mexican car buyers on edge.

Healthy export figures

The latest figures from the Mexican Automotive Industry Association (AMIA) show that Mexican auto exports recorded a surplus of $18.8 billion in the first quarter of 2018, representing a 17.7% increase of trade surplus compared to the same time last year. As per the figures released by the AMIA, total exports of finished automobiles as well as parts amounted to approximately $33.3 billion as opposed to imports of $14.5 billion. The exports increased 15.1% year-on-year as compared to 2017.

Exports to the US contributed 85% of the trade surplus and those to Europe and Latin America also increased. Specifically, Mexico’s automotive trade surplus with the US in the first quarter of 2018 rose by 14.4%, to $16 billion compared to 2017.

Where did these encouraging figures come from? The rise in exports can be attributed to the continued march of US, European, Japanese and Korean carmakers to set up new plants and divert production away from high cost countries, in spite of Trump’s warnings of sanctions against automakers and suppliers who ‘stole jobs from the US’. New plants set up by Audi in San José Chiapa in September 2016 are now really coming onstream. Daimler-Nissan in Aguascalientes as well as a production increase at the Toluca plant of Fiat Chrysler Automobiles (FCA) have all contributed to the strong trade surplus.Toyota also grew its operations, expanding its truck plant in Baja California, Mexico. The country's output rose 6.2% in February 2018 (the latest accurate figures) to 328,352 light cars and trucks.

A troubled home market 

Conversely, imports to the region of US-made vehicles decreased by 0.9% to $5 billion compared to 2017 and sales in Mexico fell 7.2% in February to 109,484 units, bringing the accumulated retreat for the first two months of the year to 9.4%. 

2016 was a very healthy year for domestic sales in the region, with a record figure of 1.6 million units; this fell to just over 1.5 million last year. In global terms these figures appear small but it must be remembered that Mexico is a young but growing market with more than 120 million people and, as we have seen with China and India, a rapidly advancing middle class with growing disposable income, which promises large gains over the next decade - if employment continues to grow, something that will continue to be fuelled by the automotive industry. 

As Mexico moves towards a western-style economy so the country is experiencing the vagaries of a modern capitalist market, complete with rising interest rates and rising vehicle and petrol prices. Part of this inflation has been caused by the suspension of various government subsidies on finance, housing and fuel. 

Guillermo Rosales

Guillermo Rosales

Revision of NAFTA rules required

Speaking at an event earlier this year, Guillermo Rosales, head of the automotive distributors association, sought to reassure reporters. “The strong economic crisis that some analysts anticipated from anti-Mexico policies and the protectionism exacerbated by Trump has not come to pass,” he said. 

Eduardo Solis, CEO of AMIA told delegates at another recent event that, “Mexico had a nearly $71 billion trade surplus in autos and auto parts last year, including light and heavy vehicles and motorcycles, this is a healthy economy that is growing exponentially.” 

Speaking at a press conference in the region recently, Mexico's economy minister and chief NAFTA negotiator, Ildefonso Guajardo, said that the auto portion of the NAFTA accord needs to be modernised to reflect the vast changes made in the automobile itself over the last 26 years.

“The NAFTA accord was negotiated using a 1992 model of the typical auto when determining which parts would qualify as tariff-free North American content, he said, adding; “That vehicle no longer exists with all the changes in technology and advances in materials such as plastics, steel and aluminium.” 

Guajardo talked of increased Mexican flexibility on the rules of origin, suggesting that, “the North America content requirement could remain at 62.5% or rise to 67.5% or 68” or whatever it ends up being, and I feel that this should include a phase-in period.” Guajardo was quite firm in his analysis of the future. "We are going to work on new rules for regional content - period." 

Flexibility - the region’s unseen advantage 

While the region offers obvious benefits for incoming carmakers and suppliers, such as low labour cost, a growing local supply base, some favourable raw material prices and a rapidly developing logistics network, the flexibility of the workforce and thus the plants’ production lines means that global carmakers can ramp-up, suspend or even close manufacture of various models and even marques with far greater ease than in the more heavily regulated (and unionised) other areas of North America, Europe and the rest of the more-developed world. An example of this is the Audi plant in San José Chiapa, as Peter Koltai, Director of Production Control and Logistics at Audi Mexico told me earlier this year. “Of course it is a special challenge to set up a plant in a country new to us, where we do not know the language and where we have to recruit staff from the ground up and qualify them. We have found many diligent and well-educated people for the positions we needed to fill but to get them to the right level of knowledge and understanding of what we want to achieve has been a lot of work. At the beginning, we started a qualification plan; we sent more than 700 people to Europe for training. Some of these people spent a few months in Europe, some over a year in Ingolstadt and in Neckarsulm where they worked in the plants to train on the job. We wanted to give them the Audi ‘DNA’ shall we say.”  

Peter Koltai

Peter Koltai

Flexibility works both ways, when a model does not reach sales expectations and production must be cut or even permanently halted, as in the case of the Chevrolet City Express, a small work van which the automaker has marketed under a partnership with Nissan Motor Co. since 2014. General Motors has stopped production of the van, which is a derivative of the Nissan NV200, at Nissan's assembly plant in Cuernavaca, Mexico in February. 

This could be seen as a blow for GM, as it strived bravely to break the stranglehold that Ford has had on this segment since 2009, with its Transit Connect. 

While an emerging segment like this should have seen healthy growth for all players, Chevrolet sold less than 30,000 City Express units in the US since it went on sale in November 2014. Ford has averaged more than more than 42,500 Transit Connects annually since 2013. 

In one of its best years, 2015, Ford sold more than 52,200 Transit Connects, Nissan sold more than 17,300 NV200s and FCA found homes for more than 11,000 Ram ProMaster City vans, a vehicle which had launched in the same year. 

It is testament to the fluidity and flexibility of Mexico manufacturing that the supply agreement between GM and Nissan was renewed on an annual basis; a contract this short-term would not be seen in almost any other manufacturing region. 

Outbound challenges in Mexico

Re-visiting my conversation with Peter Koltai, I observed that as Audi is a very successful brand in North America a large proportion of the Mexico production will no doubt be exported to the US and Canada. While San José Chiapa is closer to the port of Veracruz, the heavy export quota does bring to mind the possible capacity restrictions in outbound transportation in the region. Koltai was sanguine about the regional challenges. “At present, Veracruz is the centre of attention in the whole infrastructure of Mexico logistics, not just for us but for several other OEMs,” he said, adding: “I think Veracruz will manage about 20 or 30% higher volume than its rated maximum capacity but it is a difficult situation. It is not a smooth-running process there and we have to do a lot of capacity management but I think all the OEMs in Mexico face this challenge. This is why we are looking for other east coast ports, both existing and new. In the long term the Veracruz situation is not satisfactory for any of the OEMs. The Mexican government is trying to find other ports to take the traffic.” 

Localisation and logistics
Horacio Saldivar

Horacio Saldivar

To get another perspective, I talked to Horacio Saldivar, Purchasing Director at Nissan Mexicana and asked him about the localisation factors in logistics; is there a healthy emerging Mexican-owned network of providers? He explained that: “We are mainly using global logistics companies but, increasingly, we are working with local logistics providers. Some of them are sometimes lacking certain technologies such as IT infrastructure but this is fairly typical of operations in all rapidly-expanding automotive regions. Local logistics networks now have a great opportunity to grow their business within the auto industry. Their focus must be, and usually is, on keeping up with the IT and other communication technologies. These smaller companies are starting to invest in this area and this is making them more attractive to OEMs here in Mexico.” 

On the theme of localisation, I asked Saldivar about the proximity of suppliers and how that affected Nissan’s supply chain. “In considering both our inbound and outbound supply chains, the proximity of all suppliers, be they component makers or logistics providers, is something we always consider carefully. Over the the last five years we have seen closer and closer proximity with our supply chain here in Mexico.” 

Train and truck security challenges

Moving away from ports I asked Koltai about train and truck routes in Mexico and what challenges they present. He singled out train services as being quite challenging. “In the last five years we have faced several difficulties with rail connections to Veracruz. We are pushing hard to raise the security level on the rails. We are not alone in this situation, other OEMs are facing security issues as well, so we have decided to put more car transporters on the road. We are working together with the Mexican government to make the train route safer. 

In most of the world, car-carrying railcars developed into covered ‘autoracks’ to protect vehicles from the elements but in Mexico the security issues may surpass even these autoracks as Koltai explained: “All our trains are closed and our train provider is trying to secure the autoracks better; the major point is that security for these routes must be improved and this mainly in the hands of the government.” 

Moving on to truck transportation, I asked Koltai for his view of the trucking situation in Mexico; he says that: “Trucks are at present the more secure method of transport but of course it is much better to have one dedicated train than 40 or 50 trucks on the road and unloading one train in Veracruz is easier than unloading 50 trucks.” 

Opportunities for suppliers and LSPs

The region is still growing rapidly and has the advantage, for vendors and logistics providers, of being a more open business territory than more-developed manufacturing countries. As Peter Koltai told me: “There is such a rapidly-growing auto manufacturing base in Mexico that there are just not enough suppliers of every kind to go round. Everybody is looking for packaging and other logistics services. 

“At Audi, we are always looking for new partnerships, particularly in the region. We welcome their approaches; all local suppliers and logistics providers have a good chance to get into business with us.” 

Future challenges and solutions

The Automotive Leaders Summit Mexico 2018 will be held in Mexico City on November 13 & 14 this year. Thought leaders from OEMs, suppliers and logistics providers will gather to discuss materials planning and logistics challenges and to share exciting new strategies facing both Mexico and the US automotive supply chain as a whole. We look forward to seeing you there to discuss and network with our OEM, tier supplier and logistic provider speakers, panel discussion members and delegates. 

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