According to a recent report on the Wall Street Journal, Mexico’s auto industry manufacturing output rose 7.5% in the first seven months of 2014. These recent gains place Mexico’s auto industrial output ahead of Brazil, its closest rival in the region.
According to the same report, Mexico manufacturing of automobiles reached 1.86 million units produced so far this year. At the same time, Brazilian output decreased 17% during the same comparative time. Indeed, as USA Today recently reported: “Mexico is poised to pass Brazil this year as the world’s seventh-largest automaker, IHS Automotive predicts.”
Fausto Cuevas, general director of Mexico’s Auto manufacturers association (AMIA) told the Wall Street journal that Mexico’s current manufacturing trajectory – output is likely to reach 3.2 million cars produced in 2014. In particular, Cuevas noted, Mexico exports of autos to foreign markets looks particularly favorable.
Why is Mexico’s industry accelerating compared to regional rivals?
As the report outlines, a series of free-trade agreements play a significant role in the growth of Mexico’s auto sector, including the North American Free Trade Agreement (NAFTA). Mexico’s auto industry is accelerating due to Mexico’s access to lucrative foreign markets. Brazil, on the other hand, sell few autos into international markets due to its tightly protected domestic market. Just as antecedent, Brazil closed its border to Mexican auto exports during 2012 until reaching a quota deal.
In recent years, Mexico has exported up to 83% of its auto production. And those exports have been focused primarily on the United States, Canada, Argentina and Brazil. In contrast, Brazil sells 85% of its production domestically. In turn, Mexico is suffering in domestic market with historic lowest sales and not easy solutions on the horizon. However, Mexico has become so sophisticated at the production of autos that luxury production is now in ascendance in the country. And according, both BMW and Mercedes are planning to open manufacturing facilities in the country. Audi, another of Germany’s elite automakers, is already in the country as an independent facility from sister company Volkswagen. The report cites “Harley Shaiken, chairman of the Center of Latin American studies at the University of California, Berkeley, and an expert on auto industry labor issues” — who told USA today that Mexico has supplanted Detroit as a car manufacturing hub. Mexico is now “motor city south”, he said.
As USA today’s report outlined, Audi is deploying operations in Mexico to start in 2016. Then, Daimler/Renault-Nissan, followed by BMW in 2019, according to IHS Automotive. Most mainstream auto manufacturers are already in Mexico, the report outlined, including the major three US automakers. And they are expanding. VW, Honda and Mazda will expand in Mexico this year, and Kia will do so in 2016 in northern state of Nuevo Leon.
As a result of Mexico’s liberalized economy and expanding international markets for its auto exports, auto makers and supplier from around are likely to continue to enter the market rapidly.
As a result of Mexico’s burgeoning auto sector boosted by international markets and international investment, auto-sector production is projected to exceed four million units per year by the decades’ end.
A bright future for Mexico’s auto manufacturing sector
The Wall Street Journal reported on Mexican President Pena Nieto’s recent comments on the prospects for Mexico’s auto sector: “’The [Mexican] automotive industry, including parts makers, now represents 20% of Mexico’s manufacturing production and 26% of its exports.’” And these markedly positive market figures are something that ought to bolster confidence in Mexico’s economy among international investors, according to Nieto.
Let´s not forget recently approved reforms and plans that could catapult automotive industry even farther. Energy liberalization in force could mean cheaper energy and flexible strategy for plants. Telecom reform could mean better logistics and coordination between brands, OEMs, Ts and providers. Labor reform could mean better talent management. Finance industry reform could mean better financing for local suppliers. More trade agreements could mean global integration and attractive exports. Finally, all infrastructure and communication projects could connect everything to make Mexico the auto nation it plans to become.
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Many experts have watched the development and evolution of Mexico’s economy. Her GDP has been steadily rising for the last few years and many of her people are being lifted from poverty. It is estimated that in the next five years Mexico could produce an annual manufacturing output of US $60 billion.
There have been a number of reasons for this growth. Mexico has established over forty trade agreements with countries around the world. They have also maintained low production costs which according to 2012 figures have dropped below the average production costs of Chinese factories. These costs look set to drop further as Mexico is continuing to establish a well-supported infrastructure which promotes manufacturing and trade.
Many automotive manufacturers are taking advantage of the potential gains from Mexican production. US companies are forging strong relationships and can appreciate the significant changes which have taken place in the region.
Mexico also represents an extremely large potential market of over 100 million consumers. This is estimated to be almost a third of the market in the US, so provides significant potential. The growth in the Mexican economy is opening up this market as towns and cities are established around manufacturing and trade.
Great examples of this are the towns which are building up around airports and airfields. Carriers are moving thousands of tons of cargo annually from Mexico to all over the world. This cargo varies from textiles to consumer electronics, perishables to luxury goods. Automotive parts also factor into this figure quite significantly.
The trade agreements and other bureaucratic processes have facilitated easier trade between Mexico and other countries around the world. While paperwork is still an issue and security measures for import and export remain tight, it can be a fluid process. This has allowed a number of businesses to cut their production costs and improve shipping and handling fees.
The current limitations and delays in air freight are largely due to the sheer number of goods coming in and out of smaller airports. The international airport in Mexico City, Benito Juarez, is limited by its current size and is restricted to grow further. The city has grown and developed around the airport which has left it almost at the center of one of the biggest cities of the world. This severely restricts the possibility for additional runways, terminals or even warehouse space.
Many US auto part suppliers have already become accustomed to the idiosyncrasies of Mexican customs paperwork and find the process straightforward without causing any noticeable delays. Officials have also made the effort to learn the importance of speedy import and export processes to assist trade. Even the limitation of reduced aircraft capacity can be managed by trucking freight over the border and flying it out of US airports.
During several years, Mexico has been adapting its legal framework to encourage manufacturing facilities for exporting, and implementing public policies for facilitating automotive plants. Currently, Automotive Decree and IMMEX Program rule the eligibility and benefits for automotive manufacturers. The most basic benefits are the import of raw material and machinery without paying import duties or sales tax, as long as the finished goods (parts or cars) are exported.
The general consensus is that Mexico is set to continue flourishing. Her manufacturing potential, infrastructure and trade agreements represent a renewed opportunity for all suppliers including auto part suppliers. Wise investors are taking full advantage and seeking out new traded relationships and investment agreements as early as possible.
A recent example of this trust in Mexican automotive industry is the Plant of Mitsubishi Electric. This Plant will be open in the central State of Queretaro with an investment of $70 M USD generating 500 jobs.
Other companies like BMW and Mercedes are considering setting up plants in Mexico, and companies like Toyota and Nissan are considering increasing their operations. While these operations are not yet confirmed, the truth is that Mexico has been attracting big automotive investments and some of these have big possibilities to happen in a spiral effect.
Do you believe Mexico will finally attract these investments?
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To anyone who’s been watching Mexico’s economy for the past few years, it will come as no surprise that it’s growing by leaps and bounds compared to other countries in the world that have been effected by the global economic downturn. Because of the Spanish-speaking country’s prowess in automobile manufacturing, both German and Japanese automakers are in a rush to build new factories and plants to take advantage of one of the world’s most efficient and skilled workforces, favorable tax laws and almost innumerable free-trade agreements.
Despite the global downturn in financial affairs, Mexico is doing well thanks to its automobile manufacturing industry. German automaker Audi has recently announced that they will probably be doubling production in their new Puebla plant, which will be operational by 2016. Honda recently invested $800 million in a new plant in Guanajuato, and announced in May of this year that an additional $470 million will be invested in a new transmission plant in the same state.
Mazda and Nissan have also heavily invested in manufacturing plants in Mexico recently, and all major auto firms that are manufacturing in the country are planning on increasing production. All of this means that there are plenty of opportunities for auto parts suppliers.
Honda, as seen above, decided in 2013 to invest $470 million dollars in a new transmission plant in order to meet their own auto manufacturing needs. The plant is expected to produce over 2 million transmissions, more than the 1.92 million they will be needing. The company explained its decision: it was simply more cost effective to manufacture the auto parts in the same country rather than transport them from elsewhere, even if the labor costs abroad were cheaper. Shipping costs are now incredibly high, and in order to save money and guarantee quality, it’s just best to make the parts in Mexico.
“We are establishing a production base with outstanding global competitiveness in CVT production in the same location as our new automobile plant in Celaya,” said COO of Honda North America Regional Operations Tetsuo Iwamura. “As we continue to advance our commitment to build products close to the customer, we appreciate the strong support we have received here in Mexico.”
Japanese auto parts suppliers are in a rush to set up operations in Mexico: along with selling their parts to the big auto manufacturers, they can also take advantage of the same things the auto manufacturers take advantage of: Mexico’s prized geographic location central to all markets in the Americas, free trade agreements with literally dozens of nations and trading blocs, and a business-friendly, tax friendly environment.
With German car makers, American car makers and Japanese car makers rushing to increase production capabilities, they will need car parts. While some suppliers are still relying on shipping to get their product to customers, they’d be much better off setting up shop in the same areas as their main customers in Mexico. The problem of shipping will be completely eliminated, and surplus items can easily be shipped to other markets in North, Central, and South America via Mexico’s excellent and reliable transportation infrastructure.
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Mexico’s economy, up until very recently, was based on labor-intensive, low-paying industries such as textiles. However, in the past few years, the industry that’s been fuelling economic growth in this Spanish-speaking North American country is that of high-tech automotive manufacturing; and although the textile and other manufacturing jobs have been going to China and India, Mexico’s economy is expected to continue growing.
A big part of this growth and interest from investors isn’t simply about lower wages; it’s about highly skilled labor and experience which may not be present in other countries or regions in the world. For example, German automaker Volkswagen opened their first plant in Mexico in 1967; and anyone who’s visited the country knows that the Bug or “el vocho” was ubiquitous in the country for decades.
The present-day Volkswagen plant in the historical city of Puebla, about a two-hour drive southeast of Mexico City, is now the largest auto manufacturing plant in North America. Featuring state-of-the art equipment, computer and robot technology, it employs over 18,000 people and produces 2,500 vehicles a day. The country exports most of the cars, and is at the present time the eighth largest automobile producer on the planet. It is also the fourth largest automobile exporter, and growth is not expected to slow down any time soon.
But what are the other reasons why investors in high-tech industries should consider Mexico? According to Thomas Karig, one of Volkswagen Mexico’s vice presidents, “Mexico is becoming quite an automotive powerhouse”. Karig emphatically states that companies and car companies in particular should set up shop in Mexico; Mexico’s location makes it an almost perfect location for export to North, Central, and South America. Further sweetening things for foreign investors is the fact that the country has an open trade policy and a workforce that is highly skilled and experienced.
In September of 2012, Volkswagen subsidiary Audi announced it would be establishing a new plant close to the one in Puebla. President of the Mexican Automotive Industry Association Eduardo Solís stated: “There is an important element here where Mexico is, currently in the automotive industry, associated with good quality, with good products. We have been scaling up in the value chain.”
It’s not only the automotive industry that is growing; because automotive industry employees in the past were able to afford educational opportunities for their children, industries that require a highly educated workforce can operate in Mexico. Other countries, although wages may be lower, simply do not have the education the Mexican workforce has. Mexico is the place to invest in industries such as aerospace, technology, and autos; and these industries are, not surprisingly, growing quickly.
Other car manufacturers in Mexico include Lexus and Nissan; interestingly, New York City’s entire new fleet of taxis is currently being manufactured at the Cuernavaca Nissan plant.
To summarise why Mexico is a place high-tech industries should consider, perhaps Cesar Lopez Ramos of California-based Plantronics Inc. says it best: Mexico is attractive because it has “human capital that is more developed and capable of not only making products but innovating.”
Photo credit: Bolsa Mexicana de Valores by mykewithwai
Mexico’s Instituto Nacional de Estadística y Geografía (INEGI), translated as the National Institute of Statistics and Geography, has recently stated to the public that the country’s economy, due to a rise in agricultural sector activity, grew by 3.9 percent in 2012.
The growth in the economy corresponded to projections made by the Mexican government a year ago, and was roughly the same as the growth the country experienced in 2011. INEGI stated that part of the growth was fueled by agricultural activity, which grew 7.2 percent in 2012’s last quarter. A higher production of corn, beans, sugarcane and wheat was responsible for the sector’s growth.
In a move to promote higher rates of growth and to attract investment in high-tech industries, the new Federal Government under President Enrique Peña Nieto is working to pass reforms in the energy and telecommunications sectors. The objective is to increase the rates of formal employment in the country where unemployment and underemployment can be problematic.
However, there are industries other than agriculture, which are contributing significantly to Mexico’s strengthening economy. The first industry is that of automotive manufacturing, with the Volkswagen plant in Puebla alone employing over 18,000 and producing approximately 2,500 vehicles per day mainly for export. Other international auto companies with plants in Mexico include Nissan and Lexus.
The electronics industry is another area where strong growth has been seen and is expected to continue. Mexico is the sixth largest producer of electronics after China, the United States, Japan, South Korea and Taiwan. Electronics currently are responsible for 30% of the country’s exports.
Mexico’s highly skilled workforce is also contributing to the country’s economic growth; foreign companies who may have at first gone to China or India due to the low wages there are choosing to invest in Mexico as the workers are solidly educated and are also capable of innovation. Automotive companies base their research and development headquarters in Mexico, and companies in the aerospace industry are also establishing manufacturing plants in order to access the highly skilled Mexican workforce. According to the WTO and the OECD, the Mexican workforce is the hardest working in the world when it comes to hours worked per year and profitably in terms of man-hour.
Mexico’s economy is growing while others might not be doing as well for several different reasons. Along with the skilled labor force, Mexico enjoys a good location for companies that want to export. Due to the high cost of fuel, a company that might have thought of locating to Asia may very well find that manufacturing in Mexico will produce big savings on transportation costs. From Mexico, both North and South American markets are easily accessed.
Finally, a significant factor in Mexico’s economic growth is the fact that it has 12 free trade agreements with 44 countries, including Japan, the United States and Canada (NAFTA), and the European Union among others. Mexico has also shown interest in MERCOSUR and negotiations for free trade agreements are currently underway with South Korea, Peru, and Singapore. The present government is also hoping to arrange a free trade agreement with Australia.
Opportunities for investors exist in Mexico; lower wages, a highly skilled workforce, and business-friendly free trade agreements will most likely ensure that the country’s economy will continue to expand.