Mexico – Automotive Industry 2019

Mexican Automotive Industry Faces a Difficult Market Environment

Published: 27 March 2019

 

1. General market trends

2019 will be a year full of challenges

For the first time in years, the successful Mexican automotive industry is facing major challenges in 2019. Particularly, weak domestic sales might continue, putting pressure on automakers. The AMDA (Asociación Mexicana de Distribuidores de Automotores) expects national sales to fall by 4.5% in 2019, having already fallen by 7% in 2018.

Additionally, prospects for Mexican passenger cars in the USA, the most important market, are worsening. On one hand, according to analysts, total US sales will fall to 16.7-16.8 million units in 2019, compared to 17.2 million in 2018. On the other hand, US consumers are increasingly demanding SUVs and pick-ups. This is a problem for Mexican manufacturers, who produce mainly compact cars.

Despite the difficult conditions, production is expected to rise to around 4.2 million vehicles in 2019, as predicted by the market research company IHS Markit. In 2018, about 3.9 million units rolled off the assembly lines. The reason for the growth in 2019 is that two manufacturers – BMW and Mercedes-Benz – are starting and expanding production at their new plants, respectively. According to current estimates, however, production figures will stagnate in subsequent years.

Free trade agreement USMCA offers opportunities

Paradoxically, the new free trade agreement (USMCA) between Mexico, Canada and the USA could offer opportunities for the Mexican automotive industry. USMCA is the successor to the NAFTA and was signed at the end of November 2018 after intense negotiations. The agreement still has to be approved by the legislatures of the three countries, which is uncertain in the USA due to a new majority in Congress.

The renegotiation initiated by US President Donald Trump has always aimed at producing more cars in the USA and reducing the trade deficit with Mexico. However, Mexico will probably benefit from the new regulations, as they provide for a higher regional minimum value added in the production of passenger cars in order to benefit from zero tariffs. The minimum value added will rise from 62.5% to 75% in 2020. Foreign automotive suppliers in Mexico expect higher order intake as OEMs are forced to source more parts regionally.

 

2. Market opportunities for automotive sales

Sales remain weak in 2019

Guillermo Rosales, Deputy Managing Director of the dealer association AMDA, expects passenger car sales to fall by 4.5% in 2019. On one hand, this is due to higher interest rates and thus higher financing costs. On the other hand, the austerity policy of the new government depresses car purchases from the public sector and public sector employees. A further risk for new car sales is that the current restriction on used car imports might not be extended.

In November 2018, Volkswagen announced an initiative for its plant in Puebla under which workers could suspend their activities for two years and receive full pay for one year in return. Nissan announced in December that it would lay off 1,000 employees at three of its four Mexican plants, equivalent to 7% of its workforce.

 

Mexico: Vehicle sales (units sold)

2016 2017 2018 Change 2018/17 (%)
Passenger cars 1,603,672 1,530,498 1,421,498 -7.1
Trucks 34,470 32,808 32,099 -2.2
Buses 9,581 8,957 9,170 2.4

Sources: AMIA, ANPACT

 

Premium segment not affected by decline

The poor sales in 2018 mainly affected mass manufacturers, while sellers of premium models were able to increase their sales, in some cases significantly. Mercedes-Benz and BMW, for example, sold more vehicles than in 2017, up 16% and 15.1%, respectively. This development reflects the fact that the upper consumer class is still able to bear higher financing costs, while the middle and lower classes are currently not in a position to afford expensive loans.

The manufacturers of cheaper cars – Nissan, Volkswagen, Ford and Fiat Chrysler – have all suffered declines of 10% or more. Since premium models are primarily imported from abroad, imported car sales increased by 2.6% in 2018, while sales of nationally manufactured vehicles fell by 21.2%.

 

Mexico: Passenger car sales by manufacturer

Sales 2018 (units) Change 2018/17 (%) Market Share 2018 (%)
Nissan 312,034 -14.4 22.0
General Motors 236,069 -8.7 16.6
Volkswagen 196,402 -16.0 13.8
Toyota 108,761 3.1 7.7
Kia 94,234 8.7 6.6
FCA (Fiat Chrysler) 88,083 -12.7 6.2
Honda 83,821 -5.0 5.9
Ford 68,785 -15.8 4.8

Source: AMIA

 

Transport vehicles also facing a difficult year in 2019

Sales of transport vehicles remained more or less constant in 2018. For 2019, however, the industry association ANPACT (Asociación Nacional de Productores de Autobuses, Camiones y Tractocamiones) forecasts a difficult year in which only 30,652 trucks (-4.5%) and 8,325 buses (-9.2%) will be sold.

According to ANPACT President Miguel Elizalde, financing is an important obstacle to sales. He is urging the government to improve access to credit for smaller companies and haulers so that they can invest in modernizing their fleets. Despite the current slump in sales, transport vehicles have great market potential in Mexico, as 56% of goods are transported by truck and 96% of all journeys are by bus.

 

3. Market opportunities in automotive and auto part production

Shift towards SUV

Even with the higher regional value-added requirements of the USMCA, carmakers will still face challenges in the coming years. For one, they must adapt the model types manufactured in the country to North American tastes. One example of this is Toyota, which originally intended to manufacture the Corolla compact model at its new plant in Guanajuato but changed its plans in favor of the Tacoma SUV.

In the medium term, manufacturers in Mexico will face an increasing demand for electric and autonomous models in important export markets such as the USA and Canada. At the same time, local customers will continue to prefer conventional vehicles because of the lower purchasing power and less developed EV-infrastructure. Mexico’s labor cost advantage is also dwindling as a result of more automated production globally.

A study called “Perspectives for the Automotive Industry of the Future in Mexico,” published by the economic development agency ProMéxico, warns that the industry could fall behind if the government does not succeed in increasing the productivity of the automotive industry, for example by better education and training.

Mixed picture among manufacturers

As with sales, the 0.6% decline in production in 2018 did not affect all manufacturers equally. Asian manufacturers Kia (Hyundai) and Toyota, as well as German manufacturer Audi, were able to achieve strong growth. On the other hand, Honda, Ford and Nissan notably recorded losses.

The largest car manufacturer in Mexico in 2018 was General Motors with 834,414 vehicles produced, followed by Nissan (762,408) and Fiat Chrysler (639,022). Lower spots were occupied by Volkswagen (435,373), Kia (294,600), Ford (280,499), Toyota (191,978), Audi (173,098), Mazda (149,589) and Honda (147,158).

 

Mexico: Important investment projects in the automotive industry (selection)

Investment (in US$ millions) Status Comment
Mercedes-Benz/Nissan plant in Aguascalientes 1,000 Production of Mercedes models since the end of 2018 Capacity of 230,000 vehicles per year, including production of Mercedes A Class
BMW plant in San Luis Potosí 1,000 Start of operations 2nd quarter 2019 Capacity of 150,000 vehicles per year, production of the BMW 3 Series
Toyota plant in Guanajuato 700 Start of operations 2020 Capacity of 100,000 SUV model Tacoma per year
Michelin tire plant in Guanajuato 510 Start of operations September 2019
BAIC plant Not specified Start of construction 2020, start of operation 2022 First plant of the Chinese OEM in America, location in Mexico still unknown

Source: author’s research

 

Among the car manufacturers, in the second half of 2018 only the Chinese BAIC Group announced plans for a new plant. It will be built between 2020 and 2022 with an initial capacity of 20,000 vehicles per year, which will be sold in Mexico and other Latin American countries. According to the company, half of these could be EV’s. Currently, eight federal states are interested in this investment. BAIC already has an assembly plant in Veracruz, which is to cooperate with the planned new factory.

 

Mexico: Motor vehicle production and exports (units)

Production Exports
2017 2018 2017 2018
Passenger cars 3,932,119 3,908,139 3,253,859 3,449,201
Trucks and busses 152,903 129,795* 114,251 110,131*

*January to September

Sources: AMIA, ANPACT

 

Exports boost commercial vehicle production

Thanks to the favorable economic situation in the USA, production and export of commercial vehicles in Mexico is expanding. Overall, exports rose by 31.3% in the first nine months of 2018. However, as domestic sales remained weak, production increased by only 15.1% to 129,795 units. The industry is a long way from its peak in 2015, when 147,912 trucks and buses were produced during the first nine months.

The commercial vehicle sector in Mexico is also beginning to take interest in electrically powered vehicles. Due to the predominance of cargo and passenger road transport, emissions would be reduced. The most advanced manufacturers in the country are Daimler and Volvo. In June 2018, Daimler announced its intention to manufacture the electric version of the Cascadia truck model in Mexico. The model is already being manufactured at the Daimler plant in Saltillo, and from 2021 on it will also come off the assembly line with an electric drivetrain.

Parts production will continue to grow

According to the INA (Industria Nacional de Autopartes) association, Mexico will benefit from the new USMCA agreement in the coming years. INA President Oscar Albín expects the turnover of domestic manufacturers of automotive parts and components to increase from around US$ 90 billion in 2018 to US$ 100 billion in 2021. According to Albín, suppliers serving European and Asian OEMs in particular will increase their investments.

However, there is also a downside: a rule in the USMCA agreement dictates that 40% to 45% of the value added to a passenger car must be generated in a high-wage region with an hourly wage of more than US$ 16. This might lead to higher investment in the USA and Canada instead of Mexico. In addition, the new requirements are much more complex than under NAFTA. Automotive components are now divided into three categories, which in turn are subject to different minimum value-added levels. Nevertheless, major foreign car parts suppliers have expressed optimism that the new regulations will be positive for their business in Mexico.

 

Mexico: Imports of selected automotive parts (in US$ millions)

2017 Change 2017/16 (%)
Vehicle electrics (SITC 778.3) 3.181 1.4
Bodies, bumpers etc. (SITC 784) 25.484 11.1
Ignition cable sets (SITC 773.13) 864 -24.5
Engines (SITC 713.2) 6.794 19.4
Total 36.322 10.4

Source: UN Comtrade

 

Currently, around 40% of Mexican auto part production is destined for manufacturers in the country, and 33% for export. The rest is for the spare part industry. With a value of around US$ 36 billion, Mexico is one of the largest import markets for automotive parts. Electronic components in particular are usually purchased abroad. The import business is likely to suffer due to the new USMCA regulations.

Investments have stalled in the meantime

During 2018, automotive parts companies were reluctant to undertake new investments, as the USMCA negotiations had stalled for some time. In the second half of 2018, there was only one major announcement: in November 2018 Continental made public its intention to build a new electronic components plant in Aguascalientes for around US$ 77 million. Construction will start in 2019.

 

4. Business practice

In Mexico, the Ministry of Transport SCT (Secretaría de Comunicaciones y Transportes, http://www.sct.gob.mx/transporte-y-medicina-preventiva/autotransporte-federal/marco-normativo) maintains safety standards. Information on technical requirements and standards in the Mexican automotive aftermarket can be found under http://www.economia-noms.gob.mx. Environmental standards are subject to the Ministry of the Environment (Secretaría de Medio Ambiente y Recursos Naturales, http://www.semarnat.gob.mx/leyes-y-normas/nom-fuentesmoviles).

 

5. Contacts
Name Website
Secretaría de Comunicaciones y Transportes (SCT) http://www.sct.gob.mx
Asociación Mexicana de la Industria Automotríz (AMIA) http://www.amia.com.mx
Asociación de Distribudores de Automotores (AMDA) http://www.amda.org.mx
Asociación Nacional de Productores de Autobuses, Camiones y Tractocamiones (ANPACT) http://www.anpact.com.mx
Industria Nacional de Autopartes (INA) http://www.ina.com.mx
Asociación Nacional de Comerciantes en Automóviles y Camiones Nuevos y Usados (ANCA) http://www.anca.com.mx
Expo INA PAACE Automechanika Mexico https://ina-paace-automechanika-mexico-city.us.messefrankfurt.com
Alianza Automotriz http://www.alianzaautomotriz.com