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Mexico – The Next Automotive Production Powerhouse?

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As the first of our five part automotive market assessment of the MIST countries – Mexico, Indonesia, South Korea and Turkey, we discuss the strengths and weaknesses of Mexico as an emerging automotive hub, and the underlying potential in this strategically located gateway to both North and South America.

Emergence of Mexico as a major automotive production hub is the result of a series of events and transformations over the past decade. The most important of which is the growing trend among automotive OEMs and auto part producers to have production bases in emerging economies. And the earthquake in Japan in 2011 tilted the tide in favour of Mexico just as ‘near-shoring’ was already becoming a key automotive strategy in 2011.

Automotive production in Mexico increased by 80% from 1.5 million in 1999 to 2.7 million units per year in 2011, largely thanks to a significant boost in investment in the sector.

Between 2005 and 2011, cumulative foreign direct investment (FDI) in the automotive sector amounted to USD10.3 billion. In the last year, several automotive OEMs have initiated large scale projects in Mexico; some of these projects include

  • Nissan – building a USD2 billion plant in Aguascalientes; this was the single largest investment in the country in 2012 and should help secure the country’s position as the eighth largest car manufacturer and sixth largest car exporter in the world

  • Ford – investing USD1.3 billion in a new stamping and assembly plant in Hermosillo, New Mexico

  • Honda – investing USD800 million in a new production plant in Celaya, Guanajuato

  • GM – investing USD420 million at plants in Guanajuato and San Luis Potosi

  • Daimler Trucks – investing USD300 million in a new plant to manufacture new heavy trucks’ transmissions

  • Audi – has decided to set-up its first production facility across the Atlantic in Mexico; with planned investment outlay of about USD2 billion, this move by Audi represents a significant show of trust by one of the world’s leading premium car brands

  • Mazda – building a USD500 million plant in Guanajuato; it has reached an agreement to build a Toyota-branded sub-compact car at this facility and will supply Toyota with 50,000 units of the vehicle annually once production begins in mid-2015

Bolstered by this new wave of investment, Mexico’s vehicle production capacity is expected to rise to 3.83 million units by 2017, at an impressive CAGR of 6% during 2011-2017.

Why is Mexico attracting such large levels of investment from global automotive OEMs? Which factors have positively influenced these decisions and what concerns other OEMs have in investing in this North American country?

So, What Makes Mexico A Favourable Destination?

  1. Trade Agreements – Mexico has Free Trade Agreements (FTAs) with about 44 countries that provide preferential access to markets across three continents, covering North America and parts of South America and Europe. Mexico has more FTAs than the US. The FTA with the EU, for instance, saves Mexico a 10% tariff that’s applied to US-built vehicles, thereby providing OEMs with an incentive to shift production from the US to Mexico.

  2. Geographic Access – Mexico provides easy geographical access to the US and Latin American markets, thereby providing savings through reduced inventory as well as lower transportation and logistics costs. This is evident from the fact that auto exports grew by 12% in the first ten months of 2012 to a record 1.98 million units; the US accounted for 63% of these exports, while Latin America and Europe accounted for 16% and 9%, respectively (Source – Mexican Automobile Industry Association).

  3. Established Manufacturing Hub – 19 of the world’s major manufacturing companies, such as Siemens, GE, Samsung, LG and Whirlpool, have assembly plants in Mexico; additionally, over 300 major Tier-1 global suppliers have presence in the country, with a well-structured value chain organized in dynamic and competitive clusters.

The Challenges

  1. Heavy Dependence on USA – While it is good that Mexico has established strong relations with American OEMs, it cannot ignore the fact that with more than 60% share of its exports, the country is heavily dependent on the US. The country needs to grow its export markets to other countries and geographies to hedge against a downturn in the American economy. For instance, during the downturn in the US economy in 2008 and 2009, due to decline in sales in the US, automotive production in Mexico declined by 20% from 2.17 million in 2008 to 1.56 million in 2009. Mexico has trade agreements with 44 countries (more than the USA and double that of China) and it needs to leverage these better to promote itself as an attractive export platform for automotives.

  2. Regional Politics – Mexico is walking a tight rope when it comes to protecting the interests of OEMs producing vehicles in the country. In 2011, Mexican automotive exports caused widespread damage to the automotive industries in Brazil and Argentina and in a bid to save their domestic markets, both the countries briefly banned Mexican auto imports altogether in 2012. Although, later in the year, Mexico thrashed out a deal that restricts automotive imports (without tariffs) to its two South American neighbours rather than completely banning them, it does not augur well for the future prospects of automotive production in Mexico. One of the reasons automotive OEMs were expanding their capacity in the country was to be able to cater to the important markets in Latin America, particularly Brazil and Argentina. Now the Mexican government has the challenge of trying to keep everyone happy – its neighbours, the automotive OEMs and most importantly its own people for whom it might mean loss of jobs and income.

  3. Stringent Regulatory Environment – The Mexican government, the Mexican Auto Industry Association and International Automotive OEMs are locked in a tussle over the government’s attempts to implement fuel efficiency rules to curb carbon emissions. Mexico has an ambitious target of cutting greenhouse gas emissions by 30% by 2020, and 50% by 2050. The regulations are similar to the ones being implemented in the USA and Canada, however, the association has complained that the proposal is stricter than the US version. Toyota went as far as filing a legal appeal against the government protesting the proposed fuel economy standard. Although the government eased the regulations to appease the automotive OEMs in January 2013, the controversy highlights resistance by the country’s manufacturing sector to the low-carbon regulations the government has been trying to introduce over the past few years. Such issues send out wrong signals to potential investors.

So, does Mexico provide an attractive platform for automotive OEMs? From the spate of investments in the country so far, it seems so – over the past few years, the country has finally begun to fulfil that potential and is now a key driver in the ‘spreading production across emerging economies’ strategy of companies looking to make it big in the global automotive market. However, there are still a few concerns that need to be addressed in order for Mexico to become ‘the’ automotive manufacturing hub in the Americas.

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In our next discussion, we will assess the opportunities and challenges faced by both established and emerging automotive OEMs in Indonesia. Does Indonesia continue to be one of the key emerging markets of interest for automotive OEMs or do the challenges outweigh the opportunities?

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Can Poland Remain A ‘Green Island’ Amid Crisis-struck Europe?

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Since 2008, the economic crisis has been the subject of countless news headlines across the world with numerous economies sliding towards the verge of painful recession. Europe has been severely hit as well, with only one state, Poland, performing considerably better than those once believed to be more stable and better prepared for potential turmoil, resulting in the Polish economy being dubbed the ‘green island’ among weaker, crisis-ridden EU states.

As the economic crisis wave spread across the globe in 2008, it hit virtually all economies. The slowdown was visible in form of declining economic growth rates, which soon changed into negative growth in economies of Europe, USA and Japan. Interestingly, Poland was the only economy in the EU to register a positive growth during 2009, and, despite visible slowdown due to recession hitting its trading partners, Poland has managed to storm though the crisis reasonably well.

Real GDP Growth Rate 2009

Real GDP Growth Rate - 2000-2014F

Since the onset of the crisis, Poland’s good economic performance has surprised many analysts. Obviously, the country did not remain unaffected, and a look at a trend line of the country’s growth rates over the past decade clearly shows how its performance has mirrored EU’s economic struggles. Nevertheless, the Polish economy managed to grow throughout the crisis, and this year, again, as the EU economy is expected to shrink by 0.3%, Polish economy is expected to expand (though modestly). Poland’s position in terms of GDP per capita increased considerably by 11 percentage points, to 65% of EU’s average in 2011. The economic growth and persistence in defying the crisis is believed to be largely underpinned by strong internal consumption, as Poles took long to believe that the crisis could have an actual impact on them, thus did not cut down on their expenditure (e.g. in 2011, the Polish retail sector enjoyed one of the highest y-o-y growth rates in retail sales during the December holiday season in Europe, second only to Russia). This strong internal consumption, paired with attractiveness for foreign investors in production-oriented sectors, along with postponed entry to the Euro zone (a fact that has helped shield Poland from Euro quakes) and limited household and corporate debt, allowing for greater stability of banking assets – these factors are typically cited as reasons for Poland’s good performance amid the crisis.

However, there seems to be an air of negativity and the country might get its share of the crisis after all. Just in November 2012, the IMF and Morgan Stanley slashed Polish GDP 2013 growth forecasts by almost half, down to 1.75% and 1.5%, respectively, as rather modest export gains are expected to fail to offset weaker consumer spending. Indeed, private consumption boom is likely to significantly cool down, as for an average Polish citizen the situation does not appear bright. The mood amongst Poles seem to no longer reflect the earlier enthusiasm, with opinions that good performance of Polish economy is now more of a government propaganda, since what they see on a daily basis contradicts the positive overtone of analysts’ words. The change in moods has been already captured – in November 2012, the Indicator of Consumer Trust (BWUK) was down by 5.3 percentage points over November 2011.

In reality, Poland’s position in EU’s GDP per capita statistics improved more as a result of a decline of the EU average, rather than actual improvement in Poles’ incomes and standard of living. The accumulated negative impact of adverse situation in the country’s Euro zone-based trading partners, leads to increased cautiousness of firms, who are introducing cost control measures, including layoffs. Rising unemployment (registered unemployment reaching close to 13% overall and as high as 28% amongst graduates in November 2012), together with growing fear of losing jobs, as well as limited credit activity, seem to have put brakes on consumer spending and thus internal consumption, an element once considered as one of the fundamental forces allowing Poland to withstand the pressures of the crisis. The mood is increasingly pessimistic, and the Poles have now started to change their shopping habits – they buy less, think twice, postpone high-value purchases, downgrade to cheaper equivalents and demand higher value for money. Poles are finally increasingly aware of the economic storm going through neighbouring economies, and realize that they do not live on a safe ‘green island’ any more. This fear is escalated by recurring news and discussions filled with warnings of 2013 brining the crisis full-on to Poland. And what is definitely not helping is the opposition leaders’ lack of political will to constructively work with the government in averting the impending crisis.

Many economists urge Poles to remain calm and claim that there is no reason to panic (at least, not yet). Though the slowdown in economic growth is a fact, consumers’ calm approach is definitely recommended, as fear of the future might multiply the slowdown, resembling a self-fulfilling prophecy. But, one has to keep in mind that consumption levels, strongly correlated with consumer sentiments, has no capacity to remain the single force driving economic growth. Several cushions that previously protected the Polish economy slowly cease to exist – continuous, high value public spending, favourable VAT, weak currency that supported Polish exporters and high inflow of EU funds to sponsor infrastructure investments are becoming a story of the past. In this negative scenario, consumers’ wishful thinking, positive attitude and frequent shopping trips might turn out far too weak to lift Poland’s economy as Europe and the Euro zone continue to sink.

It seems that the story of the ‘green island’ may not remain true for long.

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