Mexico Outsourcing Podcasts
Automotive Manufacturing in Mexico: A 2012 Forecast
Podcast Transcript
Automotive Manufacturing in Mexico 2012
Interview with: George Magliano, IHS Global Insight, Senior Principal Economist
The Offshore Group: Today we have a very interesting topic of discussion to consider in this on-going series of podcasts dealing with doing business in Mexico conducted by The Offshore Group.We are going to look into what the prognostications are for the Mexican automotive industry in 2012.
We’re fortunate to have with us, a gentleman by the name of George Magliano, he is a Senior Principal Economist, and an expert on the Mexican automotive sector at IHS Global Insight.
George, please provide us with a little bit of your personal and company background.
George Magliano: IHS is the largest economic, consulting and forecasting firm in the world. We have practices in industry, energy, and auto with IHS automotive which I am part of.
I’m an auto industry economist and my responsibility is North and South America. I am principally concerned with the overall economic picture in the region concerning light vehicle demand and production.
The Offshore Group: That’s very interesting. Looking at the press over the last couple of months in 2011, we were looking at numbers coming out of Mexico. They demonstrate Mexico’s automotive manufacturing was at its highest point historically during 2011 in terms of units produce.
When we look at what’s happening this (2012) year in terms of production, first of all let’s look at sales. What is the outlook for automotive sales in Mexico, for this year and for the future?
George Magliano: Mexico’s demand, sales in light vehicles (there is no medium or heavy duty trucks) is coming out with a pretty good year. Last year, sales came in at around 905 million cars and light trucks. This represents a figure that is 10% better than 2010. In 2009 there were 750 million units produced. A 10% increase is pretty good, and in line with what happened in the U.S.
It’s a solid recovery in the Mexican automotive sector due to the fact the U.S. and the world is struggling economically. This includes regions and countries such as Europe, Japan and other major economies. We still have a very slow growth recovery occurring. Obviously, if the U.S. is moving with a slow economic pace, related to job growth and housing, that impacts North America, Canada and of course the automotive sector in Mexico.
The 10% increase is pretty good. The new forecast is about 4% growth this year, a sustained growth to 2015 of about 5% a year, and then getting back to about 1million units (1.1 million in cars and light trucks) being sold internally in Mexico. Then we go up to 1.3 million in 2020.
The reason why we don’t see bigger numbers coming out of the Mexican automotive sector is due to some structural problems with the Mexican market. There are issues with the Peso, the Brazilian Real which is the price of importing vehicles of inexpensive cars. We also have an issue with the remittances going into Mexico, as well as the availability of auto credits. That’s really keeping the internal Mexican market from making much more of a robust the long-term forecast.
The Offshore Group: You’ve mentioned a slow economy, and obviously this is the case in Mexico, as well as countries. Perhaps people are delaying the purchase of big ticket items, and are waiting for days which the economy is a little bit brighter. Is that in many instances, if a person needs a car they may be more likely to buy a used vehicle?
Can you tell us if there is any impact in this regard on Mexican automotive demand? Do we see a spike in used car sales? And does it create an adverse demand for new vehicles at this point?
George Magliano: That’s an excellent question. This is one of the factors holding back new vehicle sales in Mexico’s automotive sector.
There is a major problem with Mexico controlling its borders as far as used cars. The Mexican government opened up the borders back in 2007. We estimated used car trucks sales in Mexico where 1.7 million. vs 1.1 million in new units (vehicles and light trucks).
Last year there was more control on the border. We have recorded imports numbers for used cars. There are a lot of illegal cars and trucks that make it to Mexico without being identified. This puts a lot of pressure for new cars and truck demand in Mexico’s automotive sector.
The Offshore Group: Let’s look at the other side of this equation. Essentially we at The Offshore Group, talk to companies that are suppliers to the automotive industry in Mexico, they’ve been changing with regards to production and investment on new platforms to actually produce in Mexico.
How is this production in terms of volume, in terms of players, how has it changed in recent years and where is it going? And how will this trend for automotive manufacturing in Mexico affect T1, T2, T3 suppliers?
George Magliano: This is a real success story regarding automotive manufacturing Mexico. About 10 years ago, Mexico decided to re-orient its production base and decided to focus on high value programs such as top of the line pickups and mid-size cars The focus on production to sell into the U.S. mainly for the Detroit Big 3 automotive manufacturers: Ford, GM and Chrysler, although that picture is expanding.
One time we were looking into Mexico on the light duty side running at a peak level of about 1.5 million units. Today, it’s up to 2.5 million units and expected to grow outbound from programs that are in place to about 3.5 million units. Most of this growth in North American production and output between now and 2015, is now being focused on automotive manufacturing in Mexico.
This is a phenomenal story. You have top name programs like Ford Fusion done down there, and a good deal of other vehicles that come out of Mexico. we first started with Detroit and now we have Nissan and VW. The big 3 are expanding their operations and we know about Honda and Mazda opening up plants, and now other Asian manufacturers locating in Mexico.
The Offshore Group: George, maybe you can help me with this as well. When the maquiladora industry first began in the late sixties, what we saw as far as automotive suppliers, very high volume, easy assemble and wire harnesses. Obviously Mexico, over the years, has structured itself, both in terms of industry and educational infrastructure, to be able to climb the value chain in the kind of things that they could do in the automotive industry.
For our listeners, what kind of automotive suppliers do you see making the trek southward in terms of installing capacity to provide service to the big 3 primarily in Mexico. What kind of things do you see in terms of migration happening over the last five years?
George Magliano: Things have totally changed. Now there is a serious and more complex supplier base located down there. Basically T1, T2 suppliers are engines and transmissions. Things go well beyond electronics to include what it takes to build the car or truck, and it’s all located right where the assembly plants are in places like Hermosillo, Sonora or where GM is located in San Luis Potosi.
They have all kinds of automotive supplier plants right around the assembly line of Honda. The supplier base will increasingly migrate to where the new plant will be.
These are top of the line car and light truck components to assemble the vehicle in Mexico. The move to do so is not only related to labor cost savings. The quality of the components that are being manufactured in the Mexican automotive industry are top notch.
The Offshore Group: Another thing that I’d like to quickly mention from our perspective, not only American suppliers, but we’re seeing suppliers from other countries looking to service the growing industrial base of automotive assembly operations in Mexico including: German automotive suppliers, due to the big presence with Volkswagen and BMW in Mexico, but also Indian and Japanese part suppliers are looking at Mexico. It’s becoming a lot more international in terms of investment than in the beginning, which it was pretty much North American suppliers feeding the automotive manufacturing industry in Mexico. We’re seeing a much broader supplier base in terms of international origin.
Could you tell us just to keep our listeners up to date about recent investments, there have been big one’s over the last couple of years, if you could comment on those, and then what you see coming down the pipeline within the next year?
George Magliano: The big moves before were Mazda, and the big rumor going around at the moment is that Hyundai will soon be locating a plant in Mexico. When the factories materialize in Mexico, their part suppliers move in with them. In the auto business today, you have to be close to where you sell your cars and trucks. You got to have automotive parts assembly happening close to the area.
At one time, everybody was talking about China. Obviously China is a big factor, but the story on China has been the growth in the internal market. It has also been discovered that sourcing parts from China is not a good option. You will not fly automotive parts around the world to incorporate in an end product. Also other parts in the world become more attractive for auto parts manufacturing as wages rise in Asia.
The Offshore Group: One thing that is very interesting, and this is a relatively new dynamic, again going back to the traditional build in Mexico for shipment to the U.S. model, we’ve seen companies, for example: Nissan is one of the companies that is building in Mexico with an eye not only to sell back to the United States but also to supply products to South American economies like Brazil. Is it accurate to say that this is happening in any volume?
George Magliano: We’re estimating that about 150,000 units, which is approximately the size of an assembly plant, is being exported out of Mexico throughout the world. They are shipped mostly to South America will grow to about 350,000 per year.
Brazil and Mexico are moving closer together in terms of trade. At one time it was difficult to crack the Brazilian market because of their peculiar taste of vehicles down there. They had pretty much customized their market, but now it is becoming more of an open area as far as automotive exports from Mexico are concerned. Mexico is very much concerned with its currency, so prospects of developing businesses between the two countries is very good right now.
The Offshore Group: Brazil has a much more of a protectionist tendency in its economy in general.
One thing that enters in many discussions related to Mexico these days is the question related to the safety. Some of the problems that are reported by the press surrounding this issue are of particular concern.
With respect to the automotive industry, how do you see this as a factor that should be taken into consideration by anybody looking into invest in a manufacturing facility in Mexico to supply the automotive industry?
George Magliano: Obviously, this is something that cannot be taken lightly. There are events that have occurred that have caused concern and caution.
For the manufacturers, the issue is not going to stop them for moving into Mexico. Investment and the construction of new automotive manufacturing plants in Mexico continue to occur regardless of the headlines in the newspapers.
Manufacturers are aware of Mexico’s situation, concerns and potential risks, but they’re going ahead and involved themselves in automotive manufacturing in Mexico. This not only applies to the automotive industry.
The Offshore Group: Last year Mexico was popping out record number of units of production. Suppliers are following companies like Nissan, Mazda and, maybe Hyundai, as you’ve mentioned of a possibility of that firm’s starting up in Mexico as they’ve done recently in the Southeast U.S.
In some U.S. cities, there is a renaissance in auto manufacturing i U.S. Where does the U.S. fit into the global automotive industry dynamic?
George Magliano: The dynamic would be due to the UAW, as they have made concessions to Detroit. Lower labor costs make them much more competitive with foreign manufacturers. The unions have shown efforts to work with Detroit and other manufacturers in order to keep jobs and assemblies in the U.S. If you want to source overseas it becomes more difficult to your production base and the cost differentials have becoming less over time. Is there an advantage to be local? Or to relocate to the U.S.?
Because of the unions, and they have become much better to work, companies may be economically and competitively be able to maintain jobs in the U.S.
The real loser in the big equation is starting to become Canada. This is because of the way unions are structured there. Labor there seems less willing to work with management to keep costs competitive.
The Offshore Group: One of the things that we see from the perspective of the market in which we work, typically when a company does work in Mexico and if it has operation in the United States, it never leaves the U.S. lock, stock and barrel.
What manufacturers typically do is walk through their plants and analyze every aspect of their operation, every part that is being made, and every process they perform in order to see which one has an economic comparative advantage to be done or produced in the U.S. They then determine which ones make sense from a comparative advantage perspective to make in Mexico. So really, at the end of the day, it’s about combining resources in both countries in order to come up with competitively priced products.
Is that something that you observe?
George Magliano: It’s becoming more like textbook economics related to comparative advantage, what we’ve always told our clients is that you don’t want to compete in price in each instance, however, you want add value and be able to make a top notch product with a competitive price.
Twenty years ago people were talking about offshore sourcing and finding a cheaper cost. If you’re going to compete in the global market, you have to compete with your strengths. When you look at the automotive industry in Mexico, there is a success story when it comes to delivering a quality product at a competitive price.
The Offshore Group: Last question, George: If you were to make one prediction for 2012 in the automotive industry in Mexico, what do you think people should pay attention to?
George Magliano: I think they should pay attention to the potential of locating in Mexico, as well as how the business has changed, and how it continues to change. We talked about growth in the supplier base. The automotive industry in Mexico can grow even more, if the quality and price of product produced is what it has been to this point, and, of course, if it improves. This is the start of the trend, not the end.
The Offshore Group: George, we want to thank you for taking the time to chat with us today. Hopefully we will have a similar conversation in 2013 and see in retrospect how some of your commentary on the automotive industry in Mexico in 2012 pans out.
George Magliano: Thank you, look forward to it.
