Mexico plays important role in worldwide parts production, sales

March 10, 2017
The ramifications and unintended consequences of an escalated tariff and trade tiff with Mexico could have profound impacts beyond the Mexican OEM manufacturing sector.

Mexico is a critical link in the global automotive supply chain. American aftermarket manufacturers, distributors, retailers and repairers – along with numerous international automakers and suppliers – could all end up getting caught in the crossfire if a trade war erupts from President Donald Trump’s statements toward Mexico and its vehicle exports to the United States.

“Mexico is beating us to a pulp,” said Trump in one comment directed at the nation’s automotive outsourcing presence.

It remains unclear if Trump’s threatened re-do of the North American Free Trade Agreement (NAFTA) and enactment of a “big border tax” would apply only to completed vehicles, or if parts are included as well. But the ramifications and unintended consequences of an escalated tariff and trade tiff could have profound impacts beyond the Mexican OEM manufacturing sector.

Mexico would almost certainly retaliate with tariffs of its own. An unraveling of the social fabric and workforce instability could ensue with the potential for civic unrest driven by economically based fears combined with a sense of sovereignty and wounded national pride. In February thousands of Mexicans took to the streets of 18 cities in protest of Trump’s stated ambitions.

Mexican President Enrique Peña Nieto is not faring well in opinion polls due to a host of domestic criticisms of his policies, but his status could show marked improvement amid nationalist fervor against the U.S. Or the situation could pave the way for an anti-American firebrand to mount a successful bid for the top office.

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Notwithstanding widely predicted and dreaded pricing increases throughout the entire automotive segment, Trump’s proposed wall is another point of contention, both economically and culturally, one that could have repercussions far from the border in U.S. warehouses and on factory floors. For example, documented and undocumented workers of Mexican descent send significant portions of their paychecks to relatives back home, amounting to $2 billion a month and accounting for 2.3 percent of Mexico’s overall economy.

Delivering 3.2 percent of the country’s gross domestic product, “the booming auto sector makes Mexico the seventh-largest car producer in the world and the top one in Latin America, overtaking Brazil in 2014,” said analyst Elizabeth Gonzalez at the New York City-based Americas Society/Council of the Americas organization. “It’s also the world’s fourth-biggest vehicle exporter, as well as the sixth-largest auto parts producer, making $85-billion worth in 2015.”

Mexico comprises the largest export market for made-in-the-USA auto parts, supplanting Canada’s previous status as the No. 1 foreign purchaser in 2015. “The size of its market and the shared border provides an excellent market for U.S. OE and aftermarket parts,” according to the U.S. Department of Commerce’s International Trade Administration (ITA).

Underlining Mexico’s global role, it is home to more than 400 parts-producing plants. Some 2,000-plus companies are involved in the industry, and 65 percent of those are foreign-owned, the ITA reported. In 2015, 60 percent of the $5 billion in foreign investments in Mexico’s auto sector were directed toward parts production.

Many American parts suppliers have maquiladoras (U.S.-owned factories) in Mexico along with warehouses in the U.S. near the border, which could face hardships if the wall is built or tariffs from the U.S. and/or Mexico are implemented.

Addressing concerns over the possibility of a NAFTA renegotiation, the Motor Equipment and Manufacturers Association (MEMA) has been rallying its respective memberships, which includes the Automotive Aftermarket Suppliers Association (AASA), to mobilize and become involved in efforts to obtain “a seat at the table as discussions on NAFTA and other trade-related issues move forward,” said Steve Handschuh, MEMA’s president and CEO.

“MEMA has established ongoing meetings with our counterparts in Mexico and Canada, and together we are working toward an approach that will preserve the portions of NAFTA that are beneficial while embracing positive changes to a 25-year-old agreement,” Handschuh wrote to the members in a February letter that also outlined the formation of a Trade Working Group and urged participation in the May 17-18 Legislative Summit taking place at the Watergate Hotel in Washington, D.C. A face-to-face meeting with the new Secretary of Commerce was additionally being pursued.

“MEMA and its divisions are committed to working closely with the Trump Administration and Congress to create a result that supports motor vehicle parts suppliers and their employees,” said Handschuh. “Many MEMA and division members are already engaged. You can be involved, too.”

Other relevant industry events include the June 14-16 INA PAACE Automechanika Mexico City exposition and Mexico’s Auto Industry Summit, Dec. 6-7 in León, Guanajuato, Mexico.

Last year’s inaugural edition of the INA PAACE Automechanika Mexico City attracted nearly 20,000 attendees from 36 nations visiting the booths of 452 exhibitors. Organizers this year are expecting more than 500 exhibitors and an increased crowd count of industry decision makers.

The show is “one of the most important industry events for the automotive aftermarket in Latin and Central America,” said Oscar Albin, president of Industria Nacional de Autopartes (INA).

Expanding demand

For American aftermarket suppliers with south-of-the-border sales or production operations, “a footprint in Mexico facilitates trade with South America. Although the U.S. is by far the leading export destination for Mexican automakers, exports to Central and South America are expected to grow at a faster rate,” according to Matthew Rolfe, senior market research analyst at The Freedonia Group, which is producing a series of reports on the aftermarket for release later this year.

“Mexico has free trade agreements with 40-plus countries that account for nearly half of all motor vehicle demand globally, more than twice the number of agreements the U.S. has. It gives them (American firms) a presence in a market that has a lot of potential for growth,” said Rolfe.

“Demand for both OEM and aftermarket auto parts is expanding more quickly in Mexico than in the U.S.,” he explained to Aftermarket Business World. “Over the last 10 years motor vehicle production in the country grew six times faster than in the U.S., and the number of vehicles in use grew four times faster, a trend that is expected to continue going forward.

“Engines and engine parts, electrical and electronic equipment, and transmission and powertrain components accounted for more than half of Mexico’s component manufacturing last year. The world’s leading motor vehicle manufacturers have built production lines in Mexico, including capacity for making the latest fuel-efficient engines and transmissions,” said Rolfe.

“Despite the low labor costs, the country features a skilled labor force, which makes it attractive for higher value-added production. Mexico has quite low labor costs compared to the U.S. and Canada – about 80 percent lower in the broader manufacturing sector.”

Rolfe discounted concerns that a Trump-induced NAFTA shift is going to be implemented anytime soon. “Any permanent change in U.S. trade policies would require Congressional action, and the enactment of high tariffs with Mexico is far from certain. I think most U.S. auto parts companies will take a wait-and-see approach in the short term.”

Should such a tariff scenario come to pass, though, “More parts would be made in the U.S. for the vehicles assembled here, but production costs would also rise,” said Rolfe.

“How much of that would be paid by consumers and how much of that would come out of manufacturers’ bottom lines is difficult to say. Mexico would remain an attractive motor vehicle manufacturing location because of its much lower labor costs, but less of its output would be sold in the U.S.,” he elaborated.

“Canada’s share of imports from Mexico might increase, as the market for Mexico’s exports would theoretically shrink, but the value and/or volume of Canada’s imports from Mexico might not increase,” said Rolfe. “After all, one of the main objectives of the suggested Mexico tax appears to be a desire for the U.S. to capture capacity/job additions to North America’s motor vehicle industry.”

Differentiated products

Trump’s irritation with Mexico has not gone unnoticed north-of-the-border, where Canada’s business community is eying heightened sales prospects. “With Mexico becoming a manufacturing powerhouse in North America, we foresee increased demand for Canadian industrial goods – including auto parts, machinery, plastics and rubber, as well as primary metals and fabricated metals,” said Linda Seymour, executive vice president at HSBC Bank Canada, publisher of a recent report entitled, Reaching Out for Business Opportunities in Mexico.

“Companies looking to grow would do well to look to Mexico, our fifth-largest trading partner and one of Canada’s free trade partners since joining NAFTA in 1994,” Seymour pointed out. “Mexico’s young population, ambitious economic reforms and status as a major manufacturing hub mean big opportunities for Canadian companies in many sectors; however, they will need truly differentiated products or services, as competing on costs is not an option.

“To identify business opportunities in Mexico, it is also important for Canadian companies to have a network of useful contacts on the ground, as well as an in-depth understanding of the market,” she noted. “Doing business in Mexico does not come without its challenges. But companies can overcome these challenges as long as they are committed to this market for the long run.”

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