Blog by Winston Moore MCIPR, Director Automotive PR – Latin America
APR Latin America examines options for the Mexican Automotive sector should President-Elect Donald Trump disown NAFTA, clamp-down on Mexico-based US OEMs, and raise import tariffs by an eye-watering 35%
Mexico accounts for 20% of North American vehicle production and has for the last seven years led the way in terms of percentage year-to-year grains. Its share was expected to continue to grow by 50% in the next five years on the back of over US$24bn investment since 2010 according to the US Automotive Research Centre (ARC), that is until US President-elect Donald Trump threatened to target the Mexican automotive sector during his presidential campaign.
Automotive is one of the most dynamic sectors of the Mexican economy, and has been closely tied to NAFTA since 1994, and the US since the early 20th century. In 2015 a record 17.4 million vehicles were manufactured in the Free Trade Area. Mexico mass-produced 3.4 million vehicles, up 6.1% compared to 2014, while the USA made 11.8 million, a 3.6% increase on 2014, and Canada 2.3 million vehicles, down 4.8% compared to 2014.
Seventh Largest Auto Industry in the World
Mexico boasts the seventh largest automobile industry in world and employs 1.7 million people. Automotive is a key export sector with 86% of Mexican vehicle exports — about two million — destined to USA and Canada. As a point of comparison, for every 11 vehicles imported from Mexico the US exports one to Mexico, which is also the main exporter of trucks and buses and principal seller of auto-parts to the US market.
These opportunities have, however, resulted in a US$67 billion US automotive sector trade deficit with Mexico. The US office for trade and statistics says: “The trade deficit in vehicles and parts is more than the entire $42.2 billion U.S.–Mexico trade gap. In all other goods and services combined, the United States has a trade surplus with Mexico”.
US OEMs have become vulnerable to action from the incoming Trump administration because 55% of exports to the United States come from Mexico-based assembly plants run by the three Detroit giants GM, Ford and FCA, while the remaining 45% coming from Japanese, South Korean and German plants. Other OEMs established in Mexico include: Volkswagen, Toyota, Nissan, Mazda, and Honda, accompanied by recent arrivals BMW and Audi. They prefer Mexico as an export base to reach out to wider Latin American and Asia Pacific regions.
GM is main exporter from Mexico with 442,706 units produced in the first ten months 2016, of which 94% went to the US and Canada. GM invested US$20bn in US manufacturing after staving off bankruptcy in 2009, compared to US$5bn invested in Mexico. This action safeguarded an estimated 48,000 of GMs 97,000 US jobs. GM employs 222,000 globally including 15,000 people in Mexico.
Fiat Chrysler Automotive (FCA) is the third exporter of cars and trucks from Mexico, with 365,000 units exported in the first 10 months of 2016, 97% of which went to the US and Canada. Ford, the first US OEM to set up shop in Mexico in 1925, is the fourth exporter of automobiles from Mexico. Ford stopped exporting trucks in 2015, but exported 326,500 automobiles in the first ten months of this year, with 96% of its exports destined to the US and Canadian market.
The biggest and fastest automaker expanding in Mexico is Nissan, which locally sells 37% of cars made in Mexico. Some 377,000 low margin small cars are exported to USA, with a further 140,000 destined mainly for 50 other markets including South America. Nissan adds that 57% of cars sold in the US are made locally, 25% come from Mexico and 15% from Japan. Nissan plants in Tennessee and Mississippi make 1.1 million vehicles and employ 10,000 people.
Mexico is, on the other hand, the fourth importer of US automobiles, and the second importer of trucks, buses and auto parts, beaten only by Canada in all the above
Mexico’s Location and Free Trade Comparative Advantages
Mexico is attractive to OEMs and auto-part manufacturers seeking a prime automotive export base within NAFTA because the country provides:
- access to global automotive markets assisted by proximity to the US and easy access to Pacific and Atlantic oceans.
- free trade agreements (FTAs) with over 40 countries representing 47% of global automotive market, compared to 19 FTAs held by the US.
- an opportunity for OEMs to export to 60% of world’s GDP, while the US FTAs account for % of global GDP.
- FTAs avoid export taxes to deliver the biggest saving. Ford saves an estimated US$2,500 exporting its Ford Fusion to Europe from Mexico, and BMW and AUDI are reportedly able to save even more, while larger cars and trucks for the US market are made in the United States. This is another reason automakers choose to build cheap in Mexico.
- Mexico is the only country in world with this kind of tariff-free automotive export environment. Mexico avoided over US$1.2 billion in tariffs on vehicle and parts exported to trading partners in 2015. The US and Canada do not enjoy such a privileged position.
- It secured 9 of the 11 vehicle assembly plant commitments announced since 2011. Detroit automakers announced nine new assembly plans, expansion, and reinvestment at existing plants in Mexico to compete and secure improved competitive cost levels.
- from a US perspective, a well-integrated North American supply chain delivers vehicles produced in Mexico with up to 40% US content.
Trump’s Bravado vs the Reality of the US Auto Industry
President-elect Donald Trump plans to address the relationship with Mexico and reshape the North American automotive industry. Trump charges US OEMs moved to Mexico to reduce costs and this resulted in job losses, specifically singling out the Ford Motor Company. In September 2016, Ford announced the transfer of small car production from Michigan to Mexico, the first assembly plant to be built by a Detroit 3 car maker since the 2008 financial crisis.
The US automotive sector is recovering after facing hard times. Employment in the US auto industry fell by a third between 1994 and 2013, while jobs in the Mexican auto industry increased five-fold in the same period. This boom was due to cheaper labour available south of the border and is the prime reason behind Trump’s threat to withdraw from or renegotiate NAFTA. This will likely affect all companies manufacturing abroad and selling vehicles into US, and may perhaps prompt them to in-time shift production back to the United States.
US withdrawal from NAFTA and or Trans-Pacific Partnership will prove challenging as it will be difficult to shift OEM production back to the US from Mexico. Pulling out of NAFTA will also provide an opening for China to assume leadership in Asia and Latin America. If US influence declines, Mexico and other Latin American countries will continue to gravitate toward China. Retreat from NAFTA and increased protectionism points to the US shirking from its global responsibilities.
Knock-on Effect of Trump’s Proposed Policies
President-elect Donald Trump specifically threatened to impose 35% import tax on Mexico made vehicles. This will translate into a 15% rise in import costs, with the North American supply chain at risk of being crippled by such tariffs. As indicated above, US OEMs are globally competitive because Mexico is a key low-cost supplier of parts and components. The automotive supply chain between US and Mexico is highly integrated, with auto-parts more exposed as they represent 15% of US imports from Mexico, hence auto-parts suppliers are likely to face higher risks that OEMs. Also on the OEM front, there is currently no spare capacity in US for them to relocate their production to the US from Mexico. The only alternative would be to rebuild capacity in the US, but this will take time.
The US leads the way in manufacturing despite employing fewer people and this trend will continue. as technological innovations make obsolete jobs lost. US job losses will inevitably increase if it stops selling goods and services overseas, as one in 12 US jobs is reliant on international trade. This means any changes proposed by Trump could in effect back-fire and have a negative knock-on effect on US based jobs
Mexico’s response to Trump’s bravado will be to stand-up for NAFTA. Mexican trade commissioners will argue that it is best for the US to keep the free trade deal than do without it. Eduardo Solis, president of the Mexican Automotive Industry Association says the starting point for negotiations with US will emphasise: “The strong relationship that exists among industries in the three countries.”