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02/10/2014by EOS Intelligence EOS Intelligence No Comments

Mexico: The Next Manufacturing Powerhouse?

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As China’s cost advantages continue to erode with its increasing wages and fuel costs, the trend of nearshoring surges in popularity. North American manufacturers have started to include Mexico in their supply chains to achieve operational efficiencies such as speed to market, lower inventory costs, and fewer supply disruptions. As a result, Mexico’s manufacturing industry has gained tremendous momentum in recent times and industry experts often cite Mexico as ‘China of the West’.

The Changing Global Manufacturing Landscape

“There is always a better strategy than the one you have; you just haven’t thought of it yet” – this quote from Sir Brian Pitman, former CEO of Lloyds TSB, captures the dire need for companies seeking to gain competitive edge. In the current business environment with shrinking profits and increased competition, companies are under tremendous pressure to gain operational efficiencies.

More than a decade ago, when in 2001 China joined the World Trade Organization, it changed the dynamics of the global manufacturing industry. It became the safe haven for manufacturers across many industries and geographies due to significantly lower wages it offered as well as the abundant workforce. However, more recently, with sharp wage and energy cost increases, declining productivity, as well as unfavorable currency swings in China, the global manufacturing industry is witnessing another paradigm shift, as outsourcing production near home has gained popularity amongst North American companies. The economic growth, skilled labor force, proximity to the US market has allured firms to open up their manufacturing operations in Latin America region. Companies are investing billions of dollars into new production capacities in Latin America to serve their North American markets. In 2011, Gartner predicted that by 2014, 20% of Asia-sourced finished goods and assemblies consumed in the USA would shift to the Americas. Although, the entire Latin American region has witnessed an influx of investments, Mexico seems to have outperformed its peers.

Why Mexico? Why Now?

Mexico received a record US$35.2 billion in foreign direct investment (FDI) in 2013 from various countries, of which 74% was directed towards the manufacturing sector. According to a 2014 AlixPartners study, Mexico continues to be the top-choice for North American senior executives from manufacturing-oriented companies to outsource. So what has suddenly attracted manufacturers towards Mexico?

On the one hand, labor costs have seen a sharp rise in China over the past 7 years. Wage inflation has been running at about 15-20% per year and this trend is expected to continue in the coming years. The tax incentives offered by the Chinese government for foreign companies are diminishing, while local energy costs and costs of shipping goods back to the USA continue to increase. As per AlixPartners’ 2013 estimates, by 2015, manufacturing in China is expected to cost the same as manufacturing in the USA. Additionally, going forward, China is set to be more focused on catering to the rising domestic demand, as its domestic businesses grow and consumers are strengthening their purchasing power. These factors have made North American companies to re-think their outsourcing strategies, previously heavily linked to China-based manufacturing. Mexico seems to have seized this opportunity and started to reap the rewards by establishing itself as a lucrative manufacturing hub.

On the other hand, a dramatic improvement in cost competitiveness is driving Mexico’s manufacturing industry growth. Mexico government’s economic reforms, sound policy framework, and investments in infrastructure have boosted investor confidence and attracted several corporations to open their manufacturing operations in Mexico. According to BCG’s Global Manufacturing Cost-Competitiveness Index of 2014, Mexico has positioned itself as a rising star of global manufacturing. Besides having a growing aerospace industry, the country now has positioned itself as a major exporter of motor vehicles, electronic goods, medical devices, power systems, and a variety of consumer products.

Including North America Free Trade Agreement (NAFTA), Mexico has more free-trade agreements than any other country in Latin America. For manufacturers, this results in ease of doing business as well as a range of tax and financial benefits. Additionally, lower wages and energy costs offered by Mexico, strengthens its prospects as an outsourcing destination for North American manufacturers. Mexico is US’ third largest trade partner and has seen its exports to the USA increasing from US$51.6 billion in 1994 to US$280.5 billion in 2013, an increase of a whopping 444%.

The mass consumerization of IT, increased competition, and changes in consumer behavior are forcing companies to develop and deliver products at a faster pace than ever before. Manufacturers need to streamline their supply-chain operations in order to be more agile and customer-centric. Mexico’s proximity to the US market makes it compelling for North American companies to nearshore their manufacturing as this can drive transport costs down, increase their speed to market, and reduce inventory cost. Besides, it helps them to avoid supply-chain disruptions and serve the markets better by reducing shipping lead times, ensuring on-time deliveries to customers, and responding faster to customer issues.

In the past few years, North American aerospace companies such as Bombardier, Cessna Aircraft, Honeywell, General Electric, Hawker Beechcraft, and Gulfstream Aerospace have all developed major operations in Mexico. In the electronics industry, 2014 figures from BCG show that Mexican exports of electronics have more than tripled to US$78 billion from 2006 to 2013. This has also attracted the eyes of Asian electronic giants such as Sharp, Sony, Samsung, and Foxconn who invested heavily in Mexico as a part of their outsourcing strategy to effectively serve their North American markets. In 2013, they account for nearly one-third of investment in Mexican electronics manufacturing.

In the automobile sector, Mexico today is the world’s fourth largest exporter of light vehicles. On top of Ford, General Motors, and Chrysler’s significant investments towards manufacturing facilities in Mexico, the country is now gaining traction from the likes of global players such as Nissan, Honda, Toyota, Mazda, BMW, and Volkswagen. By investing in Mexico, all companies have committed to establish or strengthen their manufacturing capabilities there. According to IHS’s 2012 estimates, by 2020, Mexico will have the capacity to build 25% of the vehicles remaining on roads in North America.

Why manufacturing companies are running to Mexico with their manufacturing needs makes perfect sense due to its cheap and well-educated labor force and the proximity that can provide companies a strong supply base to cater the North American markets. Combining these factors with the rising middle-class population and increasing consumer spending across several South American nations, offers manufacturers a strong value proposition not only to use Mexico-based manufacturing to support their established North American markets, but also to penetrate and grow its customer base in emerging South American markets.

Challenging Times Ahead

Despite Mexico’s emergence as a leading destination for manufacturing nearshoring, there are certain pain-points that need to be addressed. Mexican government lowered its growth projections for 2014 after a disappointing economic performance during the first quarter of the current year. As reported by Bloomberg in May 2014, the economy is struggling to re-bound from 1.1% growth last year and many analysts predict the growth to be extremely modest in the short term.

Security concerns top the list of worries due to the nation’s history of drug-related crime and attempts to slip contraband into trucks moving north across the Mexico border. It will be interesting to see how the government plans to keep this under control, and whether these attempts will result in investors’ increased confidence in this market.

Further, despite recent reforms and investments made in infrastructure, there are large gaps that need to be filled. The country has areas with unstable supplies of water, electricity, and gas. In order to compete with the likes of China, and to further encourage the influx of foreign investments, Mexico’s government will have to make continued investments in infrastructure in the foreseeable future.

Additionally, over longer term, as Mexico continues to attract manufacturers from across the globe, leading to growth in manufacturing employment and increase of wages, the country might face a similar challenge to that of China, where labor rates continuously increase over years and cease to be as attractive as they used to be. This can hamper the nation’s competitiveness as a lucrative outsourcing destination. It is now the task for policy makers to develop policies that can enable Mexico to be more than just a source of cheap labor. To maintain good availability of skilled labor both in terms of quality and quantity that can meet the global manufacturing demands is a rather complex challenge.

For manufacturers operating in today’s cost-conscious environment, Mexico is becoming their top manufacturing go-to destination to shorten supply chains, cut inventory and logistics costs, and reduce delivery lead times. Although Mexico seems to be on the right path towards establishing itself as the manufacturing hub for the North American markets, it still has a long way to go in order to become the global manufacturing hub. Together with ongoing economic, social, and political reforms, as well as a progressive work environment, Mexico definitely can hope for a bright future as the hotspot for global manufacturing.

03/09/2014by EOS Intelligence EOS Intelligence No Comments

Mexico Energy Reforms – Pleases Energy Companies, Displeases Nationals

In H2 2013, we published an article on Mexican President Enrique Peña Nieto’s proposed energy reforms. Eight months after constitutional amendments were introduced to actualize these reforms, the President has taken a historic step and signed the energy reform bills passed by the Congress into law. While analysts seem happy with the new package of laws, the key question pertaining is that, has the government done enough to satisfy the key stakeholders, the oil companies, PEMEX, and the Mexican public.

Mexican President Nieto has set a blistering pace for reform of the nation’s oil, gas and electricity sectors, with final Congressional approvals being in place in less than a year of the initial proposal. The secondary legislation signed into law by the President on 11th August 2014 has opened up the oil and gas sector to private investment for the first time in 75 years. The Mexican government estimates that the new framework will result in an investment of US$50 billion by 2018 in oil exploration, production and refining activities.

The determination with which the President has pursued energy reform is highlighted by the move to pre-pone the ‘Round Zero’ process by a month, which entailed the granting of exploration and production rights to PEMEX. PEMEX has been awarded rights to 83% of the country’s proven and probable oil reserves and 21% of the nation’s prospective resources. The next round of bidding, Round One, will involve private companies, foreign companies, and PEMEX bidding on equal terms for the remaining 79% of prospective reserves. This tender process will be overseen by the National Hydrocarbon Commission (CNH), and is expected to take place between May and September of 2015.

The reforms are considered ‘fairly pro-market’ as private players will be allowed to pursue joint ventures on their own accord or with PEMEX. More importantly, addressing earlier concerns regarding share in resources, foreign and private companies will be allowed to book reserves, even though oil and gas resources will remain under state ownership until they are produced. This has resulted in keen interest from leading global energy companies, few of whom have given official statements stating their intent to bid. The new law also opens up the electricity generation market, while the state retains monopoly in transmission and distribution. The government looks to set up an electricity wholesale market under the reforms.

In addition to introducing private investment into every segment of Mexico’s hydrocarbon sector, the regulation encompasses the strengthening and autonomy of regulatory bodies, CNH and Energy Regulatory Commission (CRE) as well as setting up of new independent bodies for supervising environmental protection as well as controlling and operating the natural gas and electricity network. This it to ensure smooth and transparent implementation of the reforms.

From the point of view of the energy companies, the reforms could have not come at a better time, with several of their current operation zones (of the likes of Iraq, Libya, Nigeria, and Russia), facing violence and above-the-ground problems. In comparison, the situation in the Mexican territory seems much less risky. However, there exists a slight amount of political risk for international companies.

President Nieto has bagged several wins in his first two years, including banking, education, telecommunication, and energy reforms. Unlike the case of the three former reforms, the public has not supported their President in his latest endeavor. According to a poll published in Mexican newspaper, Reforma, 40% of Mexicans believed that the changes under the energy reforms would be bad for the country. Should President Pena Nieto’s PRI party lose elections in 2018, an incoming government may be likely to roll back such reforms that displeased the Mexicans. Nonetheless this risk, most energy companies are likely to welcome the reforms with open arms.

Overall, Mexico’s energy reforms are expected to be transformational for both the country as well as the global energy industry. While they are running well within the timelines in terms of policy formation, time will determine the success, or lack thereof, of the reforms, especially with regards to implementation.

09/10/2013by EOS Intelligence EOS Intelligence No Comments

Mexico’s Energy Reforms – The Balancing Act

Mexico’s president Enrique Peña Nieto seems to be a man on a mission. Since his term started in July 2012, he has worked towards weeding out the inefficiencies and monopolies plaguing several sectors in Mexico and has received much appreciation for that. But this time, has he gone too far? With Pemex being Mexico’s much-guarded jewel, the attempt to bring in private investment seems much more ambitious than the previously introduced overhaul in the labor laws and telecom sectors.

President Enrique Peña Nieto took a bold step in June 2013 by reforming the country’s quasi-monopolistic telecom sector, voicing his seriousness about bringing real changes to Mexico’s economy by tackling inefficiencies and welcoming foreign investment. While the results of the telecom reforms remain yet to be seen, he has moved to an even more ambitious project – to allow foreign investors to enter Mexico’s energy sector, which has been closed to private participation since 1938.

Pemex, which is the world’s 10th largest oil producer, has been a government monopoly for over 75 years. The country’s oil output has been falling since 2004, as a result of its inability to explore unconventional (deeper) sources driven by lack of investment and outdated technology. It is expected that if further exploration is not undertaken, Mexico will become a net energy importer.

To combat this, the president sent a bill to congress that aims to end the state’s 75-year old monopoly over the energy sector. According to the proposed bill, private oil exploration companies would gain access to the Mexican oil reserves under profit-sharing contracts for upstream oil and gas development (exploration and production).The bill also cover reforms regarding the restructuring of Pemex to make it more transparent and accountable.

The bill also encompasses reforms in the electricity market, wherein it looks to allow private participation in electricity generation, while maintaining transmission and distribution under state control. While few amendments to partially allow private participation in the electricity sector have been introduced in the past, they have left much to be desired. The current amendments only allow private companies to generate or import electricity for self-supply or to undertake cogeneration. In addition, Independent Power Producers that produce less than 30 MW of electricity and exclusively sell to the state-owned Comision Federal de Electricidad (CFE) or export to other countries are allowed to generate electricity under the existing amendments. As against the state-owned CFE choosing the players from which it would like to purchase electricity, these reforms would boost competitiveness in the sector by establishing an independent system wherein power generator participation would be decided based on lowest generation costs.

These reforms are expected to boost investments in the oil sector by about US$10 billion per annum. Further, an influx of investments is expected to help Pemex offset its current US$60 billion debt. In addition, they are also expected to bring down electricity prices in the country (which are 25% higher than that in the USA), boost employment, and strengthen the participation of renewable energy in the energy mix primarily underpinned by private participation in electricity generation.

While these reforms spell out immense benefits for Mexico’s economy, their implementation and outcome are a different story altogether. The Mexican population that applauded and supported the government through the education and telecom reforms, is now much less convinced regarding this arm of reforms. Mexicans have for long considered Pemex to be symbol of their national independence and the oil found beneath Mexico’s soil and water, a part of their national heritage. Moreover, March 18th – the day when president Lazaro Cardenas nationalized the country’s oil industry in 1938 is celebrated proudly as a national holiday. Unlike the case of the previous successful reforms, the government faces much opposition from the leftist groups. However, with full support for the reforms from Peña Nieto’s Partido Revolucionario Institucional (PRI) and the Partido Acción Nacional (PAN) parties, which control more than two-third seats in congress, there are strong chances of this proposed law becoming a reality.

The bill also falls short from the point of view of leading global oil exploration companies. While the reforms give foreign companies access to extract and exploit oil, share risks and profits, they would not be able to have a share in the resources. This makes the Mexican agreements far less lucrative for large oil players when compared with proposals offered by neighboring oil-producing countries, such as Brazil and Columbia, which allow the producers to own a certain amount of oil in their books. Thus, although leading oil companies, including Shell, Chevron, BP, and Exxon Mobil have welcomed the wave of reforms in Mexico, their participation will largely depend on the nature and attractiveness of the final profit-sharing agreements.

Therefore, while these reforms look at altering history, it remains extremely premature to predict their outcome. These reforms run the risk of offering ‘too much’ from the eyes of the Mexican public or ‘too little’ from the point of view of resource-hungry energy companies and can only be a success if they manage to find the perfect balance between both the stakeholders. Thus, the key question that remains is not regarding the approval of reforms, but if these reforms will actually manage to stir foreign investment into the Mexican oil sector.

05/09/2013by EOS Intelligence EOS Intelligence No Comments

Strike On Syria – Potential Impact On Emerging And Frontier Markets

Though there is still uncertainty of the US military action on Syria, global markets seem to have already given an indication of what could be in store if it actually happens. Crude oil prices rallied in the last week of August amid indication of strike, followed by a fall in oil futures, as the fear of imminent action receded. In another instance, share markets showed signs of panic due to a false alarm regarding missile attack on Syria (which eventually turned out to be an Israeli missile testing exercise).

The possible US strike on Syria has implications for global economy, and specifically for emerging economies, which are experiencing economic slowdown. The situation could be a tough test for countries such as India and Indonesia, as both of them struggle to keep trade-deficit under control, and are under the watch of credit rating agencies. For countries such as Brazil and Mexico, the US action may lead to delayed economic recovery. For Russia, being one of the largest oil producers, political implications are more than the economic one in case of a unilateral US action (i.e. without UN backing) on Syria.

While a sense of uncertainty and urgency prevail globally, we take a look at what potential impact the strike might have on select emerging and frontier markets.

12/06/2013by EOS Intelligence EOS Intelligence No Comments

Is New Legislation Enough To Transform Mexico’s Telecom Market?

When Mexico’s telecommunication market is under discussion, one name is sure to pop out – that of the world’s richest man, Carlos Slim, who through his companies (America Movil Telcel and America Movil Telmex), controls majority of the market. But now, with the government determined to break open this tightly-held market, it gave a first-ever nod to game-changing reforms that can boost foreign investment and competition. The question, however, remains whether the country is mature enough to take these reforms till the finish line.

In July 2012, when after 12 years the PRI Party (Institutional Revolutionary party) bounced back to power in Mexico under the leadership of Enrique Pena Nieto, there was little hope for any reforms in the country. This assumption was based on the party’s actions during its previous tenures, which were marked by electoral frauds, widespread corruption, economic mismanagement, and its success in blocking attempts at reforms proposed by previous presidents: Vicente Fox (2000-2006) and Felipe Calderón (2006-2012).

However, remaining under a growing pressure of frustrated and agitated general public asking for reforms and solutions the widespread mafia problem, PRI was forced to offer several promises during the electoral campaign. These included addressing the problem of unwarranted concentration and lack of competition in many sectors of the economy, and post election PRI had no choice but go ahead with at least some of its promised reforms. PRI’s-led government entered into an alliance, called the ‘Pact for Mexico’, with its opposition – National Action Party and the Democratic Revolution Party, to push reforms and encourage competition. After the overhaul in the labor laws and the education system, this Pact has been pushing for reforms in the country’s telecommunication and broadcast industry. These reforms look to provide a makeover to this previously quasi-monopolistic and inefficient sector, introducing several fundamental changes:

Firstly, opening the market to new international players by allowing 100% foreign ownership in the telecom sector (a rise from the existing 49% FDI limit)
Secondly, forming two new independent regulatory commissions to regularize the industry

Federal Telecommunications Institute, with profile similar to the U.S. Federal Communications Commission, to have the authority to check and punish non-competitive practices to the extent of withdrawing company licenses
Federal Competition Commission, created to fight monopolistic practices by ordering companies that control more than 50% of the market to sell off assets to reduce market dominance

The reforms also encompass the creation of a specialized court to oversee all competition, telecom, and media rulings
The previously existing Mexican law allowed companies to file private injunctions in order to block the regulator’s rulings aimed at improving competition in the market (while appeals were in progress); this loophole in law, which was misused by companies to indefinitely freeze inconvenient regulatory decisions, has been removed under the new legislation

Recently, Mexico’s Senate approved these changes, and passed legislation aiming at improving competitiveness in the telecom sector. While few key changes brought about by these reforms still need to be ratified by two-thirds of Mexico’s 31 states in order to become a law, this seems like a mere formality considering PRI’s dominance in provincial legislatures, as well as complete support from the opposition through the ‘Pact for Mexico’. The legislation is thus expected to go into effect by early 2014.

These reforms aim primarily at improving market dynamics in this $30billion annually industry, by facilitating competition, encouraging foreign investments, pushing down prices, and increasing mobile penetration, which (currently at 85.7%) stands much lower than 100%+ penetration in its neighboring Argentina and Brazil. However, the new legislation spells trouble for the current monopolies in this sector – America Movil Telcel (that accounts for 70% of the mobile market) and America Movil Telmex (that accounts for 80% of landline market). Both these companies operate as subsidiaries of America Movil, which is owned by world’s richest man, Carlos Slim.

The reforms seem to be particularly beneficial for international telecom companies operating in neighboring lands, who have been shy of entering the Mexican arena owing to the 49% limit on foreign investments. These players can look to buy companies such as Axtel and Maxcom Telecommunications, to get their hands on the fiber-optic cables placed across Mexico, thus hinting towards a wave of consolidation activities in the medium term.

However, despite ongoing efforts by the government, the success in this industry is not guaranteed. Firstly, the fixed line market is expected to remain devoid of foreign investment, owing to the overall decline of the industry globally, and the local Telmex’s 80% share in the market. Moreover, the impact of the reform would only be assessed on how it is brought to force (i.e. if it is implemented in its current form by the legislatures of the 31-states) and also upon how well is it enforced by the independent bodies (Federal Telecommunications Institute and Federal Competition Commission), as previously the industry suffered mostly due to law loopholes and poor implementation of these laws by authorities.

Moreover, reforms similar to those in the telecom industry have been implemented in the television industry, where Televista holds 70% market share. While these reforms (in both the telecom and the television industry) are expected to weaken the hold of the monopolies in their respective markets, it provides them with an opportunity to strengthen their existing presence in each other’s market. (Carlos Slim’s America Movil is a leading player in the pay-TV sector in Latin America, having a subscriber-base of 15million viewers and Televista, along with Azteca, owns Lusacell, the third largest mobile network in Mexico.) Thus, it is feared that instead of stirring foreign investments and competition, these reforms might just result in these incumbent monopolies swapping market share among themselves.

While the majority of the nation rejoices at these reforms and eagerly awaits an influx of investment and increase of competition that could push down the prices, it is premature to predict the long-term outcome of the new legislation. The country is on a correct path to build competitiveness in the telecom sector, but considering the level of corruption and red-tapism in the nation, it seems clear that what matters even more than the reforms themselves, is the way they are implemented.

08/02/2013by EOS Intelligence EOS Intelligence No Comments

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?

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.
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).
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

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.
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.
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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