Mexico Auto

Bill Rinna, Director, Americas Vehicle Forecasts

18 November 2019

Mexico Auto

Mexico: Is the shine wearing off?

Once the rising star of the North American automotive industry, with seemingly endless upside, Mexico has fallen on more difficult times. As the economy sputters and Light Vehicle sales, production and exports decline, the country’s automotive sector has lost some of its lustre.

“US ratification appears to have taken a backseat to impeachment proceedings against President Trump, and with a dwindling number of legislative days remaining in 2019, the likelihood of the US signing the treaty by year-end is fast evaporating”

At the heart of the problem is growing uncertainty in the region. Notably, the delayed ratification of the United States-Mexico-Canada Agreement (USMCA) has led to increased trade anxiety. In late November 2018, the leaders of the US, Mexico and Canada signed the landmark follow-up to NAFTA at the G20 Summit in Buenos Aires. Theoretically, all that remained to enact the agreement was ratification by all three governments. Thus far, however, only Mexico has done so. US ratification appears to have taken a backseat to impeachment proceedings against President Trump, and with a dwindling number of legislative days remaining in 2019, the likelihood of the US signing the treaty by year-end is fast evaporating. The national elections hampered progress in Canada, with the country now poised to follow the US’s lead.

Further compounding the issue is President Andrés Manuel López Obrador’s failure to restore business and consumer confidence since taking office. The resulting rise in economic uncertainty has led to a freeze in all non-essential automotive investment, with the notable exception of supplier investment to support upcoming domestic programmes.

Against this backdrop of unpredictability, new Light Vehicle sales in Mexico contracted for the ninth consecutive month in October. Sales fell by nearly 8% year-to-date, following a 7% drop in 2018. Depressed consumer confidence, high interest rates, tighter credit and pressure from less stringent regulations on used vehicle imports have all contributed to the decline.

Production has not fared much better. October marked the seventh straight month of decline, with year-to-date output down by more than 3%. The UAW strike on GM in the US made a further dent, hurting production at GM’s Large Pickup plant in Silao and output of the Chevrolet Blazer at the Ramos Arizpe facility.

Mexico Auto

And while Mexico’s status as an export hub helps to shield manufacturing from weakening domestic demand, Light Vehicle exports fell by nearly 2% in the year to October. Shipments to the US rose by 5% in the period, but exports to Europe, Mexico’s second-largest export region, plunged by 18%.

“Capacity has expanded to nearly 5 million vehicles this year, an increase of almost 50% from just five years ago, far outstripping the country’s production requirements”

The market downturn, meanwhile, comes at a time when production capacity in Mexico has never been higher. Capacity has expanded to nearly 5 million vehicles this year, an increase of almost 50% from just five years ago, far outstripping the country’s production requirements. Plant utilisation in 2019 is set to plummet to around 75%, from a stellar 93% in 2014.

So, what lies ahead for Mexico?

Demand should begin to recover next year, with the eventual ratification of the USMCA boosting investment and consumer spending. That said, used vehicle imports will continue to exert pressure on the market.

The production outlook, however, is less rosy. US tariff threats and NAFTA renegotiations mean that investment in new assembly plants has either been put on hold or cancelled altogether. And although the USMCA should bring more stability, investment in vehicle assembly is unlikely to match the levels seen in previous years. Why? Simply put, the new Labour Value Content (LVC) rule in the treaty. By stipulating that 40% of a Passenger Vehicle and 45% of a Light Truck must be built by workers earning a minimum hourly wage of US$16, the LVC directive essentially incentivises production in the US.

Despite this pressure, Mexico will remain an important market on the global automotive landscape, albeit with a little less of its former shine.