Road to recovery: Production perseverance in Mexico

Between a global pandemic and a monumental chip shortage, the past two years have been fraught with pitfalls for the global automotive industry. In North America, that has meant that production fell to historic lows, with volumes below 13.0 mn units in both 2020 and 2021. While the situation remains highly complex, we expect that Light Vehicle production will begin to show some signs of recovery this year. Overall output should exceed 2019’s pre-pandemic totals by 2024, and long-term growth is projected to be around 19% between 2022 and 2027. 

However, the path towards recovery is unlikely to look the same for all the countries in North America. While all three countries are expected to experience an increase in volumes, Mexico is currently projected to see a larger rebound than either the US or Canada on a percentage basis. Volumes in Mexico are anticipated to rise by 31% by 2027, compared with just 9% for Canada and 17% for the US during the same period. 

This begs the question: why is Mexico expected to see a more robust recovery than its northern neighbours? With lower manufacturing costs relative to the US and Canada and a higher number of Free Trade Agreements than the US (Mexico has FTAs in place with 48 countries, whereas the US only has FTAs with 20 countries), Mexico is considered to be a key component for the manufacturing strategy of many companies. As such, almost all major automakers in North America have a factory based in Mexico, with the notable exceptions of Volvo, Tesla, and Subaru.

GM is the largest producer of vehicles in Mexico by volume, responsible for roughly 20% of the vehicles built in the country. GM’s overall growth strategy is currently focused on Mexico, with 65% of its total growth in North America over the next five years expected to come from the country. Overall GM volumes in the region are likely to rise by 20% through 2027; GM’s Mexico division will grow by 48%. The centralisation of the Chevrolet Equinox and launch of the Equinox EV at GM’s Ramos Arizpe and San Luis Potosí plants are major drivers of growth for GM in Mexico, along with the likelihood that other EV models are likely to be built at these plants. Other OEMs with a strong presence in Mexico that are also expected to see substantial recovery in the country include: Renault-Nissan-Mitsubishi (expected to rise 48% through 2027), Stellantis (+69%) and Toyota (+66%). In the case of GM, RNM and Stellantis, all this growth will fill existing capacity at plants rather than spurring investment to increase capacity or add a new facility in Mexico. 

Despite these positive signs, risks abound for Mexico. Outside of the possibility that further headwinds could restrict global growth in the coming years, Mexico faces its own unique set of challenges related to the United States-Mexico-Canada Agreement (USMCA), the trade agreement in place between the US, Mexico, and Canada. New labour value requirements in place under the agreement have had a greater impact on Mexico than they have had on either the US or Canada. These labour value requirements stipulate that 40% of components for Cars and 45% of components for Light Trucks come from factories where workers are paid more than US$16 an hour, substantially higher than the average auto worker compensation in Mexico. 

This change in policy has caused a bit of a rethink by automakers when it comes to investing in their Mexican operations. From 2015-2020, automakers increased available capacity in Mexico by nearly 1.6 mn units. However, from 2020-2025, capacity is only expected to increase by a little over 300k units. Investment in Mexico began to drop off as USMCA went into force in 2020, with few investment projects announced that expand manufacturing operations in any meaningful way. 

That being said, the investments of the past have the potential to help solidify the future. The ability to utilise the excess existing capacity at plants in Mexico gives automakers a relatively inexpensive way to bring to market a variety of products with tighter margins. As long as that business case remains, there are signs that a robust recovery could be in store for Mexico.