Automotive Manufacturing in Mexico Reduced Risk. Reduced Cost.

Mexican Automotive Industry

The Mexican automotive industry represents an important sector of the country’s diverse economy.  It accounts for 3% of the nation’s GDP and approximately 18% of manufacturing production (it is the second most important industry after food processing). Additionally, it is the source of approximately 1.9 million jobs in the country and accounts for 32% of Mexico’s total exports to foreign markets.

Mexico is now the sixth-largest automaker in the world and the fourth most prolific exporter.  It is only behind Germany, Japan, and the United States and is the fifth-largest source of manufactured auto parts in the world (behind China, the United States, Japan, and Germany).

In the last 25 years, the Mexican automotive sector has been a success story. Its growth has been significantly enhanced since the entry into force of the North American Free Trade Agreement (NAFTA). While in 1993 the sector’s exports were $10 billion, in 2019 the amount that they registered was $148 billion.

Under the new USMCA, the Mexican automotive industry will be able to export the vehicles that it produces if the following conditions:

• For light vehicles, 75% of its RVC (Regional Value Content) must come from the North American Region. Under the NAFTA, which the USMCA replaces, content requirements were 62.5%.  Additionally, between 40% and 45% of the value of a passenger vehicle must be produced by workers who receive at least $16 per hour.  Content percentages required by the USMCA must be reached within a timeframe of 3 years.
• For heavy vehicles, the RVC must reach 79% within the next 7 years, with a wage rate requirement of 45% in areas where a minimum wage per hour of $16 dollars is paid.
• Seventy-percent of steel and aluminum used in the Mexican automotive must be sourced in North America (the minimum percentage used to manufacture some essential components may reach 75%).

All major passenger vehicle producers have a presence in the Mexican automotive industry.  They include Volkswagen, Nissan, General Motors, Honda, Audi, Toyota, Hyundai, Volvo, Chrysler Fiat, Ford, and Mazda.  Among the heavy vehicle manufacturers in the country are Scania, Freightliner, and Cummins.

Total auto parts production in Mexico was approximately $100 billion in 2019. What is most produced and exported in Mexico are the following items:

• wire harnesses
• seats and their parts
• motors
• gearboxes
• die-cut parts
• axles
• brake mechanisms
• lighting appliances
• airbags
• seat belts

There are about 600 Tier (level) 1 (90 of the world’s top 100 Tier 1 companies that have a presence in Mexico) in the Mexican automotive industry.  Tier 1 are companies are those that supply components directly to OEM (Original Equipment Manufacturer).

All this represents a great opportunity for creating interesting alliances between OEMs and local and foreign suppliers (Tier 1 and 2). Tier 2 companies are the ones that deliver parts to Tier 1.

The following is a summary of the performance of the Mexican automotive industry in 2019.

• Production was 3,750.840 million light vehicles: 63.8% were made up of SUV, Minivan, Pickup, and 36.2% light truck and car units.
• Export: 3 million 333 thousand vehicles to 120 countries (79.2% of those units shipped abroad went to the United States). 67.1% of exports consisted of light trucks and 22.9% remaining in subcompact, compact, luxury and sports cars
• General Motors and Chrysler lead exports (41.4 percent)

These are the main advantages of betting on the Mexican market:

• Because of its commercial opening and market size, Mexico welcomes all kinds of products.
• 24 states of Mexico have the presence of companies that provide auto parts manufacturers.
• Mexico’s geographical location: It is perfectly located and equipped to distribute its cars and parts not only to the United States but to South America and other regions of the world.

Further benefits of automotive manufacturing in Mexico include:

• Production costs in Mexico are significantly lower than in North America or Europe. This makes Mexico is an attractive place for medium and large companies to do business.
• The country has free trade agreements that govern commerce with more than 50 different countries through 14 Free Trade Agreements.
• Trade has been conducted under the Free Trade Agreement between Mexico and the European Union (TLCUEM).   

Since 2000 most industrial products imported from and exported to the EU have been exempt from tariffs.

The new USMCA (United States-Mexico-Canada Free Trade Agreement) presents many opportunities for the Mexican automotive industry. The most important change is that the rules of origin have been modified in such a way that now, in order for a car to comply with the label of being a product in the region and therefore can be exported duty-free, 75% of its contents will have to come from one of the three signatory countries. This percentage is more restrictive than NAFTA that established a requirement of 62.5%. This means that a greater number of components are will be produced in Mexico. The USMCA means significant opportunities for growth in the Mexican automotive industry.

These factors combine to create a unique environment in the industry and make Mexico one of the most important players in the global automotive and auto parts industry.