Automotive market of Mexico major opportunity for car makers

01 June 2016 Consultancy.uk

Mexico is well on the path to becoming a key manufacturing hub for light vehicles, with almost double digit growth projected to see production ramp up from 2.3 million units in 2010 to more than 4.8 million by 2020. OEMs are attracted to the country's cost-competitive workforce, good logistical access to many parts of the world, a business-friendly regulatory environment, and free-trade-agreements with over 60 different countries. Mexico is currently reliant on importing parts for manufacture, highlighting a new opportunity for local players according to a new report.

Growth within the market for light vehicles is set to continue to grow at around 2.1% per year to 2021, seeing the market reach more than 100 million units in new sales per year by around 2020. Growth is sparked by, among others, a growing middle-class and higher interest for eco-friendly cars, as well as technological advancement. By 2020 up to 80% of new light vehicles will support digital services, according to a research by BearingPoint, and the industry is also adding autonomous features, found BCG, such as self-driving functionality in traffic jam situations, single-lane highway autopilot and urban autopilot.

The continued growth of the global light vehicle market, as well as a move towards lower cost emerging market manufacturing bases, has seen the significant rise of manufacturing in, among others, China. In a new report from Roland Berger, titled ‘Being prepared for the next Mexican automotive boom’, the authors explore the fortunes of light vehicle manufacturers in Mexico, as well as barriers they may come to face in the coming five years.

Light vehicle production in Mexico and sales destination

The Mexican hub
Light vehicle manufacturing in Mexico has boomed in recent years. In 2010 the country produced 2.3 million units, while last year the country produced 3.4 million. The CAGR over the past five years hit and average of 8.4%.

The major destination of Mexican automotive exports is to NAFTA participants, which increased from 63% of production share to 67%. The country’s internal market has remained relatively stable, at around 19% in 2015, while the export to the rest of the world decreased slightly from 19% in 2010 to 14% last year. Continued demand from Asia has seen a shift of export within the rest of the world segment; in the 2010-15 term, Mexico's light vehicle exports to Asia grew ~250% whereas exports to Latin America grew by ~20%.

Light vehicle production in Mexico

The report highlights that growth in light vehicle production in Mexico is set to continue at an almost double digit rate, forecast at 9% over the years to 2020. While growth is set to slow between 2018 and 2020, total units produced is expected to reach 4.8 million.

The research highlights, however, that the largest share of new growth will be outside the NAFTA region, with growth in terms of absolute exports forecast to increase from 0.5 million units this year to 1.7 million units by 2020. Sale to NAFTA region countries will increase 5%, up from 2.3 million units to 2.4 million. Internal market dynamics will remain relatively stable, increasing demand by 0.1 million units in the coming four year years.

Investments in Mexican automotive market

Manufacturing expansion
The emergence of Mexico as a manufacturing hub for vehicles reflects a number of strong fundamentals, including a cost-competitive workforce, good logistical access to many parts of the world, a business-friendly regulatory environment, and free-trade-agreements with over 60 different countries.

The continued competitiveness of the market, coupled with growing demand globally for light vehicles, has seen OEMs keen to invest in the region. Seven large OEMs have announced new investment plans totalling more than $6 billion over the coming four years, while in total $17 billion in new investments have been planned for by all regional players. The new plants, spread across various regional hubs, will boost production capacity to 1.7 million.

Local production vs. imports of parts by system

Parts barriers
While demand for production, as well as capacity to produce, continues to rise, the local supply chain is being underserved in a number of key areas related to parts. While the local production of electrical systems and interiors are met by local producers, at 80% and 65% respectively, other parts of the vehicle are for a majority imported. Body parts, for instance, has an import rate of 70%, and  powertrain parts an import rate of 65%.

A reliance on imports within a range of parts segments, increases inventory handling costs, as well as creates risks around logistical bottlenecks that may hamper just-in-time production methods.

Growth of light vehicles vs auto-parts production

The research highlights that the gap between demand for parts, and the ability for local supply to meet that demand, will continue as production demand ramps up further. The difference in CAGR between the segments is significant, at 9% and 1% respectively. The result will be that, by 2020, $20 to $25 billion in imports will be required to fill the gap.

The increased reliance on imports, which create various structural issues, may also be relatively expensive due to the devaluation of the Mexican peso. Accordingly, setting up local manufacturing bases for parts, that too meet changes to more digital and technology heavy requirements, has the potential to further boost manufacturing in Mexico as well as reduce risks related to currency volatility. Stephan Keese, a Senior Partner with Roland Berger and expert for the Americas' automotive markets, says "Setting up a full local supply chain will take years and will require strong actions from all players along the value chain, but companies that act now have a true chance of benefitting the most from these interesting growth opportunities.”

A recent automotive study by Roland Berger found that Iran's car market could offer "historic opportunities" to global players.

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