Automotive market of Mexico major opportunity for car makers

01 June 2016

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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Four ways digitalisation is transforming car brands and dealers

16 April 2019

From changing expectations from the customer to new stakeholders entering the industry, the digital transformation of global automotive industry means it is facing the wholesale transformation of its business model. In a new white paper, global consulting partnership Cordence Worldwide has highlighted four major digital trends that are transforming the relationships between car brands and dealers with consumers.

With digital transformation drives booming across the industrial spectrum, automotive groups are no different in having commenced large digital transformation programmes to improve productivity, efficiency, and ultimately profitability. Falling sales figures mean the automotive sector is facing an increasingly difficult road ahead, something which means companies in the market are even more hard pressed to find new ways to improve their bottom lines.

While it offers major opportunities, the industry’s move to digitalise is not without complications. It has triggered a series of major internal changes, which have presented automotive entities with the challenge of becoming a “customer-oriented” industry. A new report from Cordence Worldwide – a global management consulting partnership present in more than 20 countries – has explored how automotive companies are navigating the rapidly changing nature of digital business.

New business models

The level of change likely to be wrought on the automotive industry by digitalisation is hard to overstate. Automation could well lead to significant reductions in the number of accidents, higher vehicle utilisation and lower pollution levels, while leading to a $2.1 trillion change in traditional revenues, with up to $4.3 trillion in new revenue openings arising by 2030.

As a result of this colossal opportunity, it is easy to see why almost all automotive groups now have digital departments, with generally strong communication within the digital transformation and the customer approach. The changes to society which this may have are potentially distracting automotive firms from the change it is leading to in its own companies though, according to Cordence’s paper.

The automotive market is dead, long live the mobility market

Because of this, the sector’s business model is set to transform over the coming decades. With digitalisation speeding up the appearance of concepts such as car-sharing, a subscription package model will likely become more palatable. At the same time, car and ride-sharing models will cater to the sustainability criteria of millennials, who will rapidly become one of the automotive market’s leading consumer demographics in the coming years.

Antoine Glutron – a Managing Consultant with Cordence member Oresys, and the report’s author – said of the situation, “These ‘old school industries’ are now working on creating new opportunities, but in so-doing are facing challenges and threats: new jobs, new technologies, new ecosystem of partners, necessary reorganisation, different relationship with customers, and even new businesses. The customer approach topic is in fact a real challenge for car companies as it implies changing their business model and adjusting their mind-set to address the customer 4.0: from product-centric to customer-centric, from car manufacturer to service provider.”

Digital customer experience

In the hyper-competitive age of the internet, even top companies face an uphill challenge when it comes to holding onto customers through brand loyalty. Digital disruption has resulted in changes to consumer behaviour, which is forcing a range of marketing strategists to reconsider their old, possibly out-dated strategies. As modern customers wield an increasingly impressive array of digital tools and online databases, they and are now able to quickly and conveniently compare prices, check availability and read product reviews.

The automotive sector is no exception to this trend, according to the study. In order to adapt to the needs of the so-called ‘customer 4.0’, car companies will increasingly need to change their business model and move away from product-centric companies to customer-centric ones, from car manufacturers to service providers.

Glutron explained, “As an automotive company, you can no longer expect customer loyalty simply with good products; you must conquer and re-conquer a customer that “consumes” your service. The offer now has to be global, digital and personalised. Your offer has to be adapted to this customer’s needs at any given moment. A key issue related to data control is to build customer loyalty by creating a customer experience 'tailored' throughout the cycle of use of the 'car product': purchase, driving, maintenance and trade-in of the vehicle.”

One way in which the sector may be able to benefit from this desire for a tailored experience is via connectivity. Consumers are generally positive about new connective features for automobiles, and many are even willing to pay upfront for infotainment, emergency and maintenance services. Chinese consumers, where the connected car market is set to hit $216 billion, are already particularly interested in paying a little more for navigation and diagnostic features in their future new car. This can also enable automotive companies to exploit a rich vein of customer data, enabling them to rapidly tailor their offerings to consumer behaviour.

New automotive segments

Digital transformation has also brought with it the rise of completely new application areas. As mentioned earlier, the most well-known example is the autonomous or self-driving car, where the last steps forward were not taken by major automotive groups but by technology companies such as Tesla. While this may have given such firms the edge in the market briefly, a number of keystone automotive names will soon be set to take the plunge into the market themselves, leveraging their car manufacturing prowess and huge production capacities to their advantage.

Before companies rush to invest in this market, however, it is worth their while to remember that the readiness and uptake for such vehicles differs greatly geographically. For example, following a study published in 2018, 92% of Chinese would be ready to buy an autonomous car, compared with only around 35% of drivers in France, Germany and US. Meanwhile, the infrastructure of different nations will also be significantly less accommodating of the new technology.

Use digital for steering thr activity

Elsewhere, Cordence’s analysis has suggested that hooking the cars of tomorrow into the Internet of Things is also likely to see a rapid change in the business model for car maintenance, providing real-time diagnostics for problems. This presents chances for partnerships to improve the connectivity of cars, especially with tech companies; for example, PSA partnered with IBM for a global agreement on services in their vehicle. Meanwhile, data could also be sold to other parties with an interest in this data, such as the government, which could use it to manage traffic levels, or ensure that only adequately maintained vehicles take to the road.

Glutron added, “With the increase in the amount of client data and connected opportunities, the recommendation is to set up data-centric approaches. The value is now in the customer data. The general prerequisites are to rework the data model and the Enterprise Architecture and generally build up a data lake including data from all sources (internal and external, structured and unstructured).”

From automotive to mobility

Relating further to the idea of connectivity, the report claimed that automotive firms must now adjust their models in line with the provision of end-to-end mobility, rather than treating the sale of a car as an end point in their relationship with the customer. In order to realise this transformation, transformations are likely to become more and more important.

A network of partner companies means automotive firms can provide a global mobility experience. As the vehicle is increasingly connected to its environment, new partners can also be cities, governments, and other service providers within the global mobility services industry in which the car brands want to take part.

According to the study, the target is clear. Companies must look to a holistic transport service, offering to move customers from A to B in a unique and pleasant way – otherwise they might as well take public transport. At the same time, they should extend the services reachable “on-board” (especially the enhancement of the connectivity between the car and smartphones or other connected devices), and reach high standards in terms of user experience (online sales, online payment, customised experience during and after the use of the car).

Concluding the report, Glutron stated, “These mobility market transformations could be considered a threat for the car manufacturers. Quite the opposite: if they take up the challenge and review their business model so that they become the service provider – communicating no longer to a driver but to a ‘mobility customer’ – they can then take advantage of their expertise and their position as a historical player. The most convenient means of transport are cars, and building a car is highly-skilled work.”