It seems like only yesterday that H. Ross Perot, former U.S. presidential candidate and founder of Electronic Data Systems (EDS), was bemoaning the establishment of the North American Free Trade Agreement (NAFTA) in 1994 and warning of a "giant sucking sound" of jobs and opportunities out of the United States and into Mexico. Few will argue that the adoption of NAFTA has transformed the automotive landscape. However, while Mexico has become a formidable player in vehicle and powertrain production, it is coming under increasing competitive pressure in the area of automotive component production.
Vehicle assembly hits its stride
Vehicle production in Mexico has grown significantly over the past several years. The production landscape of just over 1.7 million units in 2002 is a far cry from the less than one million units produced per year in the early 1990s. Production is expected to grow further (albeit at a slower rate) to nearly 2.0 million units by 2008 (see chart).
Several automakers are expanding their focus on vehicle production in Mexico. For example, Ford will be adding production of an all-new mid-size sedan replacement for the Taurus/Sable at its Hermosillo plant in 2005. In addition, Renault/Nissan is expected to build upon an already strong base of production with the addition of new small car production and expanded production of current offerings. Furthermore, Volkswagen, a long time vehicle producer in Mexico is poised to expand its operations. The company is currently ramping up production of its Beetle Cabriolet at its Puebla, Mexico plant. They will also be adding production of the Gol small car as well as the all-new Touran monospace. Furthermore, Volkswagen recently designated its Puebla plant as essentially the worldwide source for the Jetta (called Bora in Europe).
An emerging player in the production landscape is Toyota, which recently announced plans to invest $140 million for a plant in Tijuana, Mexico. The facility will initially produce 30,000 Tacoma pickups as well as Tacoma truck beds. However, it is expected that Toyota will expand production of the Tacoma and add production of small car offerings.
Competition from an unlikely player
Notwithstanding Mexico's strong and growing position with respect to vehicle production, it is interesting to note that competition is emerging from an unlikely source - the southern United States. Automakers with facilities under construction, such as Hyundai (Alabama), Toyota (Texas), and DaimlerChrysler (Georgia) are adding to an already impressive dossier of recently constructed facilities in the southern U.S. Honda (Alabama) and Nissan (Mississippi) are already planning significant capacity expansions to existing facilities or plants nearing completion. Relatively low labor rates, a deep labor pool, the lack of a major union presence, and significant state & local financial incentives contribute to a compelling business case for establishing production in the southern U.S. As a result, establishing production facilities in "lower cost" Mexico is becoming less of a foregone conclusion.
Moreover, other lesser-developed regions in the world are exerting additional competitive pressure. The recent signing of a trade agreement between Mexico and Brazil, which phases out high import tariffs, should ensure a steady supply of vehicles to Mexico from Brazil. In fact, both General Motors and Volkswagen are hoping to use increased Brazilian production to satisfy Mexican market demands.
A victim of its own success or the evolution of a global marketplace?
While Mexico has carved a strong (although vulnerable) position with respect to vehicle production, from an automotive components perspective the country is encountering significant competitive pressures from other emerging (and already emerged) markets. These markets, including Brazil, China, and Eastern & Central Europe find themselves in a position to better compete with Mexico on cost/price and overall investment.
As the automotive industry evolves into an increasingly global enterprise, Mexico's position as simply the lowest cost provider has been largely eliminated by other countries in the global marketplace. This is leading, in some cases, to a shift in investment to other regions. For example, in 2001, German tire and parts maker Continental AG closed a facility in Mexico, while it expanded production in the Czech Republic and Romania.
Perhaps the most compelling threat to Mexico from a component investment perspective is China. It is clear that there is a growing movement by companies to leverage China both in the area of vehicle production and component sourcing. Late last year, Ford Chief Operating Officer Nick Scheele made the bold announcement that the company would purchase $1 billion in components from China by mid-2003 and $10 billion by the middle of the decade. Furthermore, while another large company, Denso, is adding business in North America, it expects to satisfy that demand with existing capacity in North America. However, the company has said it could add up to four plants in China in 2003 or 2004 to accommodate demand from emerging and other developed markets.
It is ironic that China has become the new target for anti-free trade groups fearing the exodus of jobs and investment out of the United States; a position Mexico found itself in only a few years ago. The impact of China sourcing on Mexico, while having enormous potential, is not without its own hurdles. In some cases, Chinese parts makers are not yet entirely competitive with other suppliers from quality, delivery, technology, and total cost perspectives. However, this is expected to change rapidly. In fact, the longer-term hurdle to significant China sourcing outside the country may lie with the overall demand for components domestically to accommodate the forecasted growth in vehicle production. For example, CSM Worldwide is forecasting a compound annual growth rate for Chinese light vehicle production of 9.8 percent from 2002 to 2008. This amounts to production growth from 2.6 million units in 2002 to 4.5 million units forecasted in 2008. However, supply constraints will likely be surmounted by even more investment in the Chinese marketplace, which will therefore place additional pressure on more established markets such as Mexico.
Mexico's status as an important player in the automotive industry is undeniable. The adoption of NAFTA has certainly fostered and promoted a more efficient allocation of resources in the North American marketplace. In many ways, Mexico has benefited greatly itself and benefited other countries since the adoption of freer trade. However, as the world evolves, other countries are asserting themselves more than ever. Mexico is no longer the forgone conclusion in the minds of the automakers' procurement staffs, and sourcing from developing markets is evolving ever more from a threat to a promise.
Michael Wall
Manager, Forecast & Analysis
CSM Worldwide, Inc.
mikewall@csmauto.com
