Mexico Less Complex for OEMs than for Suppliers

Commentary by JP McDaris

A recent article in Wall St Cheat Sheet posed a very fundamental question: Why are auto manufacturers moving to Mexico? The piece cites data from Forbes that foreign automakers have invested $19 Billion in the country over the past few years, adding that auto production is expected to reach 4.7 million vehicles by 2020.

The reasons they cite for strong Mexican auto manufacturing are well-known by those following the industry:

  • Mexico’s extensive free-trade structure, with 44 free-trade agreements globally
  • The willingness of the current and past few Mexican governments to encourage commercial investment from overseas
  • Mexico’s strong infrastructure, enabling production and export to not just North America and South America, but also Europe and Asia

As the article states: …“the car companies themselves have plenty of reason to be giddy as well, as they have found a safe, cost-effective launching pad from which to attack North and South American markets.”

Suppliers a Different Story

It’s certainly true that things are booming for the OEMs. The Mexican government is offering big incentives for them to establish operations in the country and produce vehicles for export. But things aren’t necessarily that effortless for the next level down the supply chain.

For auto suppliers, particularly the smaller tier two’s and tier three’s, setting up operations in Mexico isn’t easy. For starters, the government isn’t doing as much to help them. Most incentives provided by the Mexican government are for the OEMs and very large suppliers. Second, most of the smaller suppliers lack the in-house expertise or track record required to set up in the country. Taking on that level of risk with so many unknowns is not viable for smaller firms.

But because the OEMs need them to beef up the supply chain, these providers need to be in Mexico. Companies from tier one to tier three need to establish a local presence in order to leverage growth opportunities here. The alternative would result in OEMs turning to local Mexican suppliers to fill in the gaps.

Source: Wall St Cheat Sheet

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