Plastics Today 2014: Mexico’s Auto Market Set to Hit the Fast Lane

As published in Plastics Today.

Mexico’s automotive industry is booming. At the end of 2013, Mexico was the eighth largest vehicle manufacturer globally after China, the U.S., Japan, Germany, South Korea, India, and Brazil, according to information from IHS SupplierBusiness. In 2013, light vehicle production saw
 an improvement of 1.7% year-on-year to 2.92 million units, breaking a new output record. Mexico accounted for about 18% of North American automotive production in 2013; it is expected to increase to 25% by 2020. Additionally, notes SupplierBusiness, Mexico was the fourth largest light vehicle exporter in the world.

>>Read more: What does Thyssen Krupp’s $20 million expansion say about Guanajuato?

All of this is thanks to several factors including Mexico’s proximity to the United States, the North American Free Trade Agreement (which allows parts produced in the United States and Canada to cross the border without tariffs), and the resurgence of the automotive industry after the recession. Mexico is on track to move into the number two spot for vehicle exports to the United States by the end of 2014.

Expansions and greenfield plants continue to dominate the news in Mexico. Nissan recently inaugurated its new Aguascalientes plant, its third vehicle plant in Mexico. It will have capacity to produce 175,000 units annually with multiple platform flexibility to address growing demand in the Americas, according to a Nissan announcement. Operations were brought online in a record 19 months, raising Nissan’s capacity in Mexico to more than 850,000 units annually, a 25% increase over what the company currently produces. The new facility will generate more than 3,000 new jobs in Aguascalientes and over 9,000 indirect jobs.

Nissan has been producing vehicles in Aguascalientes since 1992, and the plant has expanded significantly just in the past year. In November 2013, Nissan opened its $2 billion manufacturing complex in Aguascalientes.

A global benchmark

During the new plant’s opening ceremonies, Carlos Ghosn, Chairman and CEO of the Renault-Nissan Alliance, said, “Nissan Mexicana is a global benchmark in manufacturing, productivity, competitiveness, and customer satisfaction. The investment in our third vehicle plant in Mexico leverages the world-class manufacturing capabilities of the Nissan Mexicana team and is aimed at satisfying the high demand for Nissan vehicles produced in Mexico throughout the Americas and beyond. It will help consolidate our leadership in the domestic market and strengthen our growth plans globally,” said Ghosn.

Another major plant and plant expansion was announced in June 2014 by the Renault-Nissan Alliance and Daimler. Those companies announced jointly that they have agreed to establish a 50-50 joint venture, a business entity that
will oversee construction and operation of the new plant in Aguascalientes in north-central Mexico. The new plant will be built in the immediate vicinity of the already existing Nissan plant and will have an annual capacity of 300,000 vehicles when fully ramped up.

“Joint development of compact premium vehicles and joint production in Aguascalientes represent one of the largest projects between the Renault-Nissan Alliance and Daimler,” Ghosn said.

Dieter Zetsche, Chairman of the board of management of Daimler AG and Head of Mercedes-Benz Cars, remarked, “In Aguascalientes, we will take our successful partnership to the next level by combining the skills of our two companies, Daimler and Nissan, 
in one production plant. Just over four years after the cooperation was founded, the decision for the new plant in Mexico is a major milestone.”

Start of production is planned for 2017 with Infiniti models. The production of Mercedes-Benz brand vehicles will follow in 2018. Daimler and Nissan will share the total investment cost for Aguascalientes of approximately €1 billion ($1.34 billion). The companies will add almost 5700 jobs (including engineering, line workers, and support staff) by the time the plant reaches full capacity, expected in 2021. In addition, a high localization rate will significantly increase the Mexican supply base.

Honda announced the continued expansion of its manufacturing operations in North America with the production start of the redesigned 2015 Honda Fit at a new technologically advanced automobile plant of Honda de Mexico, S.A. de C.V. The new plant, representing an $800 million investment for Honda, will increase Honda’s ability to meet customer demand for fuel-efficient subcompact models from within the region, according to Honda.

The new facility in Celaya, Guanajuato, increases Honda’s annual automobile production capacity in North America to approximately 1.92 million units. In 2013, more than 90% of the Honda and Acura automobiles were produced in North America; this is expected to exceed 95% when the Celaya plant reaches full capacity.

A $470 million transmission plant
 is currently under construction at the same site in Celaya, which Honda said will “play a significant role in the region as Honda’s North American operations take on increasing responsibilities within global Honda for product development, production, and sales activities.” The new transmission plant in Celaya is expected to begin production of continuously variable transmissions (CVTs) in the second half of 2015, with employment of approximately 1500 associates. Honda had record production in North America in 2013 with 1,781,213 vehicles, and was a net exporter shipping 1,309,917 vehicles from the U.S.

In July 2014, BMW Group announced that it will invest roughly $1 billion in the Mexican state of San Luis Potosi, the site of its newest North American plant that will have a capacity of around 150,000 units per year. Production is anticipated to begin in 2019, with about 1500 employees.

“Mexico is an ideal location for
 the BMW Group and will be another important plant within our production network,” said Harald Kruger, member of the BMW AG management board, responsible for production. “This decision underscores our commitment to the NAFTA region. We have been building BMW cars at our U.S. plant in Spartanburg for the past 20 years.

“With a planned annual capacity
 of 150,000 units for the new plant in Mexico, the BMW Group will be even better positioned to take advantage of the growth potential in the entire region. The Americas are among the most important growth markets for the BMW Group. We are continuing our strategy of ‘production follows the market,'” he concluded.

A special report in the March/April 2014 issue of MexicoNow magazine noted that from 2010 through 2013, Mexico received $12 billion worth of investments from automotive OEMs. The German VW Group is investing an impressive $3 billion, which includes a new engine plant (Silao, Guanajuato) and improvements to the VW assembly plant in the state of Puebla. There is also the $3 billion in investments by Ford, General Motors, and Chrysler.

With all these plants and plant expansions, the need for suppliers will become greater. OEMs like their suppliers close, with many increasingly using a regional sourcing strategy. While Mexican component suppliers were few in the past, leaving room for U.S. suppliers to fill that void, things are changing rapidly. According to MexicoNow, Ford Mexico will soon surpass $10 billion in component purchases from Mexican suppliers, representing a significant percentage of the more than $75 billion in auto parts production in Mexico.

Reuters noted in a recent report 
that GM has outlined plans to invest $691 million to expand its Mexican operations, including the previously unannounced expansion of its Toluca engine plant. IHS SupplierBusiness
 cited Reuters in its July commentary, Economics & Country Risk, noting that General Motors will use the investment to build a factory in Silao for eight-speed transmissions and upgrade an existing factory in San Luis Potosi. The company has been operating plants in Mexico for nearly 78 years.

Who is going to Mexico?

A recently released survey by the Entrada Group, a manufacturing services firm located in Zacatecas, Mexico, offering assistance to companies wanting to establish facilities in Mexico including shared shelter services, shows that Mexico is becoming increasingly desirable as a manufacturing location to serve the Americas. And it’s not just large manufacturers that are locating in Mexico. Sixty-nine percent of the respondents to the Entrada Group’s survey are under 500 employees; 14% have 501 to 2000 employees; 8% have 2001 to 5000 employees; and another 8% have more than 5000 employees. Eighty-two percent of the respondents are privately held companies, and 55% have two or more manufacturing locations.

Seventy-three of the respondents to the survey are headquartered in the U.S., and 95% manufacture products delivered to customers in North America. When asked in which low-cost location they are currently manufacturing, 51% said they currently manufacture in China; 36% are currently manufacturing in Mexico; 27% are currently manufacturing in other Asian countries; and 24% currently manufacture in India.

A recent report from IHS SupplierBusiness noted that automakers are choosing to assemble vehicles in Mexico because of the lower labor costs and “the willingness of the Mexican government to do what it takes to attract global manufacturers.” That along with favorable trade agreements with several nations-including, of course, the North American Free Trade Agreement (NAFTA) that kicked off the relationship between Canada, Mexico, and the U.S.-has become a critical factor in the strong activity in Mexico.

SupplierBusiness says that the outlook for the Mexican supplier industry is strong, as it becomes a “favored destination” for both U.S.-based and Japanese suppliers that look to locate near their OEM customers. “Component suppliers in Mexico are increasingly locating production facilities at supplier campuses within close proximity to major automakers’ plants,” says IHS SupplierBusiness. “Both Ford and Toyota are setting up supplier campuses in Mexico, with some 35 component manufacturers locating operations at Ford’s Hermosillo plant and many suppliers also setting production facilities close to its Tijuana factory in Baja California.”

While many mid- to large-sized suppliers (injection molders and moldmakers, primarily) have been willing and 
able to follow their OEM customers to various geographic regions in the U.S., there has tended to be resistance to cross the border and establish facilities in Mexico. Cities like El Paso and McAllen, TX, Nogales, AZ, and San Diego, CA, have been popular places from which to serve OEMs that put plants in Mexico. Putting a plant in Mexico is a different thing altogether.

SupplierBusiness also noted that the impetus for wanting suppliers in Mexico is the OEMs’ drive to get pricing closer to the “China price,” which continues to make Mexico an attractive alternative. Lower tier suppliers add a great deal to the cost of any investment there.

Source: Plastics Today.

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