After the US election, the economic outlook for Mexico may now face some challenges. Experts debate the impact of potential trade agreement changes on the thriving automotive sector.
The presidential election victory of Donald Trump came at the end of a year that saw political uncertainty spread across the world. While Europe holds its breath to see what a post-Brexit EU will look like, the entire world is now waiting to see whether the wealthy American businessman upholds his election pledge to make sweeping changes to his country’s trade agreements.
Mexico stands to be affected more than most. Just in recent weeks, Ford has announced that it would halt plans for a new plant in Mexico. Part of this production volume is now expected to be sourced from other existing Mexican plants, and some of it will be produced in the United States. Furthermore, Toyota has said it is reconsidering a new Mexican plant planned for 2019.
Production and exports from Mexico have grown significantly over the past five years. Up until the November US election, the country’s 2017 outlook was a positive one.
“For some time now, the automotive manufacturers in the country have thrived from the skilled labour force, advanced supply network and generally low cost levels,” says Erik Solum, a senior analyst at Wallenius Wilhelmsen Logistics (WWL). “In spite of recent political uncertainties and scale-back signals from some auto manufacturers, we still have high hopes for Mexico and the auto manufacturing activities in the country.”
Most analysts tend to share this view. In fact, the number of vehicles exported from Mexico to the United States and Canada is expected to increase significantly. This development will put additional pressure on existing transport capacity out of Mexico, and many in the industry point to short-distance sea transport as a sustainable and safe response to this growth.
More US auto makers eye Mexico
Roberto Zavala, Head of Mexico at WWL, says the North American Free Trade Agreement (NAFTA) has facilitated the rapid development of Mexico’s automotive industry.
“NAFTA allows for the free movement of certain goods between Mexico and the US, in a similar manner to the free trade agreements in Europe,” he says. “Of the estimated 3.4 million cars produced in Mexico during 2015, a clear majority were exported, with 2.3 million of those heading to the US and Canada.”
At least five new auto manufacturing plants have opened in the past few years. This trend is of critical importance to WWL’s Mexican operations, as over half of its business is reliant on the automotive industry. “WWL has a presence at manufacturing plants, vehicle distribution facilities and major ports throughout Mexico, and the auto industry drives almost all volumes via rail between Mexico and the US,” Zavala says. “WWL also plays a role in the ocean transport business, something that should increase if, as expected, Mexico’s exports continue to grow.”
Mexico an important partner to the US
Since the financial crisis in 2008, Mexico has become strategically important when it comes to the manufacturing of American cars. The crisis forced some tough decisions that revitalised the US car industry and positively affected Mexico.
Mike Jackson, Senior Executive for North America Vehicle Production Forecasting at IHS Markit, says: “New powertrain technology, better safety systems and advanced infotainment systems were introduced, which made the North American product more compatible with global demand. Production has doubled since 2008 and we’ve seen tremendous growth across the board, with localisation efforts resulting in record output in North America even as Mexico accounts for disproportionate gains.”
Low oil prices have shifted consumer demand in the United States away from small passenger cars and onto pickups, SUVs and crossovers. As American manufacturers have unionised workforces with relatively high wages, it makes economic sense to build these large vehicles domestically and produce the smaller vehicles in Mexico.
Cars can be produced in Mexico far more cheaply than in the United States because of substantially lower labour costs. Production of light vehicles in Mexico for the US and Canadian markets is set to increase to more than 3 million by 2020, while exports to Europe are also expected to grow significantly. Jackson adds: “Although the aim of the incoming administration appears to be to protect manufacturing jobs within the United States, a candid discussion needs to take place about the potential consequences of trade restrictions and import tariffs to the American economy.”
Investments in manufacturing technology
Mexico is also a prime location for e-commerce across the Americas. Despite some infrastructure problems, the industry has grown by 400% over the past five years.
To help address these issues, AT&T announced plans to invest $3 billion to extend its high-speed mobile Internet service to Mexico by the end of 2018. Furthermore, investments in manufacturing technology are paying dividends.
According to a PwC report, Stanley Black & Decker monitors the status of its Mexican production lines in real time via mobile devices and Wi-fi RFID tags. Overall equipment effectiveness has increased by 24%, labour utilisation by 10% and throughput by 10%.
The connected factory has arrived in Mexico, and such investments should only serve to increase the attractiveness of the country as a manufacturing base, if the benefits of NAFTA remain in place.
Despite uncertainties about tariff levels on exports to the United States, Roberto Zavala believes the effect on long-term economic trends will be limited. “We expect trade between Mexico and the rest of North America to develop positively during 2017 and beyond,” he says.
“It’s good for Mexico, but it’s just as beneficial to the US. However, in the short to medium term, we expect to see a more cautious approach from the automotive manufacturers.”